On the vast stretch of road heading out of Dubai towards Abu Dhabi, it is not unusual to drive at 100 miles an hour and still be overtaken as if moving at a snail’s pace. Not surprisingly, road accidents are common. Earlier this year a massive motorway pile-up involved 150 cars. Perhaps recognising the dangers of excessive speed, the government has lowered the speed limit. The breakneck pace of building, however, is unlikely to slow down. Construction crews work around the clock, and across the emirate the sound of drills and cranes is ever present.
Also ever present are signs that the place is bursting at the seams and that a bubble may be on the verge of bursting: gridlocked roads in the city, rising rents and prices, over-reliance on foreign labour and talent, and a population that has exploded from 60,000 40 years ago to 1.3 million today. Inflation is a looming threat. The International Monetary Fund warned in a recent report of an unsustainable asset-price bubble in the United Arab Emirates, in particular in Dubai.
Amid questions that Dubai could be overleveraged, the cost of insuring the emirate’s corporate debt against default has doubled since the credit crunch and it has become more expensive for companies to fund crossborder acquisitions. Many blame state-owned companies’ ambitious expansion plans for causing net debt to spiral, although the government points out that it has run an average fiscal surplus of 10% since 2000.
There does not appear to be any let-up in the expansion aspirations of the UAE’s free zones, either, as they continue to build up capacity at home and launch projects overseas.
When mega-projects that are under construction in Dubai are delivered, the shortage of commercial space should ease up, but transport and other infrastructure requirements still need to be incorporated to meet the needs of multinational corporate tenants. Building at such a rapid-fire pace has meant infrastructure is built around real estate rather than the other way round. Some fret that this could prove Dubai’s eventual downfall, because buildings without properly planned infrastructure result in the kind of urban chaos that is already being seen in legendary city centre traffic congestion.
To address the problem in Dubai style, the emirate’s authorities are building what will be the longest fully automated rail system in the world when it opens in 2009. The urban rail system will be a light rail network that will run underground in the city centre and on elevated viaducts throughout greater Dubai. The rail system will provide a more direct link to Dubai’s planned international airport.
When complete, Al Maktoum International Airport (JXB) will be, it is claimed, the world’s largest passenger and cargo hub, with a capacity of up to 150 million passengers and more than 12 million tonnes of cargo annually. The airport will have six parallel runways and as many concourses with a 91-metre-high control tower (the tallest in the region).
Dubai aviation development
A government-endorsed 140-square-kilometre urban aviation community called Dubai World Central (DWC) is planned around the new airport. Currently being built 40km from the existing Dubai International Airport, the $33bn project is almost twice the size of Hong Kong Island and will host up to one million people, making it a ‘city within a city’. It will include six specialised zones: Al Maktoum International Airport, Dubai Logistics City (DLC), DWC Commercial City, DWC Residential City, DWC Aviation City and DWC Golf City.
The airport’s first cargo flight is due to land at the end of this year, by which time Logistics City and its cargo terminal are due to be operational. Opening of the passenger terminal is expected to follow in mid-2009, serving low-cost regional charter flights, and Aviation City’s executive terminal is due to be ready to receive corporate jets by early 2010. The entire airport is expected to be fully operational by the middle of the next decade, says CEO Michael Proffitt.
“The airport will be built around a 150 million passenger capacity but it is important to view that in a visionary sense. We’re working to a 50-year-plus time horizon; we need to build ahead of the forecast, of having the capacity available should it be needed,” Mr Proffitt adds. “Given the planned growth of the emirates and the position of Dubai, [the other airport] will come under pressure over time.”
Residential real estate
DWC Residential City’s first occupants are expected to move in before June 2009, according to Maisoon Thani, real estate general manager of the project. “We have already sold most of phase one and we are developing the residential property in a controlled way so that when there is demand we will build and release more units for sale,” she says. “A light rail system will serve the whole residential development, which will also be connected to Dubai’s new metro, and linked by road and rail to the airport.”
DWC Commercial City is designed to be a business and finance hub employing 130,000 people. The plan includes more than 850 towers, ranging from six to 75 storeys in height, and 25 hotels, ranging from three to five stars. DWC Residential City will include a mix of five- to 10-storey mid-cost apartment blocks housing 250,000 people. DWC Golf City will offer two 18-hole golf courses, driving ranges, practice facilities, a luxury clubhouse with restaurants and a high-end boutique hotel; more than 5000 freehold residential properties will surround the courses. DWC Aviation City is meant to be a centre for technology, manufacturing, and science and technology education. Exhibition City, developed by the World Trade Centre, is intended to become a major exhibition centre.
DWC Logistics City will be part of an integrated multi-modal logistics platform in a single-bonded free zone that will also be made up of JXB, Aviation City and Jebel Ali Port. To date, 150 companies have reserved space in the zone.
“Dubai is going through such rapid growth, more capacity is required. Logistics City gives companies opportunities to build warehouses, in recognition of what the airport will become; it will provide additional space for a lot of companies that many need it,” says Mr Proffitt. “We are looking for companies that are using Dubai as a regional base – logistics, supply chain companies, import/export companies, multimodal operators.
“For a while now companies have been seeking low-cost production sources, such as in the Far East,” he continues. “While that approach has been very successful, it has also created long supply chains and increasing complexity and risk in supply chains. As a result, customers [of logistics companies] are becoming more stringent in their requirements. This is where Logistics City comes into focus: we have this opportunity for a major hub in the Middle East. We expect to see very strong growth in cargos passing through Dubai as more and more companies establish their regional base here.”
Mohammed Al Zarouni, director-general of Dubai Airport Free Zone Authority (Dafza), says he is not worried by the competition that DWC’s development presents. “Having an airport at DWC does not mean this airport [Dubai International Airport] will close. Most of the aviation companies here have built their own facilities and invested quite a lot,” he says. “The standard of service we offer them is excellent, they are very happy about what they are getting from the airport authority – of that I am very confident. But if any of these companies do decide to relocate, they are welcome to do that. We [the airports] are both part of the government, after all.”
In any case, he insists, “it is good to have a competitor. You try harder to reach your target and the quality will be better and better. That is a good benefit for the country, whether internally or from outside. I like the challenge.”
He says that right now the only challenge he is facing is lack of space. “I don’t have space for more light industrial units,” he says. Currently there are 255 units.
Of the 1357 companies operating in Dafza, more than 500 are in the services sector, more than 350 are trade-related and a further 350-plus work in import/export activity. Only three are industrial entities. The biggest percentage of investment has come from Europe, accounting for 36% of the companies represented in the zone, followed by other Gulf Co-operation Council (GCC) countries with just over 26%.
“Since establishing the zone, from day one our focus was on bringing [in] companies to stimulate local business. To reach this target, you have to have a good plan and a clear strategy with an objective to achieve that,” says Mr Al Zarouni.
“In this zone, we have seven to eight companies in each field that we are targeting – they are the biggest in the world in their respective fields. In aerospace, we have Boeing, Airbus, Rolls Royce; in cosmetics and luxury goods, we have Chanel, Cartier. Those companies coming to Dafza deserve to be in Dafza. The neighbour of Boeing should be Airbus, the neighbour of Chanel should be Cartier,” he says.
From desert to outsourcing centre
On a vast stretch of land outside the city centre that looks remote but is sure to be all but unrecognisable in a few years’ time, Dubai Outsource Zone, now in its third phase of development, is busy attracting outsourcing centres for the banking and finance, insurance, healthcare, IT and media, and leisure and tourism industries. Among its portfolio of investors is Arab Bank, ABN AMRO, Fullerton, Accenture, Willis, Jumeirah and Emirates airline.
“This is the future of Dubai,” says Ismail Al Naqi, director of Dubai Outsource Zone. “Three years ago this was literally desert.”
Five thousand workers are already on site and there are expected to be about 30,000 by the time the entire zone is operational in 2010. “As we grow, we will have all the retail solutions, from cinema down to small grocery shops. It will be a self-contained environment so employees would not even need to go outside this area,” he says. “But we will need some time, three to four years at least – construction in Dubai is never easy.”
Making the pitch to the outsourcing service providers segment comes easier. “For inshoring or captive operations, being here is not just about the office space. When ABN AMRO came here, it took it a long time to re-engineer its internal operations. It had to consolidate from 11 different locations in Dubai but that helped it to reduce the number of staff, and being all in one location helps it do business much faster,” he says.
Jumeirah centralised 17 offices in Dubai into one location in the zone that functions as back office and shared service centre for its local, regional and international operations. Arab Bank is moving its entire regional operations to the zone and will use the site as the backbone of its global operations.
While Dubai has its headaches, Mr Al Naqi still feels it is the right place for an economic zone such as his. “Dubai has its pros and cons but the most interesting thing about Dubai is the level of flexibility that companies have here: in today’s world for a company to be agile it has to be flexible.”
The Jafza success story
The ‘grandfather’ of Middle East economic zones, Dubai’s Jebel Ali Free Zone Authority (Jafza), was established in 1985 as a provider of office units and warehouse facilities. As Dubai’s economic fortunes grew exponentially in the following two decades, so too did the size and scope of Jafza’s business. Today it is one of the world’s biggest developers of economic zones with a global presence of a true multinational business.
Jafza’s most common association is with Jebel Ali Free Zone, located next to the Middle East’s largest sea port, just 30 minutes’ drive from Dubai International Airport. But the company also has an impressive line-up of international projects under development, including projects in Kazakhstan, Russia, Subic Bay in the Philippines, Vietnam, South Carolina in the US, Libya, India, Oman and Senegal. Its economic zone global expansion strategy is as ambitious as any of Dubai’s real estate projects across the world, although economic zones do not tend to receive the same media attention.
Jafza’s project to build a 1300-acre $600m logistics park in South Carolina did make international news. The park will serve as a major manufacturing and distribution hub into North America. Despite being one of the US’s poorest regions, it is believed the Orangeburg County site was chosen for its strategic position in relation to the Panama Canal, which is undergoing a $5.25bn widening project. The park is Jafza’s first project in the US and is designed to create up to 10,000 jobs and attract private investment of about $1.2bn.
In Vietnam, Jafza is collaborating with Dubai World’s marine terminal company DP World and its global real estate master developer, Limitless, in a joint venture with Vietnamese state-owned Tan Thuan Industrial Promotion Company (IPC) to develop a 1600-hectare harbour city and port project with accompanying industrial park alongside the new port facilities
In east Africa, Jafza is a managing partner for the $20m Djibouti Free Zone. The incentives and benefits offered by Djibouti, and for the most part all of Jafza’s international locations, mirror those offered at Jebel Ali Free Zone. They include 100% foreign ownership, no corporate taxes, no import duties, flexible recruitment laws, full access to ports and 100% repatriation of capital and profits.
Rakia branches out
One project that Jafza did not win, however, is management of the Black Sea port of Poti in Georgia. The competition came from very close to home. Neighbouring emirate Ras Al Khaimah is following in the footsteps of Dubai’s rapid development and, like Jafza, the Ras Al Khaimah Investment Authority (Rakia) is looking overseas for free zone investment opportunities. Rakia bid against Jafza and won the Poti project, paying $90m for managing control of the port in association with the emirate’s Saqr Port Authority.
Rakia will spend a further $200m to $300m on developing Georgia’s first industrial free zone around the port. It will pay $80m for a 51% stake in the port, and an additional $10m for the purchase of more than 300 hectares of surrounding land. The Georgian government will retain a 49% stake. It is the 49-year period of the concession for the Georgian port, which handles about 100 ships a month, that is an attractive proposition.
Managing a foreign port will be a new area of activity for Ras Al Khaimah, which is already involved in Georgia’s real estate projects. Rakia’s real estate arm, Rakeen, is involved in the Uptown Tbilisi and Tbilisi Heights mixed-use projects that include development of a five-star hotel, residential towers, villas, shopping malls and offices in Georgia’s capital city.
The development signals Ras Al Khaimah’s shift in focus from traditional stone mining economy to its objective to become a tourist and investment hub in the vein of Dubai. Rakia has focused on reforming laws to attract foreign investment into the emirate as a low-cost destination
As well as developing projects in Georgia, Rakeen is working in Iran, in spite of a longstanding territorial dispute with the Islamic republic. Other international destinations where Rakeen is working include Tanzania, where the firm’s gas company arm has signed a production-sharing agreement with the government of Tanzania and Tanzania Petroleum Development Corporation for the exploration of the East Pande Block. This includes seismic acquisition, interpretation, drilling and, if successful, the development of the field.
DP World sets its sights
DP World, which operates 43 terminals in 23 ports worldwide, also aims to diversify its holdings. In February 2007, it took control of one of Egypt’s most important development projects, the port and industrial zone of Sokhna. It purchased a 90% stake in Sokhna Port Development Company (SPDC), which holds a 25-year concession to develop and operate the port. The port, located in the North West Suez Economic Zone, east of Cairo, will be Egypt’s first deepwater port. Three new port basins are due to be constructed by 2010 and a fourth by 2020 and, ahead of that, a container terminal with capacity for 1.2 million TEUs by the end of 2009. By some estimates, DP World will invest $1.3bn to complement $910m from the Egyptian government. DP World and SPDC will promote the zone to European and Middle Eastern investors.
Last year, DP World won two contracts from the government of Senegal, to upgrade the existing container terminal at Dakar and to develop a new terminal there. An industrial zone adjacent to the port will provide a potential base for export-processing investors once the new terminal comes on stream in 2011, it is hoped.
And in southern Africa, DP World has reinforced its already strong position on the Indian Ocean by increasing its interest in the port of Maputo in Mozambique, purchasing 48.5% of Portus Indico – Sociedade de Serviços Portuários, which holds a 51% stake in port operator Maputo Port Development Company.
Additional reporting by Lara Williams.
Abu Dhabi’s slow and steady approach
Compared with the fast development times in Dubai, neighbouring emirate Abu Dhabi has taken a slower, more studied approach – a luxury afforded it by its larger, longer-lasting energy reserves. Abu Dhabi officials prefer to put infrastructure in place before major developments and are less keen to take risks on big schemes.
The Abu Dhabi Ports Company’s (ADPC) development plans for the Khalifa Port and Industrial Zone are illustrative of this careful, considered approach. “This is a massive infrastructure project and we have to have the right building blocks in place. We are confident that we do,” says CEO Ahmed Al Calily.
The plans are a key plank of the broader Abu Dhabi 2030 development plan. “This project is a platform for Abu Dhabi’s industrial and economic development and that’s very much the way we see it. By creating this platform, we are also encouraging FDI and seeking the partnership of international players in these development efforts, and also as tenants and investors in the industrial zone.”
The ADPC has signed joint-venture agreements with Jafza and Dubai Ports World (DPW). Through these newly created joint-venture companies, DPW will manage and operate the completed terminal of phase one of Port Khalifa. (Operation of phase one of the port is due by the end of 2010. Operation and management of the other phases will be decided at a later date.) The joint venture with Jafza will be for the purpose of developing, managing and marketing economic zones in the Khalifa Industrial Zone.
More countries jump on free zone bandwagon
The United Arab Emirates remains the main free zone market in the Middle East but other countries are plugging away at promoting theirs as well.
State-owned Qatar Free Zone Authority is manager of two free zones; one south of New Doha International Airport and another 10 kilometres south-west of the capital. Qatar’s government is aiming to broaden the state’s economic base by attracting and diversifying foreign and local investment in manufacturing and its associated industries.
Egypt’s General Authority for Investment and Free Zones has an impressive line up of 10 free zones, including Port Said free zone at the north entrance of the Suez Canal. The 729,000-square-kilometre industrial zone is strategically located next to Port Said Port and has good transport links and infrastructure, including internal roads, water, networks, a sewage system, electricity, telecommunication networks and natural gas.
In the republic of Yemen, the capital city of Aden’s seaport is the location for the Arab state’s first free zone project offering international investors incentives including access to natural 18-metre deep port. The authorities view the establishment of Yemen’s first free zone as a business model for further free zones in the future. As well as financial incentives, the free zone has 325 square kilometres for expansion and development, warehousing facilities, and is the southern gateway to the Arabian peninsula.