By

The amendment and reform of the UAE Company law is a major economic policy reform measure that will lower the cost of doing business, provide incentives for new company formation and registration –particularly for the SME sector- and improve the overall investment climate.

H.H. Shaikh Khalifa Bin Zayed Al Nahyan, President of the UAE, issued a decree on 10 August 2009 amending Federal Law No 8 of 1984, the company law. The amendment removes the minimum capital requirement of Dh150, 000 for the establishment of a limited liability company (LLC) in the UAE and is retroactive to companies established on or after June 1, 2009 and allows new businesses to determine the capital required for the establishment and sustainability of their companies.

This is an important piece of legislation which provides incentives for SMEs and company formation and effectively lowers the cost of doing business. The result, over time, should be to encourage new business formation, spur entrepreneurship, increase domestic investment and promote foreign investment. However, in a more open and competitive global environment, where capital and entrepreneurs are mobile, we also need to measure how we stack up vis-à-vis other countries in terms of the incentives and costs of doing business.

The World Bank (WB) publishes an annual report comparing business regulations in 181 countries ( http://www.doingbusiness.org/ ), the latest was released on 08.09.09 (Doing Business 2010). The report ranks countries according to a number of criteria and indicators associated with the cost of doing business, including fees, charges, time, number of procedures and related:

Starting a Business 

• Dealing with Construction Permits
• Employing Workers  -Registering Property
• Getting Credit
• Protecting Investors
• Paying Taxes
• Trading Across Borders  
• Enforcing Contracts   
• Closing a Business

The amendment to the UAE company law addresses one aspect of the overall costs of doing business as represented by the costs of Starting a Business. In the past 5 years, 115 economies around the world have simplified business startup through 193 reforms. Many opted for low-cost administrative reforms requiring little or no change in regulation. Others went further, introducing or amending legislation. Abolishing minimum capital requirement, as the UAE has done, is considered by the WB as one of the top 5 reform features in the costs of starting a business. This is reflected in the new report which ranks the UAE among the top 10 reformers in 2008-09. Some sixty-nine economies allow entrepreneurs to start a company without putting up a fixed amount of capital before registration. They allow entrepreneurs to determine what is appropriate for the business based on its type, the nature and risk of the activity and capital structure.

The countries implementing such reforms have seen some of the biggest spikes in new company registrations. For example after Madagascar reduced its minimum capital requirement by more than 80% in 2006, the rate of new registrations jumped from 13% to 26%. Similarly, after Tunisia reduced its requirements, new company registrations increased by 30% between 2002 and 2006. 

In the WB doing business 2010 report the UAE is in the top 10 reformers, an important achievement. The overall global ranking of UAE has improved to 33 in 2010 from 47 in last year’s report. The changes have been made in broadly three categories:

Starting a Business: The UAE’s rank improved from 118 to 44 as a result of scrapping the minimum capital requirement and a reduction in number of days and procedures

Dealing with Construction Permits: The cost has been reduced to half, and reductions in procedures and time as well; this improved the UAE’s ranking from 54 to 27.

Trading Across Borders: Decrease in number of documents and time for export, combined with a reduction in cost to import and export by container; the UAE’s ranking improved to 5 from 13 previously .

Through the company reform act and other measures, the UAE has improved its rankings. However, the UAE should aim at additional reforms with the overall objective of improving the ease of doing business; of making the UAE even more business friendly.

We have run three simulation scenarios of the effect of additional reform measures on the UAE’s ranking in the WB league tables on the Ease of Doing Business. 

 Policy Reform Simulation 1: Reducing Time & Procedures of Starting a Business

The first policy reform simulation was to reduce the time and procedures of Starting a Business to the average of the top three countries for this sub-category (New Zealand, Canada and Australia). As a result, the rank of UAE under Ease of Starting a Business would improve to 2 and the overall rank in Ease of Doing Business would move up to 29 from the current 33.

Another quick win is reforming dealing with licenses, with construction permits. “Dealing with Construction Permits” is an important category for the UAE, given its large real estate sector. Reducing the number of procedures (from 17 to 10), time and cost to the average levels of the top-ranked in this sub-category raises the ranking of UAE to 30. 

Policy Reform Simulation 2: Dealing with Construction Permits

What if both sets of the above-mentioned policy reforms are undertaken? Then the UAE’s overall Ease of Doing Business global ranking dramatically improves from today’s 33 to 24. 

The writer is Chief Economist with Dubai International Financial Centre