Strength in depth: An established industrial and manufacturing sector sets the tone for diversification

In a region where most economies are dominated by oil or gas, Ras Al Khaimah stands out because it is one of the few without significant domestic reserves. Instead, a resource-based economy has developed around RAK’s limestone, clay and silica, with a well-established industry and manufacturing sector making use of these raw materials. The government has attracted thousands of private sector partners to share in strategic investments or set up shop in export-oriented free zones, with the result being a highly diversified economy. As the emirate continues to develop, the government is working to keep up with demand for electricity, adding crucial elements of infrastructure to support growth, and pursuing sectors that should add to the existing mix.

Comparative Advantages

With its development to date, the emirate’s economic strategy is tightly aligned to its comparative advantages. RAK’s terrain differs from that of most of the rest of the Arabian Peninsula, because of a lack of hydrocarbons below the surface, but also because of its more varied geography. Along with the familiar desert landscapes, the emirate is home to a part of the Hajar Mountain range, which gives it limestone to quarry and supports its cement industry, a key supply source for the numerous real estate projects that have brought so much attention to the Gulf region in recent years, including most notably the Burj Khalifa in Dubai, the world’s tallest skyscraper. Precipitation runoff from the mountain range also means that RAK has arable land for farming. RAK Ceramics, which was established in 1991 by Sheikh Saud bin Saqr Al Qasimi, the current ruler, takes advantage of the abundance of local clay. The company is now the largest producer of ceramic tiles worldwide and has expanded into bathware, kitchenware, tableware and production of other household staples. Additionally, the emirate has not ignored the potential of its sand, taking advantage of its abundant supply to develop a domestic glass fabrication industry. This industry, however, has developed primarily through the flow of foreign direct investment (FDI) into RAK, rather than through the establishment of a local producer that maintains ownership within the emirate.

Leveraging its natural resources and aligning its early-stage economic development efforts has left RAK with an economic foundation capable of supporting future growth. Beyond its natural resources, the emirate’s geographic positioning has enabled it to become a natural shipping hub for the trade routes that link Asia, Africa and Europe. Historically, the emirate’s location has supported merchants and traders. By using its free zones and economic incentives to complement its manufacturing sector, the emirate has succeeded in attracting foreign companies to set up locally to produce goods for export.

Sector Strength

As of 2011 the economy in RAK had five sectors that accounted for at least 8% of GDP: mining, quarrying and manufacturing industries; trading and repair services; financial services; government services; and construction. The biggest sector, at 26%, is manufacturing, a testament to the government’s success in its mission to develop the segment as an economic heavyweight, and work in this area continues. “To develop RAK’s manufacturing sector, we are looking at improving our infrastructure, sewage and refuse collection systems, as well as the availability of space for growing companies,” Peter Michael Schuster, general manager at the RAK Investment Authority (RAKIA), told OBG. Underpinned by an investment enabling regime, RAK has become key to the UAE’s emergence as a magnet for FDI. The country is a regional leader with more than double the number of FDIfuelled projects as Saudi Arabia, the nearest rival in the area, according to fDi Intelligence, part of The strategy vis-à-vis its fellow emirates in the UAE, developing strengths in different areas.

Going Further

The next step is to continue pursuing the diversification goal. Authorities have found another way that RAK can leverage its natural surroundings: tourism (see analysis). The emirate aims to develop tourism as an economic sector to complement the others, and is confident it has plenty to sell, with its combination of beaches, mountains, historic sites and traditional hospitality. Tourism now accounts for at least 2% of GDP, but it is hoped that number can rise to 9% by 2020. The plan to ramp up capacity includes a $250m government investment into new hotels and other infrastructure.

Further economic growth is also likely to occur following the natural maturation of government institutions in RAK, which are developing along with the economy. The government is adopting more rigorous statistical methods and surveying its natural wealth, population and other resources, with a view to gaining further insights on what is needed, which opportunities are untapped and how the future may look.

An economic census undertaken by the RAK Department of Economic Development (RAK DED) has provided a clearer picture of the size of the private sector, and by the end of 2013 a comprehensive study of future electricity demand will be available to guide the government and investors. Comprehensive, high-quality data will further increase foreign investors’ comfort with RAK. Although the emirate is considered investment grade by global ratings firms Standard & Poor’s (S&P) and Fitch, increased access to data regarding the economy could result in further upgrades. For example, Fitch affirmed the emirate ceiling of AA+, the same as the UAE’s country rating, in April 2013.

Size & Scope

RAK is one of seven emirates that comprise the UAE, and as such government oversight is shared by the emirate’s own agencies and federal ministries in Abu Dhabi. In terms of the economy, this includes areas such as monetary and fiscal policy, regulation of financial services, trade policy and taxation issues. As elsewhere in the UAE, the currency of RAK is the UAE dirham, which is pegged to the US dollar at a rate of Dh3.6725:$1. The Central Bank of the UAE is the regulator for banks licensed to operate in the country, including the two that have roots in RAK: The National Bank of Ras Al Khaimah (more commonly known as RAKBANK) and Commercial Bank International (CBI).

The UAE Insurance Authority regulates insurance providers. Of the insurers licensed in the country, however, only the RAK National Insurance Company (RAK Insurance) is based in the emirate. It is majority-owned by the government and the ruling family. The firm’s market share in the emirate is roughly 75%, although this is difficult to calculate because some business conducted in RAK is accounted for on the books of insurance companies located in other emirates. Several other insurers maintain branches, and while the market is relatively small at present, RAK’s expected economic growth is widely considered to be a good reason to establish a market presence now and begin the process of building brand recognition (see Financial Services chapter).

Another important actor, seated in Abu Dhabi but not a part of the federal government, is the Abu Dhabi Stock Exchange (ADX). Many of the companies established by RAK’s government or state agencies have floated minority stakes on the bourse, thereby making the transition from RAK to the ADX a proven growth path for leading local corporates. Examples include RAK Ceramics, RAKBANK, RAK Insurance, several cement companies and Gulf Pharmaceutical Industries (better known as Julphar Pharmaceuticals), the first pharmaceuticals company in the region.

Federal-Local Split

The federal government of the UAE administers education, health care, pensions and most social spending. Inter-emirate roads are also the responsibility of federal authorities. The UAE constitution stipulates, however, that each emirate controls its own natural resources and revenues. RAK’s income comes from the companies it has founded and in which it maintains strategic investments, as well as from licensing and other fees. The emirate levies no taxes.

The federal electricity regulator is the Federal Electricity & Water Authority. In the Gulf region, power supply and water desalinisation are often paired because water desalination can be undertaken as part of the same process, using energy created during electricity generation that would otherwise be wasted.

GDP by sector, 2011 Owing to the growing economy in RAK, demand for power has reached the point where a local strategy is needed, and without additional capacity, and perhaps a grid, the authorities have recognised that they could be jeopardising some of the emirate’s future economic potential. There are now two government-owned power plants in RAK and a newly established regulator, the RAK Electricity and Water Authority, which was created in March 2013. Its role is to oversee the operation of electricity and water facilities, along with the distribution and sale of water and power.

More Power

The long-term goal is a more comprehensive system for power generation, transmission and distribution. For now, RAK aims to attract private-sector investment in electricity generation and water desalinisation. Tata Power, a division of the Indian conglomerate Tata Group, has set up shop in the emirate and is conducting an electricity demand survey to develop a 10-year projection for demand growth. The firm is also considering building an independent power plant, or independent water and power plant, once the data is collected and analysed.

Another company, a private utility called Utico, is planning similar projects, including a clean-coal facility that would be a first in the region. The project is expected to lessen RAK’s dependence on oil and gas for electricity generation and provide it with an environmentally friendly facility to serve as a model for elsewhere in the region. Shipping coal to a part of the world most famous for oil and gas deposits at first could seem counterintuitive; however, abundant supply does not necessarily mean easy availability. Natural gas, which is the preferred feedstock for power plants, is in high demand. Recently, economic development in the GCC has been to a large extent based on the establishment of industries that are heavy users of natural gas as a feedstock, on the assumption that the inexpensive gas available there would provide a comparative advantage. However, gas suppliers are concerned about how much would be left over for others. RAK would therefore gain a measure of energy independence by diversifying its sources.

Key Bodies

At the emirate level, RAK DED is legally responsible for managing statistics and producing official data, including on the economy, as well as being one of the main development planning agencies and the one-stop shop for operating licences. A licence is required for all economic activity in the emirate. Other key bodies include the RAK Investment and Development Office (RAK IDO), which is the government’s corporate finance and advisory arm, and RAK Properties, its real estate arm. Management of the local port facilities has been consolidated under one supervisory authority, RAK Ports. Several agencies have been created to develop free zones, including RAK Free Trade Zone (FTZ) and RAK Maritime City. RAKIA maintains both conventional onshore and free zones.

Encourging Numbers

GDP in 2011 reached Dh22.86bn ($6.22bn), an increase of 29.9% over the Dh17.6bn ($4.79bn) recorded in 2010, according to the “RAK 2012 Statistical Yearbook”. The jump reflects a rise in economic activity, but there are other factors at work, such as gains in the reliability and depth of the data collected by the statisticians responsible for producing the numbers. Officials at RAK DED had long suspected that GDP figures were underestimated due to insufficient data prior to 2011. According to government sources, GDP was expected to jump by as much as 8% for 2012, although official figures had yet to be published at the time of writing.

More Data

Although the UAE has an umbrella statistics agency at the federal level, the National Bureau of Statistics (NBS), development of the RAK branch is already under way. RAK DED’s data, and especially that reported in the statistical yearbook, is considered the most accurate information currently available. In future, the NBS branch is expected to provide more detailed, emirate-specific information. Boosting the accuracy of economic data available on RAK has meant not only adopting a more rigorous methodology based on international standards, but also going door-to-door to the emirate’s bookkeepers and proprietors to convince them of the importance of sharing data and having it available to decision-makers and foreign investors.

According to global ratings agencies S&P and Fitch, RAK is noted for its healthy balance sheet, underWorkers by economic sector, 2011 pinned by its status as a member of the UAE federation, and also because its plans for investment can be financed from existing accounts without incurring any debt. However, the ratings agencies would consider further upgrading the emirate’s ratings should more detailed local economic information become available. “The availability and quality of official economic data on RAK, including national income and external accounts, is limited and is effectively a ratings constraint,” S&P wrote in December 2012 when it confirmed the emirate’s A/A-1 rating.

Gross fixed capital formation, which is useful as one of the predictors of an economy’s financial performance as it moves into the middle stages of development, climbed from Dh6.18bn ($1.68bn) in 2010 to Dh6.42bn ($1.75bn) in 2011, a 3.8% increase.

Slightly more than half of those assets were spent in the mining, quarrying and manufacturing industries, a proportion that has remained constant in the last three RAK DED reporting years, measured between 2009 and 2011. The sector accounted for approximately one-third of GDP in 2011, and absorbed 28.5% of the workforce, which numbered 203,890, according to the government figures.

Investment Environment

In general, there are three types of economic establishments in RAK: offshore shell companies, registered with RAK Offshore; free zone companies; and enterprises registered as part of the conventional onshore economy. For foreign investors, 100% ownership is possible within the free zones and offshore. “All government entities in the economic field work together towards the same goal, which is to continue with the growth pattern of RAK and help foreign companies find an easy way to invest,” Sheikh Mohamed bin Kayed Al Qasimi, the president of RAK DED, told OBG. “There is a transfer of knowledge and best practices among the different government departments that help improve the overall investment environment in RAK,” he added.

Among the seven emirates RAK was the second, after Dubai, to loosen controls on foreign ownership of real estate, and as such the jurisdiction has evolved as an open and enabling destination in which to do business. RAK DED serves as a one-stop shop, with the incorporation process generally taking only hours to complete. RAK offers potential foreign investors a range of options both onshore and in free zones.

On Taxes

RAK has no capital gains, value-added, income or withholding taxes; no restrictions on foreign exchange or capital repatriation; and no restrictions on foreign workers. In the UAE corporate income tax decrees have been passed by five of the seven emirates, but are levied only on foreign energy companies, at generally flat rates of 50-55%; and foreign banks, at a flat rate of 20% that is negotiable with the relevant emirate at the time of entry and licensing. Currently, the only taxes that may apply to any company in RAK are a 5% import tax and duties on exports to other GCC countries. These taxes are levied on firms producing in free zones if they decide to sell into the local market or other markets in the economic bloc.

RAK provides investors with a range of options for tax optimisation, with the intended market of a firm’s products generally considered the main factor in determining corporate type and arrangement. Those aimed at markets outside the GCC generally opt to locate in a free zone, where they can own 100% of the firm and do not need a local partner or sponsor. Duties, which generally range from 12% to 15%, would apply to sales in the UAE or other GCC markets.

Firms wishing to sell into the domestic market or to other GCC countries often choose to set up in the onshore economy, where they require a joint venture partner that will own at least 51% of the firm. The company can then sell its products without incurring duties, as long as at least 40% of its supplied materials are sourced from the local market. This can therefore include materials that are either produced locally or imported by a local merchant.

The joint venture model addresses ownership but is not typically a profit-sharing arrangement. This licence type is generally offered on a fee basis, and licences are also significantly less expensive outside of the free zones, according to RAK DED.

Higher Rankings

The investment environment in RAK seeks to be open and accommodating. The World Bank’s annual “Doing Business” report boosted the country’s ranking three notches in 2013, to 26th from 29th, out of a total of 185 countries. The ranking surged 24 spots in the category of starting a business, which indicates less about RAK – which has already simplified that process – and more about the rest of the country catching up overall. The UAE fell in two areas: investor protection and access to credit. The slip was four spots to 128 for the former and three spots to 83 for the latter. Investment protection remains the weakest area overall: the UAE ranks 104 in contract enforcement and 101 in resolving insolvency issues. In all other areas, however, the country maintains a ranking of 22 or higher.

The UAE also climbed three places in the overall rankings of the World Economic Forum’s “2012/13 Global Competitiveness Report”, to 24th. In both ranking lists, the UAE scored highly for infrastructure – second worldGDP, 2009-11 wide for the quality of its roads and third for air transportation infrastructure in the “Global Competitiveness Report”. Both are crucial factors for businesses considering locating a facility in RAK.

Connections

The emirate offers companies a number of good sea freight options as well. Sheikh Mohammed bin Zayed Road, the federal highway that links Dubai and RAK, makes commuting between the two emirates feasible, particularly for those who live in RAK’s southern areas. The Al Hamra development in RAK is emerging as an especially popular residential option for Dubai professionals.

Businesses that rely on well-connected transportation domestically and regionally are likely to see a boost from the construction of Etihad Rail, an anticipated rail line that, when complete, will run 1200 km across the country and eventually connect to a broader pan-GCC rail network currently in the planning process. The project could lead to even lower costs for goods moving from RAK’s factories to customers across the GCC. It is expected to be several more years before construction reaches RAK, however.

Free Zones

RAK has developed its free zones to appeal to a wide variety of investors. There are currently three main offerings: RAK FTZ, RAKIA’s free zones and RAK Maritime City (see analysis). Such zones are important to the economic mix of the UAE. Some of the best known are in Dubai, such as the Jebel Ali Free Zone and the Dubai International Financial Centre (DIFC). RAK’s strategy is to seek where it can promote its natural resources as an effective feedstock and where it finds a niche that complements offerings elsewhere. Its free zones also offer companies lower costs, though rates can vary by the size and activity of the enterprise.

RAK FTZ, which was established in May 2000, has typically targeted small and medium-sized enterprises; services and light manufacturing industries, for example, continue to be a focus. The zone is now also trying to attract larger organisations to fulfil its mandate of facilitating FDI. To that end, investors are entitled to 100% ownership of companies provided they do not sell their products or services into the domestic market. Businesses can be founded within RAK FTZ’s various locations, or set up as branches of existing companies elsewhere.

Establishments are generally separated according to their markets and operational needs. RAK FTZ’s Technology Park is a 71-ha zone at the southern end of the emirate, whereas its Industrial Park is situated in the northern area near Mina Saqr Port. Service-oriented companies and others that do not require specialised office space or facilities are located in the Business Park, which is not a specially delineated area but considered a part of RAK’s central business district.

For investors in heavy manufacturing industries, the free zone operated by RAKIA is a more likely choice. RAKIA was set up in 2005 as a quasi-governmental agency outside the emirate’s own balance sheet. Its mandate is to increase FDI by attracting targeted investments, both foreign and domestic, that increase diversification, and it has attracted $1bn or more in FDI annually since then, according to official figures. RAKIA has two main free zones: Al Hamra and Al Ghail. Al Hamra is an area of 4.8m sq metres located in the city district of the same name; it is developing as an upscale residential community with luxury hotels and high-end shopping. Al Ghail, RAKIA’s other zone, is inland and covers 22m sq metres. RAKIA has built a dedicated power plant for each area, and in 2012 connected them in order to share loads. Electricity typically costs between Dh0.40 ($0.11) and Dh0.45 ($0.12) per KW. For foreign investors who would prefer to establish themselves as part of the onshore economy – generally those looking to sell into the domestic or GCC market, and want to take advantage of the tax and duty concessions available on that basis – RAKIA can serve as a local partner and also offer land; it has been allotted nearly 1.4m sq meters to provide for such purposes.

RAK Maritime City, opened in May 2011, is the emirate’s newest free zone, and is under development with its own port and as a cluster concept in which like firms will be grouped together at the site. The common thread is the need for proximity to a maritime port.

Commercial Orientation

Visitors often hear RAK called the commercial emirate – perhaps because it has no significant oil or gas reserves, or because its government is especially receptive to growing economic opportunities. The RAK IDO was formed in 2004 and plays a pivotal role. Its mandate is to develop new investment opportunities at home and abroad, and facilitate inward investment. The IDO has been the central actor in creating some of the most important economic players in the emirate. RAK Properties, the real estate arm, is the premier developer in RAK and behind iconic projects such as the twin Julphar Towers in the Nakheel district, and Mina Al Arab, a mixed-use area under development on the shoreline near Al Hamra.

Oil & Gas

RAK Petroleum and RAK Gas are important players in the emirate’s upstream and downstream energy segments, and both are tasked with developing assets abroad. RAK Petroleum developed a close working relationship with DNO International, a Norway-based independent explorer and producer, which culminated in a 2011 deal in which the two companies merged. Under the terms, which were finalised in January 2012, DNO will take over RAK Petroleum’s exploration and production assets, including fields in Yemen, the Kurdish region of northern Iraq, Oman, Tunisia and elsewhere. RAK Petroleum in exchange saw its stake in DNO expand from 30% to 42.8%, and RAK Petroleum’s CEO Bijan Mossavar-Rahmani was named the chairman of the new entity, which is based in Dubai. The group’s shares are not traded publicly, rather in private transactions, with the deal set to result in RAK Petroleum becoming an investment driver as opposed to focusing on operations (see Energy chapter).

RAK Gas remains an emirate-owned company focused on upstream exploration and production, as well as imports and processing. The company maintains assets in Egypt, the UAE and across the African continent, but in 2013 it has focused specifically on East Africa, where it established a presence in 2006 prior to the current boom in prospecting. It is active in exploring for oil onshore, following the Great Rift Valley, and gas offshore, including in the territorial waters of Tanzania and Mozambique.

RAK Gas’s processing facility is at Khor Khuwair in the emirate and has two trains. The oldest is Buka, which has a capacity of 60m cu ft per day and can handle up to 4% sour gas (gas with a high hydrogen sulphide content). The newer train, Atlantis, has a capacity of 90m cu ft per day and can handle feedstock that is up to 1% sour. As the gas is sweetened, and sulphur dioxides and other impurities are separated out, small amounts of petroleum by-products are generated, including liquefied petroleum gas, oil and some condensates. These add up to roughly 500 barrels of oil equivalent per day. Supply of gas to the emirate comes in part from fields owned by the neighbouring emirate of Umm Al Quwain (40%, according to RAK Gas) and from the Dolphin Gas Project (10%), a pipeline from Qatar that supplies customers in the UAE.

The downstream gas market in RAK currently sees 15% of demand from electricity generation and water desalinisation, with the biggest users being the Al Ghail and Al Hamra power plants and Utico, the private utility. Other major customers include RAK’s cement factories and industrial facilities, such as RAK Ceramics.

Outlook

Having successfully established a growing industrial and manufacturing centre, the emirate is now shifting its focus to refining goals in industry, as well as concentrating on developing the tourism sector. This will help to ensure a broadly diversified economy and create new opportunities throughout the emirate. Future plans include improving existing transportation links and developing new ones, largely to encourage more investment and business activity within the growing number of free zones, a major construction effort in the hotels and hospitality sectors, the development of RAK Airways into a significant contributor to the mix, and management of the growth of Al Hamra to ensure it retains its upscale feel as it expands.