Dubai’s free zones offer much more than mere tax advantages for foreign investors. Small wonder then that these centres of excellence are proving so popular.

Dubai’s three – soon to be four – free zones are one of the emirate’s real success stories. Like many popular concepts, it is a straightforward one. The free zones are defined areas scattered around Dubai where none of the principal restrictions on doing business in Dubai apply.

This means that the 49% limit on foreign ownership of business is waived – a bone of contention for many foreigners doing business there. Companies located in the free zone pay no tax, and can repatriate 100% of profits to their parent company or country. There are no currency restrictions and all offer streamlined registration and licensing facilities.

Jebel Ali Free Zone (JAFZ) was the first to be built and is the biggest of them all. Established as a harbour on the shoreline some 40km from Dubai city centre in 1976, it remains one of the largest man-made structures in the world. Since then, the Dubai government has sunk over $2.5bn of investment into the zone to develop its potential.

In the 1980s, the harbour area became a warehouse and distribution base for multinational companies doing business in the Gulf and Middle East. More recently, it has also become a manufacturing and services hub, though trading still accounts for 80% of all activity in the zone.

The list of tenants is extensive: 2350 companies from 97 countries at the last count. Japanese companies (Nissan, Mitsubishi, Honda, Sony) and European multinationals (ABB, Shell, BASF, Unilever) play a large role in the free zone.

Ahmed Mutti, managing director of the JAFZ, continues to bang the drum for new business. He led a four-city tour of the UK in March designed to draw in fresh investment. Historic links to the UK mean that British industry is a lucrative draw for the JAFZ. Over 250 British companies already operate in the zone and UK-Dutch giant Shell recently announced the expansion of its Middle East chemicals business at Jebel Ali.

Praise for ports

Port authorities are also proud of the facilities’ technical standards, which recently became the focus of a Harvard Business School study. JAFZ’s manifest documentation system, which has helped to minimise waiting and maximise cargo turnaround, was praised as an example of, “how a forward thinking organisation uses technology to improve itself and work with its partners,” by Harvard professor Andrew McAfee. The system helped container traffic grow by just under 20% last year; the combined ports now count as the 19th largest harbour in the world. In addition to the imminent expansion of Port Rashid at the mouth of Dubai Creek, expansion work to build new berths also began on the Jebel Ali Port, which by 2020, will bring the total number of berths in the port to 82.

Tech cities

With the boom in the technology industry in the late 1990s, the government set about establishing a free zone dedicated to internet and media technologies and the Dubai Internet and Media Cities (commonly referred to jointly as DIC) were born. Located along a two-kilometre stretch of the road west of the city centre, in an area fast becoming Dubai’s new business district, the DIC has mushroomed in the two years since its inauguration, and now plays host to some big names (Microsoft, Oracle and Canon; and McGraw-Hill, CNN on the media side), despite the global slowdown in technology and media spending. (See page 44 for more on FDI).

“In 2000, we approached multinationals with a wish list of what they would want [in a media and technology free zone],” recalls Omar Bin Sulaiman, chief executive of DIC. “We are actually more expensive than an ordinary piece of real estate,” admits Mr Sulaiman, “but ultimately we’re cheaper.” By that he means that the services the DIC provides in terms of technical infrastructure, settling-in services (arranging work permits and incorporation paperwork) are hard to find in a single location elsewhere in Dubai or the region.

The DIC also offers critical mass without being cramped. Software company Oracle has had an office in Dubai since 1988 and was one of the first tenants in the DIC. “We were running out of space in our old office,” says Ayman Abouseif, Oracle’s marketing director for Eastern Europe, the Middle East and Africa. “We have many of our partners here, including smaller vendors.”

Mohammed Kateeb, managing director of Microsoft Middle East – which employs half of its regional workforce of 400 in the DIC – says he appreciates the working environment. “In Dubai, you used to need a local sponsor to operate. The laws here give us much more freedom.”

Freezone four

With frequent plaudits from corporate tenants, it’s no surprise that more free zones are in the pipeline. Federal legislation needed to create the Dubai International Financial Centre (DIFC) as a legal entity is being held up in Abu Dhabi, but the DIFC is expected to become Dubai’s fourth free zone in the coming years. The third free zone, Dubai Airport Free Zone, houses 158 companies, many of which rely on it for delivery of luxury or temperature-sensitive goods. Dubai Maritime City, a 2.5 million square meter marine development expected to be completed by 2005/6 could become the fifth.

Limitless opportunity

For the moment, the free zones’ main competitive advantage is the absence of ownership restrictions. Sultan Ahmed Bin Sulayem, executive chairman of the Ports, Customs and Free Zone Corporation, the main authority responsible, says he would like to see the 49% limit on foreign ownership lifted outside the free zones for the sake of Dubai’s broader economic development, but says, “I have no idea if the government will [do this].” As long as the government is unwilling to move on the ownership issue, the free zones will remain in place.

The government’s approach has support from those who want to encourage foreign investment but are concerned about being engulfed by it. “It’s too early to open up the economy completely– there is already that happening in the freezone,” says Obaid Al-Tayer, president of the Dubai Chamber of Commerce and Industry.

There are competing forces at work in Dubai’s corridors of power. With UAE citizens representing less than 10% of Dubai’s population, the government is seeking a balance between encouraging foreign business to put down long-term roots, but not letting them gain too much power or influence. But one local businessman warns of the fickle nature of most foreign investors. Even in the free zones, he says, “remember that most multinationals’ commitment only extends as far as a one-year lease”.