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"UAE’s initiative of investing its hydrocarbon surpluses into non-hydrocarbon economy, seems to be providing some cushion in reducing the impact."

Venkatesh Prasad
Partner, J. Sagar Associates

A Third Eye Perspective

January 30, 2018
UAE is reinforced due to its attractiveness, competitiveness and business friendly regulations, thus creating an environment to survive smoothly amidst the strong waves. Venkatesh Prasad, Partner, J. Sagar Associates shares insight from a third person’s point of view on the UAE market.

By Namrata Nikale Tanna, Oil Asia Journal

OAJ - Despite the low oil prices slowing the flow of public works projects across the UAE, the investors community in UAE has refused to dampen its spirit in the wobbly economy, what kind of evolution do you witness in the UAE regulatory body that is helping them survive smoothly amidst the strong waves?
Prasad : With the fall in the global oil prices, UAE in past few years has seen reduction in oil revenue forcing the government to rationalise and prioritise spending – which has led to slowing down of some of the public works project. However, UAE’s initiative of investing its hydrocarbon surpluses into non-hydrocarbon economy, seems to be providing some cushion in reducing the impact. The UAE regulatory authorities appear to be actively exploring fiscal, structural and monetary reforms. Various oil companies are making efforts to consolidate assets, boost efficiency, and reduce costs. In this light, efforts are being made by the authorities to balance out the loss of revenue from oil sector against revenues generated from non-oil economies such as real estate, tourism, air transport, trade, financial services, manufacturing and alternative energy. While several austerity measures are in force, the government continues to invest on infrastructure and public works. Some of the other factors that have contributed to the stability, are gradual fiscal consolidation by raising electricity and water tariffs, removing fuel subsidies and scaling back capital transfers to government related entities etc. The government has also introduced new public-private partnership law in Dubai to increase participation of private players thereby increasing investments.

OAJ - On the regulations front, do you think the introduction of Bankruptcy law which was effective in December 2016, has helped the UAE’s Economy?
Prasad : The new UAE bankruptcy law came into force on 29th December, 2016 with an objective to streamline the bankruptcy procedures in line with international practices. As has been the case with other countries, the benefits of the bankruptcy law will take some time to emerge. However, in the short term, it will surely have positive impact on investor sentiments, especially considering the efforts being undertaken by the UAE government for diversification of its economy and increased role of private sector. The law will contribute positively to the credit dynamics of the UAE economy by introducing mutually beneficial framework for banks and owners of businesses, for restructuring or liquidating distressed companies. However, the success of the bankruptcy law, like in other economies, will heavily depend on the local judicial systems and the practicing insolvency experts. Nevertheless, the bankruptcy law represents a move towards a more streamlined and internationally associated approach which should assist businesses in the UAE tread through financial complications.

OAJ - Could you highlight some key policies that have attracted foreign investors in the Middle East market?
Prasad : The Middle East countries have developed several policies which have attracted foreign investments. A few notable ones that can be highlighted are: (i) establishment of investment promotion agencies; (ii) creation of Free Economic Zones wherein several incentives and market oriented regulatory regime have been provided; (iii) the ability to incorporate wholly foreign owned and controlled entities; (iv) absence of corporate and income tax; and (v) liberalised exchange control law.

OAJ - UAE has ranked 31st in the World Bank’s Ease of Doing Business for 2016 out of 189 economies, could you please throw some light on the policies that has helped them to achieve the rank whereas, India still ranks 100th in the list?
Prasad :While the World Bank’s Ease of Doing Business ranking captures some key dimensions of regulatory environment, it is not reflective of all aspects. The indicators used for devising the index are: (i) starting a business; (ii) dealing with construction permits; (iii) getting electricity, (iii) registering property; (v) getting credit; (vi) protecting minority investor; (vii) paying taxes; (viii) trading across borders; (ix) enforcing contracts; and (x) resolving insolvency. A reduction in the number of days and/or number of procedures vis-à-vis any of the above indicators increases the ease of doing business. Considering the above, there are inherent limitations to the computation of the World Bank’s Ease of Doing Business as the same may not account for factors such as security, macroeconomic stability, labour skills of the population, underlying quality of institutions etc.

Having said the above, India can learn from the UAE on the parameters where UAE has consistently ranked well. In the Ease of Doing Business Reports, 2018 UAE has been ranked significantly well on indicators such as construction permits (Rank 2), getting electricity (Rank 1), paying taxes (Rank 1), and registering property (Rank 10).

While the higher ranking of UAE in relation to payment of taxes is attributable to lack of income and corporate tax, other indicators appear to have been benefited due to streamlining of systems and processes. This year, India has taken several initiatives and has jumped 30 places to break into the top 100 countries for ease of doing business. The best performance has been in four out of 10 parameters: paying taxes, resolving insolvency, access to credit and protecting minority investors. For other parameters, India will have to learn from the steps taken by other countries, and UAE can be one of such examples.

OAJ - As the investment stole headlines during UAE – India relations wherein trade, investments and energy were the most visible features of India – UAE ties; could you please elaborate on the legal aspect of comprehensive strategic partnership that will enhance economic engagement in the energy sector?
Prasad : Pursuant to the meeting/discussions between the Prime Minister of India, Mr. Narendra Modi and the Crown Prince, H.H. Sheikh Mohamed bin Zayed Al Nahyan, both countries have signed several MoUs/agreements to enhance economic engagements. The most important of the above being the Comprehensive Strategic Partnership Agreement which enlists the areas of strategic partnership agreed upon pursuant to the joint statements issued in August, 2015 and February, 2016. Amongst others, energy security also forms a part of the strategic partnership. The aforementioned Comprehensive Strategic Partnership Agreement is not available in the public domain, however from the joint statement we understand that it provides for (i) deeper partnership and focus on investments and joint ventures in petrochemical complexes; (ii) enhance cooperation in joint exploration in India, UAE and other countries; (iii) training and human resources development; and (iv) cooperation in R&D in the energy sector. On December 12, 2013, India has executed a Promotion and Protection of Investments Agreement with UAE and considering the ongoing review of the existing bilateral investment protection agreements, the fate of India-UAE Promotion and Protection of Investment Agreement remains to be seen.

The agreement on oil storage and management between Indian Strategic Petroleum Reserves Limited and Abu Dhabi National oil Company (ADNOC) was executed in early 2017. ADNOC appears to have sought blanket exemption from entry tax, value added tax, central service tax and income tax etc. The future cooperation between UAE and India in the energy sector may depend upon the satisfactory outcome of the above concerns.

OAJ - Owing to low oil prices, Middle East have opened gates for alternative energy, can we expect that the initiative will boost the economy in UAE?
Prasad : As discussed earlier, Middle East countries (in particular the UAE) are looking towards diversification of their economies, which amongst others includes development of renewable and alternative energy. In 2015, the UAE ratified the Kyoto Protocol to the UN Convention on Climate Change, becoming one of the first major oil-producing countries to do so. Considering its geographic and climatic advantage, the recent push towards renewable and alternative energy can attract significant foreign investment into UAE and create jobs, reduce emission etc. With the operationalisation of the alternative renewable energy sources, it can be assumed that such initiative would proliferate the economic growth compared to the present GDP, especially when the low oil prices have grossly resulted into loss of revenue for oil sector.

OAJ - According to you, could clean energy be a game changer in UAE and help in creating a sustainable environment for investors?
Prasad :UAE is a signatory to the Paris Agreement and is committed to foster a green economy. UAE Vision 2021 also incorporates ‘sustainable environment and infrastructure’ as one of its objectives. UAE is targeting to generate 30% of power from clean energy sources by 2030. Dubai has also formulated Dubai Clean Energy Strategy, 2050 which provides for clean energy to account for 7% of Dubai’s energy needs by 2020.

To upkeep with the national and international commitments, UAE has been investing heavily in the construction of renewable and alternative energy infrastructure. On the investor front, such commitment to clean energy has resulted in facilitation of attractive investment opportunities.

* Disclaimer. The observations contained herein are based solely on our understanding of the publically available information. We are not expert in the United Arab Emirate’s laws and / or economy. We highly recommend consultation with subject matter and jurisdictional experts for a definitive view on the observations. We expressly disclaim any and all liabilities for, or damages of any kind arising out of use, reference to, or reliance on any of the observation contained herein.

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