A broader view: Diversified base continues to expand as investment-friendly policies draw in FDI

With a reputation for fiscal prudence and a strong emphasis on industry, Ras Al Khaimah stands out in the Gulf as one of the region’s most diversified economies. RAK’s government has run a consistent fiscal surplus over the last decade, enabling it to make considered investments that, in turn, have helped create a broad-based economy with a high degree of resilience. Investment spread across manufacturing, tourism, retail, high-tech industries and construction has been underpinned by improvements in infrastructure and connectivity.

OVERVIEW: While the economy is relatively small in absolute terms, reflecting its population size – estimated by the government at 300,000 – the emirate has built up plenty of physical and administrative infrastructure. In the UAE, social spending (education, health care, pensions, etc.) is the responsibility of the federal government, whose revenues are largely, though not entirely, drawn from the emirate of Abu Dhabi, a leading global hydrocarbons producer. This has relieved the less oil-rich emirates, such as RAK, of financial commitments that could prove onerous, and allowed it to forego levying income, sales and corporate taxes, as is the case with the rest of the UAE. Instead, the RAK government largely draws its income from investments in strategic assets, which have the twin benefits of contributing to government coffers and fuelling local development. While it is true that the emirate has limited natural resources, it has built a growing reputation for making the most of what it has. The emirate has plenty of limestone, a good location, ports and attractive beaches, and the government consistently turns a fiscal surplus.

FOCUSING ON THE LONG TERM: RAK has invested with an eye on the long term, and has successfully built up a diversified manufacturing base, rooted in sectors such as cement, ceramics, pharmaceuticals and glass, but with increasing involvement in new sectors such as metals, auto components and alternative energy. There are no less than five ports in the emirate, many of them conveniently sited for the industrial areas, and RAK also has its own airport, with an annual capacity of 250,000 passengers, and its own airline, RAK Airways. RAK is well connected with transport nodes in the rest of the UAE as well; Dubai International Airport and Abu Dhabi International Airport, both of them major aviation hubs in their own right, are just one and three hours away, respectively, while the port of Jebel Ali in Dubai is around a 90-minute drive. These connections have helped the emirate increase tourist numbers, which has had positive knock-on effects for both the retail and construction sectors, spurring investment in new hotels, residential developments and shopping malls. Unlike some other economies in the Gulf, the authorities in RAK adopted a more broad-based approach to development. By limiting its exposure to any one sector – such as financial services or real estate – the emirate was able to come through the global recession relatively unscathed, continuing to post both fiscal surpluses and growth.

FINANCIALS: GDP growth in RAK came in at 8% in 2011, up from 6% in 2010. The government reported in April 2012 that it anticipated the same level of growth for the second year running. The public finances remained healthy, with the total debt-to-GDP ratio in 2011 just 25.8%, according to RAK Investment and Development Office (IDO).

Figures from the RAK Department of Economic Development (RAK DED) put mining, quarrying and manufacturing as the largest single component of the economy, at 30% of GDP, followed by financial services at 14.4% and wholesale, retail and repair services at 11.7%. The government follows what it calls the “20:20 rule” – no one sector should make up more than 20% of GDP or account for more than 20% of the government’s fiscal surplus. This has helped to develop a diverse economic base, and made the economy and the public finances more resilient. This contributed to RAK being awarded an “A” rating by credit ratings agencies Standard & Poor’s and Fitch Ratings in 2008, putting the emirate on a par with leading economies such as China, and allowing the government to finance what debt it does take on much more cheaply. In April 2012 Fitch affirmed RAK’s “A” rating. Although no figures on total investment into the emirate were available, investment into industry amounted to Dh5.56bn ($1.5bn) in 2010, according to the RAK DED, up from Dh5.38bn ($1.47bn) in 2009. Local investment accounted for the bulk of this, Dh4.24bn, ($1.2bn), with GCC investment at Dh924m ($251.5m) and foreign investment at Dh393m ($107m).

REGULATORY ENVIRONMENT: The UAE’s federal structure allows each emirate considerable latitude to follow its own economic strategy, and RAK has taken full advantage of this. The federal government, through the national Ministry of Economy, formulates general policy pertaining to the UAE’s internal market, as well as matters such as trade policy and product safety regulation, while on the emirate level, the main regulatory bodies are the RAK DED, RAK Investment Authority (RAKIA) and RAK IDO. The latter acts as the government’s corporate finance and advisory arm, forming strategic investments and partnerships, and also serves as the emirate’s “economic ambassador”, taking a front seat role in preparing information pertaining to investment, such as bond prospectuses.

To operate in RAK, businesses must hold a licence from the RAK DED, renewable on an annual basis. In 2010 it issued 24,144 licences, compared to 22,354 in 2009. Of these, 12,201 were commercial, 11,422 were professional and 521 were industrial licences. Many of the industrial firms also come under the aegis of RAKIA, whose core function is to promote investment into the emirate. In pursuance of this, RAKIA and its subsidiaries operate a number of industrial and free zones within the emirate, and the organisation is responsible for granting offshore licences. In 2011 RAK Free Trade Zone (RAK FTZ) issued 2033 licences, up 17% on 1740 in 2010, bringing the total number of companies operating in the zone above 5000. Oussama El Omari, CEO and director-general of RAK FTZ, told OBG, “We have tried to minimise the impact of the global recession by remaining flexible and trying to find creative solutions so our client can continue with their business.”

RAKIA issued 1415 licences for its industrial zones in 2011, compared to 1108 in 2010. According to Khater Massaad, the CEO of RAKIA, the authority has seen an uptick in new company registrations in recent years. “RAKIA has witnessed an increase in the registration of new companies because it has been rated as the most attractive destination for FDI in the Middle East by the Financial Times Group’s fDi Intelligence magazine and because existing companies have been satisfied by the services of RAKIA.”

FREE ZONES: At present, there are three free zones in the emirate: RAK FTZ, RAK Industrial Zone and RAK Maritime City. RAK FTZ mostly caters to small and medium-sized enterprises and companies offering professional services. RAKIA operates two industrial estates, at Al Hamra and Al Ghail, covering 4.8m sq metres and 22m sq metres, respectively. Of these, Al Hamra reports almost 100% occupancy and Al Ghail over 50% occupancy. Both zones have their own power stations, with respective capacities of 45 MW and 84 MW, and these are in the process of being interconnected, creating a private power network for RAKIA by the end of 2012. RAK Maritime City, located next to the port of Mina Saqr, the largest in RAK, is the newest free zone in the emirate, opening in May 2011, with dedicated areas for warehousing, cargo handling, and shipbuilding and repair. All free zones in the emirate offer similar incentives, including exemption from taxes, avoidance of double taxation, no restrictions on ownership or repatriation of capital and profits, and access to the market and strategic location of the UAE. The authorities are also considering establishing a fourth free zone at RAK International Airport.

MANUFACTURING STRENGTHS: In general, manufacturers have tended to be export-oriented and geared towards specialised products. The emirate’s small population means its own market is limited, and it does not enjoy the oil and gas resources that have made, for instance, large-scale petrochemicals and aluminium industries viable in other parts of the Gulf. In many ways, however, this has been to RAK’s advantage, since it has avoided duplication with other schemes in the federation and the wider Gulf region, and instead focused on niche products and areas where it has a clear competitive advantage (see Industry chapter).

While many of RAK’s larger industrial concerns were originally founded by the government, often in partnership with foreign firms that were in a position to bring know-how to the emirate, these days most are either private firms, or else publicly listed firms, although in many cases the government retains a significant stake. Of the 60-odd firms listed on the Abu Dhabi Securities Exchange (ADX), 14 have their headquarters in RAK. Manufacturing accounted for 22% of GDP in 2010, according to the RAK DED, which showed nonmetallic mineral products to be the largest single sector, accounting for 27% of industrial firms, followed by chemicals and plastics and fabricated metals, both with 22.5%. According to manufacturing firms that OBG spoke with, the main advantages to operating in RAK include the tax-free, low-regulation environment; the location, which gives access to the markets elsewhere in the UAE and GCC, as well as the Indian subcontinent and East Africa; abundant and relatively cheap land, which combined with the ability to bring in inexpensive labour and a flexible approach to Emiratisation makes for lower operating costs.

CEMENT: In the cement industry, the existence of high-quality limestone deposits right on the doorstep constitutes an additional competitive advantage, since plants are not reliant on imports of raw material. In 2010 RAK counted five cement firms: Union Cement, RAK Cement, RAK White Cement, Gulf Cement and Pioneer, which in 2011 was taken over by Oman’s Raysut Cement. During the UAE’s real estate boom of the past decade there was much investment in expansion, but since the onset of the global financial crisis, the cement industry in the UAE has suffered from overcapacity. This has, in turn, seen prices fall to among the lowest levels in the GCC, at around $50.40 per tonne in the first half of 2011, down 5.1% on $53.10 per tonne over the same period in 2010, according to Global Investment House (GIH), a Kuwaiti investment firm. GIH reported that among the UAE’s listed cement firms, consolidated net income was down to $19.4m in the first half of 2011 compared to $44.2m over the first half of 2010, a drop of 56.1%, and gross margins fell from 12% to 7.1%. A number of companies were operating at a loss.

CERAMICS: The ceramics industry, on the other hand, has gone from strength to strength in recent years. While there is only one ceramics firm in the emirate, the company is the world’s largest producer by volume: RAK Ceramics, which in 2011 turned out 117m sq metres of tiles. The firm is also a significant producer of sanitary ware, turning out some 12,000 units a day. Although the company does use local limestone where possible, its success is not so much the existence of raw material locally as innovation. Since its foundation in 1991, the company has focused on sourcing the best possible designs, while making use of RAK’s competitive advantages to produce products of high quality, but at a slightly lower price than is possible in Italy or Spain, RAK’s main competitors in the field. The company has been constantly refining its products to make sure they keep pace with public demand and tastes, and to date offers more than 8000 product lines. As of 2011 the company exported to 160 countries worldwide. The company, which is listed on the Abu Dhabi bourse, posted net revenue of Dh3.34bn ($909m) in 2010, compared to Dh3.77bn ($1.03bn) in 2009. Net profits were Dh270.2m ($73.5m), a 3.2% increase on the Dh261.9m ($71.3m) recorded in 2009.

PHARMACEUTICALS: The pharmaceuticals industry is another strong point for the local manufacturing sector. Gulf Pharmaceutical Industries, better known under its brand name Julphar, was set up in 1980, and now the company is one of the leading generic drugs producers in the GCC. Around 90% of production goes to export, with Julphar products found in more than 45 countries. In 2011 the company reported results to the ADX of Dh1.02bn ($277.6m) in turnover, an increase of 11% on turnover of Dh920m ($250.4m) in 2010, while net profits in 2011 were D170m ($46.3m), compared to Dh154m ($41.9m) in 2010. One particular strength of Julphar is insulin; genetic predisposition and sedentary lifestyles mean the UAE suffers from some of the highest rates of diabetes in the world. The company has expanded its factories to produce 1500 kg of insulin a day, which once fully up and running will make the UAE the world’s fourth-largest producer of insulin, after Denmark, the UK and the US. Production was due to commence at the start of 2012.

OTHER INDUSTRIES: In addition to these three sectors, which account for a substantial proportion of local activity, the industrial base has widened significantly in recent years, with several new segments having been attracted to the emirate. Among these are glass, metals, food processing and automotive components. RAK Ghani Glass, a joint venture between RAK and Pakistan’s Ghani Glass, Pakistan’s JS Group and Saudi Arabia’s Swicorp, set up shop in RAK in 2010. It produces glass bottles for the pharmaceuticals industry, with capacity of up to 100,000 units a day. Guardian Glass, a US firm, produces 700 tonnes a day, aimed at customers in the automotive and construction industries. Arc International, a French-based international producer of glass and tableware products, has also set up locally.

Metals is another sector that has grown rapidly in recent years as new ventures have established operations in the emirate. Steel in particular has shown marked growth. Saudi Arabia’s Zamil Steel set up a factory producing prefabricated buildings in RAK in 2006. South Korean steel producer SeAh Steel followed suit, opening a 250,000-sq-metre steel pipe plant in RAKIA’s Al Ghail industrial zone in April 2011. The plant has a capacity of 150,000 tonnes per year and total investment came in at $70m.

The sector is also adding capacity to process metals other than iron and steel. Unifico, a Swiss-based industrial group, is building a smelter with a production capacity of 500,000 tonnes a year of London Metals Exchange-quality copper cathodes. The smelter, due to open by the end of 2013, also has the capacity to process gold ore. Although initially the ore will come from overseas, both Oman and Saudi Arabia have substantial deposits of copper, meaning that there is potential to source materials from closer to home in future. In addition, Union International Holdings Group, a local group with interests spanning construction, real estate and manufacturing, has joined with UK-based commodities group TriStar Resources to build a plant to process antimony, a rare earth that is required for a number of high-tech industrial applications.

The presence of metal processing facilities is likely to spur further development of downstream industries in the vicinity. Already, RAK has factories producing batteries and electrical cables. Ashok Leyland, an Indian-based bus manufacturer, opened a $50m plant in 2010 that produces more than 2000 buses a year, while another Indian firm, Mahindra and Mahindra, set up a facility to manufacture armoured vehicles in 2011. RAKIA has a dedicated industrial zone, the RAK Auto Park, for automotive assembly and component firms.

GOING HIGH-TECH: Gradually, RAK is moving up the value chain, transitioning from the manufacture of basic products to that of more finished articles. At the same time, the emirate is investing in a number of high-tech initiatives designed to cement its role as a centre for advanced manufacturing. One such initiative is that involving Falcon Technologies International, an optical media joint venture between RAK and a number of Swiss investors. The firm is a global leader in archive technology solutions. A number of European research institutes have chosen to site local research centres in RAK, including Centre Suisse d’Electronique et de Microtechnique, which set up a solar test site at RAKIA’s Hamra Industrial Estate in 2005, and the École Polytechnique Fédérale de Lausanne, which set up a campus and research centre in the emirate in 2009. Although in their infancy, these initiatives hold the promise of attracting further investment in technology and research over the longer term, as well as potentially generating spin-offs that can be commercialised.

TOURISM: However, one of the areas with the biggest growth potential is the “industry without chimneys” – tourism – which in many ways remains underdeveloped in RAK compared to its potential (see Tourism chapter). Although exact figures on tourist numbers are not available, in 2010 the emirate’s hotels hosted a total of 259,000 guests who together stayed more than 515,000 guest nights, though this was down on figures of 542,000 and 1.07m in 2009. Occupancy rose from 66% to 72% over the same period. The leading source of tourists was the UAE itself, followed by Europe, then Asia and Africa.

The sector has potential, with a pleasant winter climate, 65 km of coastline, historic sites and museums, and the Hajjar Mountains, which stand in sharp contrast to the desert in most of the rest of the UAE. As of the beginning of 2012, the emirate had 15 hotels (excluding establishments aimed at budget travellers), and capacity has been growing fast, with new developments such as Doubletree Suites, Banyan Tree Resort and Spa, and Waldorf Astoria having either opened in 2011 or due to open by the end of 2012. The Mina Al Arab, Marjan Island and Bab Al Bahr mixed-use developments are set to add further capacity by the middle of the decade.

One project that has attracted a great deal of attention in the press of late is Spanish football club Real Madrid’s “sportainment” theme park and resort, which was announced at the end of March 2012. Featuring rides, extensive sports facilities, retail space, a club museum and a 10,000-seat stadium, the 50-ha resort on Marjan Island will open in January 2015 and is hoped to attract as many as 1m visitors a year.

CONSTRUCTION & REAL ESTATE: Such projects are helping to support the construction and real estate sectors in RAK. The local construction industry was affected by the global downturn, but less so than in some other emirates, given that the local government had not overexposed itself to the real estate market (see Real Estate & Construction chapter). Nonetheless, there were repercussions in terms of demand for cement and the willingness of banks to approve funding for new projects. However, RAK continued to register economic growth, which has meant people have continued to come to the emirate, thus supporting demand for real estate. The government projects the local population will reach 750,000 in 2020, compared to around 300,000 at present. To meet part of this demand, as well as provide facilities necessary for ongoing development in RAK, the government, through its real estate arm Rakeen, is moving ahead with a number of mixed-use projects that feature a range of hotels, housing, retail and leisure space. These include the $1.8bn Marjan Island, an artificial island off the coast that will have 10 luxury hotels, plus residential and commercial components. La Hoya Bay, one of the projects on the island, will feature hotels, apartments and a number of marinas and is being developed by Khoie Properties at a cost of Dh2.5bn ($680m). Completion is due in 2014.

Saraya RAK, under development by Saraya Holdings, is another mixed-use island development; covering 1.2m sq metres, it is due for completion in 2015 with total investment of Dh7.34bn ($1.1bn). Al Hamra Village is partially completed, with villas and a shopping mall now open to the public, and a Waldorf Astoria hotel due follow suit by the end of 2012. Mina Al Arab features villas, apartments and 29,000 sq metres of retail, though this latter component is not due to open until 2016. Other projects designed to boost business in the emirate include RAK Financial City, set to house the offshore financial sector, and RAK Exhibition and Convention Centre, which should help the emirate to grab a slice of the meetings, incentives, conferences and exhibitions business. This lucrative segment accounts for up to 15% of the tourist trade globally, according to the World Travel and Tourism Council.

RETAIL MARKET: Increasing visitor numbers will also help retail trade, which presently accounts for 11.7% of GDP. Most of RAK’s retail space is aimed at a mid-market clientele, reflecting the size of the local population and the dominance of shopping malls in other emirates, notably Dubai, which have a wider range of goods (see Retail chapter). By increasing tourism, RAK can increase footfall in its own malls and attract new segments for a more diverse retail base. New mixed-use development are due to add to the retail area over the next few years, with one, the Al Hamra Souq, adding some 150,000 sq metres alone by the end of 2012.

Much of this is expected to be geared towards the higher end of the market, as both tourism and spending power among local residents increase. Traditional crafts and industries like pearling may also see renewed attention as a result. “We believe that the region can again become one of the largest producers of pearls in the world, after a hiatus of over a century,” said Daji Imura, the director of the board, CEO and COO of RAK Pearls. “There is a history of pearling in the region that people will want to hear about and buy the pearls.”

ENERGY, AGRICULTURE & FINANCE: While RAK’s hydrocarbons reserves are limited, the energy industry is nonetheless a contributor to the emirate’s GDP. Local player RAK Gas operates a gas treatment plant producing 150m cu feet of sour gas, 120 tonnes of liquefied petroleum gas and 25,000 barrels of condensates per day. The firm is charged with ensuring the security of natural gas supply to RAK for its power system, and to that end it engages in gas trading and is involved in a number of exploration and production (E&P) operations in Africa. At the beginning of 2012, RAK Petroleum, founded in 2005, completed a merger with Norwegian oil and gas independent DNO, and it is in the process of merging the enlarged group’s E&P operations in the Middle East and North Africa.

Unsurprisingly for a desert country, agriculture accounts for just a small percentage of GDP – 5.7% together with fisheries in 2011, according to RAK DED figures. Nevertheless, there are a number of successful agricultural ventures that are geared towards producing for local consumption, including several date plantations and Salata Farms, established in 2008, which uses hydroponic gardens to produce a variety of vegetables sold on the local market.

The financial services industry remains relatively small in RAK, reflecting the high degree of integration with the rest of the UAE. There are two banks, RAKBANK and Commercial Bank International, headquartered in the emirate (see Financial Services chapter). For 2011 RAKBANK reported preliminary results to the ADX of Dh1.2bn ($326.6m) in net profits on revenues of Dh2.64bn ($718.6m), up on 2010 figures of Dh1bn ($272.2m) and Dh2.21m ($602m) respectively. The bank is 52.75% owned by the government and has 28 branches, of which seven are in RAK. CBI opened in 1991 and operates a total of 16 branches in the UAE, together with two subsidiaries, Takamul Real Estate and International Finance Brokerage. Preliminary results for 2011 showed revenues of Dh541m ($147.3m) compared to Dh535m ($145.7m) the previous year, and net profits of Dh64.7m ($17.6m) compared to Dh16.6m ($4.5m) in 2010.

Other UAE institutions with a presence include Abu Dhabi Commercial Bank, First Gulf Bank, National Bank of Abu Dhabi and Emirates ADB. Among the foreign banks were HSBC, Bank Melli of Iran and Banque Misr of Egypt. A number of Islamic banks also have branches in the emirate. The offshore sector has grown rapidly over the past few years, but as with manufacturing, will likely have to target specific niches to compete with the regional financial services giants.

INFRASTRUCTURE ENHANCEMENTS: RAK is improving infrastructure to keep pace with growth. With the opening of RAK Maritime City, it has five ports, and as with the free zones, they are targeted to specific niches (see Transport chapter). The biggest, Mina Saqr, has berths of up to 12 metres and primarily handles aggregates. Al Jazeera port has dry dock facilities for small and medium-sized vessels, such as tugs and oil support boats. Al Jeer is the only port in the region specialised in livestock and Ras Al Khor, situated on the creek in the middle of RAK City, focuses on ship repair, maintenance and warehousing. All ports come under the Saqr Ports Authority, a public body.

To ensure the projected increase in population does not disrupt the smooth flow of traffic (one of RAK’s major selling points is that its roads, unlike Abu Dhabi or Dubai’s, remain uncongested), the emirate is looking to improve its bus system and upgrade the road network, with a Dh3bn ($816.6m) improvement programme running from 2008-12. The Etihad Railway aims to link all seven emirates by rail. Construction on the section joining RAK to the rest of the UAE is due to start in 2013 and to be completed by 2017. The network will meet up with railheads in Oman and Saudi Arabia to form part of the broader GCC rail network, due to be finished by 2018. The cost of the Etihad Railway is estimated at $8bn, while the GCC project has a projected price tag of about $25bn.

On the aviation front, RAK International Airport also has plans for expansion. The airport currently serves six regular carriers and 25 charter airlines, a number which it intends to increase. The master plan for development includes proposals for new arrivals and departures lounges, food and beverage outlets, a free trade zone, cargo facilities, parking and office space. In the short term, the arrivals and departures terminals will be brought together, while in the medium term the number of gates will be increased from three to 10. Within three years’ time, the plan is to have a dedicated terminal for charter airlines. The airport has signed a deal with Kuwait’s National Aviation Services to manage ground services, and it intends to focus on developing new areas of business, such as maintenance, repair and operation activities.

POWER: One area where infrastructure has struggled to keep up with growth in recent years has been the electricity supply, which has emerged as a major concern for the business community over the past few years. Currently, the Federal Electricity and Water Authority, which is responsible for utilities in the Northern Emirates, including RAK, suffers from a shortfall in generating capacity, and has been prioritising domestic over commercial users as a result. A number of factories have found themselves obliged to run expensive diesel generators for want of adequate mains supply, while some potential projects have had to look elsewhere. However, in March 2011 the federal government committed some $1.5bn to upgrading power and water networks in the Northern Emirates, and RAKIA is currently in the process of connecting its power plants at Al Hamra and Al Ghail to create its own power system. Although new generating capacity will almost certainly be required over the next five to 10 years if the pace of industrial growth is to be sustained, over the short term, the power supply is now largely stable, if tight.

OUTLOOK: Driven by manufacturing and ancillary industries, the economy looks set for further expansion, while the range of industries should continue to broaden, especially into new, high-tech areas, although growth in the latter is more of a long-term proposition. At the same time, tourism and related sectors such as real estate and retail are expected to grow, raising RAK’s profile and further diversifying the economic base. The expansion of offshore firms is another area with strong potential, although this will likely come through exploiting niche markets. Concerns over electricity supply may act as a drag on growth in the short term, particularly in manufacturing, but as new supply comes on-line this issue is likely to fade.