20-20 vision: The government seeks a balanced and diversified economy

Industrial activity has been crucial to Ras Al Khaimah’s economic growth, driven by the government’s policy of attracting firms and investment into the sector based on the natural resources RAK has to offer them. The emirate is now looking to increase growth capacity by removing electricity supply constraints, addressing logistics concerns and targeting specific industries, such as vehicle assembly, electrical equipment and downstream plastics. Developing a greater number of focus areas is a years-long process, and the groundwork is well under way: for example, 2013 should see the completion of an electricitydemand survey the government intends to use to guide its expansion plans.

Sumbiosis

RAK is well positioned to thrive in the UAE’s globalised and competitive environment because it is naturally suited to exploit niches that complement other emirates and countries in the region, rather than duplicating or competing. This is in large part thanks to RAK’s different mix of natural resources: what it has is lacking in the rest of the region, and what it lacks is abundant in the rest of the region, namely sizeable oil and gas reserves. So whilst others in the GCC are a good fit for industries that need petroleum products as a feedstock, RAK has focused on those requiring limestone or clay.

RAK has continued to pursue measures designed to further integration of the manufacturing sector, through which local firms can be relied upon for supplies and inputs by larger companies. Some moves investors can expect are a drive to develop small and medium-sized enterprises (SMEs), improvements to transport routes, further articulation and differentiation of RAK’s various free-zone offerings, and general improvements in the crucial soft factors for investment decisions, such as real-estate developments that improve quality of life in the emirate.

The specific segments that make up RAK’s industrial sector are quarrying, manufacturing, and crude oil and gas, which together now account for 34.6% of GDP. Industry has served as a major catalyst for the drive to diversify the economy to the extent that government is now looking to provide that same boost elsewhere. The government has advocated a “20-20” strategy as part of its diversification efforts: no one sector should account for more than 20% of GDP or 20% of the fiscal surplus.

For industry in RAK, growth from 2013 on seems assured, given the strong forecast demand for building materials linked to regional investment plans for infrastructure, hospitality and housing. Although a building boom in the 2000s brought considerable real estate to the market, construction-related activity should continue to be a major source of demand for RAK’s materials producers. While there are a host of projects being carried out across the Gulf, work will need to be done locally as well. Timothy Lefebvre, president of Mabani Steel, told OBG, “Many people who left RAK for jobs abroad are returning, as they prefer living in RAK over other emirates. However, the infrastructure to support this reverse migration, like public transportation, still needs to be developed. This will help ensure that returners and newcomers stay in RAK for the long term.”

Size & Scope

The constitution of the UAE gives each individual emirate control of its own economic policy, and therefore its strategy for industry. Within RAK, the RAK Department of Economic Development (RAK DED) serves as a one-stop shop for registration, licensing and any other interactions with the local Industrial cos. by owners’ nationality, 2011 government. In addition, it is also an important research and development planning body, and is legally responsible for producing official statistics.

RAK DED is the primary source for data on the economy, and its statistical yearbook is considered the most reliable source of information about the emirate. According to the 2012 edition, manufacturing accounted for 26% of the economy in 2011, with quarrying at 3.6%, and oil and gas at 5%, bringing industry’s total contribution to 34.6%.

Census

RAK DED completed an economic census in 2011, including a headcount of enterprises and basic information about them. In addition to enabling the agency to correct the number of licensed businesses in the local economy – it adjusted the figure from roughly 22,000 to around 14,000 (firms with more than one licence were counted more than once) – the census shed light on the industrial sector and what types of companies exist in it.

There are 2186 large and medium-sized firms in the industrial sector’s main categories of manufacturing, quarrying, and oil and gas. In manufacturing, more than a third of enterprises are producers of textiles and leather – 919, according to the yearbook. The next most common industrial enterprise was equipment manufacturing, with 454 firms, followed by basic metallic industries, with a roster of 216 companies. The most labour-intensive sectors were non-metallic minerals, with 17,348 workers in 2011; wood products, with 14,582 staff; and equipment manufacturing, with 10,187 employees. Industry accounted for 27% of RAK’s labour force.

Retaining employees is one of the major issues for the building materials industry. “A challenge one must face is how to retain talent,” Amer bin Ahmed, the managing director of building materials supplier Knauf for the GCC, India and East Africa, told OBG. “Large capital investments must be made to develop talent and human resources, and to make sure that skilled teams are in place for the long term. Integration of Emiratis should also be encouraged.”

Government Led 

A handful of companies in the sector stand out due to the fact that they were founded by the government to spearhead industrial growth and have since gone on to play crucial roles in the emirate’s economic development. Many are still majority-owned by the state, though stakes in most have been offered in public sales via the Abu Dhabi Securities Exchange (ADX).

Stevin Rock, for example, is the main quarrying company in RAK, and has emerged as a key provider of aggregate and other construction materials for the region. RAK Ceramics is another example of a company created by the emirate to leverage local resources. The firm processes local clay into ceramic tile and is the largest such manufacturer worldwide. It has diversified into household fixtures such as bath products, as well as tableware.

RAK also hosts five cement companies, and several other providers of basic building materials. For these firms, their prospects are broadly aligned with those of the construction industry in the GCC region. Several growth catalysts are expected in the medium and long terms, providing a promising outlook for producers (see analysis).

Infrastructure Spending 

Stevin Rock executives have identified three infrastructure projects that will add to its competitiveness in the coming decade, as well as bring new transportation options and opportunities to cut costs for companies across the manufacturing sector. The first is a ring road for RAK, which will connect the main quarry directly to Mohammed bin Zayed Road, the national highway.

The second is a plan to deepen the berths at Mina Saqr Port, one of five ports in the emirate. Berths at Mina Saqr, which is the Middle East’s largest bulk facility, are currently 12 metres deep, but greater depth will boost the port’s competitiveness by giving it the ability to bring in larger ships.

This could be of particular benefit to Stevin Rock as it will help to bring Mina Saqr Port more in line with facilities in its export markets. The company is a major exporter to India, for example, where many ports have depths of between 14 and 16 metres.

The third infrastructure boost would come later this decade, likely in 2018, in the form of a railway line. Etihad Rail is a federal project that aims to connect the emirates of the UAE as well as provide a alternative for shipping cargo. The plan calls for terminus points at the borders with Oman and Saudi Arabia, the latter of which is a particularly important market for construction and materials firms, as it is the biggest economy in the region and the authorities there have plans for large-scale infrastructure and housing projects. Eventually, Etihad Rail could link up to a GCC-wide rail system, which would help reduce the cost of transport for the raw materials and manufactured goods produced by many of RAK’s industrial concerns.

Pharma Focus 

Another government-backed firm that has helped to diversify the industrial sector is Gulf Pharmaceutical Industries, better known as Julphar. Founded in 1980, it now sells 800 products and employs roughly 2800 people. The company maintains 11 plants in RAK and one in Addis Ababa, Ethiopia. Expansion plans include facilities in Saudi Arabia and Algeria. The company reported an increase in profits in 2012 of 17.6%, or $54.5m, while gross profit reached a total of $189.85m.

One of Julphar’s newest lines of business is insulin, a production line established in 2012 in response to an increasingly important regional health issue. Six of the top 10 countries by diabetes prevalence are found in the Middle East and North Africa (MENA) region, according to the International Diabetes Federation (IDF). About 19% of adults in the UAE have the disease, and the percentage is around 22-23% for the GCC. The IDF estimates that as many as 39% of cases in the UAE were not diagnosed as of November 2012, and according to Julphar’s research, trends suggest that the number of diabetics in the GCC could double by 2030. The firm invested roughly $150m in the insulin production facility, which will lower the region’s reliance on imports.

Regional Consumer Growth

Though Julphar’s input materials are different than most of RAK’s state-owned ventures, it shares with them an exposure to the strong consumer growth seen in the GCC and MENA regions over the past decade. Indeed, many of these firms have thrived as the emirate’s overall economy has grown: the Arabian Peninsula’s compound annual GDP growth rate from 2002 to 2012 has been 3.5%, according to research from the Kuwait-based bank Gulf Investment Corporation (GIC), in contrast to rates below 1% in the US and Europe. RAK’s GDP per capita is rising faster as well, on a compound basis, recording increases of 10.1% a year during the past decade.

Demographics play a role in supporting the growth of RAK’s industrial sector as well. For the GCC as a whole, citizens aged 15 to 24 years old account for anywhere between a third to slightly under half of the overall population, according to a study from the consultancy Booz & Co. The rate was 31% in the UAE, but some 50.8% in Saudi Arabia. This likely means that consumption will be heavily skewed towards the types of industries found in RAK because a young population is commonly expected to marry and establish new households, creating demand for supplies that RAK-based producers turn out, like aggregate, cement, ceramics, fixtures and other household products, for example.

Freeing Things Up

Private sector industries in RAK are mainly based on two models, depending on their target market. Companies whose customers are within the domestic or GCC market usually set up shop outside the emirate’s free trade zones (FTZs), as this allows them to avoid import duties thanks to intraGCC tax policy, but leaves them exposed to a 5% import tax on materials not sourced locally. Industries with customers beyond the Arabian Peninsula typically opt to locate their operations within one of several FTZs, where they are exempt from the import tax. Free-zone companies can also be 100% owned by foreigners, whereas firms in the onshore economy must have a local partner with a majority ownership stake. Profits are not shared, but instead fees are usually paid to that local partner. The RAK Investment Authority (RAKIA) will often perform that service for foreign firms.

Free zones can be found throughout the emirate, and are run by three organisations: RAKIA, RAK FTZ and RAK Maritime City, which is a new free zone that was opened in May 2011 and is aimed at firms that want their own private jetty. For industry, RAKIA and RAK Maritime City are the two most suitable options. RAK FTZ’s facilities host some light manufacturing entities, but the long-term strategy is to reserve these zones for non-industrial uses – RAK FTZ is an ideal fit for services, consulting, trading and other non-industrial businesses. It is making a push to develop education as a strong component by licensing universities and other post-secondary education options as offshore entities located in the zone.

RAK FTZ was the emirate’s original free zone, having opened in May 2000, and is the only free zone worldwide to have established overseas liaison offices and networks, according to the zone’s media offiIndustrial labour by sector, 2011 cer, Cleo Eleazar. These are in India, Turkey, Germany, the US and UK. It has a technology park at the southern tip of the emirate and an industrial park near Mina Saqr Port, the largest bulk port in the Middle East.

Attracting Investment

RAKIA was created in 2005 as a quasi-government agency. Its chief remit is to attract foreign investment, and it operates two free zones as part of that strategy. They are at Al Hamra in the south of the emirate, and inland at Al Ghail. RAKIA also controls an area to the south of its Al Hamra free zone where industries can set up in the local economy, and provides access to this land to foreign firms with which it enters into joint ventures.

Foreign companies operating in RAK are not subject to any income, capital gains, value-added or withholding taxes. There are also no restrictions on foreign exchange, capital repatriation, or labour imports. In the UAE corporate income taxes are levied only on foreign energy companies, at flat rates of 50% to 55%, and on foreign banks, at a rate of 20%, which is negotiable with the relevant emirate at the time of entry and licensing.

The Basic Offering

Along with the supportive financial operating environment, RAK’s proposition for foreign investors includes its overall low-cost and facilitative environment, with plentiful raw materials close at hand, and a location ideally suited for shipping to global consumer markets in Europe, India, China and South-east Asia.

RAK’s industrial approach is similar to the broader policy being pursued more broadly across the UAE: the individual emirates are leveraging a low- or no-tax atmosphere, geographical positioning and a model based on attracting FDI to free zones. The country has risen from 29th to 26th in the World Bank’s annual “Doing Business” report for 2013. Strong spots include infrastructure, and smooth procedures for starting a business. Weaker points included investment protection and access to credit. The UAE rose three spots in the World Economic Forum (WEF)’s 2012-13 “Global Competitiveness Report”, to 24th. The UAE was ranked second worldwide by the WEF for the quality of roads, and third for air transportation infrastructure.

For RAK this means expanding local port facilities, easy connections to Dubai’s Jebel Ali port, and the smooth movement of passengers and air cargo between the emirate and RAK International Airport, as well as other hubs in the country. In the future RAK plans to add to its infrastructure advantage by renovating its airport, in addition to rolling out air cargo and passenger routes at competitive rates.

Finding The Power

The mix of local and federal factors has resulted in considerable success for industry, so much so in fact that RAK is now facing some challenges as a result. The most prominent example in early 2013 was the issue of electricity. RAK receives power and water for residential consumers from the Federal Electricity and Water Authority (FEWA), based in Abu Dhabi. The utility has until recent years also agreed to supply industrial customers, but demand is now large enough that RAK has had to look for new sources. RAKIA has constructed two power plants to service its own free zones, Al Hamra and Al Ghail, and in 2012 it added a power line between the two plants to increase efficiency. The emirate has turned to local private sector utility Utico for desalinated water and a third power supply. Utico also has plans for a 270-MW coalfired power plant that will capture all carbon dioxide emissions, making it a pioneer in the use of cleancoal technology (see Energy chapter).

This plant is just one example of the environmentally friendly developments expected in the sector in the long term. “Given the focus of this emirate on protecting the environment, greater industrialisation of RAK will go hand-in-hand with developments to reduce its carbon footprint via energy savings, heat recovery, reuse of waste and recycling,” Abdallah Massaad, the CEO of RAK Ceramics, told OBG.

Local Regulation

In 2013 authorities created the RAK Electricity and Water Authority (RAKEWA) to regulate and oversee growth of the fledgling power industry in RAK. As part of this process the government commissioned Tata Power, a unit of the Indian conglomerate, to conduct a comprehensive demand survey and create a 10-year forecast. The project is due to be complete by the end of 2013.

The demand survey will be used to determine what new capacity is needed in RAK, and as a step toward settling oversight of the power sector in the emirate. With RAKEWA as regulator, and several existing power producers, all the sector is missing is a transmission grid and distribution companies. Existing power plants currently connect directly to their customers, and a comprehensive system has not been set up yet aside from the installation of a transmission line between RAKIA’s Al Ghail and Al Hamra power plants. Alternative options include building an independent water and power plant (IWPP), or perhaps purchasing RAKIA’s electricity assets. RAKIA has hired an interim management team for the facilities until long-term decisions can be made.

Responding To Needs

In addition to a solution to the power supply issue, the evolution of the industrial sector will also likely entail a move toward more technology-intensive activities, the growth of research and development capacity (see analysis), as well as the further expansion of facilities, supply chains and logistics. Other challenges being addressed include the need for more infrastructure in free zones. Both RAK FTZ and RAKIA are working under new management teams and are making efforts to clearly define their target niches. RAKIA’s zones are aiming at industry and manufacturing, whereas operators in other sectors of the economy are being pointed towards RAK FTZ.

RAKIA is surveying the potential for container shipping from RAK, as none of the five ports in the emirate are currently configured for the task. Companies reliant on container shipping generally truck their goods to Dubai’s Jebel Ali Port, one of the world’s busiest. However a container-shipping option from RAK could cut down on costs and time, and several exporters told OBG they would prefer a local service from RAK to using Dubai, on the assumption that costs and procedures would be comparable.

Supporting Smes

Improvements to the supply chain are also something that the emirate has been encouraging. There are official efforts under way to support the development of SMEs, which are seen as potential suppliers to other large manufacturers, as well as a source of job creation. The authorities recognise that this will take time, and they rely on companies designing their business models in line with bigger industries and signing long-term supply contracts. These are normally written such that a large share of production goes to a single firm.

Persuading SMEs to enter into these types of relationships can be difficult at the onset. One factor is that smaller players may in some cases require capital investment to be able to enter into these contracts, for example to develop the capacity needed to produce the parts requested by their customers. Initial efforts are paying off, however. Global manufacturers such as Switzerland’s Franke Group, which makes equipment for bathrooms and kitchens, and Indian bus maker Ashok Leyland have opened up in the emirate and have succeeded in developing relationships with smaller firms as suppliers, to the extent that now most of their inputs are supplied locally by manufacturers or RAK-based importers.

“The development of SMEs goes hand-in-hand with the establishment of larger companies in RAK,’’ Abdulnaser Abdullah Al Qasser, director-general of the RAK Chamber of Commerce and Industry, told OBG. “The former provide the latter with local support and resources. Similarly, having large corporations set up operations in RAK provides local SMEs with a transfer of knowledge and expertise that would be otherwise hard to receive.”

Outlook

With RAK firmly established as an industrial and manufacturing centre at multiple points in the regional value chain, the government is considering steps that will consolidate that success. That mandates some familiar moves in an economicdevelopment context, such as plans to go from basic industries to higher-value-added ones and undertaking research and development initiatives. RAKIA is targeting sectors such as downstream plastics, for example. Further development also means boosting capacity in areas such as infrastructure and services – adding transport options for assembled goods, attracting companies to fill gaps in the supply chain, and encouraging commercial relationships between fellow members of its free zones or industrial areas.

However, along with these plans the emirate should also address the issue of power supply. A timeline for added electricity capacity is expected in 2013 or 2014, and that will likely be a key factor in determining the pace of industrial growth in the future.