Identifier
Created
Classification
Origin
04MUSCAT1942
2004-11-03 09:47:00
CONFIDENTIAL//NOFORN
Embassy Muscat
Cable title:  

AIRPORT PRIVATIZATION GROUNDED

Tags:  EAIR EINV EFIN PGOV ECON MU 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 MUSCAT 001942 

SIPDIS

SENSITIVE

STATE FOR EB/TRA, NEA/RA, AND NEA/ARPI
USDOC FOR 4520/ITA/MAC/AMESA/OME/MTALAAT
ROME FOR FAA/GJOYNER

E.O. 12958: DECL: 11/02/2014
TAGS: EAIR EINV EFIN PGOV ECON MU
SUBJECT: AIRPORT PRIVATIZATION GROUNDED


Classified By: Ambassador Richard L. Baltimore III
for reasons 1.4 (b) and (d).

Contains sensitive business information. Please handle
accordingly.

C O N F I D E N T I A L SECTION 01 OF 02 MUSCAT 001942

SIPDIS

SENSITIVE

STATE FOR EB/TRA, NEA/RA, AND NEA/ARPI
USDOC FOR 4520/ITA/MAC/AMESA/OME/MTALAAT
ROME FOR FAA/GJOYNER

E.O. 12958: DECL: 11/02/2014
TAGS: EAIR EINV EFIN PGOV ECON MU
SUBJECT: AIRPORT PRIVATIZATION GROUNDED


Classified By: Ambassador Richard L. Baltimore III
for reasons 1.4 (b) and (d).

Contains sensitive business information. Please handle
accordingly.


1. (SBU) Summary: A long-expected pullout by British Airports
Authority from the privatized consortium managing Oman's
international airports means that the government will now run
the airports in Muscat and Salalah. One of the alleged key
sticking points was the failure of the government and the
private consortium to agree on the financial terms for
constructing a new passenger terminal in Muscat. Originally
slated for completion by 2007, the new terminal likely will
now be erected on a longer timetable under government
control. A new 100 percent Omani government-owned company
will be formed to assume control of the airports; the
government has agreed to buy out the shares held by the
private consortium. Most staff will be retained by the new
company, including administrators and consultants from the
previous consortium who will be invited to stay on for the
first six months during a transition phase. End Summary.

--------------
Rough Landing
--------------


2. (SBU) Airport management had long been viewed as an area
where privatization could proceed in modernizing Oman's
transport infrastructure and achieving key efficiencies in a
growing regional marketplace. On September 10, 2001, a
consortium led by the British Airports Authority (BAA) and
the local firm Bahwan Trading Company (BTC) established the
Oman Airports Management Company (OAMC). The largest
shareholder in OAMC was an entity called Capital Aviation
Services (75 percent shareholding),with the remaining shares
held by the Omani government and Oman Aviation Services.
Operating under a 25-year license granted in January 2002,
OAMC's mandate was to modernize the existing airport
facilities at Seeb International Airport in Muscat and
Salalah International Airport in southern Oman, and lay the

groundwork for the construction of a new passenger terminal
at Seeb Airport by 2007. On October 20, 2004 newspaper
headlines declared that Oman's privatization of airport
management had come to an end with the pullout of BAA from
OAMC, reportedly due to substantial disagreement over the
financial terms of constructing the new terminal.
Administration of the airports should revert to the
government within 30 days according to the terms of the
original concession agreement.

--------------
Company Never Truly Took Flight
--------------


3. (C) General Manager Alex Borges of BTC (strictly protect)
told Econoff that the blame lies squarely on the government's
shoulders for failing to approve a single expansion plan
submitted by OAMC in slightly over two years of operation.
Whereas the contract called for renegotiation clauses,
company insiders claim that the government never appreciated
the increased aviation security costs associated with the
September 11 terrorist attacks and the resulting decline in
Middle East passenger traffic, but rather showed complete
unwillingness to accept any long-term proposal floated by the
company. Borges pointed to the Finance Ministry in
particular as being uncompromising during the negotiations.


4. (U) In a local newspaper interview, OAMC CEO Colin Hobbs
expressed his own frustration over the inability of the
government to understand the scarcity of commercial financing
for expanding Middle Eastern airports in the wake of
September 11th. In addition, Hobbs intimated that Omani
officials no doubt saw major airport projects being carried
out by the governments of Doha and Dubai and decided to force
OAMC's hand in order to reassume control and proceed with a
publicly financed terminal project. Hobbs echoed separate
comments from Borges in saying that OAMC succeeded in
operating the airports effectively, reducing their costs, and
enhancing their commercial viability; the only thorny issue
in the end was building the new terminal.

--------------
The Flying Public Demanded More Change
--------------


5. (SBU) News of the failed privatization generated mixed
reaction around Muscat. The business world was not greatly
surprised that OAMC would fail to deliver on airport
expansion after a series of difficult circumstances for the
regional tourism industry (e.g., September 11, OEF and OIF,
Bali bombings, SARS). The local and regional media gave the
matter greater attention, particularly given the
ramifications for the government's privatization and tourism
promotion efforts.


6. (SBU) Average Omanis were, if anything, pleased with the
news. Most Omanis we have spoken to comment that apart from
a significant facelift for the Muscat Duty Free shopping
area, there were no major visible upgrades made to the
existing terminal at Seeb under OAMC's tenure. Moreover, the
Omani public's skepticism toward the government is only
exceeded by its distrust of foreign companies and the local
burgher class represented by family firms such as the
Bahwan's. Much of the public therefore believes OAMC was
likely unfairly benefiting from its deal with the government,
and credits the Ministry of Transportation for finally
putting an end to it. These factors gave OAMC a serious PR
headache, even as it tried to parlay public dissatisfaction
with the existing terminal into some sort of accord on
constructing a brand new terminal. In the end this balancing
act proved too difficult and costly for OAMC, leading to the
company's dissolution.

--------------
The Government's Thrust
--------------


7. (C) For its part, the government believes that OAMC never
fully delivered on its core promises of upgrading facilities
and laying out a feasible plan for future airport expansion.
Acting Director General of Civil Aviation and Meteorology
Sultan al-Saifi (strictly protect) described to Econoff the
current situation, whereby a 100 percent Omani
government-owned company called OMC will assume control of
the airports. Following the most recent 90-day period of
discussions, the government agreed to buy the shares of
Capital Aviation Services. The original handover date of
November 17 was accelerated because of Eid holidays and
National Day celebrations, and the assets will now change
hands no later than November 10. Nearly all staff members of
OAMC are expected to remain with the government company,
including technical and managerial personnel from BAA who may
stay aboard for up to six months. Plans will move forward
for a new terminal at Seeb airport under government guidance,
and al-Saifi left open the possibility that private investors
might be allowed to take equity stakes in future airport
development projects.

--------------
Comment
--------------


8. (SBU) Beyond the finger-pointing and the disappointment on
both sides, this development casts a shadow over the pace and
scope of privatization in Oman. Earlier hailed as a model of
privatization for the GCC, Oman's airport management
experiment appears for now to have failed, or at least been
dealt a significant set-back. Bureaucratic obstacles remain
in other privatization fields as well. One prominent American
businessman confided that the government does not want to see
a foreign company make too much money in a privatized
venture, lest it be perceived as a net loss for the Omani
people. Other commentators view the airport development as a
"black eye" for Oman's investment climate, even if it is more
a perception than the overall reality.
BALTIMORE