Abu Dhabi free zone in search of tenants

03 November 2011

The new Khalifa port and industrial zone is expected to boost Abu Dhabi’s non-oil economy, but the free zone is having trouble attracting investors in the current economic climate

When Abu Dhabi Ports Company (ADPC) opens the first phase of its massive Khalifa Port at Taweelah in 2012, it will be hoping that the development lives up to the hype that surrounds it.

If all goes to plan, the port and its adjoining free zone, Khalifa Industrial Zone Abu Dhabi (Kizad) are to contribute 15 per cent of the emirate’s non-oil gross domestic product (GDP) by 2020, creating 150,000 new jobs in the process. But given the current economic climate and the fact that so far only one anchor client has signed up to the zone, these plans may be overambitious.

In economic clusters, anchor clients build manufacturing complexes that produce and export raw materials ranging from metals to chemicals. These can also be used on site as feedstocks for downstream industries.

Attractive incentives

ADPC hopes to attract manufacturers by offering a range of incentives from free zone status to the ability to use foreign nationals for 100 per cent of their workforce, as well as some of the region’s cheapest utility costs. With a giant port adjacent and a line of the planned GCC-wide railway due to pass through the zone, firms using Kizad will have access to some of the fastest-growing and wealthiest markets in the world, from Asia and Africa to Saudi Arabia.

The government is trying to make sure all the factors needed to attract investment in the free zone are there

Anil Gupta, Robert H. Smith School of Business

The port is being developed 4.5 kilometres offshore. When complete, the first phase will handle 2 million containers and 9 million tonnes of cargo a year. It will be operated by Abu Dhabi Terminals. Once fully complete in 2030, the port will be able to handle up to 15 million 20-foot equivalent units and 35 million tonnes of cargo a year.

“An economic cluster can be innovation-led, like [the US’] Silicon Valley,” says Anil Gupta, chair of strategy and entrepreneurship at the University of Maryland’s Robert H. Smith School of Business in the US. “[It can also] be productive heavy industry, or a logistics hub, or one or more of these. Any cluster, to be economically viable needs, through design or accident, to have lots of complementary factors like the education pool in Palo Alto, or the necessary venture capital. You might have the companies, but not the people, or the capital, or the feedstocks. In Abu Dhabi, it looks like the government is really trying to make sure that all of those factors are there.”

If executed successfully, such schemes can help to drive non-oil GDP growth, while generating employment and facilitating skills and technology transfer. But there are risks attached.

“The logic of investing in infrastructure for other industries to kick-start diversification is totally valid,” says Mauricio Zuazua, a UAE-based partner at US real-estate firm AT Kearney. “The Gulf has been the scene for that [kind of development] for the past 5-10 years. In many cases, economic clusters fail and become real-estate plays because the developer builds the infrastructure and doesn’t do the rest.”

Zone elements

Crucial elements in attracting successful investment into clusters include a readily available skilled workforce and liberal regulations, which allow investors to wholly own the companies they set up. The benefit of not having to share their profits with local partners is just as important.

From both the developer and investors’ perspective it is important that clusters be easily integrated into the local economy, says Zuazua. This should occur through links with local small-to-medium enterprises (SMEs), which often offer the services needed by foreign investors and create the employment the region’s governments are searching for.

Many of the necessary elements are already in place. ADPC has tried to make the zone as attractive as possible to investors, from offering free zone status to advertising electricity costs of AED0.15 a kilowatt hour, which are higher only than those found in Saudi Arabia.

It has also focused on putting agreements in place with a series of major banks including the UK’s HSBC Group and the state-run National Bank of Abu Dhabi, along with key players from emerging markets such as India’s Bank of Baroda. SMEs account for 90 per cent of all businesses in the UAE, according to the federal economy ministry. They contribute 46 per cent of GDP and 86 per cent of total employment, suggesting that there are enough local firms to meet the needs of incoming investors.

Workforce availability

However, the question of a skilled workforce is still a complicated one. The UAE is hugely dependent on immigrant workers to fill both manual labour positions and management roles at international corporations and state-run firms alike.

For example, ADPC’s chief executive officer Tony Douglas is a UK national. Questions remain unanswered as to how many of the 150,000 jobs planned for Kizad would be taken up by UAE nationals.

Meanwhile, Kizad has bigger concerns to address. So far, ADPC has only announced one anchor tenant for the entire zone, which occupies an area of 417 square km, one third the size of Singapore.

The first phase of the Kizad project, a 51 sq km area, will be largely complete by the end of 2011. It was designed to provide space for aluminium, steel, petrochemicals, paper and packaging producers, and pharmaceuticals, food, logistics, and metal products manufacturers.

Kizad economic impact by 2030
Residential population100,000
Expected contribution to GDP$22bn
Percentage of output exported60-80%
GDP=Gross domestic product. Source: Abu Dhabi Ports Company

Emirates Aluminium (Emal), a joint venture of Dubai Aluminium (Dubal) and state-run Mubadala Development Company, is the only anchor tenant to have set up at Kizad. Emal’s two smelters will have a total capacity of 1.5 million tonnes a year, making the firm the operator of the largest single-site smelter complex in the world.

In May, Abu Dhabi Basic Industries Corporation (Adbic) and the local Gulf Extrusion announced plans to build a $200m aluminium extrusion plant at Kizad to make use of Emal’s output.

But another anchor project – a giant petrochemicals complex planned by Abu Dhabi National Chemicals Company (Chemaweyaat) – has been moved from its original Kizad site to a new industrial complex at Ruwais on the other side of Abu Dhabi.

So far, the government has only announced one anchor client for the zone, which occupies 417 square kilometres

In July 2010, MEED reported that Abu Dhabi Chemical Integrations Company (Tacaamol), a wholly-owned Chemaweyaat subsidiary, was to be built at the newly unveiled Madeenat Chemaweeyat in Al-Gharbia, the emirate’s western region, rather than at the Taweelah site that had been discussed initially. The company’s literature still refers to the Taweelah site, which lies within Kizad, but makes no mention of its plans for the space.

Sources with knowledge of the project cite issues related to transporting feedstocks from the Ruwais refinery to Taweelah and the amount of space available at Kizad as reasons for the decision to relocate the plant elsewhere.

Khalifa port key facts
Planned launch dateFourth quarter 2012
Initial container capacity2 million TEUs 
Initial general cargo capacity 8 million tonnes 
Quay length 3.2 kilometres
Draft 16 metres
Port area3.2 million square metres
Cost of dredging/land reclamation $1.5bn
Cost of port onshore facilities $380m
TEUs=20-foot equivalent units. Source: Abu Dhabi Ports Company

However, an engineering executive with ties to both Chemaweyaat and ADPC concedes that the decision to move the project must have struck a bitter blow for ADPC. Tacaamol is unlikely to be completed until 2015-16, he says and Chemaweyaat will not develop any new projects at Taweelah or anywhere else until this first phase of the scheme is complete.

Furthermore, an industrial cluster project focused on plastics already exists in Abu Dhabi. Abu Dhabi Polymers Park is being developed by Adbic at Mussafah, on the borders of Abu Dhabi city itself.

“It is a little odd that there are all these competing ventures going on at once,” says a regional petrochemicals industry executive. “You would think that there would be a more centralised plan given the amount of money being spent on the Taweelah port.”

Meanwhile, Gupta remains sceptical over plans to integrate downstream producers into the cluster. “The further upstream their focus, the more economically viable it is for producers to be near the feedstock source [energy for aluminium industries, and gas and refined oil for petrochemicals plants],” he says. “The need for specialisation is low but the need for economies of scale is high, so it’s okay to be far away from the market.”

Efficient production

However, the closer production is to finished goods, the more sense it makes to produce them near to the end-market, particularly if they are component parts for electronic or other consumer goods, says Gupta.

Producing close to the end market means that the volume of production can be tailored to local needs and that products can be quickly adapted if changes are required.

“I can think of some products where demand is uniform over the world and where it doesn’t matter where it’s produced, but short of those, it isn’t a good idea to mix [upstream and downstream],” he says.

Many experts on economic and industrial clusters warn against focusing on too wide a range of industries and service sectors. The more narrow the focus of the development, the more likely it is to succeed, they say.

Meanwhile, the coming year may not be a good one to attract new investments from abroad. The eurozone debt crisis and fears over the US economy are dominating most Western businesses thinking and even Beijing is trying to rein in inflation in China.

However, Zuazua says that there is no better time than now to be investing in as much infrastructure as possible in order to attract foreign investment in the emirate and to try and create new jobs domestically.

“This is an even better moment to be doing these things than when times are booming,” he says. “It is more difficult than ever to attract investment and by having the infrastructure in place you make your chances better. Otherwise, you are just going to get left behind.”

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