The UAE’s logistics sector has enjoyed growth in the face of global slowdowns, in addition to heavy investments from its government and private sector. But despite a predicted industry growth of 14% in 2016, significant challenges remain

The UAE’s exponential growth over recent years has been the success story of the region and, even at the height of the oil price crash, the diversified economy of the UAE remained strong.

The continued development of places such as Dubai South, Kizad and Jebel Ali has created a national infrastructure to rival even the most high-tech logistics hubs in the world. But it didn’t come about by accident.
One of the richest countries in the world, the UAE enjoys a robust GDP, with an aggregate average growth rate of 5.5% per annum, despite growth forecasts being cut by the IMF in January of 2016 and the tangible risk of recession in the year’s earlier quarters.

In Dubai alone, for the last three decades GDP has increased almost 11 times. During the same period in Singapore GDP showed a 10 fold increase, in Hong Kong seven fold and the US three fold. The IMF predicts that by 2018 the gross domestic product per capita in the United Arab Emirates will reach $57,000, up from $24,000 in 2013.
Consider this growth is recorded in the face of a global downturn in consumption and, ultimately an absence of the usual demand drivers for GDP growth.

The UAE Minister of Economy, His Excellency Sultan bin Saeed Al Mansouri, was quoted in a report this year as saying: “The UAE Economy has proven to be among the strongest economies regionally and the most promising globally. Our economy has maintained high growth rates in the past few years confirming its strength through a very challenging period. While many economies worldwide slumped in the years following the global financial crisis of 2008, our economy continued to follow a positive growth trajectory.

“The current fall in oil prices poses a great challenge to all oil exporting countries and the UAE is no exception. However, our national economy has once again proven its resilience. Thanks to the leadership’s efforts to diversify the economy and reduce its dependence on oil in line with the UAE Vision 2021 and the national agenda, the contribution of non-oil sectors to the national economy has reached 69%, leaving only 29% to the oil sector. “

Aluminium and cement manufacturing remains strong in the UAE along with tourism, which has been reinforced recently with world-class leisure offerings and two major airlines driving arrival numbers. In Dubai, where 25% of the country’s GDP is generated, a strong focus on trade, tourism and construction has created strong economic growth.

While development of Expo related infrastructure will be the primary driver of almost all industries in the country for the coming 24 months, it won’t be the only factor driving growth in the logistics industry.

Looking at recent events there are three primary industry drivers: economic diversification of the country; strength in the international trade ties of the GCC nations, in additional to regional trade and customs regulations; and the continued development of infrastructure.

Regardless of the GDP predictions it is widely believed that 2017 will be a year of economic strength and progress ahead of the deadlines for such national strategies as Dubai Urban Masterplan 2020, UAE Vision 2021 and Abu Dhabi Economic Vision 2030.

According to plan

All these strategies place a huge focus on infrastructure and it is this, coupled with capacity expansions, that will strengthen the competitiveness of Logistics Service Providers (LSPs).

As a statement on Vision 2021 reads: “The National Agenda highlights the importance of infrastructure and aims for the UAE to be among the best in the world in the quality of airports, ports, road infrastructure, and electricity. Leading telecommunications infrastructure will allow the UAE to become a forerunner in the provision of Smart services.”

In May, it was announced that the UAE ranked among in the top five of the Nabarro Infrastructure Index, which rates 25 countries across the world in terms of investment attractiveness. The latest index followed the Infrastructure Index 2012, where the UAE was ranked 12th.

The new index rated the UAE as a more attractive investment location than European powerhouses France and Germany. Only the UK, Canada, US and Australia are more highly rated, said the report. It is this ease of doing business, which ensures the capability to complete such projects is available locally.

For example, this year the $2.88 billion contract for the Route 2020 project by the Roads and Transport Authority (RTA) was awarded to a consortium of French, Spanish and Turkish firms, with a track record for UAE operations.
The service will begin on May 20, 2020, five months before the official opening of the Expo. As part of the project, 50 trains will be purchased with 15 for the Expo service and 35 to upgrade the metro system, said the report.

In the Logistics Performance Index by the World Bank, an interactive benchmarking tool to help countries identify the challenges and opportunities they face in their performance on trade logistics, the UAE ranked 13th in 2016, out of 160 countries.

The index examines performance across six factors: the effectiveness of border and customs management in terms of simplicity and speed; the quality of trade and transport infrastructure; the ease of shipping at competitive prices; the efficiency and quality of logistics services; the ability to track and trace cargo; and arrival of cargo to destinations on time.

“Logistics performance both in international trade and domestically is central to countries’ economic growth and competitiveness,” said Anabel Gonzalez, senior director for the World Bank Group’s Trade and Competitiveness Global Practice.

“Efficient logistics connects people and firms to markets and opportunities, and helps achieve higher levels of productivity and welfare. Unfortunately, the logistics performance gap between rich and poor countries continues and the convergence trend experienced between 2007 and 2014 has reversed for the least performing countries.”

Challenges to be faced

However, if the UAE is to continue on its upwards growth trajectory, two major issues must be addressed: that of the development of a GCC-wide rail network and the country’s telecoms capabilities.

Of the latter, while infrastructure and economic performance rank highly in multiple tables, The World Economic Forum’s 2015 Networked Readiness Index study placed the UAE 23rd  in terms of telecom services and the International Telecommunications Union 2015 ICT Development Index placed the UAE 32nd worldwide.

Many attribute this huge disparity in performance indicators to outdated regulations in the telecoms sector, however the ability to impact connectivity for the logistics sector – especially as the IoT age dawns – will cause havoc further down the line

In June this year, Mohamed Alabbar told a delegation at hosted by Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, that while the UAE has made significant progress, the work is far from done.

He was quoted as saying at the time: “The UAE has made huge progress in this field and is way ahead of other Arab countries, thanks to the wise policy pursued by its leaders. The overall commercial value of trade in the country was AED600 billion and only a small portion of this is traded online. Those numbers are really low and we need to get into the opportunities that the digital revolution is providing”

Others note the issue is that telecoms as an industry has grown on the back of other industries, rather than fostering its own innovation.

Writer, author, orator and Sharjah Royal family member, Sultan Al Qassemi wrote last year: “The likelihood is that the historic increase in profits and subscriber numbers that these telecom duopolies enjoyed was to a large extent because of the fast paced development of every other industry in the UAE?—?except the telecom industry. In other words this growth in subscriber base and profits is not because of their service but is in spite of their service. Instead of adding value to the economy, etisalat and du are merely benefiting from the growth of other industries in the UAE.

The more employees Emirates, Dubai Holding and Mubadala hire, the more subscribers Etisalat and du sign up”
Another huge barrier for the country is the development of its highly anticipated 1,200km rail network. When launched in 2011 was planned to link up to similar, compatible networks, across the GCC, running through the UAE from the border of Saudi Arabia to the border of Oman. The network will run from Ghweifat to Abu Dhabi, Dubai and the Northern Emirates with major connecting points in between, including Al Ain and Madinat Zayed, taking in all major ports in the country.

Last year, the tender for the second phase of the project was suspended. The first phase continues operations after commercial activity for Etihad Rail commenced in December 2015. To date, Etihad Rail has transported more than 7.4 million tonnes of granulated sulphur for Abu Dhabi National Oil Company (ADNOC), the equivalent of 494,000 truck trips.

One train removes approximately 300 trucks from the road, producing 70%-80% less carbon dioxide emissions than trucks required to transport the same tonnage. However, both Oman and Saudi Arabia’s plans have also faced delays and the official project deadline has now been pushed to 2021.

“In principle we agreed on 2021 as a ceiling. Some countries might link before 2021 and some of them might even need a higher ceiling. The suspension was logical because you simply cannot build your part and wait for others,” said UAE Minister for Infrastructure Abdullah Belhaif Al Nuaimi, in a report released in Q3 last year.

The road ahead

The UAE is built on a can-do attitude that dares to dream – no other country in the Arab world has achieved what it has economically and it is the attitude of those in the country, as well as those who lead it, which drives that. This is supported by a strong desire to lead future innovations and integrate the latest technological developments in all new projects, strategies and developments.

In addition, the UAE is home to multiple logistics mega-projects, including Dubai South and Kizad. The problem remains however, that integration with its neighbouring nations hinders what can be achieved. Without a common strategy for telecoms and rail development, the UAE – along with the rest of the GCC – could see its plans jeopardised.

While on one hand, this is a country that over recent years has demonstrated economic growth in the face of a global decline in the demand for goods, on the other the UAE’s capability as a transhipment hub can only account for so much growth.

David Harris, director of international logistics services, Dubai Department of Economic Development, comments: “The question then arises: How long will current stocks absorb existing economic growth and when will the inevitable upwards price pressure hit due to a shortage of supplies?

“Aligned to this are longer decision cycles concerning new investments in the logistics infrastructure. Multinationals are less inclined to make such investments due to reduced liquidity and also the lack of multi-year contracts that would normally stimulate investment decisions,” he continues.

While on one hand, this is a country that over recent years has demonstrated economic growth in the face of a global decline in the demand for goods, on the other the UAE’s capability as a transhipment hub can only account for so much growth moving forwards.

While there is evidence of a significant growth spurt in the retail industry – driven by the continued development of malls and an increase in disposable income, not to mention the infiltration of smart devices to drive e-commerce and m-commerce – rail and telecoms infrastructure are still required to hit even modest targets.

Harris explains: “Overall, the investment prognosis looks positive. The population in the Middle East is currently growing at a rate of over 1.5% annually. This represents more than 6 million people per year in the region who will become future consumers and drivers of current demand, according to the UN. MENA’s encouraging report of GDP figures is another indicator of sustained growth.”

Al Mansouri adds: “All indicators currently confirm the stability of the UAE economy and its potential to thrive even as our country becomes a major economic centre for the region and an international maritime and aviation hub that connects the East to the West.

“The successes we are witnessing are the result of a number of integrating factors – political stability, security, advanced infrastructure, and an enabling legislative environment. All these factors have made our country a desired destination for businesses and helped the UAE build the second largest economy in the Arab world achieving truly remarkable growth rates.”