Dubai’s silver-service free zone hub

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By Karen Thomas  www.meed.com

The creation 25 years ago of Jebel Ali Free Zone has played a key role in the establishment of Dubai as a regional trade and logistics base

Before Jebel Ali Free Zone (Jafza) opened in 1985, oil accounted for 50 per cent of Dubai’s gross domestic product (GDP). But with its oil reserves declining, the emirate’s government had more reason than most GCC states to diversify quickly and it identified trade and transport as a means to that goal.

In the pre-oil era, Dubai’s creek had been a major hub for dhows trading between the Gulf, east Africa and the Indian Ocean. Airfreight volumes followed in 1960, when Dubai International Airport opened to commercial flights.

The 1970s brought oil and new wealth. But the standardisation of container sizes had already begun to revolutionise the speed and efficiency of global sea trade and the government of Dubai was quick to see an opportunity.

Dubai came to lead the region in container traffic. It channelled its new-found oil wealth into building specialised berths, first at Port Rashid in 1972, then with its dedicated container port at Jebel Ali in 1979. The ancient dhow port reinvented itself as a modern, multi-modal trade hub that today serves an entrepot trade catering to more than a billion people.

But like many other Gulf states, the emirate’s trade laws were heavily protectionist and governed by sharia law. Global manufacturers and investors required a local partner and were subject to stringent labour, taxation and other laws. So, in 1985, Jafza was established by Emiri decree on 25 acres next to Jebel Ali port. A 35-kilometre motorway was built linking the port and free zone to the airport on the north-east bank of Dubai Creek.

Its free zone status allowed Jebel Ali to offer 100 per cent foreign ownership, exemption from corporate and personal taxes, freedom from currency restrictions and import/export duties, and flexible hiring. Initially offering offices and warehouses, Jafza added its first light industrial units for manufacturing, assembly and re-export companies in 1990. In its first year, it attracted just 19 companies to its 70,000 square metres of covered warehousing, but in 2009 alone it signed up nearly 500 new tenants. By summer 2010, Jafza was home to more than 6,500 companies, including some of the largest multinationals, from 120 countries.

Today its tenants span all industry sectors, business activities and markets. More than half – 54 per cent – are from outside the Middle East.

Overseas expansion for Dubai Ports Authority

Originally Jafza was a sister company to Dubai Ports Authority (DPA), the state-owned port management company in charge of operations at Jebel Ali and Port Rashid. Today, DPA has evolved into DP World, transformed by two decades of global concessions and acquisitions into the world’s fourth-largest port management company.

From the late 1990s port and free zone worked together to expand overseas. DP World won its first overseas management concessions in Jeddah, Beirut and Djibouti. It went on to expand worldwide, supplementing individual port management concessions with high-profile acquisitions such as the 2006 purchase of a global rival, P&O Ports. Jafza International secured its first free zone management concessions in Morocco, Malaysia and Djibouti. But in 2007 the free zone company refocused its overseas strategy, moving away from concession-based agreements to expand by taking equity stakes in international free zones.

Meanwhile, growth at home and overseas had forced the Dubai government to reorganise its assets. In 2006 it created holding company Dubai World, whose portfolio of businesses includes DP World, Economic Zones World (EZW), Dubai Drydocks, Inchcape Shipping Services, property developer Nakheel and a private equity arm, Istithmar.

Jafza is part of EZW, where its sister companies include UAE businesses Dubai Auto Zone and Techno Park. EZW entered the European market in 2008, through the acquisition of Walmart’s UK-based warehousing giant, Gazeley.

Now, after the emirate’s boom has come to an end, Jafza continues to expand.

Jebel Ali Free Zone: World’s largest free zone

The free zone authority plans to create the world’s single largest free zone in Dubai. Future expansion will centre on the multibillion dollar South Zone, creating industry-specific business clusters that will maximise the site’s proximity to Dubai’s new Al-Maktoum International Airport, which handled its first cargo flights this summer.

Building a new airport to serve Dubai’s industrial south opens competitive opportunities. Jebel Ali Free Zone Authority and Dubai Aviation City Corp have come together to launch Dubai Logistics City (DLC), covering 25 sq km between the port and new airport.

DLC aims to become the world’s largest multimodal logistics platform for warehousing, industrial and distribution companies. The unified project, Jafza says, “includes more than a million sq m of logistics space [and] will open up to an anticipated workforce of … 150,000 people”.

Al-Maktoum International Airport’s initial cargo capacity stands at 2.5 million tonnes and Dubai Airports will meet projected cargo growth to three million tonnes by 2015. By 2030, Al-Maktoum International will be the world’s largest airport, with five runways and four terminals, handling up to 160 million passengers and 12 million tonnes of cargo a year. Dubai Airports says 15 airlines have pledged to operate all-cargo flights out of the airport. Passenger flights are due to start early in 2011, bringing the first bellyhold cargo.

There is no doubt that Jafza has succeeded in its goal to position Dubai as a world-leading trade and transport hub. Last year, oil accounted for just 5 per cent of Dubai’s GDP, while the free zone generated about 25 per cent. Dubai increased its exports by an average of 28 per cent a year between 2003 and 2008. Today, Jafza generates a third of Dubai’s trade and almost half its exports.

Container trans-shipment – the ship-to-ship transfer of cargo from one trade route to another – is a notoriously volatile business. Carriers aim to cut back the number of port calls on their schedules, serving only the terminals that maximise volume and efficiency.

Because Jafza generates significant imports and exports in its own right, it is worthwhile for the biggest shipping lines to call into Jebel Ali, despite the disadvantage of an inner Gulf location that forces ships to divert from the most direct east-west and north-south trade routes to enter the Strait of Hormuz.

Jebel Ali Port is now the world’s seventh-largest container terminal, a hub for 90 services a week. Dubai officials hope Jafza’s location, its logistics offering and its willingness to tailor that offering to specific client demand will help the port weather the economic downturn.

These are uncertain times and logistics companies report that their customers have switched from supply-chain expansion to consolidating and restructuring their businesses.

Responding to this new realism, Jafza is offering more flexible investment terms to prospective customers: sister-company Gazeley offers new tenants the option of built-to-order premises, for example.

Jafza says it leased 572 new premises in the first half of 2010, 200 of these to existing customers. Demand for new space is 63 per cent higher than in the first half of 2009, free zone officials have reported. Jafza’s business model continues to draw trade, transport and logistics companies seeking to set up regional hubs.

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