UAE's effort to liberalise economy may disappoint

Hopes that restrictions on foreign investment will be loosened in one of the world's top oil exporters are being tempered as details of proposals trickle out

Long-awaited legislation that is meant to liberalise the economy of the United Arab Emirates may bring only modest changes, because of strong opposition from some Emiratis who fear they could lose out to foreigners.
In December, when the UAE's cabinet approved a draft of a new companies law that would update legislation dating back to 1984, hopes grew that restrictions on foreign investment in one of the world's top five oil exporters would be loosened.
But this optimism is now being tempered as details of the draft, which has not been widely circulated to the public, trickle out.
Also, lawyers and investors fear the law's passage may be delayed as it wends its way through the government, becoming subject to pressure from local interest groups; and when it is passed, it may be applied only in a conservative way.
"Frankly there seems to be resistance from the local business community. The UAE nationals, the business community is fairly strong and well-entrenched, and consequently the government has to take their views into consideration," said Sabah Mahmoud, lawyer and author of a book titled "The UAE Company Law and Practice".
Citizens of the UAE are among the wealthiest on the planet - the country's per capita income is over $65,000. But local citizens account for only a little more than a tenth of a population estimated at roughly 8 million; the overwhelming majority are expatriate workers.
So controls over foreign workers and companies are strict: every foreigner needs a local individual or entity to sponsor him, while outside so-called "free zones", foreign companies can only operate by partnering with a local entity, and they can only hold minority stakes in a venture.
The global financial crisis, which underlined the UAE's exposure to a slide in oil prices, and last year's Arab Spring uprisings appear to have pushed the country towards reform.
Loosening restrictions to attract more foreign investment could make the economy more diverse and resilient while creating jobs for locals.
Unemployment among UAE citizens was estimated by the International Labour Organization at 14 per cent in 2009 - a potential political problem if the government ever runs short of money for lavish welfare spending and subsidies.
There is also international pressure on the UAE to loosen up: at the end of a review of the country's trade policy last month, the World Trade Organization urged the country to speed up passage of legislation liberalising foreign investment.
But lawyers say that while the cabinet's draft law will improve areas such as corporate governance and the ease of setting up businesses, other hoped-for alterations appear to fall short of what is needed.
"On the 49 per cent foreign ownership limit, the draft is no change on the existing law except that the cabinet will now be allowed to exempt certain companies in certain sectors on a case-by-case basis," said lawyer Essam Al-Tamimi, senior partner at Al Tamimi & Co, who has seen the draft.
These companies, provided they can prove that they would "add value" to the UAE economy, might be allowed up to 100 percent foreign ownership, he said.
The Ministry of Economy has yet to specify which sectors will be included. Certain firms in the oil industry are already exempt from foreign ownership curbs under the current law.
"The proposed change to the law is small and a watered-down version of what the market has been expecting," said Hardeep Plahe, partner at Gibson, Dunn & Crutcher in Dubai.
Plahe said the draft nevertheless showed a positive "shift in thinking" within the government. He added that the cabinet had always had the discretion to decide whether to apply foreign ownership limits; the new legislation will give that a clearer legal basis, he said.
But Tamimi, along with some other lawyers, thinks the new system will not be conducive to foreign investment.
"I don't think this is perfect; it could have been better. To have to go through that whole process of needing to get approval from the cabinet - this doesn't appeal to foreign investors. They need something clear and simple," he said.
Another question mark over the new legislation is its timing. Minister of Economy Sultan bin Saeed al-Mansouri said on Monday that he hoped the law would be promulgated this year, but given past delays -- officials have been talking for at least a decade about revising the companies law - this does not seem certain.
The legislation is now being reviewed by the Federal National Council, a partially elected body which does not have binding legislative power.
"We expect it will be ready in the second session of the FNC, which lasts from October this year to June," said Ali Essa al-Nuaimi, an FNC member who sits on its finance committee.
After the FNC has completed its review the law will pass directly to the court of the president for his approval, unless the Ministry of Economy exercises its right to withdraw the legislation, Nuaimi said.
The demographic imbalance in the UAE, and the challenge that opening the economy could pose to existing businesses and the traditional business model of many Emirati families, convince some locals that liberalisation is not a good idea.
"In our situation, where you have such big difference in the ratio of the population, it's not a good proposal to give our businesses into foreign hands," a prominent Emirati businessman from Dubai told Reuters.
"We have become a vibrant country. We have so much to offer. Reaching this stage and then being deprived of reaping the fruits of this will hurt a lot of people emotionally," said the businessman, declining to be named because of the sensitivity of the issue.
He agreed that 100 percent foreign ownership in certain sectors would be a positive development for the UAE's economy, creating jobs and opportunities for Emiratis.
"But if it conflicts with my livelihood, with our traditional trade concept, then I cannot accept that."
Abdulkhaleq Abdullah, an Emirati political scientist, said the new law was coming at an awkward time.
"Maybe it would have been fine when they first tried it a few years ago, but with all the events of the past year in the Arab world, and this shift we are seeing towards catering to the needs of the locals, I don't think the mood is right for this."
Western pressure on the UAE to open its economy may also not sit well with some Emiratis who remember how a political uproar in Washington over U.S. national security in 2006 pressured Dubai-owned port operator DP World into selling off its U.S. port assets.
Under current legislation, the UAE is by no means incapable of attracting foreign investment. It received foreign direct investment worth $3.9 billion in 2010 and $4.0 billion in 2009, according to the United Nations Conference on Trade and Development.
That was sharply down from $13.7 billion in 2008 because of the global financial crisis and Dubai's own corporate debt problems.
The UAE's economy is already open enough for Dubai to serve as a top trading and banking hub for the Gulf; the Dubai International Financial Centre, a financial "free zone", has in the past decade attracted banks from around the world.
But the experience of other countries suggests a more welcoming legal environment could make a difference. Thailand, with an economy roughly the same size as the UAE's, attracted $5.8 billion of investment in 2010, according to UNCTAD. Colombia, which is smaller, attracted $6.8 billion.
Much will hang on the choice of sectors of the economy in which the government applies the new law, and on how transparent the application process will be.
"It is key that there are transparent criteria in relation to exemption applications. That will allow foreign companies to invest the considerable time and effort required to explore investment opportunities in the UAE," Plahe said.
High-profile businesses in the industrial sector, manufacturing, green technology, medical services and even construction might potentially benefit from the new law, said John Martin St. Valery, chief executive of The Links Group, which specialises in setting up companies in the UAE and Qatar.
The proposed reforms are better late than never, and even small changes would improve on the status quo, he said.
"The law will hopefully mean that there will be a wider discretion and faster decisions. At least there will be clarity and a process that foreign companies will be able to understand and budget for."