Dubai incentivises SME creation

Developing small and medium-sized enterprises (SMEs) is a priority for the Dubai government. As in many developing countries, these businesses account for the bulk of commercial establishments — about 95%, according to government figures. However, while they employ 42% of the workforce and account for 40% of the total value added in the economy, they are not seen as a crucial source of employment in the country. Instead, SMEs are seen as a way to provide greater opportunity and for their potential to turn Emiratis into entrepreneurs.

Dubai’s citizens have long preferred to work in the public sector, which puts pressure on the government to create and provide jobs. If Emiratis can be convinced to adopt a more entrepreneurial spirit, however, some of this pressure could be relieved. “The government wants more Emiratis to be owners of businesses, rather than employees in the public sector,” said Alexandar Williams, director of strategy and policy for Dubai SME. “The SME sector is driven by the cosmopolitan population using Dubai as a hub for business expansion.”

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SMEs also make significant contributions to the economy through fees for licensing and other services. These two types of income are particularly important for the Dubai government as there are no corporate or personal income taxes. More SMEs, therefore, means an increase in revenue. The government’s support for SMEs, largely spearheaded by an agency of the Department of Economic Development called Dubai SME, consists of incentives and support programmes as well as studies and data on the sector.

At present, most SMEs are concentrated in the manufacturing, trading and services sectors. The government definition of SME changes according to sector. In manufacturing and services, for example, any firm with 250 employees or fewer and no more than Dh250m ($68m) in annual revenue qualifies as an SME, while in trading, the cut-off is 75 employees at the same amount of revenue. According to a report by Dubai SME released in January 2013, 51% of all SMEs were in services, 33% were in trading, and 16% were in manufacturing.

Sector Studies

The research found that the two most popular manufacturing sectors for SMEs are textiles and metal products. Food-and-beverage processing has been the fastest-growing category for new licenses in recent years, according to the Dubai SME report, accounting for 24% of the total from 2009 to 2012. Real estate and construction are the two most popular activities within services, and in the trading category consumer goods and textiles are the most common. The analysis also found that returns on capital ranged from 20% to 40% in services, from 25% to 35% in manufacturing, and from 18% to 30% in trading.

Dubai SME’s report also makes the case for active government support of SMEs. Its international comparisons show that the productivity rates of SMEs in Dubai were lower in many cases — half that of South Korean counterparts and less than a third of those in Singapore. Productivity could be enhanced through more attention to efficiency gains, training and using enterprise-level information communications technology systems such as client-relationship management software, the report found. At the moment, Dubai SME programmes offer varying levels of support. The agency is available for informal consultations and facilitative support at the start-up phase, when licensing and approvals are needed, and estimates that about 13,500 local SMEs have tapped into these various resources.

Local entrepreneurs and start-ups can also take advantage of a subsidy programme that cuts licensing and fees by up to 90% for up to three years. Operating licences in the emirate cost between Dh15,000 ($4083) and Dh30,000 ($8166) a year. These fees are primarily for visas to import workers, and typically amount from Dh7000 ($1905.40) to Dh10,000 ($2722) per annum. Dubai SME also runs an incubator service, which can hold 40 firms at a time and which by 2012 counted 350 businesses as graduates, according to Williams.

The SME 100

One of the most visible Dubai SME programmes is the SME 100, an annual ranking of top SMEs in the country. SMEs are encouraged to apply for the ranking, which provides the incentive of public recognition for top performers and those with future potential. It also gives the public agency a chance to compile statistics on the hopefuls, as the application requires disclosures that are useful for research purposes. The ranking is based on a blend of financial and non-financial factors, with the latter including innovation, international orientation, development of human capital and corporate governance. Between 2011 and 2013, 4133 SMEs applied, and 400 have been shortlisted. In total they represent a workforce of 121,870 and annual revenue surpassing Dh68bn ($18.5bn).

At the top end of the SME 100 list are firms widely considered ready for investment should they seek it, either through stock offerings, private equity or otherwise. Dubai SME in April 2014 announced an agreement with Taylor Wessing, a law firm with offices in 22 countries including the UAE, to conduct seminars on key topics of interest for growing SMEs, including initial public offerings (IPOs). The 2013 ranking contained 60 trade-focused SMEs. The top spot was taken by Just Falafel, a local fast-food franchise, which had ranked 49th in 2012, and which operates more than 52 outlets in 18 countries. The top five also included Wavetec, a creator of customer-services technology; Index Holding, an SME-sized conglomerate with interests including industry, health care and trading; Dubai Desert Extreme, a retailer, markets and events producer focused on cycling and skateboarding; and Elcome International, a services provider for shipping, defence, oil-and-gas and yachting industries in the region.

Selling Stock

Just Falafel has in the past year considered launching an IPO on a local stock market, but as of September 2014 had yet to decide on a final strategy for going public. NASDAQ Dubai, one of two equities markets in Dubai, is courting SMEs in hopes of attracting listings, which may help these smaller firms with access-to-finance issues. The bourse has created an advisory group that includes Dubai SME to prepare a new market for SMEs. NASDAQ Dubai as well as the Dubai Financial Market, the emirate’s other platform, have both been in search of ways to attract new listings. Until 2014 there had been no IPOs in Dubai since 2009, in part because the concept and obligations inherent in the public sale of equities has historically lacked appeal in the region, but also due to depressed valuations since the financial crisis. As of the third quarter of 2014 the environment was changing for the better, with more demand for UAE shares, brought on in part due to the UAE’s graduation from frontier to emerging markets categorisation in May by MSCI, the US-based provider of emerging market indexes.

Dubai SME’s state-of-the-sector report tells a story familiar across the developing world in terms of access to finance. Its survey found that 80% of respondents used personal savings as the primary source for financing their businesses, with just 23% reporting access to bank financing in the five years previous to the 2013 study. It assessed the ongoing financing requirements of SMEs to be between Dh1m ($272,200) to Dh5m ($1.36m) per annum. In addition to its subsidies regime and available loans, Dubai SME plans to help in this area through an equity investment platform announced in September 2014, which would be an alternative to a traditional stock market. This initiative aims to study the potential for equity investments in SMEs and then create a platform to link investors and SMEs seeking capital. The investigative phase is already under way and includes identifying venture capitalists, angel investors and others who may be interested.

Public Procurement

SMEs in the emirate can also access government business since Dubai SME in 2002 established a government procurement programme. All Dubai government departments are expected to source 5% of procurement from these SMEs. On average, companies that have qualified have already found an enhanced ability to obtain financing, with anywhere from a third to just over half of them reporting more debt in their financing mix than the averages for the three main activities of manufacturing, trading and services.

A similar programme is being designed at the national level, with the federal government of the UAE establishing a local procurement programme through a law passed in 2014. It requires federal ministries and other bodies to source at least 10% of total annual procurement through local SMEs. For firms partially owned by the government, the threshold is 5% if the public ownership level surpasses 25%. It also provides exemptions on Customs tax for equipment, raw materials and goods for production purposes in the hope of stimulating more activity. The law also exempts SMEs from paying bank guarantees for new workers. The overall goal, the minister of economy, Sultan al Mansouri, told media, is to boost the SME contribution to the non-oil economy from a 60% share of GDP to 70%. While the government is ramping up its support for SMEs, more emphasis on their creation and success may be necessary to make them more visible in Dubai. More government-sponsored training programmes in business and entrepreneurship, as well as financial incentives, could help to promote more small business activity.