Dubai Report: Dubai's race to the top

The ruling family's strategy to transform this small emirate into a world-class business and leisure hub by 2015 is impressive. But serious challenges loom. Morice Mendoza reports.

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Last Updated: 09 Oct 2013

Ever since Sheikh Rashid Al-Maktoum, ruler of Dubai, gave the order in 1959 to modernise the local creek - a trading port since the 1830s - the small desert sheikhdom on the east coast of the Arabian Peninsula 120 miles from Iran across the Straits of Hormuz, has been developing at breakneck speed. Its aim is to become one of the world's biggest commercial hubs. Dubai struck oil in the 1960s, but this commodity is no longer its economic mainstay: oil revenues fell from 46% of GDP in 1975 to 7.1% in 2004.

In 1959, Sheikh Rashid borrowed money from Kuwait to help realise his ambitions for the Creek, from which local traders had peddled pearls, gold and, lately, grey goods to markets in India, Pakistan and Iran. He took an enormous risk. The cost of modernising the port was several times Dubai's annual GDP at the time and sceptics didn't think the project would work. But the newly dredged port increased trade by 20% in the first year, and import taxes helped to repay the Kuwaiti loan early.

In 1960, Dubai International Airport was built with an 1,800-metre runway; two decades later, it was handling 2.8 million passengers, rising to 25 million by 2005. Rashid's son, the present ruler Sheikh Mohammed, has launched a new project: the Dubai World Central International Airport, which will be 10 times larger than the old airport and is expected to handle 60 million passengers by 2010. It will also include a logistics hub, residential and commercial areas, a golf resort and a business park.

Dubai has changed beyond all recognition. Anyone living there in the 1970s would have seen empty desert and the beginnings of an expatriate community. So scarce were hotels then that many business visitors had to sleep in the lobby or share rooms in the newly built InterContinental. By 2005, Dubai had 300 hotels with 29,834 rooms; 20,000 more rooms are planned by 2010, not counting the 55 hotels invisaged in the $12bn investment in Dubailand, a new family resort.

The relentless pace of development is part of the ruling family's strategy to transform Dubai into a world-class hub. The Singapore model, which it most closely resembles, is a reminder that it faces stiff global competition. New upstarts such as Cape Verde ape the Dubai model, luring companies with tax privileges in 'free zones'. After two decades of brash development, Dubai has become one of the world's top places for businesses to locate and for tourism. The superlatives abound - from the Burj Dubai, at 800 metres-plus destined to be the tallest building in the world, to the three artificial luxury island resorts, the Palms Jumeirah, Jebel Ali and Deira. Such projects get Dubai noticed.

Dubai also offers good service facilities to support commerce. It has increased its capacity to handle shipping since the 1970s. First, Port Rashid was developed and then, a decade later, the Jebel Ali port became the world's largest man-made harbour. The trade figures reveal how successful these high-risk infrastructure investments have been. In 1975, imports were worth $1.93m, exports $2.45m and re-exports $1.52m; by 2004, imports had increased to $40.6bn, exports to $2.6bn and re-exports to $15.5bn. In 2004, goods brought in from China, India, Japan, the US and Germany were re-exported to Switzerland, India, Pakistan, Iran and Iraq.

In 2005, the UAE attracted $12bn in foreign direct investment (FDI), making it the biggest recipient in the Middle East and North African region. Much of it went to Dubai. According to Sheikha Lubna Khalid al Qasimi, the UAE's minister of the economy, FDI rose to $16bn last year.

With its luxury beach resorts, indoor ski slope and the world's biggest shopping malls, it's easy to see why Dubai has been compared to Las Vegas. Unusually for the Middle East, visitors can drink alcohol in hotel bars and women can wear bikinis on the beach. Unlike Vegas, though, Dubai is unlikely ever to tolerate gambling. But as a laissez-faire trading zone, it has attracted money from all sources, including the black economy.

To understand what is driving the unstoppable development, Singapore is a more instructive comparator. As in Dubai, a single dominant figure - Lee Kuan Yew - set the vision for creating a world-leading commercial hub. Both aimed to create a major financial centre with a high-quality infrastructure to attract foreign firms, and both saw the need to make their services indispensable to major international firms. But there is an important difference. Lee Kuan Yew was a paternalistic figure who controlled change from the top down; Sheikh Mohammed makes sure that there is money to kick-start high-risk ventures, but then leaves the rest to market forces, judging carefully the right moment to hand over.

This process was applied to the government-owned Emirates Airlines, now one of the most successful carriers in the world. Dubai provided $10m in 1985 to get the company off the ground, but since then it has operated without support or subsidy. In 2006, the airline served 83 destinations in 57 countries. After 18 consecutive profitable years, the Emirates Group reported a net profit of $674m for the airline and $762m for the group.

The Dubai model is neither top-down as in Singapore nor bottom-up as in Silicon Valley, where growth came from a mixture of entrepreneurs and innovators spurred by demand for technology products from the US military. According to Dr Jeffrey Sampler of the Said business school in Oxford and author of Sand to Silicon (2007), the state acts as a catalyst, supporting and developing new assets, which are then turned over to private management.

Says Sheikha Lubna: 'The vision is to be a global city by 2015. Most of this is dependent on the flow of people, investments and growth. The position of Dubai, being right in the middle between East and West and as a trade route from the old times, makes it very attractive. The more it gets built, the more it gets developed, you find more demand coming in.'

Critically, in Dubai's free zones, companies do not have to set up joint ventures with locals; they pay no corporate or income taxes for 50 years and are allowed to repatriate all their profits. Excellent concierge services facilitate their business, and they are free of some legal restrictions imposed outside these zones - the internet is uncensored, for example.

In the free zones, demand for buildings often runs ahead of supply. 'Seventy-five per cent of the space has already been booked,' says Salah Eldin Eltayeb Farah, corporate communications executive for the Dubai Airport Free Zone Authority. There is a 'long queue of 400 firms waiting to come into the zone', mostly multinationals in the aviation, logistics, cargo, IT, jewellery and general trade industries. Airbus wants to build its own plot there.

Derek Morrison, regional general manager of IT software services firm Cognos, says the authorities made setting up in Dubai easy. His office in Dubai Internet City (DIC) is the base for the firm's sales and marketing operations in the Gulf region. 'They allowed us to rapidly build our business in the Middle East, facilitating our office space, internet connections and phone lines.'

Anyone who visits Dubai will notice that the infrastructure sometimes lags behind the creation of hotels, shopping malls, theme parks and free zones. Buildings go up before a new road or local shops have been established. It is impossible to drive across the main east-west arterial route running through the city because the government failed to build enough slip roads or intersections.

Buildings are going up so fast that residents returning after a few weeks away have trouble recognising their own district. How, then, will Dubai cope with the 8.5 million visitors a year forecast by 2010? Dubai Metro, an overhead light railway due to be completed in 2009 and expected to carry 1.2 million passengers daily, should ease road congestion. But can Dubai bring all its infrastructure up to par if the city continues to develop at such speed?

Dubai's other challenge is like Singapore's. Both cities need to create a highly trained local technical workforce. Most international firms in Dubai have the sales and marketing capabilities to reach growing consumer and business markets in the Middle East and Africa. But to move Dubai to the next level, it must become known for first-class research and innovation. In this, the emirate is already well advanced. A number of IT and media firms, including Microsoft, Oracle, Hewlett-Packard and IBM, have clustered in DIC and Dubai Media City. Dubai Knowledge Village, launched by the government for universities and training organisations, is already filled to capacity, with 15 universities and 150 related companies; and Dubai Healthcare City has at its heart the Harvard Medical School Dubai Center.

But Dubai's dependence on foreign workers (currently 80% of the workforce) and FDI makes it vulnerable. Says Dr Paola Subacchi, head of the international economic programme at Chatham House: 'It will take time to train the local people - it starts with primary school education. Meanwhile, Dubai depends on the expat community for skilled labour. It's a vulnerable scenario. At the moment, it's very safe and very pleasant. But you only need to look at Hong Kong to see how things can suddenly change. There, lots of people are leaving because of the problem of pollution.'

Justin Doo, regional director Middle East and Africa at Trend Micro, a US IT security software firm, has been in Dubai since the first Gulf War in 1990. 'Desert Storm had an impact on business and people left. The invasion of Iraq in 2003 also had an effect, but not as much: business carried on. People know it is a high-risk environment, but the returns are also very high.'

Rising tension between the US and Iran, however, creates serious risks for Dubai, although Islamic extremists may be less likely to launch a terrorist attact on an Arab state such as Dubai, especially as it has been used by jihadists to launder money. John Cassara, author of Hide and Seek, a book on the financing of terrorism, recalls that as far as illicit trade was concerned, 'all roads led to Dubai'. He urged the US government to open an office there to monitor fraud, money-laundering, smuggling, quota violations, sanction-busting, drug trafficking and child pornography.

Al Qaeda used Dubai to finance some of its activities, including the attack on the Twin Towers. It sent millions of dollars through the untraceable 'hawala' money-transfer system to be converted into gold bullion, which is exempt from international reporting requirements. After 9/11, the US set up an office in Dubai and its authorities created 'excellent financial intelligence and compliance programmes' to deal with the illicit trade on its home turf, says Cassara. But there has been a worrying lack of enforcement.

The state's increased tolerance of alcohol and un-Islamic dress, along with the influx of Western visitors, could spur a terrorist attack. If this happened, some would expect an exodus of people and capital. Dr Christopher Davidson of Durham University says FDI is very elastic: 'It can easily move somewhere else.' Many recent investors are more risk-averse than their predecessors, he notes, and more likely to take flight at the first signs of trouble.

Dubai has other challenges too. Migrant labourers from south Asia are calling for improved working conditions. Dubai's government may have to take more notice of criticism from organisations such as Human Rights Watch. Equally, Dubai's rapid development of artificial islands and enormous towers presents an environmental challenge of equally gigantic proportions.

The authorities are responding with their own assessment of the risks. However, the amount of energy required to keep the air conditioning going to sustain Dubai Inc in 2010 and after might make its carbon footprint one of its less admired superlatives.

DUBAI'S HUMANITARIAN HAVEN

Dubai aims to create a regional hub for humanitarian organisations. The International Humanitarian City (IHC), an independent free-zone authority set up in October 2005 in Jebel Ali, has already registered more than 55 organisations and commercial firms. Some aid organisations, such as Medecins Sans Frontieres, have been present in the UAE for 15 years, says Rolando Tomasini, business school Insead's humanitarian research group programme manager, but Dubai's latest initiative is different in that it seeks to create a centre from which humanitarian organisations can operate. Its extensive facilities include climate-controlled warehouses, temporary and permanent offices, conference rooms, a business centre and short-term and long-term housing. It's early days yet, but Tomasini says it could work well. 'The concept of the IHC provides a platform for humanitarian organisations to work closely in one compound. In times of emergency, this could be useful to augment the exchange of information among those who share facilities on a daily basis.' Its location is useful too, he adds. 'It provides a great mid-way point to the field. It's common to see field workers making short visits in Dubai to update their colleagues on what is happening on the ground.'

SETTING UP IN A FREE ZONE

A Free Zone Establishment (FZE) or company (FZCO) is registered by the free zone authorities

The company or individual must have capital of at least AED1 million ($272,000)

An FZE needs only one shareholder and is an independent legal entity

An FZCO may be formed with between two and five founders (individuals or a company)

A decision on whether the application has succeeded will be given in 30 days

Incentives include 100% foreign ownership and full control; exemption from all taxes and duties levied on profits or production; no restrictions on profit transfer or capital repatriation; no customs duties; no corporate, withholdings or inheritance taxes; no personal income tax

DUBAI'S GDP BY SECTOR (USDOLLARS BN)
2000 2001 2002 2003 2004
Non-financial sector 14.08 14.77 18.50 22.67 25.87
Financial sector 1.69 2.05 2.18 2.54 2.86
Government services 1.54 1.62 1.80 1.99 2.08
Total 17.31 18.44 22.48 27.20 30.81
Source: Dubai Chamber of Commerce

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