Minister for Entrepreneurship & SMEs,
Government of the UAE.
You’re appointment comes not a day late. The task before you – to catalyze entrepreneurship and attract businesses to the UAE - is a challenging one. We hope the broad scope of issues to be tackled, is accompanied by the appropriate latitude that it requires.
This letter addresses some of the strategic issues that need to be urgently examined and remedied and we hope it is a useful pointer. It does not purport to be a laundry list of quick fixes. We touch on six crucial areas that need urgent attention.
The first vital area, to start with, is the rule of law in commerce. While progress has been made on this front, the framework and processes of commercial law need serious attention. Businesses are hamstrung and risk taking seriously hampered by the weak enforceability of commercial contracts, for one thing.
The judicial process is expensive, layered and inconsistent across the emirates. Business has been eviscerated by the debilitating pervasiveness of the practice of delayed creditor payments. Non-payment of debts/invoices for no reason has become all-pervasive.
This is killing businesses and needs to be stopped. Companies are loathe to take legal action owing to costs and other challenges - they should be able to seek quick, inexpensive and hassle-free legal redress, without the omnipresence of over-priced lawyers. Rapid disposition of cases at small business federal courts will go a long way in assuaging businessmen’s’ fear of courts and lawyers.
Make it easy to tap
Second, and indispensable, is easy access to funding. This merits a separate discussion, but here are some critical issues. One, debt and equity markets here are practically non-existent for SMEs. The only form of debt available is bank finance.
The development of both is crucial – and the basic foundations like a platform for VCs to invest in start-ups, commercial paper issuance, and alternative equity markets for SMEs need to be set up. Following on from this is the issue of the reliability of financial statements that investors look for.
This needs a rigorous cleansing of the inadequately supervised and near-unregulated audit industry. Another area is corporate governance that needs to be introduced quickly - we need only to think of Abraaj and NMC Health to be reminded of this.
Built on rule of law
There is a dire need for a robust framework of corporate law. Third, banks should be required to lend a percentage of their portfolios to SMEs with lenient terms for priority sectors. Fourth, the Central Bank and the UBF (UAE Banks Federation) need to collaborate to fill the enormous trust deficit that exists between banks and borrowers.
Lenders are at a loss to distinguish between genuine business failure and fraud - and the UBF needs to play an active role in making lending a safer business through better exchange of information, a consortium lending approach both to lending and work-outs, etc. Initiatives such as making disclosure by lenders in offshore jurisdictions (DIFC, ADGM) mandatory, tie-ups with overseas bodies for financial and other disclosures are a few examples.
Fifth, a rating agency is sorely needed. Agencies are loath to come to the UAE largely due to the unreliability of financial statements. Another problem is the lack of a comprehensive credit report to check the creditworthiness of counterparties. A platform that captures the track record of the payment history (to all creditor types, not just banks) of firms, is needed.
Make low costs count
The third pillar essential to boost business is a transparent and low cost base. The UAE is easy to do business in, but still considered expensive, with many hidden costs under different heads. This needs to be streamlined and minimized.
Perhaps a single-window clearance mechanism for SMEs is the answer. The reduction of cost of doing business needs far more attention and initiatives like permitting a) the sharing of offices by unrelated companies, b) running of certain categories businesses from home, c) start-up incentives like free employee visas and nil VAT for first three years, and reduced government fees may be considered.
The government should view fees as a “cost-covering” and not a revenue generating perspective. Lower costs will result in more business activity, which will boost government revenues through VAT, etc.
The 100% part
Fourth is the contentious one of 100 per cent expatriate ownership of business. The extant rentier model of requiring local sponsors is daunting to first-time investors. There are of course work-arounds, which are expensive, time consuming and still fraught with risk.
If workarounds are available, why have this tedious and obsolete model in the first place? Using the sponsorship model as a means of distribution of wealth is an inefficient alternative to having a good tax system in place.
The fifth strategic requirement is the identification of priority sectors for the economy that will generate jobs in sunrise industries that are globally focused. These must then enjoy significant benefits of speed of approvals, low fee structures, easier access to funding, tax holidays etc. This should be aimed at industries that are not location-dependent.
Treat failures as non-terminal
The last and certainly not the least, and in fact essential to foster entrepreneurship, is the tolerance of failure. Silicon Valley revels in failure; hence its success as a gigantic incubator. We must make it tolerable and quick for businesses to fail.
Failures, followed by bankruptcy, now invariably invite criminal charges, travel bans and, sometimes, jail. These are not conditions conducive to risk taking and in fact encourage fraud, skips and so on. If failure is tolerated and the genuinely bankrupt not tainted as criminals, the environment will turn even more conducive to risk-taking.
There are very many more fundamental changes that are required, but we are constrained by space. This is a short list that will lengthen as you go along. We wish you all the very best and eagerly await radical changes so sorely required...
- Vikram Venkataraman is Managing Director of Vianta Advisors.