Abu Dhabi Global Market - just a new free zone?

Those familiar with the United Arab Emirates, and Dubai in particular, have heard of the many free trade zones that dot the economic landscape there. For the uninitiated, free trade zones in the UAE are special economic zones that offer, among other incentives, 100% ownership to foreign investors, and a guaranteed tax-free environment. Dubai has over 30 of them, clusters of companies with similar economic activities (Dubai Media City, Dubai Multi Commodities Centre and the like) and the other emirates have a few each. Abu Dhabi, which is the capital of the UAE, has been relatively slow in adopting the free zone approach, with a few free zones like twofour54 (media related) and Masdar (clean technologies) appearing in the last decade. So when they announced their new financial free zone – the Abu Dhabi Global Market, or ADGM, it was relatively low key compared to how the Dubai International Financial Centre (DIFC) launched a hundred miles away a decade ago. Skeptics pointed out the obvious – does a second financial centre in a relatively smaller economy make sense?

The ADGM value proposition

ADGM is one of the steps that Abu Dhabi is taking in attempting to diversify its economy, away from being heavily dependent on oil and towards being services and knowledge-based. The financial services sector has been largely lacking the wide range of products and industry expertise that one would have expected to be offered in this region, given the high concentration of private wealth and the strength of the sovereign wealth funds of the GCC countries. The DIFC made the first and important step in addressing this glut; however, much remains to be done, since an estimated 37% of HNI wealth of the region is held in Switzerland, 22% in UK, and only 12% in Dubai. The silver lining here is that Dubai records an annual growth of 8%, which reflects the opportunity that ADGM would also like to capitalize on.

Add to the mix the fact that the emirate of Abu Dhabi accounts for 66% of the UAE economy, 60% of the UAE’s investible wealth and 75% of UAE’s total assets under management (AUM), and you have a fantastic case for a financial services hub!

Whats different

The next obvious question is – what is different here? Why not the DIFC instead?

Well, the DIFC has a good head start – 10 years of proven experience. The jurisdiction is maturing well, albeit slower than expected. Nevertheless, it has proved a far better success story than other onshore financial service jurisdictions in the region. The ADGM comes in with a common law framework, a robust regulatory framework and intent to learn from the experience of the DIFC. The result is a fresher look at the same kind of business, with good possibilities of differentiating itself as far as the outlook on authorization and supervision is concerned. The regulator (Financial Services Regulatory Authority, or FSRA) is headed by Mr. Richard Teng, who, along with his core team, aims to use his rich experience in the Singaporean jurisdiction to replicate that success story in Abu Dhabi as well. The ADGM doesn’t really need to offer something radically different from the DIFC; it merely needs to improve upon it and provide a viable alternative. After all, Singapore and Hong Kong have done well as international financial centres despite their relatively close proximity.

What are the benefits?

Firms established in the Abu Dhabi Global Market have access to a wide range of benefits, the main ones being:

• strategic location in the heart of new Abu Dhabi
• Independent jurisdiction, governed by the ADGM courts which are based on the common law framework
• 100% foreign ownership
• guaranteed tax holidays (corporate and personal) for 50 years
• access to the Abu Dhabi wealth industry, and the GCC in general
• access to a wide range of double taxation treaties worldwide, including with all major European and Asian countries, and Africa

These are just a few of the wide range of facilities and benefits that are offered to companies that choose to set up at the ADGM. The emirate of Abu Dhabi also offers a world-class lifestyle, which is an important factor for such onshore centres that look at attracting world-class talent.

Sounds good, but what are the challenges?

Putting on my pessimistic hat, there are a few factors that can prove to be a challenge. For one, Abu Dhabi has always moved slowly, a bit under the radar, as far as marketing their free zones is concerned. The value propositions are excellent; but a bit more hue and cry wouldn’t hurt. The ADGM may have to work its marketing well; subtle but widespread. Another factor that can make a difference, at least initially, is the limited number of agreements that ADGM currently has with fellow regulators and related associations worldwide. Well, one cannot blame them for it; after all, they only commenced licensing in the last week of October. My point being that they will have to scale this up quickly, so as to come on par with the DIFC and other regional centres.

Controlling costs will be a huge factor.

Even though the ADGM is not directly involved with leasing or selling real estate (unlike the DIFC), its success is invariably linked to the affordability it offers, especially in the case of startup entities. They have taken some well meaning steps in this direction, by having a clear definition of startups and offering them some leeway that will help with the initial costs. This will have to be maintained, so that a vibrant ecosystem can be developed, slowly and surely.

The endnote

In my discussions with clients and associates around the world, I have always noticed one thing when it comes to talking about the financial business. Regulation is the key word. Under-regulate, and the financial centre loses its credibility; over-regulate, and the financial centre loses its business. This is a fine line that the centre has to tightrope, and it isn’t easy. One may have a great setup and infrastructure, but the implementation of the vision that created this structure is paramount.

The ADGM has a fantastic vision to offer…it now has to back it by robust implementation. And I sure hope to see that happen!