12 Mar 2012

KIZAD FREE ZONE ABU DHABI – OVERVIEW OF THE LEGAL AND OPERATIONAL FRAMEWORK FOR FOREIGN INVESTORS

Authored by: Rana El Husseini

KIZAD FREE ZONE ABU DHABI – OVERVIEW OF THE LEGAL AND OPERATIONAL FRAMEWORK FOR FOREIGN INVESTORS

Rana El Husseini assesses the legal and operational framework of the UAE’s largest and newest industrial zone, the Khalifa Industrial Zone (KIZAD) located in Abu Dhabi.

In brief

  • KIZAD is the Abu Dhabi Ports Company’s flagship project which consists of a world class offshore port and integrated industrial zone and serves companies which operate in eight industry clusters.
  • The KIZAD Rules contain detailed criteria for the designation of zones, the infrastructure and utilities, the licensing process and the commencement of operations.
  • The KIZAD Rules Governance Committee may render each developer/investor liable to warnings, fines and sanctions for the relevant offence or any other fines and sanctions reasonably determined by ADPC.

The Abu Dhabi Ports Company PJSC (ADPC) was formed by the Abu Dhabi Government in 2006. ADPC’s primary role is to boost economic development by creating the fundamentals of modern infrastructure and business service across Abu Dhabi and developing ports and industrial zones. ADCP is empowered to establish, develop, manage and operate, and issue regulations and instructions in relation to, the Khalifa Port and The Khalifa Industrial Zone (KIZAD).

Located in the Emirate of Abu Dhabi, midway between the capital and Dubai, KIZAD is ADPC’s flagship project and consists of a world class offshore port and integrated industrial zone. KIZAD supports companies which operate in any of its eight industry clusters of aluminium, steel, engineered metal products, petrochemicals and chemicals, pharmaceuticals and healthcare equipment, food, paper, and printing and packaging. KIZAD offers free zone and non-free zone options for prospective investors.
Once complete, KIZAD’s geography will expand over 417sq km and will prove to be an integral part in the Abu Dhabi Government’s economic vision of diversifying its economy away from its dependency on oil.

KIZAD was conceived out of the notion that investors in this region require access to well-serviced and well-located investment land with high quality infrastructure and services.

Providing the entry and operation of industrial zones in Abu Dhabi has required significant innovation in the policy, legal and regulatory framework as well as the institutional structure, which this article reviews.
 
Institutional structures and governance
It can be argued that autonomous industrial zone bodies are among the most effective structures as they usually hold the power required to provide all necessary approvals and permits and facilitate the provision of external infrastructure (transportation, utility connections and services) to support the development of the industrial zone. The mandate of any industrial zone may however be weakened by the many provisions in its internal regulations that require it to coordinate with other government authorities.
According to Emiri Decree No 6 of 2006, ADPC has the authority to establish and maintain at all times a governance structure in KIZAD that allows for efficient supervision, management, enforcement and administration. To that end, ADPC is entitled to set and amend KIZAD Rules. ADPC may also delegate the whole or part of the management of the KIZAD to any service provider that it deems fit.

KIZAD Rules are issued and enforced pursuant to the Emiri Decree No 6 of 2006. ADPC may also issue new sets of rules to supplement KIZAD Rules. (e.g. according to KIZAD Rules, ADPC has the right to impose rules or set conditions, restrictions, fines or sanctions in relation to the issue of approvals for the good order, health, safety, security or protection of lives, property or the environment in KIZAD. These rules, conditions, restrictions, fines and sanctions will be issued in accordance with the KIZAD objectives.)

International experience suggests that the most successful programmes in developing industrial zones are those that maximise private sector participation not only in the development and management but also in the formulation of industrial zones policy and governance (e.g. the establishment of a board of directors that includes private sector representatives together with key government agencies to provide inputs to policy making and ensuring that zone development meets the interest of the private sector to expand investment and exports and generate new employment opportunities).

Although KIZAD is currently operating under the supervision of ADPC, over time, ADPC is expected to grant KIZAD the power to autonomously set out its development and operation rules. The effectiveness of the arrangement is subject to coordination between ADPC and KIZAD. Currently, most countries are increasing reliance on private providers of management and support services. To facilitate private sector entry into industrial zone developments, governments have developed a variety of Public Private Partnership (PPP) approaches.
 
Zone planning and designation
One of the most important factors directly affecting the decision of the investor to set up his business in a specific industrial zone is the establishment of criteria for zone designation and the process by which prospective investors can apply for and receive designation for a specific plot.

The KIZAD Rules contain detailed criteria for the designation of zones and the commencement of operations. Such criteria typically include: compatibility with the overall land use plan of the designated area, the availability of adequate infrastructure and utility services to the site, the compliance with standards relating to physical design, environmental and security requirements, infrastructure, factory space, road standards, sewage and waste water disposal, land use, public utilities and time constraints relating to the completion of the setting up process and the start of operations.

The criteria provide prospective investors with transparent development and performance requirements. While the provision of incentives can encourage an investor to locate in one industrial zone rather than another, incentives cannot change the basic features of an industrial zone, such as the basic infrastructure, markets, services or required manpower.

The KIZAD Rules set out all the required application forms and submission material which are made available at KIZAD Customer Service Centre. The investors must also meet the standards set out by both ADPC and the Urban Planning Council (UPC) at each stage of their respective development plot reviews. The prospective investor must also comply with the Building Codes published by the relevant authorities.
 
The Permitted Land Use Zones provide a policy framework for determining physical zones in KIZAD where specific land uses are permitted and associated requirements for how development must be addressed can be applied.

The Permitted Land Use Zones have been organised to minimise land use conflict and ensure appropriate neighbour uses and the distribution of services and facilities within each industrial cluster. The land use zones are classified into heavy industry zone, general industry zone and the mixed use zone. For instance, the heavy industry zone of KIZAD contains industrial uses which, by reason of scale or process, require large inputs of natural resources and which may have an adverse impact on air or water quality, may create noise, or generate toxic by-products/wastes or involve the storage or handling of hazardous materials that potentially damage human health and safety, or any other activity that might cause a risk or nuisance to the public.

Authorities over the disposition of land and its pricing are another important element of the KIZAD legislative framework. International practices on allowing land sales within free zones vary from country to country as land is often a sensitive issue in many developing countries particularly in terms of allowing foreign ownership. In the UAE where land ownership is a sensitive issue, a long term lease can provide a second-best, yet acceptable option.

Infrastructure provisions
One of the key success factors of industrial zones in attracting investments in productive sectors is the provision of high-quality infrastructure and services including power, water and sewage, gas, waste disposal and telecommunications. This requires integrated planning and coordination in terms of external infrastructure provision. Too often the development of industrial zones is hindered by delays in the provision of public infrastructure and services to the zone’s site.

In many developing economies where infrastructure and services are often provided by public entities, such infrastructure is either in short-supply or poor quality or priced above market rates. In order to overcome these difficulties many zone programmes permit private sector participation in the provision of such infrastructure and services, which can improve the quality and reduce development and operating costs overall.
The planning and organisation of KIZAD is designed to add value at every stage of the supply chain by enhancing productivity, offering businesses efficiencies of scale, proximity and market access and availability of utilities. Companies located in KIZAD will be supported by connectivity via sea, air, and road and rail network to ensure easy accessibility to and from the industrial zone.

The KIZAD Rules set out detailed provisions relating to land use, health safety and environmental requirements, waste and traffic management, security, warehouses excavation, trenching, scaffolding in addition to other rules.
 
Business licensing and incentives
There are two general approaches to defining the range of eligible activities within an industrial zone: a positive list provides an enumeration of eligible sectors while a negative list provides for the restricted sectors and activities. While both are workable, leading zone regimes are increasingly relying on a negative list approach in order to facilitate investment and provide more a liberal business environment. With the positive list approach adopted by KIZAD, zone authorities often screen potential projects to determine whether they meet the established criteria. Sometimes this approach can lead to bureaucratic delays and discretionary practices if the registration officers do not receive the necessary training relating to zone activities. Allowing automatic approvals or renewals reduces bureaucratic delays and uncertainty for investors and provides a streamlined investment environment.
 
International experience suggests that the most successful industrial zones programmes have powerful regulatory bodies with the authority to provide all necessary approvals, licences and permits a true “one-stop shop” approach. A second best approach is to establish “one-stop windows” within a certain zone in order to coordinate and facilitate the provision of licences and permits issued by many government entities.
 
While in practice few zones provide for the full range of mandates, many zones such as KIZAD provide a number of approvals internally. The licensing officers at KIZAD provide the investor with the necessary information to facilitate obtaining all additional approvals required by external stakeholders for the setting up of business within KIZAD. Moreover, in order to facilitate the setting up and the conduct of business KIZAD established business partnership arrangements with many local and international banks. Such partnerships provide for a range of financing solutions, as well as general banking and property services.
 
In addition to the existing tax exemption regime that attracts foreign investment, KIZAD offers many incentives including low operating costs: utilities such as gas, water and electrical power are at some of the lowest rates in the world.
 
Investment guarantees and dispute resolution
Investment guarantees are meant to provide investors with a transparent and stable investment environment. While such protections are often set out in separate legislation, where such provisions are insufficient, the comprehensive zone framework may address certain gaps under other legislation. Providing for a dispute settlement mechanism and allowing international arbitration are useful. ADPC has established the KIZAD Rules Governance Committee to be responsible for monitoring and enforcing the KIZAD rules and any related matters affecting KIZAD. The KIZAD Rules Governance Committee may render each developer / investor liable to warnings, fines and sanctions for the relevant offence or any other fines and sanctions reasonably determined by ADPC. An appeal process is available in limited cases. Some disputes may require the courts or the arbitration centre’s intervention.
 
Conclusion
To conclude, it appears that the KIZAD legal and institutional framework was generally inspired by best practices relating to the development of Industrial zones. Despite a few departures from the models of industrial zones, it should be noted that KIZAD is relatively a recent experience and it will significantly contribute to the future prosperity of Abu Dhabi and the United Arab Emirates.