In the Zone

Despite a dip in its stock market in late 2005 and early 2006, Abu Dhabi is expecting a substantial flow of foreign direct investment (FDI) this year.



At the Eighth German and Middle East World Bank Forum, Minister of Economy Sheikha Lubna al-Qasimi said, "There is a huge potential in the tourism and construction sectors. Other attractions include inexpensive labour, ample capital, low business set-up costs and the best infrastructure in the region."



Al-Qasimi also noted that the UAE economy is now the second largest in the Arab world after neighbouring Saudi Arabia.



The emirate is expecting to attract up to $4bn in FDI over 2006. Much of this is expected to pursue investment opportunities in three new industrial free zones in the emirate as well as in the real estate market.



The Ministry of Economy expects the following years to see even greater foreign investment.



It would appear from the massive efforts made so far to diversify the emirate's economy away from oil that Abu Dhabi is working to open its economy to market forces. However, the government remains cautious about opening up too quickly.



While some governmental organisations will be put up for privatisation, such as management of the emirate's sewage system, the bidding will be open only to Emirati nationals. Abu Dhabi does not want to see its social and political goals, such as the Emiratisation initiative, undermined by a dominance of foreign capital in the economy.



To this end, free zones are proving a valuable asset. Foreign investment frees up government funds to concentrate on other projects, and as the free zones are isolated from the formal domestic economy of the emirate itself, firms operating in them can enjoy considerable privileges, such as tax-free operation, 100% foreign ownership, cheap, abundant feedstock and energy, and the economies of scale that develop in clusters of related businesses.



As Dubai and its myriad of free zones have proven highly successful in many ways, Abu Dhabi is now following suit. The Abu Dhabi Industrial city is scheduled to be completed by the end of this year. After that, al-Ain Industrial City and Ruwais Industrial City will also be built. These free zones will then attract increased investment as they become host to various heavy and petrochemical industries.



Abu Dhabi will set aside some Dh1bn ($272.3m) to develop the industrial free zones. As it stands now, most of the UAE's industry in concentrated in Dubai and Sharjah, though Abu Dhabi has seen healthy growth in its high-margin ship-building and pharmaceutical industries.



When these industrial cities and other projects currently in the pipeline in the Gulf countries are completed, the Middle East could be the fastest growing plastic and metal industry market in the world.



Even as Abu Dhabi is increasingly opening up to foreign investment, it is also keeping an eye on things when it comes to reporting and monitoring business activities, particularly finance. This in turn will draw others to buy services and products from the firms hosted in Abu Dhabi and its free zones, as increasing transparency makes for a more secure investment.



In regard to the efforts to increase transparency, on June 3, Sheikh Khalifa bin Zayed Al Nahyan issued Law No. 13/2006, under which the emirate's tourism institutions, such as hotels and travel agencies, will be subject to the authority of the Abu Dhabi Tourism Authority (ADTA). By law, no organisation or company may undertake commercial tourist activity unless licensed by ADTA.



The law also contains detailed instructions on book keeping and penalties for non-compliant organisations.



So as the emirate is building a more open environment to operate in, it is also making one in which sound rules still apply. Outside of the free zones, local Emirati partners are still required for foreign companies to operate there, though this is set to change in the coming years.



Meanwhile, the Abu Dhabi stock market has seen something of a comeback in recent days from its winter and spring of discontent, with the announcement of investment in the bourse by the Abu Dhabi Retirement Pensions and Benefits Fund, which is looking to take advantage of valuations created by the correction. This has prompted other investors to act before another sharp rise in the share price of various companies, such as Etisalat, the national telecommunications provider.



As Abu Dhabi's free zones and other projects draw attention from investors, the emirate may be soon be able to compete with Dubai, where the cost of doing business is on the rise.