With regional economies still feeling the effects of lower oil prices since mid-2014, trade wars occurring across the globe, a stronger US dollar pushing up the value of the dirham and increased risks weighing on investor sentiment, Dubai and the UAE have introduced a diverse set of cost-cutting reforms that are largely designed to encourage openness to foreign investment. Additionally, the Dubai government plans to bear a greater share of the costs that businesses incur, in what amounts to a stimulus package to preserve and extend economic growth.
With a low-tax framework already in place, monetary policy following the US dollar and government spending occupying a large component of economic activity, Dubai’s main tools for economic stimulus are in its ability to lower the fees charged for services. The changes announced in 2018 either lower or freeze those fees, and are targeted to maximise the impact on the emirate’s key economic sectors, including real estate, aviation, tourism and manufacturing. While the lowered rates are accessible to any type of investor, some of them appear to benefit foreigners more so than locals.
Measuring Confidence
In the OBG 2018 Business Barometer: Dubai CEO Survey, 79% of respondents reported that they had positive or very positive expectations for local business conditions that year. However, not all economic indicators are unequivocally positive. The research department of Dubai’s largest bank, Emirates NBD, maintains a purchasing managers’ index, which fell in October 2018 to its lowest level since March 2016.
Furthermore, the total workforce in Dubai contracted for the first time in 13 months in March 2018. While business confidence remained positive, sentiment had slipped to a seven-month low, according to a survey conducted that month by Emirates NBD.
The Dubai Economic Council’s decision to take on a proactive stance is in part guided by past events such as the 2007-08 global financial crisis, when external variables turned into domestic economic shock. The stance is shared across the country, with the federal government and that of Abu Dhabi implementing similar cost-cutting programmes. According to an analysis that was published by PwC in June 2018, the recent developments in Abu Dhabi and Dubai continue to demonstrate the UAE government’s commitment to further improving and growing the way business is conducted in both emirates.
Broad Cuts
Among the main fees cut is the market fee, an access levy that is paid annually for licence renewal. In June 2018 the market fee imposed by Dubai Municipality was lowered from 5% to 2.5% of annual rent, and applies across the board.
Most of the other cuts announced in Dubai will impact some sectors more than others. For example, the Executive Council of Dubai mandated the Dubai Land Department waive fees on late payments for property registration in cases where they had not been paid within 60 days. In the aviation sector a total of 19 fees were scrapped. As a result, the emirate is expecting to attract a raft of new investment worth over Dh1bn ($272.2m).
Free zones have also offered reduced fees to help drive competition. In mid-2018 Dubai Airport Free Zone Authority (DAFZA), which oversees export-oriented logistics and industrial clusters, cut registration fees by 65%, licensing costs by 33% and fees for work visas by 20%. Additionally, the issuance fees for establishment cards were lowered by 17%, and costs for board resolution, the renewal of expired licences and the issuance of memoranda of association were waived. DAFZA also halved the capital requirement, slashing it from Dh1m ($272,000) to Dh500,000 ($136,000), and simplified several processes, including those for obtaining general trading licences. Furthermore, businesses can now be structured as free zone limited liability companies.
At the Dubai World Trade Centre (DWTC), the largest events and exhibition space in the region, the DWTC Authority introduced a fee reduction scheme in June 2018, which lowered costs by as much as 70% for businesses within the free zone and at One Central, a mixed-use project in development in Dubai’s central business district. Immigration-related service fees were lowered by 40-50%.
Power Savings
For the industrial sector as a whole, another change that will impact the cost of doing business is a tariff reduction for electricity. Roughly 6000 facilities across the UAE are expected to reap the rewards of this move. Large factories will see consumption charges fall by 29%, whereas the savings for small and medium-sized ones will range from 10% to 22%. Moreover, new service connection fees were dropped. These changes are significant for the Federal Electricity and Water Authority, as more than 25% of its income comes from industry. Though the tariff reduction was approved by the Cabinet in September 2018 and expected to take effect in the fourth quarter that year, there were no updates on its implementation as of mid-January 2018.
For the tourism sector one of the main improvements was a reduction on the municipality fee from 10% of income to 7% for hotels and restaurants. The change was implemented in July 2018 and is expected to boost occupancy rates at Dubai hotels, which had dropped from 77.3% in May 2017 to 60.9% a year later. At the federal level the UAE has a total of 767 hotels with roughly 147,000 rooms, and revenue on a per-room basis dropped by 3.3% in 2017, the fourth consecutive year in which the metric has trended downwards. The changes in fees related to the tourism sector should also help the emirate reach its target of 20m visitors annually by 2020.
The lowering of ticket prices by Dubai Parks and Resorts, the government-related entity that has emerged as Dubai’s arm for many of its tourist attractions, should also help boost visitor numbers, especially during the low season. Prices initially ranged from Dh240 ($65.33) to Dh330 ($89.83) for a single-day pass at these parks, which include Legoland, Bollywood Parks and Motiongate, and were lowered for the winter season to Dh235 ($63.97) for admission to one park and Dh285 ($77.58) for two.
Schools
A freeze on schools fees for the academic year 2018/19 is a move that will benefit all businesses, especially those with large numbers of expatriate workers who have brought their families to Dubai. The education sector has been one of the fastest-growing ones in the emirate, with 65 new facilities having opened since 2012, bringing the total to 184 in 2018/19. The average annual tuition fee climbed 44.8% in the past six years, increasing from Dh24,900 ($6780) in 2012/13 to Dh36,100 ($9830) in 2018/19. Given that the average apartment rental costs in Dubai dropped by 5.8% in the six months up to September 2018, the cost of living for families with school-aged children is likely to see significant declines in 2019, which could help Dubai retain a competitive edge in attracting skilled and semi-skilled expatriate workers.
Visas & Foreign Investment
A change most relevant to expatriates across the UAE is the new availability of 10-year working visas. In the past visas were available for a duration of two or three years. As of September 2018 students – who were normally granted one-year visas – can now receive them for five years or, in exceptional cases, 10 years. The change comes in the same year as a legal reform that will allow foreign investors to own up to 100% of their ventures based in the UAE. The country’s free zones had initially been the only place where a foreign direct investment (FDI) can be entirely owned by the investor. Outside them, a local company is required as a joint venture partner and must hold at least 51% of the equity capital.
The Ministry of Economy was directed to propose details on which sectors the foreign ownership reform will be applied, and to what extent, by the third quarter of 2018; however, the legislative process in the UAE is often methodical, which means that reforms can spend years in draft form and implementation periods can be gradual. Details are expected to be released in the first quarter of 2019. According to industry analysts, investors can speculate about the extent to which restrictions will be eased by looking to the region. In Saudi Arabia, for example, a similar relaxation on FDI restrictions came with other requirements, including commitments to knowledge transfer, local research and development, and hiring locals in positions throughout the organisation rather than at specific levels of it.
While the finer details of some of these measures are yet to be announced, the various fee reductions and policy reforms nevertheless signal Dubai’s continued emphasis on lowering the costs of doing business and its commitment to expanding the role of foreign investment in the emirate’s development.
Read More from OBG
