Oman is taking steps to attract investors to the sultanate in a bid to diversify its economy away from a reliance on hydrocarbons. These include updating the legal framework for investment while continuing to stress the value of the country’s free zones and economic zones. Foreign direct investment (FDI) inflows to Oman grew to an estimated $822m in 2015, up from $739m in 2014, according to the UN Conference on Trade and Development. However, the levels seen over the past few years pale in comparison to inflows in the first decade of the millennium, when FDI averaged over $2bn per year, and Oman is eager to see the reversal of this trend.
“The sultanate is fully aware of the cut-throat competition in the market to attract investments,” Said bin Saleh Al Kiyumi, chairman of the Oman Chamber of Commerce and Industry, said at the Invest in Oman Forum in September 2016. “It also realises that the progress made in this area is closely linked to the incentives and facilities provided to investors.” Al Kiyumi also cited Oman’s geographic location, modern infrastructure, qualified human capital and open investment laws as major strengths.
The role of the private sector is a perennial topic in the myriad conferences and consulting reports that regularly assess the direction of GCC economies, and the issues they face are similar in many ways. The government’s ability to drive the economy using oil revenues gives it a dominant position, crowding out private investment. Generous public salaries remove incentives to start new firms. Bureaucratic inefficiencies hamper business development. Inadequate legal frameworks in areas like bankruptcy deter investors.
GCC countries have thus set about improving their business environments in recent years, focusing on where the most effective alterations can be made – usually investment laws and regulations. Progress has been sporadic, and public spending and salaries continue to play an outsized role. State jobs, with their high salaries and generous benefits, are still the top choice for young, educated Omanis, leaving a dearth of suitable candidates for the private sector, which has long looked abroad for its human capital.
Part of the challenge is public perception of certain professions. “Omanis need to change their mindsets and be more willing to work in certain areas that previously would not have been considered, such as upper-end technical and vocational jobs,” Warith Al Kharusi, executive director of Oman’s Al Safwa Group & Partners, which is involved in restaurants, catering and foodstuffs, told OBG. “These are the areas where future economic growth and primary opportunities exist.”
The oil price decline that swelled the budget deficit has brought fresh impetus to change such attitudes. Slashing public payrolls, however, carries a political cost, so the approach has been one of gentle persuasion. In 2016, for example, the government began offering public servants a year’s unpaid leave to set up small and medium-sized enterprises (SMEs), guaranteeing their job should they wish to return thereafter. Functionaries who finish three to 15 years of service may resign and receive a year’s salary to start an SME. The impact on the public sector wage bill, however, is still unclear.
Removing The Stops
Another approach is to remove obstacles to start-up activity. If Oman wants the private sector to lead the way towards economic diversification, it needs to provide an enabling environment for that to happen. There are some encouraging signs. In May 2016 the Ministry of Commerce and Industry (MoCI) scrapped a OR150,000 ($389,000) capital requirement for new businesses, though investors must still seek a local partner when setting up shop. A one-stop shop for new companies, launched by the MoCI in the early 2000s, has evolved into the Invest Easy online portal, an e-services initiative launched in December 2014. Invest Easy registered more than 22,000 new companies in its first year of operation, compared to 4000 per year previously. The number of processes involved in starting a company was cut from 18 to six. An increasing number of businesses can start operations without a licence in 69 areas of activity.
“The key to diversification is making investing in Oman as easy as possible, as we are competing for investment with many other countries,” Reda Juma Mohammed Al Saleh, managing director of Lama Group, told OBG. “This means adjusting our labour laws and immigration laws to make them as competitive as possible.” Progress is being made. In the World Bank’s “Doing Business 2017” report, Oman climbed three places, to 66th out of 190 countries in the ease of doing business category. Yet further reforms are needed if it is to keep pace with similar efforts across the region.
Two major pieces of legislation – one concerning FDI and the other a new mining law – were under review by the Ministry of Legal Affairs as of late 2016, according to Ahmed bin Hassan Al Dheeb, undersecretary at the Ministry of Commerce and Industry. The new FDI law is expected to allow for 100% foreign ownership of companies throughout the sultanate – currently local partners are required to hold at least 35% – and is likely to offer a slew of other incentives for investors.
The effort to increase FDI includes targeting sectors that hold significant growth potential. Oman’s ninth five-year development plan, which covers 2016-20, aims to reduce the direct contribution of oil to GDP from 44% to 26% by highlighting five priority development sectors: mining, fisheries, manufacturing, tourism, and transport and logistics. To this end, the second phase of the National Programme for Enhancing Economic Diversification – a gathering of public sector representatives and business leaders aimed at defining the strategic approach for the development of these sectors and Oman’s broader economic diversification plans for the next five years – was concluded in October 2016.
Some of these sectors have already seen legislative overhauls. For example, a new tourism law came into force in September 2016, focused on expanding the role of SMEs in the sector, as well as making it easier for foreign investors to develop projects.
The mining sector is also receiving attention, with draft legislation being considered that would update existing laws from 2003. Hilal Al Busaidi, chairman and CEO of the Public Authority for Mining, told OBG that the new law would be based on local content, with some utilisation of international legislation from countries with well-established mining frameworks. The law is expected to be passed early in 2017, and will address issues including the short mining licence period and lack of clarity.
Oman’s free zones and economic zones are also playing a central role in the drive to increase investment. Three of the four zones are located in close proximity to the country’s major ports in Sohar, Duqm and Salalah, which supports the sultanate’s aim to become a logistics centre. The fourth, Al Mazyunah, is on the border with Yemen.
All four zones reported numerous new investments during 2016. In particular, the Duqm Special Economic Zone – which was recently expanded from 1750 to 2000 sq km – has seen a flurry of announcements from international companies about significant investments.
“It is now the time for the Omani private sector to step up and usher in a new period of economic development and diversification,” Dhafir Al Shanfari, CEO of the Omani Authority for Partnership for Development, told OBG. “The government will be playing its part in this by providing the conditions necessary for the private sector to flourish.”