In a bid to offset the impact of Dubai’s dwindling oil reserves, the United Arab Emirates government has been gradually developing a host of free zones that will serve to diversify the city’s competitive sectors. Created as clusters catering to the needs of a specific industry, the city’s free zones were formed to provide supporting infrastructure and a host of incentives, such as complete foreign ownership and low taxation, to attract foreign companies.
“As sophisticated as they are, the free zones also present a simple means of doing business in Dubai,” says Fahad Al Gergawi, CEO of foreign investment office Dubai FDI. “With their sharp focus on client needs, the free zones help investors set up and reach out to clients with exceptional speed and efficiency. There are also added benefits in the form of 100% ownership, zero tax on personal as well as company earnings and full repatriation of incomes. Today, there are 23 free zones in Dubai, many of them serving as specialised industry clusters. Together, the free zones account for 65% to 70% of foreign investment in Dubai.”
Seeking to capitalise on its location as a logistics hub, the government’s initial focus was on promoting imports and re-exports, and developing Dubai’s role as a facilitator in this process. The government began with the port project of Jebel Ali Free Zone in 1985. Built as a tax haven for private investors, the free zone quickly evolved to become the region’s capital for cargo trade, logistics and warehousing.
“When the Jebel Ali Free Zone started in 1985, it was successful, but it offered only one option to the investor, so Dubai Airport Freezone Authority (Dafza) was established to provide another option for investors,” says Nasser Al Madani, assistant director-general of Dafza. Established in 1996, Dafza has become something of an ‘aerotropolis’, and is home to 1600 companies from sectors as diverse as aviation, pharmaceuticals, information and communications technology (ICT) and cosmetics. Situated a 20-minute drive from both the historic district of Bur Dubai and Dubai International Airport, Dafza considers itself to be the fastest growing free zone in the Middle East. The free zone’s location and infrastructure have been key to its success, says Mr Madani.
“We each have different selling points and for Dafza, it is the location, the quality of the facilities and services, and the focus on the customers,” he says. “We realised that time is an important issue for investors, so our strategy was built around that, and we brought in the department of immigration, chamber of commerce, customs, banks and other service providers to Dafza so our companies will not waste a lot of time when they do their daily business. We have attracted $3.5bn of investment and we contribute [up to] 2.27% to Dubai’s GDP.”
According to Khader Mattar, Bombardier Business Aircraft’s regional vice-president for sales in the Middle East and Africa, a key reason why the Canadian aerospace company chose to set up an office in Dafza was because of its proximity to a well-connected international airport, which increases access to neighbouring markets. “Bombardier started [in Dafza] back in 1996 with a small office, but now we have expanded and we have 20 staff located [here],” he says “The Middle Eastern market is very important and our office brings us very close to our client. Dubai has established itself in terms of its infrastructure and its ability to service the market. It has the airport and the connections we need, as well as the banks we need to finance our operations.”
For the cosmetics company Clarins, an office in Daft was essential to servicing a fast-growing client base in more than 30 countries across the Middle East and the Indian subcontinent. “What led us to open up here is the importance of the region and the growth that is linked to this region,” says Osama Rinno, president of Clarins Group Middle East. “We were established about 11 years ago [in Dafza] as a subsidiary of Clarins Group France, and we manage the Gulf region and parts of the Indian subcontinent. The service and the infrastructure here are so advanced and everything happens so quickly. This is one of the key things about Dubai. Second is the proximity. It is a couple of hours’ flight to anywhere in the Gulf, so it is very central.”
Jumeirah Lakes Towers
Although the remit of Jumeirah Lakes Towers (JLT) is more limited to the city’s real estate and property sector, the free zone’s authorities maintain that JLT is among the fastest growing free zone developments in the UAE. They attribute this to JLT’s modern commercial and residential properties, which have increased Dubai’s allure as a prime location for investors. Situated on the arterial Sheikh Zayed Road in the heart of Bur Dubai, JLT is a mixed-use waterfront master development, which caters to both business investors and private buyers by offering commercial, residential and retail property for sale and lease.
“The Dubai Multi Commodities Centre is the government of Dubai’s licensing authority for JLT, and JLT is one of the largest free zone developments in Dubai,” says James Bernard, director of business development and client services at the centre. “The mixed-use free zone comprises 62 towers, which are a mix of commercial and residential freehold property. In addition, there are areas for light industry and manufacturing in which a range of sectors have set up.”
From Mr Bernard’s perspective, a key reason why Dubai’s free zones have been successful in attracting FDI is the city’s proactive approach to refining the services offered. As an example, he cites JLT’s new approach to doing business with its registered clients by offering them additional information on relevant sectors and products as a way to develop their business within the zone. “We are constantly striving to improve our overall offering,” says Mr Bernard.
“We do not just offer property and a trade licence. We offer ourselves as a partner to all members. We offer knowledge to specific sectors and we have fit-for-purpose infrastructure, products and services that make us unique and attractive. As we speak, we are running several surveys to find out from our members what they want from us and what we can do to support them. We registered 1357 new companies in 2011 and [in total] we have [attracted] more than 2000 new member companies, giving us a total of more than 5300 members to date.”
In line with the government’s drive to create a knowledge-based economy, Tecom Investments was designed to nurture Dubai’s technology-based industries by developing a cluster of business parks. Currently home to 4500 companies, including Fortune 500 corporations such as Dell, IBM and Microsoft, one of Tecom Investments’ largest portfolio companies is Tecom Business Parks.
“Tecom Business Parks comprises 10 interconnected parks strategically arranged under five industry clusters,” says Dr Amina Al Rustamani, CEO of Tecom Business Parks. “Dubai Internet City and Dubai Outsource Zone form the ICT cluster, while Dubai Media City, Dubai Studio City and the International Media Production Zone make up the media cluster. Dubai Knowledge Village and Dubai International Academic City are part of the education cluster. DuBiotech and Enpark compose the science cluster, and Dubai Industrial City comes under the manufacturing and logistics cluster.
"[We host] a variety of firms, ranging from start-ups to Fortune 500 companies. International companies are being joined by businesses from across the Arab region, as Dubai increasingly becomes a buzzword for stability in the region. This is a trend we expect to see continue for the time being.”
Launched in 2000, Tecom Investments’ oldest business park, Dubai Internet City, has evolved to become the Middle East and north Africa’s largest ICT cluster. Developed with an eye on Silicon Valley in California, Dubai Internet City is a cluster of interconnected buildings offering state-of-the-art technology and infrastructure.
“We used to buy televisions, cameras and phones in 2000, because there was a lack of up-to-date technology in the region,” says Malek Sultan Al Malek, managing director of Dubai Internet City. “That is why we created an [ICT] cluster. Since we began, we built a model based on offering incentives for technological companies to come and have bases here. We have been very successful, growing by 15% annually. We have a lot of benefits to the region when it comes to building the core competencies in technology.”
Dubai World Central
Designed to leverage Dubai’s position as a trade, business and aviation hub, Dubai World Central (DWC) is a masterplanned airport city located close to the Jebel Ali sea port and built around the Al Maktoum International Airport. “DWC is a strategic initiative of the government of Dubai that will serve as a fully integrated hub for aviation, air transport, commercial and logistics businesses, while incorporating extensive residential and leisure amenities upon completion,” says Khalid Ibrahim, vice-president for strategy and corporate communications at DWC. “DWC is a comprehensive free zone with multimodal access and a business-friendly environment.”
With more than Dh17bn ($4.6bn) already invested in DWC’s expansion, the free zone’s authorities believe it is set to be one of the Middle East’s leading aerotropolises, encompassing the airport and a business park, as well as a series of districts, which range from the logistics and aviation districts to the golf, exhibition and humanitarian districts.
“DWC is primarily engaged in creating business opportunities for companies engaged in aviation, logistics and related industries,” says Mr Ibrahim. “This is all part of the aerotropolis concept, [as DWC is] a combination of an airport, as well as a logistics and business hub. The airport is designed to accommodate up to 120 million passengers and 12 million tonnes of air cargo per year upon completion."
"The logistics district fills a gap in the global supply chain as it offers direct access to air, sea and road transportation, including a dedicated airport–seaport corridor that allows cargo to be moved from the port to the airport in just 20 minutes. The aviation district serves as a one-stop centre for all aviation-related operations. Dubai’s economy remains on a growth path and we have all the right reasons to look forward to more exciting possibilities in the future. The continued expansion of these key components of DWC will ultimately boost Dubai’s ability to attract foreign direct investments.”
Offshore versus onshore
A key selling point of operating offshore in Dubai’s free zones has been that companies are exempt from seeking a local owner, which would otherwise oblige foreign investors to place at least 51% of their company under Emirati ownership. Nonetheless, Yann Mrazek, managing partner of the law firm Cramer-Salamian, contends that far from offering foreign investors control, operating within a free zone can actually become a constraint.
“Although free zones have a lot of incentives, I am a big believer in [operating] onshore for many reasons,” says Mr Mrazek. “It is more flexible. When you are in a free zone, you basically sign up with it, so you are much less in control. If you want to change offices tomorrow, you need to stay in a free zone. So from a flexibility point of view, onshore is usually much better. There are also limitations in terms of the activities you can undertake and the geographical scope of these activities, whereas [operating] onshore has absolutely no geographical limitations.”
Mazdak Rafaty, managing partner of Ludwar International Consultancy FZC, also acknowledges the limitations of free zones. However, he maintains they are set to remain popular with foreign investors, as they are a gateway into Dubai for investors unfamiliar with doing business in the city.
Additionally, free zones offer investors the possibility of sourcing a reliable business partner, if they decide to move their operations onshore. “The legal structure [of company ownership] is 51% to the locals and 49% to the foreigners, so this is what brought about the idea of free zones,” says Mr Rafaty. “There are a variety of free zones and, depending on what your activity is, I would say they are a good way to get your foot in the market. When you meet a suitable partner, you can go onshore. Free zones are important because they are door-openers and they will continue to do well.”