Free Trade Zones in Dubai (6 mins)

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Tiya Jain

Tiya Jain is a Baker Program in Real Estate graduate student. Prior to Baker she completed her chartered accountancy course in India (Equivalent to the CPA) and has 6 years of post-qualification experience with multinationals such as Ernst & Young, Deutsche Bank, Deloitte etc. Her last position at Deloitte involved advising large developers and private equity funds on funding, structuring and cost saving transactions in line with the local laws and regulations. Prior to Deloitte, she helped Aldia Capital, a boutique investment advisor in India, set up base in Mumbai. She was responsible for creating trusting relationships with the local real estate developers for the firm to secure $100 mm mandates. Tiya also strengthened local banking and financial relationships to the firm to tie up both ends of the deal making process. She is also interested in sustainable energy solutions, solar technology and she implemented the same for 3 housing societies in her neighborhood in Mumbai to cut energy costs by 25%. At Cornell, Tiya is the VP of Events for the Cornell Real Estate Women’s club that looks at leveraging opportunities for professional growth for women and eliminating the gender differences in the real estate industry. Tiya is also a Junior editor for the Cornell Review. The assignment involves contributing high quality research articles for the Cornell yearly journal and also interviewing real estate industry leaders who speak at the Distinguished Speaker Series. She enjoys playing Sudoku and practicing eastern philosophies such as yoga and meditation in her free time. Post Baker she would like to work in real estate investments and finance.
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Photo credit: Adriaan Goossens via Compfight

The humble beginnings of the Dubai economy and subsequent rise to fame

Today, Dubai is the epicenter of financial activity in the Middle East due to the free trade zones in the emirate. The numerous free zones not only add to the GDP of Dubai but also add to the population base of expatriates living and working there. This, in turn, supports real estate, tourism and other related industries in the economy.

But in order to highlight the role of free zones in Dubai, it is important to track the evolution of the Dubai economy. Oil was discovered just 50 years ago in Dubai. It helped build the modern metropolis, but the resource accounts for just 1% of GDP. Dubai’s oil reserves have diminished significantly and are expected to be exhausted in 20 years. Real estate and construction (22.6%), trade (16%), trading (15%) and financial services (11%) are the largest contributors to Dubai’s economy. The city is now a global business hub and luxury tourist destination.

One of the main sources of Dubai’s wealth is its maritime activities. It was once a modest fishing town, and by the early 20th century had become an important trading port. It’s location, close to both Iran and the entrance to the Persian Gulf, attracted merchants from all over the region.

Abu Dhabi owns 9% of the world’s proven oil reserves. Back in the 1930s, Abu Dhabi began to discover its rich oil reserves while its neighbor Dubai had failed to find any. This occurred at the same time as the decline of the pearl industry, the Gulf’s main source of income. This created friction between the two emirates. At this point, Dubai fell into a deep depression, leaving many citizens starving and fleeing to other parts of the Gulf. Sheikh Rashid bin Saeed Al Maktoum became the ruler of Dubai in 1958 and invested heavily in infrastructure by taking out loans. He spent the money investing in private companies which then built electricity lines, telephone services, more ports and Dubai’s first airport. Much of the development in Dubai was facilitated by the British government. The relationship between the two countries began in the late 19th century when the U.K. agreed with the Sheikhs to establish the region as a British protectorate in return for diplomatic concessions. The U.K. still maintains a strong business relationship with Dubai. The London gateway port in Dubai, a deep-sea container terminal, 25 miles east of the city, helps connect London to 90 other cities of the world but it is owned and operated by DP World.

It was 1966, when the relationship between Dubai and the U.K. became increasingly lucrative, following the gulf states first discovery of oil fields. Though the oil discovered wasn’t much in terms of quantity, the revenues from oil were used to fund Sheikh Rashid’s existing strategy of basing Dubai’s economy around trade, tourism and finance. That decision has paid off, as the world looks to increase its use of renewable energy and moves away from a reliance on oil. Dubai now has the world’s busiest airport for international passenger traffic, confirming its position as a gateway to the East.

The crucial role of Free Trade Zones in Dubai’s economic development

Dubai’s main cargo port, Jebel Ali is the busiest port in the Middle East and established as a free zone. It is also the United Arab Emirate’s most valuable commercial asset. A big reason for the shipping terminal’s success is that its located inside the Jebel Ali Free Zone, also known at Jafza. Spread over 57 square kilometers, Jafza is the world’s largest economic free zone. It is one of more than 20 industry-specific free zones dotted around Dubai. These zones attract businesses with tax breaks, custom duty benefits and no foreign ownership restrictions, all within a developed infrastructure that is run by independent authorities helping streamline bureaucracy. More than 7,000 global companies are based in Jafza. This includes approximately 100 of the Fortune Global 500 companies. Jafza accounts for almost 32% of total FDI (Foreign Direct Investment) flow into the country. The Free Zone contributes 21% of Dubai’s GDP on a yearly basis and it sustains the employment of more than 144,000 people in the United Arab Emirates. In 2015, Jafza generated trade worth 87.6 billion USD. The port at Jebel Ali is by far the busiest in the Middle East, and its cargo capacity grew by nearly 12% last year. It is likely to become the biggest container port in the world by 2030.

Typically, foreigners are not allowed to purchase real estate in Dubai. Foreign companies or individuals are also required to enter into partnerships to conduct business in Dubai. But these conditions do not apply to business or activities conducted in the free zones in Dubai. Setting up business in the UAE is easier than anywhere else in the Middle East and North Africa (Mena). According to the World Bank’s Ease of Doing Business 2016 report, the nation ranks 31.

With numerous free zones, excellent infrastructure, no taxes, low import duties and a strategic location, the UAE scores far ahead of neighbors such as Bahrain (65), Qatar (68) and Saudi Arabia (82). For instance, it takes only six procedures and eight days to open a company in the UAE, compared to 8.2 procedures and 18.8 days in Mena, and 4.7 and 8.3 worldwide. There are more than 30 free zones operating in Dubai. FTZs in Dubai and the UAE are governed pursuant to a special framework of rules and regulations. A Free Zone Authority offers business licenses to foreign-owned businesses. Each free zone is designed around one or more industry categories and only offers licenses (e.g. for a Free Zone Enterprise (FZE)), to companies within those categories. Most of the free zones in Dubai broadly offer trading, services, and industrial licenses to investors looking to set up their businesses.

Dubai Airport Free Zone (Dafza) is the fastest growing free zone in the world and is ranked 1st globally by the Foreign Direct Investment Magazine’s Global Free Zones & Awards 2012/13. Dafza won this rating as a result of its outstanding strategic approach and well-articulated plans to service its investors and partners. It is one of the most prestigious and advanced free zones in Dubai, providing an ideal base to do business in the Middle East by providing a business-friendly environment, world-class infrastructure, tax exemptions, full repatriation of earning, total ownership and exceptional facilities. Strategically located next to the Dubai International Airport, Dafza is boasting rapid clearance and fast processing of paperwork to maximize business activity and efficiency. Established in 1996, Dafza has become the gateway for a remarkable number of global investors seeking business opportunities in the Middle East region and is home to over 1600 international firms from various parts of the world.

 

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