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FY 1999: Oman |
CHAPTER VII. INVESTMENT CLIMATEEconomic Overview
Oman's economy runs on petroleum. In mid-1998, the Ministry of Oil and Gas estimated Oman's total recoverable proven reserves at approximately 6 billion barrels and its proven gas reserves at 17.7 trillion cubic feet (tcf). Oman officially considers that it will be able to prove up 40 tcf in the early years of the 21st century, especially in light of recent efforts to encourage companies taking new concessions to actively explore for gas, which the government will now permit to be monetized via export. The average daily oil production throughout 1997 was approximately 890,000 barrels/day, the result of a gradual increase in production over recent years. The main producer of oil is the government majority-owned Petroleum Development Oman (PDO), with a 1997 average of 842,000 b/d, followed distantly by independent Occidental Petroleum (50,000 b/d) and others.
In addition to oil, the government is beginning to develop its natural gas reserves. In late 1997 the government completed full financial close on its $6 billion liquefied natural gas (LNG) project, including upstream field development, pipelines, collector facility, and a plant to be located, north of Sur, on the coast southeast of Muscat. The 6.6 million tons/year production from this plant has been sold to interests in Korea, India and Japan. An associated $250 million urea plant, to be built jointly by Oman Oil Company and several India parastatals, is presently in the planning phase.
Government investment in infrastructure projects continues. The capital area and other population centers have modern, well- developed communications, utilities, and road systems. The fourth five-year plan, 1991-1995, called for additional investment in infrastructure outside the capital area. This focus continues in the fifth five year plan; the Sultan's "Project 2020", announced in 1996, also highlights the need for the Omani economy to diversify beyond its present reliance on petroleum, through a process of Immunization, industrialization and privatization. The government is working to develop several projects involving privatization, including a power generation project in Salalah, and a petrochemical plant and aluminum smelter in Sohar.
The Sultanate emphasizes the training and employment of Omani workers. Oman currently depends heavily on expatriates, primarily from South Asia, to fill jobs which require physical labor, clerical work, and certain technical skills. However, Oman's population is growing at a rate variously estimated at 3.5 to 4.1 percent annually; more than 50% of the national population is age 15 years or younger. The government looks to broader education on birth spacing to moderate population growth.
While these efforts have had some success, it remains the case that nearly 20,000 secondary school graduates enter the Omani job market each year; most are unable to find work due to their lack of adequate training and job skills. The government is encouraging training for Omanis as a means to increase employ- ment, and the Ministry of Social Affairs is increasingly using its authority to enforce Immunization efforts, particularly at the lower end of the wage scale.
Continued development and the population pressures have also contributed to a growing water problem. Wells in several villages in Oman's interior have dried up and groundwater aquifers are being seriously depleted. There are increasing levels of salinity in groundwater in coastal agricultural areas. Heavier than usual rainfall in 1997 along the Batinah coast brought some relief. Private sector build-operate-transfer waste water concession projects promise major quantities of treated water for the Muscat and Salalah areas. In the context of the multilateral talks which are part of the Middle East Peace Process, a Middle East Desalination Research Center officially opened in 1997, with funding from Oman, the United States, Japan, Israel, Korea, and by the European Union.
In addition to the several major projects cited above, Oman is developing light manufacturing industries. In order to provide facilities for these efforts, the Public Authority for Industrial Estates manages a number of industrial estates throughout the country. The original and most developed is Rusayl Industrial Estate, located on the outskirts of the capital. As of late 1997, there were over 93 small factories operating at Rusayl, with another 28 operating at the other estates located in Salalah (in the southern Dhofar region), Sohar (north of Muscat near the UAE border), and Nizwa (inland of Muscat). Others are planned for Sur, Buraimi, and Khasab.
The dramatic drop-off in 1998 in the Muscat Securities Market (MSM), which lost 40 % of its value in 1998 through October, hurt many small and first-time investors deeply and undermined local confidence in the economy. The MSM, which was the world's best performing securities market in 1997, dropped from an all-time high of 509 pts in February 1998 to a low of 256 in September, and remained below the 300 level at early November 1998. Observers have attributed the MSM drop-off to be the result of overzealous speculation and over-valued offerings combined with the impact of the Asian financial crisis and the oil price slump, which severely affected government liquidity in 1998.
Section A
A. 1. Openness to Foreign Investment
The Sultanate's emphasis on diversification has opened the country to foreign participation in the economy, particularly in the form of joint ventures. Oman is actively seeking private foreign investors, particularly in the industrial field. Those investors who allow technology transfer and provide employment and training for Omanis are particularly welcome. Omani law relating to foreign investment is contained in the Foreign Business Investment Law of 1974, as amended. The current Minister of Commerce and Industry, H.E. Maqbool Ail Sultan, backs further legal and regulatory reform aimed at attracting foreign investment. A ministry spin-off, the Omani Centre for Investment Promotion and Export Development (OCIPED), officially opened in early 1997 to coordinate and smooth the path for business formation and private sector project development. It remains to be seen if other ministries will cooperate with Occupier's goal of providing firms with "one-stop shopping" for needed governmental approvals. OCIPED will also provide investors with information, currently scattered and often contradictory. OCIPED has reached out to international sources of data and assistance, including Scottish Enterprises and the (U.S.) International Executive Service Corps.
Registration of joint ventures with minority foreign ownership requires no governmental screening other than that common to all registrants. The foreign firm must supply documentary evidence of its registration in its home country, its actual headquarters location, capital, and principal activities. If a subsidiary, it must demonstrate its authority to enter into the joint venture. Registration of ventures with from 50 to 65 pct foreign ownership must seek the approval of the Ministry of Commerce and Industry (MC&I). Except in the petroleum sector, new entities with over 65 pct foreign ownership to wholly foreign-owned entities would require Council of Ministers approval of a MC&I recommendation. In theory, these would be granted to major projects furthering national objectives laid down in the current five-year plan. In practice, discriminatory tax rates (after initial tax holidays) discourage majority foreign-held enterprise formation. There have been no such applications by wholly foreign-owned firms.
There has been limited experience with the foreign investment screening mechanism. To date, it appears to be routine and non-discriminatory. Governmental policy is to grant investment licenses only to one project engaging in a specific advanced technology manufacturing process.
New wholly foreign-owned entrants are barred from professional services areas, such as the engineering, architectural, legal, or accounting fields. Existing professional service firms were, in 1996, given time frames in which they had to have Omani partners; e.g., five years for accounting firms. An exception exists for a professional services firm with a sub- specialty needed by the country; it appears such a firm would not be allowed to compete with local firms. 1997 witnessed the brief emergence of the Oman Investment and Savings Bank, created from former ANZ Grindlay's branches. After four months of operation, it took over the less amply capitalized Commercial Bank of Oman (CBO). The merged bank continues under the latter's name. In mid-1997, separate groups of founders established the Alliance Housing Bank, a competitor to the state-owned Oman Housing Bank for the local mortgage market, which had one of the largest ever public issues in the Middle East following its public offering in 1997. 1998 also witnessed the merger of the Bank of Oman, Bahrain and Kuwait (BOBK) with Commercial Bank of Oman.
Tax rates on non-petroleum, foreign-owned firms were lowered in October 1996, effective January 1997, for all except those firms with greater than 90 pct foreign ownership. (Concession terms govern taxation and royalties on petroleum producers.) Labor law and the Oman tax law also affect a foreigner's ability to do business in Oman. Since there is no complete body of regulations codifying these laws and many government decisions are made on an ad hoc basis, investors should consider engaging local counsel.
All privatization proposals currently on the table consist of joint ventures between Omani and foreign investors. Privatization Decree 42/96 of June 8, 1996, requires that a firm receiving an award under the terms of the decree be 51% Omani-owned. The firm has to be specifically created for the purposes of the award. The Government is not obligated to buy back any of the firm's output. However, it appears that the government will guarantee a minimum tariff, set maximum tariffs, and share in profits when such exceed 20 %. Again, by privatization, Oman refers not only to the conversion of a state-owned or mixed enterprise to a private sector firm, but also to the establishment of any new firm providing a commercial service that had previously been provided by the state, such as electricity. One approach to partial conversion, which may be applied to the state-owned telephone company, the General Telecommunications Organization (GTO), is that the firm sell off 40 pct of its stocks to the general Omani public. No single person can purchase more than 10 pct of new issues or newly hold more than 10 pct of shares.
Industrial establishments with a total capital of $52,000 or more must be licensed by the MC&I. In addition, a foreign firm interested in establishing a company in Oman must obtain approval from other ministries, such as the Ministry of Regional Municipalities and Environment. Foreign workers must obtain work permits and residency permits from the Ministry of Social Affairs and Labor and Royal Oman Police, Immigration Office.
For entry requirements, see Section 10, Business Travel.
Oman's investment incentives focus on industrial development and include the following:
-- Five year, one-time renewable tax holiday -- Low interest loans from the Oman Development Bank (now only for smaller firms) -- Low interest loans from the Ministry of Commerce and Industry -- Subsidized plant facilities and utilities at the industrial estates -- Ministry of Commerce and Industry-supplied feasibility studies -- Exemption from customs duties on equipment and raw materials during the first several years of a project -- Occasional imposition or increase of protective customs tariffs on similar imported goods.
A. 2. Right to Private Ownership and Establishment
Subject to the licensing and taxation previously noted, foreign and domestic entities can engage in all legal forms of remunera- tive activity. Government entities do not compete with the private sector, and it is general public policy to privatize public utilities.
A. 3. Protection of Property Rights
Mortgages exist. Real property rights are recognized and en- forced, and records kept. There is no contemporary history of arbitrary seizures of land. Foreign persons/firms may lease but not own real estate.
Oman has a trademark law. Trademarks must be registered and noted in the Official Gazette through the Ministry of Commerce and Industry. Local legal firms can assist companies in registration of trademarks. In mid-1996, Oman enacted copyright protection but did not announce a timetable for establishing registration and enforcement mechanisms until a ministerial decree in April 1998, which extended protection to foreign copyrighted literary, technical, or scientific works; works of the graphic and plastic arts; and sound and video recordings. In order to receive protection, a foreign-copyrighted work must be registered with the Omani government by depositing a copy of the work with the government and paying a fee. No such copyright protection extends to computer software, which is sold in pirated form throughout Oman to the extent that original, licensed software is difficult to find in stores. Also in 1998, the government announced that vendors of audio and video cassettes must close out all stock of copied or pirated cassettes before January 1, 1999, or face closure of their shops. Oman has joined the World Intellectual Property Organization (WIPO), and asked WIPO to register Oman as a signatory to the Paris and Berne convention on intellectual protection, which notably do not mention software protection. The Omani government says it intends to be fully TRIPS- compliant by January, 2000, at the latest.
A. 4. Performance Requirements/Incentives
All enterprises operating in Oman are expected to comply with Omani laws. The law applies equally to all business representa- tives. Matters such as the replacement of expatriate workers with Omanis, the development of Oman's image as a quality producer, and protection of the environment all affect govern- ment regulations on firms. In principle, the Government recognizes the market is the most efficient business regulator, but tries to protect Omanis from market dislocations.
Under the Industry Organization and Encouragement Law of 1978, incentives are available to licensed industrial installations on the recommendation of the Industrial Development Committee. "Industrial installations" include not only those for the conversion of raw materials and semi-finished parts into manufactured products, but also mechanized assembly and packaging activities. Firms involved in agriculture and fishing are also included.
Companies must have at least 35 pct Omani ownership to qualify for these incentives. In addition, companies selling locally produced goods are given priority for Government purchases, provided the local products meet standard quality specifications and their prices do not exceed those of similar imported goods by more than 10 pct. This incentive is available to Omani-owned commercial enterprises, as well as foreign industrial producers in joint ventures with local concerns. The government offers subsidies to offset the cost of feasibility and similar studies if the proposed project is considered sufficiently important to the national economy.
Government policy favors maintaining the present level of in- centives. Only in the most general sense of business plan objectives does proprietary information have to be provided to qualify for incentives.
A. 5. Regulatory System: Laws and Procedures
The government officially supports the free market. The govern- ment recognizes that its regulatory environment hampers investment and commercial activity. In addition to the ownership, visa, and agency requirements already mentioned, general licensing of business activities can be time-consuming and complicated. The absence of a particular clearance will stall the entire process. For example, processing shipments in and out of the Mina Qaboos port can add significantly to the amount of time it takes to get goods to market or inputs to a project. The Ministry of Commerce and Industry seeks to implement a "one stop shopping" concept through the Omani Centre for Investment Promotion and Export Development (OCIPED)that opened in 1997. OCIPED aims at cutting through red tape and providing investors in new or expansion projects with the information and approvals which are all to often difficult to obtain. However, as of late 1998, it has yet to secure the proper ministerial support in order to perform its intended function as a "one-stop shop."
A. 6. Corruption
Many ministers directly or indirectly mix their public and private business interests. Article 53 of the Basic Statute of the State, issued in November 1996, compelled ministers to resign their offices in public share holding enterprises. Most mega contracts are awarded through a rigorous, typically slow, but generally clean tender process. Contracts awarded through the tender process internal to a given ministry appear more suscepti- ble to influence exerted by agents. This culture affects the decisions of U.S. firms.
Contract participation or equity shares are standard rewards for favorable consideration. In the past, Sultan Qaboos has dismissed some ministers for egregious corruption.
A. 7. Labor
Oman relies heavily on expatriate labor, primarily from India, Bangladesh, Pakistan and Sri Lanka, to perform menial and physi- cally taxing tasks as well as to fill managerial positions. Omani labor law stipulates basic practices to safeguard workers. Wages for Omanis are set by employers within guidelines delineated by the Ministry of Social Affairs and Labor. Work rules must be approved by the Ministry and posted conspicuously in the work place. The workweek is five days in the public sector and generally five and one-half days in the private sector. The labor law and subsequent regulations also detail requirements for occupational safety and access to medical treatment. Non-Omanis in retail, personal service outlets, construction, and in the petroleum fields typically work up to seven days a week, depending on their contract.
The replacement of expatriate labor by Omanis is a high priority for the government. Foreign nationals may not be employed as technical assistants, guards, light vehicle drivers, Arabic typists, agricultural workers, forklift or mixer operators, or public relations officers among others unless the employer can show that there are no Omanis available for the positions. Taxi drivers and fishermen must be Omanis. The government sought in 1996 to "Immunize" water truck drivers. In late 1996 the Royal Oman Police required that all employees submitting documents for customs clearance and release of shipments be Omanis. With at best 19 pct of the industrial work force of Omani nationality, a 1996 deadline for industry achieving 35 pct Immunization was postponed to the close of 1997, and has sub- sequently been extended to December, 1998.
In 1994, Oman became a member of the International Labor Organization (ILO).
A. 8. Efficient Capital Markets and Portfolio Investment
As noted earlier, there are no restrictions in Oman on the flow of capital and the repatriation of profits. Access to Oman's limited commercial credit resources is open to Omani firms with some foreign participation. Joint stock companies with a capital- ization of more than U.S. $360,000 must be publicly traded on the Muscat Securities Market, providing an alternative and apparently successful means to raise capital. Oman is encouraging, and tax law currently favors, private firms going public, and offering up to 49 pct equity to foreign investors.
The Sultanate has two loan programs to promote investment. The Ministry of Commerce and Industry runs one designed to promote industrial investment. Formerly interest free, the program now charges 4 pct interest, with long repayment terms. MC&I loans will match equity contributions in the Muscat capital area, or 1.25 times equity for other locations. Projects with a high percentage of local content or employing large numbers of Omanis are given priority, as are tourism projects outside the capital area.
The Oman Development Bank also administers a loan program to support development of smaller loans to industry, agriculture, fisheries, petroleum, mining, and services. Various limits and terms are ascribed, depending on the type and size of the project.
Foreigners may invest directly in the Muscat Securities Market (MSM) as long as this is done through a local broker. Reportedly foreign investors, particularly from GCC countries, were among the first to pull out of the MSM once the market began to decline in 1998.
Oman's banking sector is stable. The Central Bank has raised the capital adequacy requirements to 12 pct, 50 pct higher than the international standard. Four bank mergers have reduced the number of banks in what is still a somewhat over-banked market. Because there are still too many banks, most are small. The five largest have combined assets of USD 2.1 billion. The sector's non- performing loans are primarily consumer loans. The Central Bank has ordered banks to limit consumer lending to 25 pct of their lending, although banks find strong consumer demand and inadequate corporate demand. The Central Bank moved to limit endemic stock market speculation in 1997, particularly in the many new issues, by restraining bank loans taken to fund stock purchases to an amount matching the borrower's own funds going to share purchases.
Most major businessmen and senior government officials are well- known to each other. These individuals are shareholders in a broad range of commercial ventures and serve as directors of various firms. This system is not intended to restrict foreign investment. In such a community of interwoven relationships, the concept of a hostile takeover is both unknown and unlikely.
A. 9. Conversion and Transfer Policies
Oman has no restrictions or reporting requirements on private capital movements into or out of the country. The government has established one offset program connected to a British sale of naval vessels to Oman. Interestingly, there are no restrictions on the nationality of joint ventures established under this program. The first joint venture set up under the offset program was with a U.S. company which now manufactures wellhead equipment at the Rusayl Industrial Estate.
The Omani Rial is pegged to the dollar at a rate of $1 equals 0.3849 Omani Rials. The Rial was devalued in 1986 due to the collapse in oil prices. The government, however, did not judge the devaluation productive. The government scotched rumors of a devaluation in September 1998 with an authoritative statement from the Minister of National Economy, ruling out the possibility of a devaluation.
A. 10. Expropriation and Compensation
The dollar value of U.S. investment in Oman is small but growing. To the knowledge of the U.S. Embassy, there have been no invest- ment disputes involving American companies over the past several years. Oman's belief in a free market economy and desire for increased foreign investment and technology transfer make expropriation or nationalization extremely unlikely. Currently, Oman is moving towards a free market economy with its modest privatization program.
A. 11. Dispute Settlement
In May 1995 Oman became a party to the International Center for the Settlement of Investment Disputes (ICSID). The ultimate adjudicator of business disputes within Oman is the Commercial Court, which was reorganized in mid-1997 from the former Authority for Settlement of Commercial Disputes (ASCD). The Commercial Court now has jurisdiction over most tax and labor cases. The Commercial Court can issue orders of enforcement of decisions (the ASCD was limited to issuing orders of recognition of decisions). The Commercial Court can accept cases against governmental bodies, which the ASCD was unable to do. In such cases, however, the Commercial Court can issue but not enforce rulings against the government. Many practical details remain to be clarified. General legal opinion believes the Court will not overturn international arbitration clauses written into contracts. However, the Sultanate is insisting that all foreign suppliers accept the Commercial Court as the sites for arbitration.
The Chamber of Commerce and Industry has an arbitration commit- tee to which parties to a dispute may refer their case for less formal and smaller matters. Minor disputes are also handled by local authorities such as walis, the district governors appointed by the central government. While Oman is a member of the GCC Arbitration Center, located in Bahrain, that center has yet to establish a track record.
Decisions of the Commercial Court are final if the value of the case does not exceed U.S. $26,000. A court of appeals exists for cases where the sum disputed is greater, but its decisions are final. There exists, however, the right of review after a judgment is issued in cases where new documents are discovered or irregularities (forgery, perjury) found. There is no pro- vision for the publication of decisions.
Business representatives generally found that the former ASCD's use of general principles of equity in deciding cases not directly covered by Omani commercial law was fair. There have been complaints that powerful businessmen utilized their connections to secure an unfair advantage.
Oman also maintains other judicial bodies to adjudicate various disputes. The Labor Welfare Board under the Ministry of Social Affairs and Labor hears disputes regarding severance pay, wages, benefits, etc.; it is not clear which matters may now fall under the jurisdiction of the Commercial Court. The Real Estate Committee hears tenant-landlord disputes, the Police Committee deals essentially with traffic matters, and the Magis- trate Court handles misdemeanors and criminal matters. Lastly, the Shari'a Court deals with family law, such as wills, divorces, personal and some criminal matters. All litigation and hearings must be conducted in Arabic.
A. 12. Political Violence
Politically-motivated violence is unknown in Oman. There is no political, economic or social issue likely to engenda civil disturbances.
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Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.