Business Environment

Published March 1st, 2000 - 02:00 GMT

Privatization

Abu Dhabi recently announced an ambitious initiative to privatize its water and power sectors. To this end, the emirate implemented a new regulatory framework for these industries contained in “Law no. 2 of 1998 Concerning the Regulation of the Water and Electricity Sector,'' which is user-friendly and creates transparency. The government published an English copy of the law. 

 

The main features of the plan include the creation of a new public body that is responsible for government policy in the sector. It also calls for creating a new regulatory agency designed to encourage local and foreign investment while protecting the interests of the country and its nationals. Furthermore, the law calls for dismantling the assets of the former government Water and Electricity Department into various separate bodies. 

 

Abu Dhabi's goals are to improve efficiency and service, promote local and foreign private sector investment and maximize revenues from an asset sales processes. At the same time, the legislation ensures continued security of water and electricity and promotes opportunities for UAE nationals.  

 

The plan, which is to be the model for the other emirates, is expected to reduce the government's capital expenditures and subsidies. In Abu Dhabi, it costs 7 cents to generate one kilowatt an hour while the selling price is 4 cents to non-emirate nationals and commercial offices and two cents to nationals. It is estimated that government subsidies for this sector total $271.7 million a year. 

 

Stock Exchange

The UAE government is expected to approve the opening of a stock exchange within the next year. In December 1999, the government presented a bill that regulates the establishment of the Securities Commission and the Stock Market.  

The bill states that the commission will be managed by a Board of Directors chaired by the Secretary for Trade and Industry. The board will consist of two members form the Trade and Industry Department, two from the Treasury, one from the Central Bank and four monetary experts. Board membership terms will be three years with the option of a one year second term. People who serve on the board of directors of publicly listed company's are barred from serving on the commission's board. The bill also states that the exchanges will be electronically linked to allow trading in all parts of the country.  

Shares are currently traded informally. When it is launched, the exchange will be the region’s second biggest. One major source of dispute has been on the issue of allowing foreigners to invest in the market. A few mutual funds now permit limited foreign ownership of shares.  

Public stock companies may be registered in the UAE, despite the absence of an official stock exchange. Shares of public companies are bought and sold through private investment agencies, and share price information is based on the latest transactions. 

The UAE stock market is believed to currently have a market capitalization of more than Dh 67 billion, and the primary market is also expected to become very active in the future. The Emirates Bank group has established the Emirates Equity Index (Emnex), a composite of thirty-one actively traded UAE stocks. There are also sub-indices for the three main market segments-banking, services and insurance.  

 

Major Projects

The government’s continued investment in infrastructure has been an important driver of growth. The main focus of this investment is electricity and water. Government officials predict that the population of nationals will be reach 1.31 million by 2005 and 2.194 million by 2012. This means that in 13 years, 9.3 million telephone lines will be needed and demand for power and water by 2012 will be 3,630mW and 1,150 million gallons per day.  

 

In 1996 the total installed electrical capacity was 7,466 mw. Abu Dhabi had 45 percent of capacity and Dubai, 26 percent. The former is expected to double power output and population by 2010. Per capita electricity consumption in Abu Dhabi in 1996 was 13,433 kW, while per capita water consumption was 82,861 gallons, much used in desert agriculture, one of the world’s highest rates. The UAE has the highest per capita consumption of desalinated water in the world. Planned water and power projects are estimated to cost $8.425 billion.  

 

The government has also made telecommunications a priority. Under the Thuraya project, awarded for nearly $2 billion to Hughes Space and Communications, two satellites will be launched to provide enhanced GSM telecommunication and television services. There is also a planned cable television network that will deliver services to 10,000 a piece in Abu Dhabi and Dubai. 

There are several new free zones in the planning or early construction stages. The most significant is the Abu Dhabi’s Saadiyat Island Free Zone, an estimated $3 billion project that is expected to concentrate on bulk commodity trading rather than manufacturing.  

In Abu Dhabi other planned or current projects include a $330 million expansion of the Abu Dhabi and Al Ain Airports and a $543 million development of an industrial city in Mussafah area that includes a 1,380-hectare industrial area with utility buildings, offices, a police station and a clinic. 

Dubai also has projects in the works, including the $300 million Dubai “Emirates Hills” residential gated community project with two 18-hole golf courses. A new Dubai Airport in Jebel Ali for Dubai Municipality is being constructed as well as the $408 million Business park in Jebel Ali for Dubai Investment Park and Development Company. And in the emirate of Ajman, there is the $135 million Ajman Free Zone Expansion for the Ajman Free Zone Authority. 

Other projects include the US$ 530 million expansion of Dubai Airport, a US$ 500 million expansion of Abu Dhabi and Al-Ain airports, the building of a number of new hotels, including a new 280-room Hyatt between Umm al-Nar and Shahama and a 416-room Park Plaza hotel near the Dubai World Trade Center, as well as two office towers in Dubai of 305 and 350 meters respectively and a new Sharjah world trade center, which will include a 320-meter tower and a 20,000 square-meter exhibition hall.  

 

Build Operate Transfer

One of the first BOT projects in the water treatment sector is the Ajman wastewater project. Concessionaires are Black & Veatch US International and the Abu Dhabi-based KEO International Consultants. One hundred million dollars will be invested in the first phase of development and the overall project is expected to require an investment of US$ 600 million. The concession will extend for twenty-five years, and the operators are expected to recover their outlay through house connection charges as well as through the treatment of waste water. 

 

Franchising

Currently, franchises are operating in the fast foods industry; dine-in restaurants and clubs; auto leasing; apparel; soft drink bottling; beauty products; hotels; toys; photography; jewelry; vending machines; dry cleaning; furniture; hardware; natural health products; publications; and sporting goods. The largest segment is the fast food franchise group which is highly sought after by local companies. Most of the major US fast food companies are already established in the market. The industry, however, is currently going through a major restructuring with several major franchises being sold to new owners. These changes are seen as a positive change from weaker to stronger management, and not as a reflection of weakness in the market. There remains considerable potential for franchises of all kinds. 

There is no special legislation for franchises in the UAE. General contract and commercial law apply to franchise agreements. UAE law mandates that only UAE citizens or corporations wholly owned by UAE citizens are allowed to conduct retail operations, the most common type of franchise. Foreign businesses must work through a local partner as licensee or enter into a joint venture. Franchisees usually prefer to own 100 percent of the franchise themselves. In other cases, the franchisee enters into a joint venture with the franchiser to operate all outlets as company-owned stores employing local managers. 

As with other types of business operations in the UAE, the selection of the local partner is critical. One common practice used by franchisers in the past that has, in many cases, caused considerable problems and significant lost sales is the selection of a master distributor to cover the entire Gulf through the use of sub-distributors in each country. Each market is different and requires qualified local partners to exploit its opportunities.

© 2000 Mena Report (www.menareport.com)

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