Northern emirates pitch for funding

29 November 2012

The emirates of the UAE’s north are pushing for further state budgetary allocation to help support their economies after the knock-on effects of Dubai’s economic crash

Economic conditions in the UAE’s northern emirates have long stood in stark contrast to the comfort zones of Abu Dhabi and Dubai. By most measures – employment, access to services, the state of infrastructure and economic activity – there is little to suggest the likes of Ras al-Khaimah (RAK), Ajman, Umm al-Quwain, Fujairah and Sharjah have been full participants in the long-term growth story of one of the region’s most dynamic economies.

Although Sharjah’s geographic location has granted it status as a feeder emirate for Dubai, enabling it to enjoy a trickledown effect in the boom years, the five northern emirates continue to struggle for resources. Service provision has generally trailed the big two, as fuel and electricity shortages experienced by some in RAK in the past year have shown.

State funding

Unemployment among UAE nationals is concentrated in the northern emirates. Fujairah’s 20.6 per cent official joblessness rate in 2009 –the latest year for which figures are available – is the worst in the federation. RAK and Sharjah unemployment figures are not much better.

The northern emirates benefited from the spillover of the long boom in Dubai in the 2000s, but have since been markedly affected by the subsequent crash – even though their respective property and tourism markets are much less developed than Dubai’s. Currently, many properties in Sharjah, Fujairah, Ajman and RAK are standing empty, with no connection to sewage and electricity networks.

The sense of a widening development gap between the northern and southern emirates attracted wider attention in early 2011.

With Gulf governments dipping into state coffers to calm tensions associated with the Arab uprisings, the sanctioning in March 2011 of AED5.88bn ($1.6bn) in extra-budgetary infrastructure spending for the northern emirates confirmed the extent of the problem. The funding was approved by President of the UAE and Ruler of Abu Dhabi Sheikh Khalifa bin Zayed al-Nahyan, following his tour of the country during the previous month.

Now [Abu Dhabi] wants to encourage broader development … setting up industries such as aircraft manufacturing

Giyas Gokkent, National Bank of Abu Dhabi

That extension of government spending to upgrade the neglected infrastructure of the northern emirates won early plaudits from the Washington-headquartered IMF as a step towards inclusive economic development. It was, however, not the first sign of a greater commitment to spreading the economic bounty from high oil prices, nor is it likely to be just a flash in the pan. 

In 2008, Sheikh Khalifa allocated AED16bn for infrastructure projects in the north of the country, to be disbursed on road, sewage systems, schools and hospitals. Under the 2013 federal budget, AED5.2bn has reportedly been set aside for water and electricity sectors, with a particular focus on the northern emirates.

Such moves should help redress a steady decline in budget support for the UAE’s north seen in recent years. Abu Dhabi’s support to the area fell from AED3.6bn in 2007 to just AED1.7bn in 2011, according to IMF figures.

Despite the one-off payment in 2011 during the Arab uprisings, there is no clear evidence of a substantial increase in budgetary appropriations to the northern emirates. Federal expenditures have risen, but “UAE consolidated budgetary expenditures are also at historical highs”, according to Giyas Gokkent, chief economist at National Bank of Abu Dhabi.  

Given state involvement in UAE economic policy-making, it should not be too difficult for federal authorities to take a more active role in bolstering the northern emirates’ economies, without treading on the toes of independent-minded emirates. The IMF, in its 2011 assessment, encouraged the government to consider launching its planned active labour-market policies in the northern emirates and locating some of its agencies and entities in the north to create jobs in these areas.

The biggest challenge is that inclusiveness has never been a prominent feature of UAE economic planning. New skills are having to be learnt. “Even within Abu Dhabi you have certain areas, such as the Western Region, which seem to be less developed than Abu Dhabi city itself, and the authorities recognise that development has largely been centred around the cities,” says Gokkent. “But now [Abu Dhabi] wants to try to encourage broader development and that’s why [it] has been setting up industries such as aircraft manufacturing in Al-Ain.”

Rising expenditure

Although economic development statistics in the northern emirates lag those of the big two, these mask the fact that, as there are no internal borders, all UAE nationals can access the same opportunities. This rings true even though the residents of Dubai and Abu Dhabi evidently enjoy better conditions.

At emirate level at least, there is clear evidence of rising expenditure filtering north on the ground. Construction of the AED400m Ras al-Khaimah Ring Road, bypassing the urban area and linking Emirates Road to northern areas of RAK, is under way. An award this month of a 25 per cent pay increase to RAK policemen also suggests a greater availability of cash to throw at priority areas. 

Among the northern emirates, RAK is the most independent-minded and has attempted to remodel its economy as a more dynamic entity through tourism and real estate projects, supported by investment vehicle Rakeen and real estate developer RAK Properties. These sit alongside RAK‘s traditional niche industries of cement, pharmaceuticals and glass.

In line with RAK’s growing ambition, it has recorded substantial increases in passenger volumes through its international airport, which is targeting 25 per cent growth annually for the next four years. RAK International airport is to be positioned as an alternative entry point into the UAE, drawing volumes away from the heavily congested Dubai International airport. For example, new charter flight deals will see Russian tour operators servicing the RAK market.

Ras al-Khaimah’s tourism ambitions

RAK’s mimicking of Dubai’s property-led growth has not been trouble free. While RAK Properties was a beneficiary as much as any Dubai government entity of the 2000s real estate boom, it predictably suffered the same consequences when the 2009 crisis hit.

“These are not isolated economies, they are interlinked – and they are experiencing the same difficulties as Dubai,” says Gokkent.

Profitability has been under pressure at RAK Properties this year. However, this is unlikely to dim the RAK government’s ambition to develop its own tourism sector. The emirate has an estimated AED600m in hotel projects, with the aim of bringing total room inventory to 10,000 by 2016. High-profile brands, such as the Waldorf Astoria, will open at Al-Hamra Village in 2016. 

“There are some decent projects in RAK that have been handed over recently,” says Matthew Green, head of research at the Dubai office international real estate consultants CBRE. “Al-Majan Island has seen a number of properties delivered, but still the excess volume of supply over demand means there is deflation on rents and sale prices, and this is likely to continue. Dubai is the only emirate that has managed to reestablish itself properly and achieve growth across the board.”

In Al-Majan Island, six or seven potential hotels are being considered, with RAK Properties as the master developer looking to push forward at least one or two of these projects.

RAK is not the only northern emirate seeking to tap the tourist dollar. Fujairah has several hotels under construction, including a 194-room development from Fairmont Hotels & Resorts, which is to open in 2013 (alongside another such hotel in Ajman). “That kind of hospitality focus remains, but it is pretty slow going at the moment and there’s not been a great deal of movement there,” says  Green.

Deflationary pressure is also evident on the residential side of the property market. “In the northern emirates, the key issue is the affordability now available in Dubai. That is really a negative for markets such as Sharjah,” says Green.

The revival of Dubai’s market has affected neighbouring Sharjah, which has seen activity drained – reversing a trend that saw Sharjah attract more volume when Dubai’s market was bursting at the seams.

Like elsewhere in the Gulf, the northern emirates have identified free zones as a means of attracting foreign direct investment away from Dubai and Abu Dhabi. 

Sharjah Investment and Development Authority (Shurooq) oversees the Sharjah International Free Zone (SAIF-Zone), which hosts more than 5,200 companies from 138 countries, including big names in sectors such as aviation, IT services, media, consumables, trade and manufacturing. Hamriyah Free Zone is also looking to attract clients, touting its strategic location and low tax environment.

“If people want to service this region, then they may well say, why not do it out of Sharjah and RAK rather than Dubai? You will still get the larger companies setting up in Dubai, but some may choose the northern emirates as a location for their business,” says Gokkent. 

The one grand project that has really galvanised excitement in the north is the launch this year of the Fujairah oil pipeline. This is seen as a potential catalyst for economic development and job creation for the emirate.

The 1.8-million-barrel-a day Abu Dhabi-Fujairah crude oil pipeline, stretching from Habshan oilfield in Abu Dhabi, saw its formal inauguration in July 2012, strategically positioned to bypass the Strait of Hormuz.  

The advent of these exports will help to transform Fujairah into a full-scale energy hub, with plans to develop an oil refinery and compete with Singapore for maritime refuelling business. Abu Dhabi-based International Petroleum Investment Company (Ipic) plans to build a 200,000-barrel-a-day (b/d) refinery in Fujairah by 2016, with total investment estimated at $3.5bn. There are also plans for Ipic and Abu Dhabi’s Mubadala Development Corporation to receive liquefied natural gas cargos at Fujairah.

Economic spark

Infrastructure continues to be rolled out in Fujairah. In November, India’s IOT Infrastructure & Energy Services was awarded a contract to build an $82m oil storage facility in the emirate.

Fujairah’s emergence as an energy hub will have economic spin-offs for the local population. “There’s a lot of activity going on around the new port and several new hotels have been launched in Fujairah, as well as retail offerings,” says Green.

Clearly, the oil pipeline is going to be a key driver for the port’s development, with storage facilities for grain and other goods being developed. “Strategically it is an important location that potentially will drive a few projects there,” says Green. “There’s a big bunkering port there and they are looking to kick off some major expansions over the next 24 months.”  

Fujairah, holding the UAE’s worst unemployment record, looks set to be its biggest winner. But all northern emirates will be pressing hard for more budgetary allocation to support their economies, while competing more aggressively with the dominant Abu Dhabi and Dubai economies in attracting FDI, as foreign investors look for lower-priced alternatives to the mature markets.

Key fact

In 2011, $1.6bn in extra-budgetary infrastructure spending was allocated to the northern emirates

Source: MEED

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