Fresh proposals to allow overseas companies full ownership of their business in the UAE were announced last week. Amid falling oil revenues the move would open the door to much needed foreign investment. Alex Delmar-Morgan reports.

Last week’s comments from the UAE government about allowing foreign companies full ownership of their businesses would certainly have been music to the ears of regional entrepreneurs and businessmen. At a time when corporate sector growth has been stymied by the global economic downturn, the remarks by the UAE’s Minister of Economy Sultan Al Mansouri only reinforced the idea that such a move is seriously being considered — a move that experts feel is crucial for attracting foreign investment into the country.

Analysts say the current system, where an overseas company wanting to set up in the UAE — and operate outside of a free zone — must find a local sponsor who then owns 51 percent stake in the firm, is a deterrent to business and a drag on the country’s economy. Any changes to legislation that would allow 100 percent foreign ownership of companies by expatriates would open the door to capital investment, a benefit to Gulf countries as they expand their economies beyond the hydrocarbon sector.

“The ownership issue by itself is a concern but if you manage to modernise and make it easier for foreign firms to come here and have full control of their operations, it would be a significant development that would attract foreign investment,” says Marios Maratheftis, head of research at Standard Chartered Bank in Dubai.

Al Mansouri said that the UAE would be particularly interested in attracting ‘high value’ firms in the hi-tech sector, an industry that the country is keen to tap into. At the start of the month, Abu Dhabi’s state fund ATIC offered to buy Singapore chipmaker Chartered Semiconductor in what would be a $3.9bn deal.

In Dubai , the number of FDI (foreign direct investment) projects last year grew 59 percent on 2007 levels and capital investment in the city jumped 123 percent between 2007 and 2008 from $9bn to $21bn, according to a study by the Financial Times FDI Intelligence published in April.

But changing the ownership structure of companies in the UAE, especially small and middle sized enterprises (SMEs) in the trade and retail sector, would be a significant step, according to analysts.

“For me, the bigger bang for the buck would come in allowing foreign ownership in small businesses such as retail,” said Robert McKinnon, managing director of research at Dubai-based investment bank Al Mal Capital.

“That’s where the heart of most economies are in terms of employment and creativity. For example, Apple started in a garage. It started as a small business. If you allow entrepreneurial guys who have an idea to start a business and to own it 100 percent, that would encourage a lot more innovation and investment,” he adds.

The status quo with foreign ownership rules make it costly and cumbersome for international firms to start up and operate in the UAE.

“It’s not just the ownership and the agency fees that make it slower for them to operate,” says Maratheftis at Standard Chartered Bank.

“Firms find it difficult to shut down and close their operations — and one of the reasons is the ownership structure and that there are sleeping partners in the company. The ownership issue is a problem and it’s a problem for SMEs.”

SMEs contribute more than 70 percent to the UAE’s non-oil GDP and have been recording double digit growth over the past few years, according to Standard Chartered. Of the 260,000 trading and industrial companies in the UAE, 208,000 — or 80 percent of them — are SMEs, according to the Ruwad Establishment, a division of the Sharjah Chamber of Commerce.

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The UAE government has launched a number of state-sponsored schemes to help the growth of the sector. Most recently in June, it announced a loan scheme for SMEs struggling for finance amid the global crisis. At the time, Al Mansouri said SMEs were “stepping stones” to a successful economy.

SMEs aside, any changes to the existing legislation will have economic as well as social and cultural implications for the UAE. Local Emiratis will no longer enjoy a 51 percent stake in a company that has been effectively been handed to them for nothing. Will this matter and financially will they suffer?

McKinnon says complete foreign ownership, especially with the bigger players moving in, will benefit the locals. “They stand to make more money,” he says.

“If you encourage more investment, there are opportunities with jobs. In the majority of cases the locals own most of the assets and the firms that are going to be servicing the employees of these companies. I think there is far more to be made by freeing it up rather than forcing local partners.”

Maratheftis calls the current system, where companies are limited to a maximum 49 percent ownership of their business (except in a free zone), an “inefficiency”. While he admits that there would inevitably be cultural sensitivities around abolishing it, he says it is a necessary step if the UAE’s economy is to modernise.

The idea of introducing 100 percent foreign ownership of businesses is not new. In May, Khalid Al Kassim, deputy director general at Dubai’s Department of Economic Development (DED) said his government was working towards a solution in an effort to counter the effects of the global financial downturn.

But Standard Chartered’s Maratheftis says the government’s push for foreign ownership is not a response to the global crisis, rather it is a progressive move aimed at transforming business in the UAE.

“The timing is not important. We will continue to see reforms in the economy going forward — the government is applying the right approach, you can’t change everything overnight,” he says.

“The timing of this is not related to the global economic crisis, it was going to happen anyway. The sooner it happens, the better.”

If and when the new measures are brought in, analysts say there would be a convergence in office rental values between the 30 free zones scattered across the UAE and the surrounding areas. A surge of new business would push rents up in line with rates in the free zones, where prices tend to be higher. Commercial rents in the DIFC (Dubai International Financial Centre) are the highest in the emirate. In May, property adviser CB Richard Ellis (CBRE) said average DIFC rents were around AED450 ($123) per sq ft.

Any potential changes to company ownership law are still some way off. Last week it was reported that draft legislation would be submitted to the Cabinet, which is presided over by the UAE Supreme Council, within two months.

For now, though, analysts say any reform must be wide-ranging and apply to all types of companies — not just specific industries.

“The devil is in the detail, it depends on what industries will benefit,” says McKinnon at Al Mal.

“They [Dubai] have gone far but now they are in a league where they are competing with markets such as Singapore and Hong Kong. If you are going to compete with them you have to offer the same type of package for businesses to invest in your market.”

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