Money makers

By Pam Dougherty DUBAI

But with most Arab states moving towards freer trade and more liberal investment conditions, it might seem as if their free zones had a limited shelf life. In fact, says Jim O'Gara of American firm The Services Group (TSG), which has acted as consultant on new free zone developments in the Arab world and elsewhere, they should be a major tool in promoting liberalization and seem set to proliferate around the region.

According to O'Gara, free zones have been considered something of a temporary phenomenon since their inception. "People working in the Shannon free zone in Ireland back in the 1950s thought it could not last, and when I came into the business 12 years ago I thought I should have an exit strategy," says O'Gara. Today, however, not only are both Shannon and O'Gara still in the free zone business, the world's largest and most sophisticated economy is awash with them. "The United States has about 300 free zones," says O'Gara, "and most of its car manufacturing takes place within them."

He points out that the real strength of free zones is that they provide an efficient, focused system for the movement of goods and people. "In modern production the percentage of value from logistics, which includes bringing in raw materials and sending out finished goods, can make up as much as 25 percent," O'Gara says, "and any efficiency that can be gained from ease of movement of goods, capital and people is vital."

Jebel Ali. The idea of free zones is hardly a new one in the Arab world. Kuwait first set up a free zone in the 1950s, and a number of other countries in the region followed suit in the 1960s and 1970s. But it was only when Dubai picked up the free zone ball - and managed to carry it further and faster than anyone else had thought possible - that they really took off.

What started with a conventional trade and industry zone at Jebel Ali Free Zone (JAFZ) has now become the accepted method for adding new elements to the economy. It is hardly surprising that Dubai looked to Jebel Ali as a model: it has turned out to be an outstanding success and has become the touchstone for economic progress throughout the region. JAFZ now covers 100 square kilometers and is home to close to 2,000 companies from over 97 countries. Jebel Ali offers almost everything big business could want: 100 percent foreign ownership, 100 percent repatriation of capital and profits, and zero corporate or personal income tax.

JAFZ has proved to be the ideal location for trading, shipping and port management company Maritime and Mercantile International (MMI). MMI is a Dubai-based company so has no need of free privileges but, according to Mike Lee, head of MMI Logistics, "Jebel Ali has the right mindset for an efficient zone, and the infrastructure and technology which allows that mindset to become reality." MMI Logistics, which handles the products of major international brand owners such as Smith Kline Beecham and Ferrero Rocher, uses JAFZ as a base for its regional business, 50 percent of which goes to the UAE, with most of the balance going to other GCC countries.

Who's who. With JAFZ running smoothly, the emirate moved on to the Dubai Airport Free Zone (DAFZ), which was set up to attract high-value, technology-driven industries needing ready access to airport facilities. After just three years of business, DAFZ's tenant list reads like a who's who of international business and includes Boeing, Rolls Royce, Porsche and a slew of luxury goods names. JAFZ and DAFZ between them have done enough to ensure Dubai's role as the logistic hub of the Middle East, but the emirate cannot afford to rest on its laurels.
In 1999, Dubai announced one of its boldest ventures to date, Dubai Internet City (DIC), which was followed within months by two satellite ventures, Dubai Media City and Dubai Ideas Oasis.

With Dubai's reputation for successful ventures well established and numerous IT and media companies already located in the emirate, DIC was almost fated to succeed. Prospective tenants were signing up for space almost before construction was underway. The latest addition to the Dubai free zone stable is the Gold and Jewellery Park, which functions as an extension of JAFZ and is the first to function as both a manufacturing center and a tourist attraction itself. Dubai is actually planning to provide buses to take tourists to the park so that they can watch the jewelry-making process and, of course, buy something to take home.

Penalties. Over the past 10 to 15 years, Dubai's success has spawned numerous copycat efforts, not least within the UAE itself. Sharjah now has two zones operating, the Sharjah Airport International Free Zone, which opened for business back in 1985, and the Hamriyah Free Zone, which offers access to both Sharjah airport and to a deep water port with separate petrochemical, bulk handling and general cargo berths. Other UAE zones include Fujairah, Ahmed bin Rashid in Umm al-Quwein, Ras al-Khaimeh and Ajman, which has pulled in more than 500 companies and in excess of $300 million in investment. One major selling point for all of these zones is the happy combination of lower costs than Dubai with easy access to its comfortable lifestyle.

The northern Gulf area is also seeing renewed interest. Bahrain Airport Free Zone is active, while Kuwait, having pioneered the concept over 40 years ago, is now developing a 2 million square kilometer zone adjacent to Shuwaikh port. The first phase of the development has attracted mainly light industry and warehousing activity, but Kuwait is hoping that a second phase will bring in e-commerce, information technology and telecommunications investment.

While the UAE zones have been growing apace, its neighbors have been watching it, and each other, with interest as they develop plans of their own. Yemen has high hopes that its new Aden Free Zone (AFZ) will help to revive its once vital Arabia seaport and will act as a catalyst for desperately needed foreign investment, which could transform the rest of the country. AFZ has attracted a healthy amount of investment, although it has come mainly from local investors and from some foreign companies that already have a presence in the country.

Aden will have to move quickly, and efficiently, if it is to hold its own against the planned Salalah free zone in Oman. Oman is moving ahead with a free zone to complement its successful Salalah Port development. The Muscat government is confident that the same prime location on some of the world's major shipping lanes that has helped to make the port such a success in its two years of activity will also encourage investors to set up logistics and manufacturing activity in the new zone.

To the west, Egypt is working hard to develop free zones that can take advantage of the Suez Canal. Zones at Suez and East Port Said are being developed as part of a government strategy to boost foreign investment and expand export-oriented industry. The Suez zone is served by the newly built North Alsukhna port and has already attracted an impressive number of heavy industry projects, most of them initiated by Egyptian investors. At the other end of the canal, the Al Farama investment zone is taking shape in conjunction with the development of the new East Port Said container port. Al Farama's emphasis is on light and medium industry, and it is also hoping to attract transit activity.

With their neighbors still concentrating on developing conventional port and industrial zone options, the Jordanians have come up with the idea of converting the entire Aqaba area of southern Jordan - which already contains a port, airport, industry and tourism activities - into the Aqaba Special Economic Zone (ASEZ). They are hoping that it will attract a mix of light and heavy industry, IT-related projects, services and tourism investment, and will provide a model for easy investment that can be applied to the rest of the country.

With so much going on in its neighborhood, it seems that Saudi Arabia, which has previously shown little interest in the free zone idea, can no longer afford to be left out. It has already opened its port to private sector management, and is now moving towards establishing free zones at both Yanbu and Jeddah. The move is understandable in the light of the benefits it could bring to its oil industry and the enormous amount of lucrative Saudi-bound trade that is currently handled by Dubai. Some observers believe that Jeddah could face competition from both Aden and Aqaba, but this overlooks Jeddah's built-in advantage in having the richest market in the region in its own backyard.

MMI Logistic's Mike Lee is happy with service in Dubai but says a Jeddah free zone could be valuable for traffic in the east of the country. "The location has a lot of promise," he says.
Yanbu is a lot further off the beaten track: a desert outpost settled more than 3,000 years ago, the site was transformed into an industrial center in the 1970s. Since then, some 50,00 full-time residents have moved to the area, most to the work in Yanbu's flourishing petroleum industry.

The zones that produce the least enthusiastic response from potential investors are those established as part of bilateral political agreements. A new zone on the Iraqi-Syrian border springs to mind. As a zone in an unattractive location, established by one country with a hesitant approach to liberalization and one with none at all - and both with severely underdeveloped infrastructures and overdeveloped bureaucracies - it seems to have little to offer investors. The cross-border Jordanian-Syrian free zone is another example. Established for years, activity in the zone has barely moved while the ASEZ was up and running within months of a clear commitment from King Abdullah of Jordan.

The proliferation of zones is forcing their marketers to work harder to persuade potential investors that their own particular mix of advantages is the best option. With all zones offering tax and customs advantages and offering freer access for foreign investment, other factors are beginning to be more important.

"It is no longer enough for a country to have a traditional zone," says one observer, "they need to offer first-rate infrastructure, state-of-the-art telecommunications and even attractive living conditions." When it comes to overall attractions, Dubai is once again in the lead. Some international companies serving markets as far afield as east Africa choose it as a base because of its comfortable living conditions for staff and their families.

Expansion. For some companies, it is not a question of either/or when it comes to deciding on a free zone. Fadi Ghandour, the CEO of courier and logistics specialists ARAMEX, says that for him it makes sense to be present in a number of zones in the region. "We already have a presence in Jebel Ali, Bahrain Airport Free Zone, the Queen Alia International Airport Free Zone in Amman and in Aqaba," he says, "and we are keeping an eye on developments in Jeddah, Beirut and Port Said." In Ghandour's view, any country in the region wanting to expand its business needs a free zone, although that alone is not enough. "A free zone simply puts a country on a par with its weakest competitor," he says. "But it is a way out of local regulations and a stepping stone towards an overall free environment."

TSG's O'Gara agrees. "The easiest way to develop an economy is still through an enclave where improvements are introduced and then extended to the rest of the economy" he says, a comment that should be music to the ears of the region's free zone investors and developers alike.