For the Middle East of the early 2000s, freezones - with their enabling business environment - were the perfect vehicles for attracting much-needed foreign investment.
Freezones appeal as they often have minimum capital requirement and are a one-stop shop for getting a company set up and running. Freezone companies are able to cut through bureaucratic red tape that might otherwise involve multiple visits to various government ministries. Plus, freezones come with basic infrastructure and telecoms support, and more pertinently for foreign investors, documentation is in English.
The host country reaps benefits as well. Not only do they collect fees as licensors and rents as landlords, they look to freezones to create jobs, boost exports, diversify the economy and build manufacturing capacity.
Indirectly, freezones also allow the host country government to experiment with institutional reforms which, if successful, can be adopted for the wider economy.
Foreign Direct Investment
Freezones are very reliant on FDI so much so that one measure of their success is the investment they can facilitate.
But as governments loosen restrictions on onshore companies and allow 100 percent ownership, are freezones in danger of losing their relevance? Or should they instead adapt to the new order by transforming themselves through disruptive development and moving upward along the value chain?
Competition In The Neighbourhood
Within the UAE, there are 45 free zones, 30 of them in Dubai alone. The value of exports from UAE's freezones amounted to 225.5 billion dirham ($61.39 billion) in 2017, 19.5 percent of the country’s total exports for the year, according to the UAE Central Bank's annual report.1
Following the UAE’s successful experiment with free trade zones and special economic zones, Middle Eastern neighbours have followed suit with their own initiatives to attract investment (both domestic and foreign), increasing regional competition.
Saudi Arabia has its Economic Cities and Special Economic Zones. Realising the potential of freezones, Crown Prince Mohammad bin Salman has announced plans to build a $500 billion Red Sea economic zone called NEOM, which will operate as a semi-autonomous region with its special customs, tax and labour regulations and an independent judicial system.2
Other freezones in the region include:
- Qatar’s Ras Boufantas Free Zone and Umm AlHoul Free Zone. 3
- The Doha-based Qatar Science and Technology Park (QSTP), an incubator for technology start-ups 4
- Qatar Financial Centre (QFC)
- Oman’s Sohar Port and Freezone 5
- Kuwait’s planned $100 billion Madinat al-Harir (Silk City)
Responding to the challenge
Caught between the competition and saturation of freezone capacity, the UAE has responded by allowing 100 percent ownership to a large cross-section of onshore businesses. This narrows the gap between onshore and freezone legislation, rendering the benefits less pronounced for freezones, at least in the UAE.
The newly opened sectors will also to a large extent be able to enjoy other advantages of a freezone, like full repatriation of capital and profits, ease of establishment set-up, an easy tax regime and no real restrictions on the movement of labour, as the UAE works towards transforming the country into a global business hub.
The 100 percent ownership rule will apply to sectors involving renewable energy, green technology, biotechnology, solar hybrid and green technology production, research and development, logistics and supply chain and e-commerce.
What happens, then, to the existing freezone infrastructure?
One way to remain relevant now that 100 percent ownership will be allowed elsewhere is for freezones to future-proof themselves through a transformation into nodes of innovation and incubators for the future economy, particularly as countries in the Middle East are trying to ready their economies for a post-oil period.
As maturing Middle East governments look for knowledge-based economic development, nurturing of skills and incubation of local talent and entrepreneurship, there is an opportunity for freezone companies to collaborate with newly formed onshore entities to become nodes through which ideas and innovations can be disseminated across the region and through to the world.
To do this, freezone operators will need to invest in the development of ecosystems that support growth of technology development, including laws around intellectual property rights.
Freezones could embrace artificial intelligence, block chain and IOT technologies, and become involved in the value chain of these sectors – from being laboratories to marketing fronts.
Another option is for freezones to become a flight to quality in terms of real estate for onshore companies. Dubai’s newer freezones position themselves as upscale work/play/live environments that can attract businesses from older commercial enclaves in the city, leaving those areas open for potential modernisation and regeneration.
Free zone models where companies set up warehouses and factories and employ people are the ones that produce more value and benefit to the host countries, rather than ones that serve as mere trans-shipment hubs.
Dubai's Jebel Ali Freezone (JAFZA) is one such freezone that has effectively made this transition up the value chain. Set up to facilitate trade and shipping, it has now become a complete logistics and supply-chain proposition. MoUs signed with the newly developed Dubai South and the new Al Makhtoum International Airport will expand and deepen the value chain. JAFZA attracts nearly a quarter of the total FDI in Dubai.
Depending on the needs of their populations, governments would do well to improve the links between freezones and the onshore local economy. For example, while increasing local employment through freezones could be a primary objective for Saudi Arabia, this is not a vital concern for the UAE, where the national population is small. For Dubai, attracting foreign investment and a talented workforce are key objectives.
Thus, it is important for freezones to closely align their programmes and policies with that of the host economy.
As freezones transform themselves to overcome the double whammy of increased competition and the easing of onshore ownership rules, there could emerge a new framework for them: one that offers state-of-the-art packages that include new technologies and innovations, smart communities and regulatory regimes for the 21st century. In short, freezones that adapt will survive.