Expanding free trade zones to aid the diversification drive

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Free trade zones (FTZs) are a major part of the sultanate’s efforts to drive regional growth and help diversify the economy away from its dependence on the hydrocarbons industry. These zones offer a host of exemptions and incentives for firms locating within them, and give companies the chance to not only serve the domestic market, but also take advantage of the sultanate’s free trade agreements (FTAs) with the wider world. These include an FTA with the US, in force since the beginning of 2009, and regional deals made via the GCC with a number of global trading powers, such as the EU.

Already Operating 

Four Omani FTZs are currently up and running, with two located in the southern governorate of Dhofar, at Salalah and Al Mazunah; one in the central governorate of Al Wusta, at Duqm; and the final one in Al Batinah North Governorate, at Sohar. In addition, the sultanate also has a string of industrial estates spread around the country that offer incentives to businesses, helping to drive regional growth. In recent years, a major programme of government investment into these zones and estates has been under way, while private sector businesses have also been drawn in.

Al Muzanah 

One of the first FTZs established was Al Mazunah, in the far south of the country in a relatively underdeveloped area of mountains and desert. The FTZ was one of the main fruits of a 1992 agreement between Oman and neighbouring Yemen that finally delineated the border between the two countries. Once this had been done, trade could be quickly formalised, with Al Mazunah created to encourage this development. In 1999, the FTZ administration block at the zone was completed, and in 2005, a royal decree was issued that established Al Mazunah as a full free zone.

The zone is located 260 km south-west of Salalah, the Dhofar Governorate’s capital, and 245 km northeast of Al Gaydah, the nearest Yemeni city. The FTZ itself lies some 10 km east of the border, inland on the P5 highway. This proximity allows Al Muzanah to operate as an inter-zone between the two countries, with visa-free travel enabling Yemeni and Omani businesses to operate jointly on the estate.

As with the country’s other FTZs, Al Mazunah offers a range of incentives. These include the possibility of 100% foreign ownership of capital and 30 years of tax-free operations, with the possibility of this being extended if a significant number of Omani nationals are employed. At the same time, though, a lower minimum Omanisation rate of 10%, rather than the national 30%, is permitted at the zone.

Companies that are located at Al Mazunah are also exempt from Customs duties and the commercial agency law, while Yemeni nationals are able to work in the zone without visas. Yemeni firms can establish representative offices in Oman at Al Mazunah, while also receiving certificates of origin in the zone, amongst other incentives.

Salalah

The Salalah Free Zone (SFZ) opened in 2006 and has leveraged on the growing importance of the nearby port. This is strategically located along a number of major global trade routes, including those running between Europe and Asia, Africa and the sub-continent. Salalah is an important international trans-shipment port, as well as being the main entrepot for southern Oman.

The SFZ, which is run by the SFZ Company ( SFZCO), offers the same FTA access advantages as the sultanate’s other zones. Goods imported and assembled in the SFZ can be exported to the US duty free, while the zone allows 100% foreign ownership, gives a 30-year tax holiday, charges no corporate or personal income tax, and has no restrictions on the repatriation of profits, no Customs or excise duties, and no minimum capital requirements.

In recent years the zone, which is sited on 18 sq km of land next to the port, has become home to polymer product manufacturers such as Octal Petrochemicals, an auto-parts manufacturer under Brakes India’s Dunes Oman label, as well as a methanol plant, run by the Oman Oil Company. International logistics firms DHL and SAGA are also present at the SFZ, too. A second phase of expansion is currently under way that, when completed, will give the zone a total of some 19m sq metres of space.

At the same time, Salalah’s international airport is also being expanded, and the additional cargo capacity is expected to benefit businesses located in the SFZ. While the airport handled 1417 tonnes of cargo in 2013, capacity will be increased to 100,000 tonnes per annum as part of the expansion.

A total of $130m has been invested in the SFZ by the Omani government, and according to the SFZCO, the free zone has in turn helped to attract some $3.3bn of investment to Salalah. This investment has helped to fuel the economic development of the city and the surrounding governorate, which had previously been largely reliant on smaller-scale trade, fishing, agriculture and pastoralism.

Al Wusta

In Al Wusta, the Special Economic Zone at Duqm (SEZD) is run by the SEZD Authority ( SEZDA). This is perhaps the most impressive of all the zones in Oman, as it is being built entirely from scratch around a port and airport at a place that until very recently was just a tiny fishing village.

The SEZD covers 1745 sq km and includes 80 km of coastline. The zone leverages many of the same advantages as Salalah in terms of its geostrategic location, while also benefitting from its proximity to many of the sultanate’s oil and gas fields. Its geostrategic location is the driving force behind the construction of the Middle East’s second-largest dry dock at the port, along with 2.8 km of quays for additional repair and maintenance purposes, and a 2.25-km commercial quay with an 18-metre draught. The dock is already operational, while the rest of the port is still undergoing construction.

SEZD’s proximity to the sultanate’s oil and gas resources also gives the zone a logical sectoral focus, and a refinery and petrochemicals complex is under construction that will have a refining capacity of 230,000 barrels per day. A natural gas supply is also being connected to the SEZD, providing abundant feedstock to companies located in the zone.

Sohar

The fourth FTZ is the Sohar Port and Free-zone, some 220 km north-west of Muscat. This too is undergoing major expansion, particularly now as the main cargo destination for the capital has been moved from Port Sultan Qaboos to Sohar.

Sohar also has a 20-sq-km industrial estate that has been in operation since 1992 and is already home to many companies. The expansion currently under way at the free zone will cover a total of 4500 ha, with companies grouped into steel manufacturing and processing, trade and logistics, oil and gas, petrochemicals, minerals and aggregates, ceramics, food and food processing clusters.

Sohar Freezone offers its tenants 100% foreign ownership and 10 years of tax-free operations, with this extendable up to 25 years if certain Omanisation targets are met. Minimum Omanisation levels here are also more relaxed than elsewhere, with a 25% target after 10 years, rising to 50% after 20 years. There is also zero personal income tax and no import or re-export duties.

Impact & Challenges

The FTZs have undoubtedly had a major multiplier effect on regional economic development in recent years. The most striking example of this is Duqm, as, according to the plan, the city will eventually house some 100,000 people – around 20 times its population in 2008. The free zone will be a major employer locally, while also helping to generate wealth for the sultanate as a whole.

The zones do face challenges though, such as finding ways to ensure that competition between them is not detrimental, but healthy. Providing enough incentives to convince people and businesses to set up shop is another challenge. The Gulf is home to a growing number of free zones, many of which also offer significant incentives.

Oman has a strategic location that few can match, however, given its direct access to the Arabian Sea. This advantage is likely to become even more significant in the years ahead with the creation of the GCC railway network (see Transport chapter). Quality of life is another advantage for the sultanate, as the free zone master plans include the development of many facilities designed to make the zones attractive places to both live and work.

While management of competition may prove challenging, each of the zones is currently serving a distinct industrial and maritime segment, with Sohar targeting the Muscat region, Duqm the global ship repair and hydrocarbons industries, Salalah the international trans-shipment trade and assembly for re-export, and Al Mazunah Omani-Yemeni trade. With targeted focuses and compelling incentives on offer, the free zones are likely to see significant expansion going forward, as they continue to serve as a major engine of growth for Oman’s regions.

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The Report: Oman 2015

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