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Friday, 2 July 2010

United Arab Emirates: Abu Dhabi seeks centralisation

02 July 2010

SUBJECT: Gradual centralisation in the United Arab Emirates (UAE).

SIGNIFICANCE: Since the onset of the Dubai debt crisis, Abu Dhabi has been using a series of partial bailouts to tighten political control over the neighbouring emirate, most visibly on security and foreign policy issues, such as Dubai's relations with Iran. Less visible, but very significant, has been a gradual trend of administrative and regulatory centralisation in the UAE federation, curtailing Dubai's bureaucratic autonomy.

ANALYSIS: The federation of the United Arab Emirates (UAE) came into being in 1971. It has been financed mostly by Abu Dhabi and has persisted against the historical odds, most notably thanks to the strong yet conciliatory personality of the founding president and emir of Abu Dhabi until 2004, Sheikh Zayed bin Sultan al-Nahyan.

Despite tensions -- for example, Dubai's earlier resistance to subordinate its defence policy to federal control -- Dubai under Sheikh Mohammed bin Rashid al-Nahyan has given up its own military and concentrated its resources on economic development and diversification. However, in the eyes of Abu Dhabi's elites, its methods have tended to endanger the stability and reputation of the UAE. Issues of concern include noisy speculative excesses as well as toleration of unsavoury activities like prostitution, money laundering and smuggling with Iran.

Federal role. The federal budget of the UAE has historically been small relative to the emirate-level budget of Abu Dhabi: 30 billion and 120 billion dirhams (8.2 billion and 32.6 billion dollars), respectively in 2007 (latest available IMF figures). The regulatory power of central government has been weak, as emirates (Dubai in particular) have pursued their own education policies, financial and real estate regulation strategies. Abu Dhabi has mostly focused on providing subsidised infrastructure and public services to its poorer peers.

Weak federal regulation has been a serious development obstacle, as it creates parallel jurisdictions and considerable legal insecurity. It is only with the recent crisis that federal institutions have waged several successful battles against Dubai government organisations, and that new rules and organisations have been created to tighten control over policy areas where the division of competencies had previously been unclear.

Recent trends. Rumours of asset transfers from Dubai to Abu Dhabi in the course of the bailout following the onset of Dubai's debt crisis seem to have been unfounded. What has been happening instead is a less visible and more face-saving, but possibly more momentous, tightening of federal economic regulation.

1. Visas. Dubai has long used the promise of permanent residence when pitching its luxury real estate projects to foreigners, specifically rich nationals of non-Western countries such as Iran, who are in need of a safe haven. However, in August, a federal announcement was made that foreigners owning local property would have to leave the UAE every six months if they wanted to continue living there without a work visa. The security angle of the federal policy is clearly visible, as it can be used to control access to the UAE to individuals with problematic backgrounds.

2. Real estate. In March, the federal minister of justice (an Abu Dhabi national) announced that a law would soon be issued to organise the UAE real estate sector, whose regulation thus far has de facto been under emirates' control.

3. Business. In April, the Ministry of Finance issued norms for a unified commercial licensing system for trademarks and registration across the UAE; revised federal company, industry and investment laws are supposed to be issued this year too. An independent federal body in charge of safety standards for food and pharmaceutical products is currently being set up.

4. Finance. Consolidation and centralisation attempts are also being made on financial markets: in April, the federal government announced plans to set up a Federal Credit Bureau to collect credit information across all emirates, which the weak Central Bank has so far been unable to do. Talks to merge the Abu Dhabi and Dubai stock markets are also underway.

Fiscal policy. Fiscal policy has been the core tool for increasing Abu Dhabi's control over Dubai. The UAE plans to set up a debt management office under the federal Ministry of Finance this year after the promulgation of a law on public debt.

In the course of this reform, fiscal offices will also be set up in every emirate; Dubai is already setting up its own. The public debt law will limit the borrowing of individual emirates to 15% of their own GDP, and emirate-level and federal debt together will not be allowed to exceed 60% of total UAE GDP.

Education. In June 2009, the federal Ministry of Education issued a decree envisaging the restructuring of all public schools in the country with a view to improving their organisation and management. In December, following the example of Dubai, the Ministry announced the federation's participation in international benchmarking exercises on maths, science and reading skills of UAE pupils.

Dubai had previously enjoyed considerable autonomy in school management through its own Knowledge and Human Development Authority (KHDA), which had created its own ranking and licensing system for schools. However, the ministry clarified that it is the ultimate regulator of educational institutions in the federation. In May, the Ministry of Education publicly overruled the KHDA's decision to freeze fees in a number of private Dubai schools.

Smaller steps. New or strengthened federal rules and institutions are also underway in a number of other domains, including the creation of UAE-wide consumer courts; a federation-wide communications and branding initiative; a national statistics centre; a Federal Demographic Council; a National Council of Tourism and Antiquities; federal standardisation of traffic administration; a federal railway; and the coordination of emirates-level transport strategies.

They also include the expansion beyond Abu Dhabi of the jurisdiction of Abu Dhabi's Critical National Infrastructure Authority. Several of these steps were initiated in November 2009, when the Dubai debt crisis was at its peak.

Outlook. Another large government-related entity, Dubai Holding, has recently announced record losses for 2009. Therefore, Abu Dhabi will probably be able to continue its strategy of 'case by case' assistance to Dubai, using the resulting political leverage to force further centralisation.

Overall, well-managed centralisation would be good for the regulatory and investment environment. With investors now putting a premium on predictability of rules and institutions, this could contribute to the UAE's attractiveness as an FDI destination -- even if the economic modernisation process will less dynamic and Dubai less nimble in taking new initiatives.

The stronger cohesion of the UAE's institutions will also increase its crisis management capacity. Dubai will continue to be the federation's leader in terms of infrastructure and logistics, but will be more constrained in its regulatory experimentation in various 'free zone' legal enclaves. This might not be an altogether negative development, as the legal loopholes in some of Dubai's regulations have left real estate investors unprotected in their conflicts with developers. To some extent, the federation will also be able to learn from the regulatory experience and track record of Dubai.

Abu Dhabi and the federation have the political capacity to strong-arm smaller emirates. The main constraint to effective centralisation will be the administrative and human resources capacity to implement the various initiatives swiftly and well -- and the process with thus take time.

CONCLUSION: The UAE federation is becoming closer to a conventional nation state, which in a regional context of political and economic volatility is by and large a positive development. Although some emirate-level adaptiveness will be lost, the new federal governance initiatives are also inspired by what has worked in Dubai's institutional laboratory and will hence lead to an urgently required modernisation of the national regulatory environment.

© Oxford Analytica 2010

Malaysia’s move to liberalise Islamic banking may raise some eyebrows | Beyond Brics | FT.com


Malaysia is well known in the Islamic finance world for a liberal interpretation of religious principles that has made the country a centre of innovation. But eyebrows will be shooting skywards in more conservative countries over its latest decision to allow banks to impose late payment penalties on customers who default.

The country’s Shariah Advisory Council, a statutory body that sets the rules for Islamic finance, said on Tuesday that it would allow the imposition of late payment charges as a deterrent against default, under the concepts of gharamah (fine or penalty) and ta’widh (compensation).
Banks will not be allowed to treat the gharamah element as income, and any payments must be channelled to specified charitable bodies. However, ta’widh payments can be treated as income, to the extent that they are imposed as compensation for actual losses incurred by the Islamic banking institutions.

That stops banks making a profit out of the penalties, which would be contrary to accepted Islamic principles. But it is an important move because it will impose some pain on borrowers who are thinking of defaulting, which will in turn make banks more willing to extend loans.

Emirates sees fleet rise to almost 250 planes, UAE Aviation, Transportation - Maktoob Business


Dubai government-owned flagship carrier Emirates airline will look to increase the size of its fleet by at least 100 planes over the next eight years, company president Tim Clark said on Thursday.

The airline, the largest customer for the Airbus A380 aircraft, is set to reveal new plane orders at the July Farnborough Airshow.

Clark declined to comment on the expected order.

Taweelah port dream comes into vision - The National Newspaper


Abu Dhabi Ports Company (ADPC) will finish building within weeks the first phase of a 2.7 square km offshore port in Taweelah, part of the emirate’s largest infrastructure project.

The initial phase of Khalifa Port and Industrial Zone (KPIZ) will open in late 2012 but later phases will not be fully completed for 20 years.

The project will be part of the Abu Dhabi Plan 2030 to stimulate new manufacturing industries and provide them with the transport links they require.

DAE bids to alter aircraft orders - The National Newspaper


Dubai Aerospace Enterprise (DAE) is negotiating to restructure more than 200 aircraft orders worth US$27 billion (Dh99.16bn) with Airbus and Boeing, a senior Dubai finance official says.

The state-backed company made headlines at the 2007 Dubai Airshow when it announced the huge orders with the two aircraft makers and plans to build up a global presence in aircraft leasing.

But several media reports, citing unidentified sources, said the firm had since stopped making payments, was not taking delivery of the planes and was seeking to get out of its contractual obligations by shifting them to Dubai’s two state-owned carriers Emirates Airline and flydubai.

Professionals return to school as jobs market shrinks - The National Newspaper


More students are taking higher degrees because of the shrinking jobs market, despite having to shoulder a greater financial burden.

Universities have seen a marked increase in students studying for master’s degrees and other postgraduate diplomas.

The number of master’s students at the Canadian University in Dubai this year tripled from last year, while there was a more than one-third increase in the same period at Zayed University last year compared with the previous year.

Emirates Wins with Big Planes and Low Costs - BusinessWeek


While the last five years have been grueling for much of the airline industry, Dubai-based Emirates has prospered, becoming one of the top three international carriers. Now, the 25-year-old government-owned airline is on the offensive. To bolster its all-widebody fleet, it's adding 90 Airbus A380 superjumbo jets with 45,000 seats and operating costs 12 percent lower than rival Boeing's (BA) latest 747. That huge fleet of double-decker widebodies poses a threat to big European carriers that, like Emirates, specialize in flying passengers long distances through giant transfer hubs, says British Airways CEO Willie Walsh.

Emirates' latest order for 32 A380s valued at $11 billion, announced in June, will give it 70 more superjumbos than any other airline. "It's a miracle that Emirates already has more intercontinental seats than Air France and British Airways combined," says Wolfgang Mayrhuber, CEO of Lufthansa. "It took us 40 years to get 30 747s in the air in one of the biggest global economies, so one must assume that this is an investment for the world."

Emirates ranked only 24th among international airlines as recently as 2000. Since then it's achieved a sixfold increase in traffic—defined as passengers carried multiplied by the distance flown. The Dubai carrier zoomed ahead last year to join Lufthansa and Air France-KLM Group as the biggest operators of international flights. "We always planned to grow, we were just never able to put our finger on how quickly," says Maurice Flanagan, founding CEO at Emirates and currently executive vice-chairman. "Now we're short of capacity all the time."

Sorouh Raises $640 Million Loan to Repay Bond, Finance Abu Dhabi Projects - Bloomberg


Sorouh Real Estate PJSC, Abu Dhabi’s second-biggest property developer, raised 2.35 billion dirhams ($640 million) in loans to repay Islamic bonds and finance projects in the United Arab Emirates’ capital.

The four-year loan, with a combination of term and revolving credit, has both conventional and Islamic portions, Sorouh said in a statement to the Abu Dhabi bourse today. The facility is secured by a portion of Sorouh’s lands, and was arranged by Abu Dhabi Commercial Bank PJSC, First Gulf Bank PJSC, National Bank of Abu Dhabi PJSC and Noor Islamic Bank.

Sorouh will use 400 million dirhams of the facility to redeem the balance of an asset-backed Islamic bond issued in 2008. The company will use the reminder of the loan to finance the construction of Shams Gate and other developments in Abu Dhabi, according to the statement.