A free hand: Free and industrial zones facilitate expansion of manufacturing

After the Second World War, winds of change were sweeping across the Gulf region – oil was flowing out, profits were flowing in and a polity was forming among the former Trucial States, which now make up the UAE. In this context of change and development, the authorities in Dubai were laying the groundwork for an economic growth strategy novel to the region, one that still drives much of the emirate’s development today.

HANDS OFF: At the heart of this strategy was the belief that businesses operate most efficiently when government interference is at a minimum. To reduce restrictions but still maintain their ability to guide economic development, the authorities opted to designate special zones where businesses could operate freely. Called “free zones”, these areas have become the cornerstone of business development in Dubai and across the GCC. Over time, free zones have grown to make up a significant portion of Dubai’s overall economic activity. In 2011 free zone exports and re-exports were worth $46.8bn, 40% of total exports and re-exports that year, according to data from the Dubai Statistics Centre.

Authorities’ laissez-faire attitudes were also coupled with major infrastructure investment. Oil production at the time helped fund important projects in Dubai. This source of revenue received a boost in the 1980s, with the discoveries of the Margham onshore field and the Rashid offshore field. Revenues from hydrocarbons windfalls, in turn, helped Dubai’s leadership finance major investments like Port Rashid and Jebel Ali Port, creating an environment in which free zones could better utilise Dubai’s geographic location.

There are more than 20 free zones in Dubai, including Jebel Ali Free Zone (JAFZ), Internet City, Media City, Airport Free Zone, Healthcare City, Knowledge Village and the International Financial Centre. Businesses operating in the zones enjoy a range of perks. These include 100% foreign ownership, 100% unrestricted capital and profit repatriation, 0% corporate and personal tax, exemptions from Customs and duties, fast-tracked business establishment and no restrictions on recruiting labour. Because they gather businesses in a concentrated area, free zones also make it easier for the government to provide necessary services on-site. For businesses, this translates to streamlined bureaucracy and smoother relations with government entities.

JEBEL ALI: The flagship of the emirate’s free zones is JAFZ, a project owned by Economic Zones World, a subsidiary of government-owned Dubai World Group. The zone’s success is woven into that of Jebel Ali, the port it sits beside. When completed in 1979 it became the largest manmade port in the world. Jebel Ali Port’s success foreshadowed that of its adjoined free zone. In 1985 the Jebel Ali Free Zone Authority was inaugurated as the independent governing body of JAFZ. Since its creation, JAFZ has grown to 48 sq km and hosts around 6400 companies. Industrial growth has been particularly strong, with trade volumes for manufacturers on the rise. The trade created by JAFZ companies that hold manufacturing licences stood at $19.1bn in 2010, Ibrahim Aljanahi, JAFZ’s deputy CEO, announced in February 2012. At that rate, manufacturing counted for just over 30% of JAFZ’s total $63.5bn in that year. Positive developments from JAFZ’s industrial members were matched by developments on its balance sheets. In the second and third quarters of 2012, the zone scored major successes regarding its debt restructuring plans. In May 2012 it received approval from its creditors to repay $2.04bn of its sukuk, or sharia-compliant bond, early, allowing it to more quickly address its debts.

INDUSTRIAL ZONES: In addition to free zones, there are a number of non-free-zone industrial areas that offer similar perks for businesses. Industrial zones, like their free zone counterparts, can take advantage of Dubai’s infrastructure and business-friendly tax policies. The key difference between the two is the application of Customs and duties. While free zones are well-tailored for businesses operating in light industrial and re-exporting activities, industrial zones are better suited for domestic trade and regional trade, since products made in Dubai enjoy easier access to the UAE’s neighbours through the GCC Common Market scheme. Also unlike those operating in free zones, businesses operating in industrial zones must obtain a licence from the Dubai Department of Economic Development. To receive a licence, companies must meet certain requirements, including the inclusion of a local partner who holds at least a 51% share of the enterprise. These regulations are currently under review by the UAE federal government, as authorities want to tweak the law to help make operations throughout the UAE more attractive.

A WALK IN THE PARK: Several major industrial zones are undergoing growth in the emirate alongside the growing onshore industrial sector. One such is Dubai Investment Park (DIP), a subsidiary of Dubai Investments. DIP covers 2300 ha, less than 10 km from Dubai World Central (DWC) Airport and less than 15 km from Jebel Ali Port. The project aims to create a self-contained area with three distinct zones: industrial, commercial and residential. The master plan was developed in 1997. By 2003 both Phases 1 and 2 were complete, and by 2011 they were joined by Phases 3 through 8. The entire zone enjoys all of the infrastructure found in a typical city: internal road networks, bus stops, metro stations, postal services and mosques. The industrial section offers firms a number of perks, including designated warehouse plots and connectivity to Jebel Ali Port and DWC Airport. So far the industrial section of DIP has attracted a broad range of enterprises, including plastics, printing, pharmaceuticals, textiles, building materials, and food and beverage processing.

Dubai Industrial City (DI) has also seen growth in recent years. Located on the western edge of Dubai near Abu Dhabi, DI is a member of TECOM Investments, a subsidiary of the government-owned Dubai Holding investment company. The area specialises in working with small to medium industrial companies concentrated on the GCC market. Its 450-plus members include ALEC, Barakat Quality Plus, Al Shaffar Steel Engineering(ASSENT) and Terazzo, as well as multinationals like chemical manufacturer BASF and home retailer IKEA.

In recent years, DI has been active in building up its facilities. Investments have topped Dh6bn ($1.63bn) since 2004, managing director Abdullah Belhoul told local daily Al Khaleej in June 2012. In January 2012 DI announced the operation’s second phase for its storage facilities, offering 3.5m sq feet of warehouses and retail showrooms. The project, which doubled the size of storage, represents an estimated investment of Dh750m ($204.15m). “The launch of the second phase of warehouses at Dubai Industrial City will further consolidate Dubai’s position as the current logistics hub in the UAE and the Middle East,” Belhoul said at the opening of the expansion. “It will also spur growth in the industrial sector, which has grown by approximately 11% in 2011, making it the second-largest contributor to the UAE’s economy after hydrocarbons.”

Stability helps as well. “Unrest in the region over the past couple of years has resulted in many organisations placing greater value in long-term stability,” Belhoul told OBG. “When you factor in that Dubai is a tax-free haven and home to one of the world’s largest and most efficient ports and airports, Dubai’s potential in becoming a regional industrial centre seems almost inevitable.”

The development of both industrial areas and free zones is continuing to impact the economy in a number of positive ways. Increasing industrial activity is set to continue supporting exports, which saw growth of over 44% in 2011, the DSC’s CEO, Aref Obaid Al Muhairi, told local daily Albayan in May 2012. During the same year, manufacturing activity picked up by 11.7%, growing to make up some 14.1% of total GDP.