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

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