Public spending demonstrates recognition of Oman's potential in transport

Leveraging the country’s strategic position adjacent to one of the world’s major seaborne trade routes, the government has identified Oman’s transport and logistics sector as a priority area with considerable potential for growth. To capitalise on that promise, public authorities are in the midst of a multi-billion-rial investment programme designed to expand and improve capacity across land, sea and air. Just as important, though, will be the creation of a regulatory environment that is able to compete with the region’s most efficient logistics centres. Meeting this challenge is the goal of the Sultanate of Oman Logistics Strategy (SOLS). Responsibility for delivering SOLS will fall on the newly created Oman Logistics Centre (OLC), which aims to propel Oman into the top 10 global logistics players by 2040.

In Numbers

According to preliminary figures from the Central Bank of Oman, the transport, storage and communication segments of the services sector contributed OR1.58bn ($4.1bn) to the Omani economy in 2014, equivalent to around 5% of GDP. This represented annual growth of 7.2%, which is significantly higher than total GDP growth of 4.6%, and an acceleration of the previous year’s growth of 6.5% within those segments.

A Ministry of Transport and Communications (MoTC) report estimated that employment in the logistics sector reached 30,000 people in 2014, or 1.6% of the labour force. Public investment in the sector stood at OR859.3m ($2.2bn) per year for 2014, equal to 41% of the government’s total spending on civil development, and representing an annual increase of 1.2%. This figure is equivalent to 2.7% of GDP for that year.

To put Oman’s transport and logistics sector in context, the sultanate currently ranks 59th out of 160 countries in the World Bank’s Logistics Performance Index (LPI), an improvement of three places on 2012. However, the sultanate’s score of 3.0 on the five-point scale places it below the average of 3.18 for its income group (high-income non-OECD nations). Within a regional context, Oman also lies behind GCC neighbours Saudi Arabia (49th place), Qatar (29th) and the UAE (27th). However, the sultanate did make significant improvements since the last report, in 2012. For example, the country’s score for international shipments saw significant progress between 2012 and 2014, along with the score for tracking and tracing.

According to the LPI, the biggest recent improvements in Omani logistics have come in the areas of tracking and tracing, where its score improved from 2.04 in 2010 to 2.84 in 2014, and international shipments, where it rose from 2.31 to 3.41. However, these gains were balanced by a significant decline in scores on timeliness (from 3.94 to 3.29) and Customs (from 3.38 to 2.63).

Structure

The Omani transport sector falls under the purview of the MoTC, which is currently headed by Ahmed bin Mohammed bin Salim Al Futaisi. Established in 1973 and restructured in 2001, the MoTC is responsible for implementing government policy and providing regulatory oversight for both land and sea transport. Regulation of air transport falls under the competency of the Public Authority for Civil Aviation (PACA), which was established in 2012.

Government policy relating to transport is guided by the broader economic objectives laid out in the Vision 2020 document (currently being updated to Vision 2040), and by the spending commitments outlined in the eighth five-year plan, which covers 2011-15. The latter earmarked $25bn for infrastructure investment in transport, including OR6bn ($15.5bn) for a national rail project, OR2.4bn ($6.2bn) for airport expansion and OR1.2bn ($3.1bn) for developing the road network.

The ninth five-year plan, which covers 2016-20, was still under evaluation at time of press. Transport and logistics, however, are sure to remain major targets for investment, with rail in particular expected to see huge investment over the coming three years, carried over from the previous plan (see analysis). Government strategy for the sector up to 2040 will be guided by the SOLS, which was released in 2015, and overseen by the OLC.

The Sea

Oman’s sea trade is divided among three principal ports: Sohar in the north (which serves the capital, Muscat), Duqm in the centre of the country and Salalah in the south. Alongside these are two smaller facilities at Khasab and Shinas. The largest of these ports is Salalah, which was established in 1996 through an agreement between the Omani government and the Maersk and Sealand shipping lines. The port began operations in 1998, and is managed by APM Terminals under a 30-year concession. It has historically focused on trans-shipment, and in 2012 it handled a record 3.7m containers. In recent years container transport has declined as the shipping industry has consolidated, and in the first quarter of 2015 year-on-year volumes at the port fell by 24% to 627,000 twenty-foot equivalent units (TEUs).

A 20-year master plan launched in 2011, however, plans to add multi-modal links to Salalah (including rail), and improve logistics facilities at the nearby special economic zone of the same name, with the aim of boosting import/export traffic. To that end, the MoTC tendered a $143m contract in 2012 to build a general cargo and bulk liquids terminal. Expansion works currently under way by a Netherlands-based marine contractor, Archirodon Construction, on this terminal will see its annual capacity rise to 18m tonnes of dry bulk and 5.4m tonnes of liquids. The new liquids terminal should help to expand Salalah’s share of industrial commodities transport in the region. More recently, a project consultancy tender was floated in July 2015 to study the implementation of the remainder of the master plan, which will constitute the third phase of expansion at the port.

Major Centre

The port of Sohar is Oman’s second-largest facility, operating as a 50:50 joint venture between the Port of Rotterdam Authority and the Omani government. Together with the 4500-ha free zone that sits alongside it, Sohar’s management said it has attracted investment of over $21bn since 2002.

Sohar received a significant boost to trade in 2014 when all commercial activities at Muscat’s Port Sultan Qaboos were shifted there. Designed to reduce congestion in the capital, the transfer – which will see Port Sultan Qaboos transformed into a cruise-liner terminal – resulted in a 58% rise in container throughput in 2014. To cope with the increase in traffic, Oman International Container Terminal (OITC), which is located at Sohar and managed by Hutchison, was upgraded from a capacity of 800,000 TEUs to 1.5m at an estimated cost of $130m. Hutchison intends to invest a total of $303m in OITC by 2019 as part of a plan to quadruple capacity to 6m TEUs per annum.

Perhaps inevitably with such a large transition, there were some delays and backlogs associated with the shift. This led shipping companies Maersk and CMA CGM to announce in September 2014 that they would be adding an emergency port congestion surcharge to cargo offloaded at the port. However, by mid-September management at the port said that they were over the worst of the difficulties, and had identified a backlog of empty containers and shifting work patterns related to Ramadan as the main causes.

The port’s management will no doubt also be hoping that delays related to Customs clearance will soon be expedited by the introduction of the Bayan single window e-clearance system, which is currently being trialled at Sohar before being rolled out across the country. However, several figures in the logistics sector told OBG that the teething troubles had resulted in a share of business being lost to neighbouring Jebel Ali in Dubai.

New Player

Oman’s newest major port is located at Duqm, and is a joint venture between the Omani government and Consortium Antwerp Port, which signed a 28-year concession in April 2011, ratified by royal decree in July 2015. The port is intended primarily as an industrial facility to serve the oil and gas sector, and in particular the major gas project that is nearing completion at Khazzan (a large-scale refinery is also planned). However, management at the port also have ambitions for Duqm to become a transit hub able to handle 2m-3m TEUs per year in the medium term, while a dry dock facility (the second-largest in the MENA region) was opened at the port in 2012.

Project cargo facilities at the port have been operational since 2012, and dry bulk exports are scheduled to begin by 2016, by which time a feeder line linking Duqm with Jebel Ali is also expected to be up and running. The port’s management expects to see project cargo triple in 2016 as construction at the accompanying special economic zone at Duqm begins to take off (65 ha of land was handed over to logistics service providers in September 2015). Minerals exports, which will begin in 2016, are forecast to reach 1m-2m tonnes by the end of the first year of operations. On the container front, Port of Duqm Company floated a tender in July for a commercial berth that should see capacity rise to 3.5m containers per year, up from the current capacity of 250,000.

By Land

In terms of land transport, ongoing investments in the sultanate’s road infrastructure are continuing to improve connectivity, while the authorities have recently begun tendering for a 2135-km national rail network intended to link Oman’s major ports with its Gulf neighbours (see analysis). Also on the cards is a new master plan for public transport, focusing on Muscat.

According to the MoTC, as of October 2014 Oman had a total of 13,857 km of asphalted roads and 16,414 km of unpaved roads, and works are under way on two major road projects. The first, the $3.9bn Batinah Expressway, will act as an extension of the Muscat Expressway, carrying on for an additional 265 km to the UAE border. The four-lane route is due for completion in 2018 (the first portion having opened in July 2015), which should improve transport times around the Sohar Industrial Port and the free zone. The project has been divided into 11 packages, with six already awarded and three more being tendered in 2015. Regarding the packages currently in tendering, 12 firms submitted bids, including Oman’s Consolidated Contractors Company, Larsen & Toubro, and Galfar Engineering & Contracting.

The other major road project under construction is the Bidbid-Sur dual carriageway, a 247-km, six-lane highway that will link the two northern cities. The $1.1bn project is divided into two phases, with the first awarded in 2011 and the second in 2014. In addition to these large projects, the MoTC announced that on March 16, 2015 a total of 25 additional smaller road contracts had been signed, worth OR375m ($971m) altogether. Alongside these road investments, authorities have opened the pre-qualification process for an operation and management contract for the sultanate’s first dry port, to be built in Al Batinah South Governorate.

Legal Updates

On the legislative front, a new land transport law, which is intended to streamline the sector and bring the provision and regulation of services under the ambit of the MoTC, was passed by the State Council in June 2015. This followed on from the implementation in March 2015 of new regulations relating to truck weightage that are designed to protect the sultanate’s highways. The rules restrict the gross weight of any tandem axle to 21 tonnes, adding to freight costs for heavy industry, in particular.

A significant recent development in Oman’s transport policy has been the decision to award Spanish consulting firm Ineco with a commission to produce a public transport master plan for Muscat. Due to be delivered before the end of 2015, the plan is expected to examine the possibility of creating a multi-modal mass-transit system, including buses and a light rail network. To implement it, Ineco has also proposed the creation of a public transport authority, which would be responsible for creating an integrated system and supervising the various phases of construction.

As it stands, public transport in Muscat consists of two bus lines and an informal network of minibuses and taxis, while outside of the capital public transport is less developed, according to a recent report by Sohar University. By contrast, private car ownership is among the highest in the world, at 215 cars per 1000 people. In 2013 almost 11,000 people were injured in traffic incidents in the sultanate, with more than 900 killed. As with other Gulf countries currently attempting to implement public transport systems, it may be difficult to persuade Oman’s car-loving public to switch.

Rail Links

In 2015 plans for Oman’s proposed railway system saw increased activity after several years of deliberations. The authorities launched tenders for four separate stages of the proposed nine-segment national rail network, which is expected to eventually cover a total of 2135 km at a total projected cost of $15.5bn.

The sections so far placed under tender amount to 1414 km and at least $6bn of investment. The 207-km first section will link the port town of Sohar with the UAE border at Buraimi, while sections two, three and four (which will total 1207 km) will provide another border link with the UAE at Hafeet before continuing all the way down to the southern port of Salalah. The line will also potentially connect to Yemen, although the authorities are still debating this move. Should they push ahead with links to border regions, in the hope that they will be met with corresponding tracks on the other side? Or should the initial focus be on improving domestic connections? This will require the government to prioritise funding, which is a difficult decision in light of lower oil prices (see analysis). Public transport in the sultanate took a major step forward in 2015, with a revamped Oman National Transport Company (ONTC) unveiling new buses and routes, a new code for taxis under way and progress on the Oman Rail project (see overview). Muscat-based daily Times of Oman reported in November 2015 on ONTC’s revamp, which included a new name, Mwasalat, along with an order for 50 new buses. These expanded services are the result of OM7m ($18.1m) in investments, rising to OM10m ($25.9m) when including the service’s IT backbone, design, stops and instruction costs for drivers, with 200 drivers currently in training. The company currently has a staff of 700, but plans to increase this to 1000.

The bright red buses were ordered from the Netherlands-based VDL Bus & Coach Company and provide disabled access, on-board cameras, air conditioning and information screens, and thus far have proved popular with customers. This bodes well for Mwasalat meeting its ambition of serving 5m passengers per year using its routes. While 10 of the buses will be used on routes that connect Muscat with other governorates, the other 40 buses will be used within the city. In addition, Mwasalat will open three new routes in 2016: the Ruwi-Muttrah-Al Alam Palace and Ruwi-Madinat Al Nahda routes will start operating in the first quarter, and the Al Khoud-SQU-Burj Al Sahwa route will begin servicing commuters in the second quarter.

Many of the new vehicles are being deployed on services within the central Muscat area, which has been divided into zones, with the maximum cost of a ticket being OM0.50 ($1.29) for a three-zone trip. Journeys to the new airport and Oman Rail stations will, however, be entirely free. The Ruwi-Seeb route is one of the main arteries, with some 60 bus stops being installed along this and served by new buses, while Ruwi-Wadi Kabir is another key lane.

More long-distance routes are also coming on-line. Mwasalat is adding extra services to its Muscat-Dubai route, while a new Muscat-Sohar-Fujairah-Sharjah international route is also being added. Mwasalat service stations and stops en route are getting an upgrade, with new rest and recreational facilities. New buses on these routes will include toilets, baby changing areas and TVs. The firm is also planning park-and-ride areas in cooperation with the Muscat Municipality. Additionally, Ahmed Ali Al Bulushi, the CEO of Mwasalat, told the Times of Oman that the firm is waiting on a royal decree to start regulating taxi services.

One of the driving forces behind the proposed rail network is the agreement – first mooted in 2005 but eventually signed in 2009 – to build a 2177-km GCC rail network running from Kuwait all the way to Oman. The GCC railway would significantly improve overland trade links between member states, and for Oman such a link would be of particular benefit, enabling the Indian Ocean ports of Sohar, Duqm and Salalah to plug into Gulf logistics networks, and offering shipping lines the possibility of bypassing the Strait of Hormuz.

Tough Terrain

The new Saudi-Omani road passes through the Rub’ Al Khali, or Empty Quarter, the largest contiguous sand desert in the world and one of the most hostile terrains on the planet. The Omani railway will likewise require construction in some of the most challenging environments: Sohar and Muscat in the north are separated from the south by a chain of mountains, while the port town of Salalah is similarly cut off from its hinterland. Such hurdles have forestalled any prior development of railways in the sultanate. There is the sense now, however, that with neighbouring states such as Saudi Arabia investing substantial sums in developing their own railway networks, the time is ripe for Oman to jump in.

Air Options

Oman’s aviation sector has also benefitted from significant investment in recent years to increase its scope and capacity. The sultanate’s main airport, Muscat International, is approaching the end of a $1.8bn refit and expansion, which will add a new runway and terminal, and bring annual capacity to 12m passengers. The expansion, which is being carried out by a consortium including US firm Bechtel, Turkey’s ENKA and local company Bahwan Engineering, is set for completion in early 2016. The government-owned Oman Airports Management Company (OAMC), which is responsible for running the sultanate’s airports, has additional expansion plans for Muscat International that would see capacity rise in stages to 24m, 36m and finally 48m passengers per year. In 2014 the airport received 8.7m passengers, for annual growth of just under 5%.

Expansion works have also been completed at Salalah Airport. The $765m project involved the construction of a new passenger terminal and air traffic control tower, as well as ancillary buildings and connecting roads. Works were carried out in a joint venture between Larsen & Toubro India and Galfar, with the new facilities opening in April 2015. Salalah Airport witnessed growth of 13% in 2014, reaching a total of 841,970 passengers.

As well as expansions to existing airports, OAMC recently invested in three new regional airports, at Sohar, Ras Al Hadd and Duqm. Each has an initial annual capacity of 250,000 passengers, alongside a 4000-metre runway able to handle the world’s largest aircraft. Flights to Duqm began in July 2014, with Sohar following in November and trial runs for Ras Al Hadd taking place in December.

The sultanate’s flag carrier, Oman Air, is 99% state-owned. As an international airline, it serves 49 destinations, focusing on South-east Asia, the Middle East, Africa and Europe. It has seen passenger numbers grow from less than 1m in 2004 to 5.1m in 2014. “Route planning is a big determinant in expanding market share. In 2015, 56% of our flights offered connections in under two hours, and we aim to increase this to 90% by the end of 2016,” the CEO, Paul Gregorowitsch, told OBG.

In 2015 the company opened five new routes, to Manila, Jakarta, Singapore and Goa, and upgraded frequencies to Frankfurt, Munich, Paris and Milan. The airline plans to expand further into India, offering daily or double-daily services on all routes, and to significantly upgrade European routes, moving to daily services where possible. On the domestic front, 2015 saw a significant increase in capacity to serve Salalah, while Khasab, Duqm and Sohar were all upgraded. Oman Air is currently ranked seventh in the Middle East by fleet size, operating 41 aircraft, including four new Airbus A330-200s, six Airbus A330-300s, an ATR 42-500 and a Boeing 737-700. The airline plans to operate 25 wide-body aircraft by 2020, and to both expand and simplify its inventory, doubling its fleet size to about 70 planes by 2020, while operating two – or at most, three – aircraft types. The government is also studying proposals to introduce a budget carrier to the Omani market. In early 2015 PACA issued a request for information for operators interested in running a low-cost airline out of the sultanate, as a preliminary to a future request for applications. The government hopes that the proposed carrier will lower the cost of travel on domestic routes and open further international links.

Outlook

Transport and logistics have been identified by the Omani authorities as key priorities for economic diversification, and the billions of rials already invested in port, road and air infrastructure demonstrate how seriously the government is taking the sector. Despite the falling oil price, the government has already signalled its commitment to these programmes through deficit funding, and short of a further collapse in oil prices, or a sustained slump, spending seems likely to be maintained. Just as significant for the long-term viability of the logistics sector, however, will be how successful SOLS and the OLC are in transforming the regulatory landscape and facilitating trade. It will ultimately be a combination of these “soft” measures, combined with the hard infrastructure under construction, that will determine the extent to which global investors will consider Oman as a potential link in their supply chains.

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The Report: Oman 2016

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Transport chapter from The Report: Oman 2016

Transport chapter from The Guide

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