Expatriate-controlled companies have taken advantage of an economic boom and low tax in the UAE to boost their wealth but have failed to contribute to socio-economic development, an official report said yesterday.
In a rare criticism of the private sector, the Abu Dhabi Department of Planning and Economy (DPE) said it was time for private institutions to get involved in socio-economic development in the country in anticipation of the receding government role in an era of globalisation and privatisation.
The department said the UAE has been very generous to these establishments and it expects them to pay back in terms of active involvement in domestic social and economic work instead of focusing on maximising their wealth and siphoning out most of their earnings.
In its weekly report, DPE proposed the creation of a pan-UAE team to oversee private sector contribution to social programmes and said such an issue should be the focus of the media and official institutions.
"It is no longer possible to swim against economic globalisation, which requires public-private sectors' co-operation and co-ordination toward a genuine partnership to serve socio-economic development schemes. Plans to get the private sector involved in the UAE's socio-economic development programmes are in full swing," the report said.
"Nevertheless, in the private sector social duty has not yet taken roots deep enough to translate into tangible contribution to Abu Dhabi, and the UAE in general. This role is strictly limited to a slim 10 per cent of private firms, and the government continues to be the sole guarantor and sponsor of social development. Though the social role is still absent for 99 per cent of private firms, these entities continue to reap record profits thanks to rising oil prices, economic boom and excellent facilities offered by the government."
The department's figures showed UAE corporate profits jumped by nearly 50 per cent during the first quarter of 2008 while the net earnings of the firms listed on the Abu Dhabi and Dubai bourses are expected to peak at Dh70 billion in 2008 compared to Dh51.7bn in 2007, a rise of nearly 36 per cent.
DPE said the sharp growth in their income was not a result of improved efficiency by those companies but because of better working conditions, an economic upswing and a surge in demand for services and products.
"The credit goes here to the Government of Abu Dhabi, and the UAE in general. These firms take advantage of external factors to maximise their profits without the community availing any part of them," it said.
"Private entrepreneurs usually mix government taxes with their social duties, which are basically based on ethical grounds rather than on taxes that are the lowest in the world. It is suffice to say the net profit of five local banks is larger than tax payments of business and private sector combined. An income/profit tax not less than 25 per cent would have been paid had these banks and private entities operated in any of the developed countries."
Citing bank estimates, the report said expatriate financial transfers out of the UAE have grown by an average 13 per cent annually to exceed Dh60bn in 2007, much higher than the country's GDP real growth rate.
It said the problem is underscored by the fact that earnings by expatriate owners of private enterprises account for nearly 55 per cent of those remittances while 45 per cent are from wages of foreign workers.
"This percentage is not surprising, given the fact that a larger part of private companies is controlled by expatriates. Statistics show more than 50 per cent of these firms are owned, partially or totally, by expatriates," the DPE report said.
The report noted that such high earnings have sharply increased the number of millionaires in the UAE, with those having at least $1 million (Dh3.67m) exceeding 75,000 at the end of 2007. They accounted for about 8.8 per cent of the total number of UAE nationals – the highest ratio in the world.
"A steady rise in the number of millionaires is expected, given the current economic and real estate boom, high GDP growth, surging oil revenues, expansion of non-oil sectors and widening fiscal surpluses," it said.
"With the number of millionaires increasing by 15 per cent annually, important questions rise about their contribution to community development at a time of a government trend toward gradual retreat from major community service sectors – a retreat driven by privatisation and economic reform programmes – and when the gap between the rich and the poor is widening at a greater pace. Had the rich been operating elsewhere, their wealth would have been axed by taxes. This is not to say an income tax should apply, but the rich should be brought face to face with their social and ethical obligations toward a generous, all-giving community," the report said.
DPE urged the local business community to follow the example of United States millionaires, who it described as major contributors to social work. It cited American tycoon Warren Buffet who has given out 95 per cent of his wealth – more than $37m – to charity.
An earlier example was Bill Gates who had set aside half his fortune – $55bn – to establish a world community support fund. Many top American businessmen have been on the same track, and a large number of renowned US universities are basically funded by businessmen.
"The weak social role of businessmen and private entrepreneurs in the UAE should be the subject of discussions and debates by the media and the Federal National Council to come up with a clear, all-out vision on how to organise and set social work in motion," DPE said. "Good intentions are not enough to inculcate the sense of social duty. If the private sector is being criticised for inadequate contribution to national issues and community service, the larger part of the blame should be directed to government and semi-government agencies and the media. An orchestrated action is therefore necessary to crystallise the size and scope of the role of the private sector in the forthcoming stage."
It said with the government share of socio-economic development plans receding, it is no longer possible for the private sector to ignore its obligations toward the community. Moreover, social commitment programmes are not just about donations, but fully integrated schemes that are needed to bolster sustainable development and cater to community interests, it stressed.
In Abu Dhabi, the government's plan is to expand the private sector's share of the GDP and this should prompt establishments to get more involved in socio-economic activity. The report noted the private sector's contribution to GDP in Abu Dhabi stood at 18.2 per cent last year but is expected to jump to 32 per cent in 2015.
"Only a very limited number of businessmen and firms set a good example of successful social work, but in a fuzzy, random way. Social duty should be part and parcel of the working environment. All efforts (corporate and otherwise) should be orchestrated to support social work," the report concluded.