Free zone fever

Over the last 20 years an increasing number of businesses have prospered from the rapidly expanding reach of the region’s free zone net. CEO Middle East crosses the border into the domain of financial enticement and flawless infrastructure, to meet the chief executives on the front line of free zone fever

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By  Andrew Mernin Published  May 11, 2006

|~||~||~|In the relentless hunt for foreign investment, governments in the region are increasingly using tax and restriction-free havens blessed with first-rate facilities to lure in their prey. And, as CEOs rightly continue to take the bait, they are also taking their businesses to new heights and boosting profits on the back of the many incentives on offer in the region’s flurry of free zones. At first glance, a sand-swept concrete hut surrounded by barbed wire fencing somewhere in the desert near Dubai, doesn’t exactly seem like a gateway to the land of opportunity. However, as part of the entrance to the Middle East’s first established free zone, it opens into a kingdom where over 5000 businesses are basking in a climate of financial benefits and super-efficient logistics and shipping capabilities. Launched in 1985, Jebel Ali Free Zone (Jafza) covers 750 acres of land, incorporating one of the biggest man-made ports in the world and housing companies from over 120 countries. Of Jafza’s multinational tenants, which include Sony, Nokia and Gap, 39% are from the Middle East, 20.4% are from Europe, 29.4% are from Asia and 7.15% from the Americas. The free zone, which sees an average of 15 new companies register every month, amassed US $18.7 billion (AED69.7 billion) through imports in 2004 and US $14.3 billion via exports and re-exports in the same year. The advantages of setting up in Jafza include a lack of import and re-export duty, zero corporate taxes for a 50-year renewable period and the permission of 100% foreign ownership of a company, as opposed to UAE regulations where at least 51% of a company must be owned by a UAE national. One of the most recent CEOs to bring his business to Jafza in search of opportunity is Milad Jabbour of Genius Computer Technology (GCT), an IT hardware distributor to the Middle East and North Africa. With 2005 profits of US $12 million compared to US $10 million the previous year, Jabbour decided to relocate the company’s headquarters from Dubai to a US $750,000 free zone office to boost the company’s growth. “Moving to the free zone is the best thing I have ever done in terms of my business, getting a good return on my investment, my resources and in terms of logistics,” says Jabbour. “It’s very cost effective here and moving into the free zone from the city centre (of Dubai) will mean I’ll save around US $100,000 a year, and eventually the property I’ve been allowed to build here can be sold for around US $1 million.” For relatively small operations such as GCT, being on the doorstep of huge foreign companies can open up a huge range of new opportunities to expand and diversify. “The free zone will give us more chance to invest in different market sectors — in fact, we recently arranged a joint venture with an American company in the telecoms sector as a result of moving into Jafza — so by being here the company will grow,” adds Jabbour. Encompassing around 10,000 companies that employ over 150,000 people, there are currently 20 free zones in the UAE. And, as the country leads the way in the Middle East’s growth as an international business player, the success of its free zones is vital in attracting more multinational companies to set-up shop in the region. Ali Ibrahim, deputy director general for executive affairs at the government of Dubai’s department of economic development explains why: “The free zones play an important role in the economic development of the Emirates. Due to the unique facilities available, a huge number of foreign investors, which are increasing on an annual basis, have set up in the free zones and this has played a key role in the rapid economic growth of the UAE.” Ibrahim believes that CEOs can only stand to gain by setting up their business in one of the UAE’s free zones. “The free zones have had a very positive impact on the growth of businesses in the region. The progress of investment into these areas is smooth, as is the uncomplicated connection with companies outside the free zone,” he says. Opening a 47,500 square metre (sq m) distribution and regional training centre last month, another new inhabitant of Jafza is Swedish commercial vehicles giant, Volvo Group. “The process of setting up in the free zone was extremely easy and uncomplicated,” says Srinivasan Muralidhar, general manager of Volvo Group Middle East. “The free zone authority did their best to ‘sell’ the zone and I must say they succeeded.” Citing the reasons behind the move to Jafza as being good costs, business friendliness, infrastructure and geographical location, Muralidhar adds: “The only difficulty we had was that the utilities (electricity and water) were slow to arrive.” Last month, a number of high-ranking delegates from India, including Sushma Berlia, president of the Punjab-based Chamber of Commerce and Industry, visited Jafza to discuss investment opportunities in the free zone. Berlia told CEO Middle East: “We visited Dubai to identify possible areas for joint ventures as well as marketing tie-ups, tapping into the export-import opportunities and Dubai as a logistics hub.” During the visit, the delegation also went to Sharjah Airport International Free Zone where 50% of tenants are Indian which, according to Berlia, “indicates the advantage of setting up base in a free zone in the UAE, not only to cater for the market in the Gulf region, but also in the CIS and Africa”. As well as Jafza and the Dubai Airport Free Zone, two huge developments facilitating a vast range of sectors, there are a number of specialist zones in Dubai, ranging from media to metals and commodities. Housing over 10,000 employees from 182 different nations, one such facility is Dubai Internet City (DIC). Launched in 2000, DIC offers its tenants, which now include Microsoft, IBM and Siemens, 100% tax exemption, 100% foreign ownership and an advanced IT-oriented infrastructure. One man who remembers DIC’s humble beginnings is Erich Wessner, chief executive of Cyber-Consult, the first registered business in the free zone. “When I first signed the deal to set up in the DIC in 1999 there was nothing there but sand. People told me I was crazy and I got remarks from my friends in Europe and the US asking what I was doing putting all of my money in the middle of the desert,” Wessner explains. “In its first year, our branch in the DIC only brought in US $136,000, but three years later our annual turnover had risen to US $2.2 million, then we expanded to Abu Dhabi, signed a co-operation contract with Siemens for hospitality services, and more deals will be signed soon,” he adds. Since setting up in DIC, Cyber-Consult, that specialises in IT, audio and video systems with offices in Europe and the US, has won a number of high-profile contracts in the UAE. The company has worked with the Burj Al Arab hotel in Dubai, telecoms company Etisalat and is currently working on the IT infrastructure for the US $214 million, 525 ft yacht owned by Sheikh Mohammed bin Rashid Al Maktoum, the ruler of Dubai. Wessner also believes the IT community of the DIC has been invaluable in pushing his business’s continual growth. “The DIC community has the campus feeling that you get in California between all the big universities. If I want to meet my partners, like IBM, Hewlett Packard or Siemens, I can go and see them in ten minutes,” he says. “We have a hospitality showroom in the Siemens building and, in the past, have hosted presentations in the Hewlett Packard building. It makes life so much easier as there is no commuting time,” adds Wessner. While the UAE is the pioneer of the free zone age, however, other Middle Eastern countries are also recognising the ability of such developments to attract more foreign investment. In recent years, the Qatari government has addressed the need to diversify and broaden its economy that is heavily reliant on the energy sector by setting up two free zones, with a number of other similar developments in the pipeline. The Qatar Financial Centre and Qatar Science and Technology Park (QSTP) will soon be accompanied by a free zone at the new Doha airport. “Free zones are an important part of Qatar’s strategy to open up more opportunities for targeted foreign investment, which reflects the country’s five-year investment pipeline of US $130 billion,” says Dr. Eulian Roberts, chief executive of QSTP. “QSTP is instrumental in kick-starting the growth of Qatar’s knowledge economy and is a very important tool in the process of attracting, establishing and growing technology related investment in Qatar from companies like Shell and General Electric,” he adds. And, while the benefits of QSTP to its multinational tenants are clear, Roberts also believes they will give something back to local businesses. “The multinational companies in the park will transfer technology and research skills to a population of young workers, who will then, in turn, take their know-how to other companies in the country,” he says. “The start-up technology companies fostered in QSTP’s business incubator will ‘graduate’ from the free zone, and enter the normal economy, once they can stand on their own two feet,” adds Roberts. Of course, the free zone frenzy is not restricted to the rapidly expanding nations of Qatar and the UAE. Since 1999, the 1.5 million sq m Kuwait free trade zone, located at the 3.2 million sq m Shuwaikh port, has provided its tenants with tax-free foreign corporate income and zero import duty. In Bahrain, where foreign direct investment averaged US $1.7 million each year from 2002 to 2004, the Mina Sulman free zone provides a free transit zone for duty-free imports of equipment and machinery. Also in Bahrain, the North Sitra industrial estate, allows duty-free imports of raw materials intended for processing in Bahrain and machinery imported by Bahraini-owned businesses. Encouragingly, as war-ravaged Iraq faces up to the overwhelming rebuilding process, it too will eventually host its own free zone, using it as a much-needed financial crutch to help get its economy back on its feet. Everyday, Iraq loses more than US $500,000 because the ports in the south of the country can no longer handle sea-born imports and exports and so most goods have to be imported through neighbouring countries such as Jordan, Lebanon and Kuwait. The Khor Al-Zubair Private Free Zone Project, established by a German consortium, will develop a 5 million sq m free zone incorporating loading and storage facilities and access to the port. The hope is that Iraq will join other developing Middle Eastern economies and international companies, both large and small, in tapping into the region’s growing list of business beneficial free zones. As Middle Eastern governments rub their hands together at the site of more foreign investment, smaller businesses can also use free zones to cut costs and expand, and multinational corporations can call one of the world’s most exciting and emerging markets home.||**||

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