OBSTACLES HINDER SALALAH FREE ZONE GROWTH

C O N F I D E N T I A L SECTION 01 OF 02 MUSCAT 000939

SIPDIS

SIPDIS

STATE FOR NEA/ARP, EEB/CBA
COMMERCE FOR COBERG

E.O. 12958: DECL: 10/07/2017
TAGS: ECON EINV MU
SUBJECT: OBSTACLES HINDER SALALAH FREE ZONE GROWTH

Classified By: CDA Alfred F. Fonteneau for Reasons 1.4 (b and d)

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Summary
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1. (SBU) Economic projects continue to emerge at the Salalah
Free Zone, where several anchor companies are in the process
of establishing operations. Obstacles remain in terms of
energy availability and infrastructure suitability, however,
which might stunt the free zone's further growth. A proposed
partnership with Dubai's Jebel Ali Free Zone remains stuck
under study amidst Omani concerns. End summary.

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Incentives Draw Customers...
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2. (SBU) On October 3, Econoff reviewed the development of
the Salalah Free Zone with Salalah Free Zone Company (SFZC)
Deputy CEO Mohammed al-Theeb. (Note: The industrial
development of the southern city of Salalah is an important
government objective in promoting equitable economic growth
and job opportunities throughout Oman. End note.) Theeb
noted that the zone was moving forward with its master plan
of developing two land parcels -- one approximately 800
hectares in size, the other roughly 1900 hectares. Work
continues on completing the first phase of the project, which
includes the establishment of roads and utility lines, as
well as the leveling of planned industrial plots. In
addition, the government has finalized a competitive
incentive package for prospective tenants, including a
30-year tax holiday, duty-free treatment of imports and
exports, permission for 100% foreign ownership, tax-free
repatriation of profits, and a low Omanization requirement of
10%.


3. (SBU) With these incentives in place, Theeb noted that the
three anchor tenants, U.S.-based Octal Petrochemicals,
India-based TVS Group, and government-supported Salalah
Methanol, have already begun construction on their respective
facilities. He remarked that SFZC also has finalized a
contract with a vitamin/energy bar producer and was close to
concluding a contract with a steel company, which is
interested in occupying 1.5 million square meters of land.
These industries will join another company that plans on
producing 300,000 tons of PET (polyethylene terephthalate)
resin by April 2008. Of the incentives on offer, Theeb noted
that the most attractive to clients so far has been the lower
Omanization rate requirement, which will enable these
companies to hire cheaper South Asian labor.

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...But There Are Obstacles to Overcome
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4. (SBU) Theeb identified energy as the most important
constraint hindering the growth of the free zone, as the now
tight supply of natural gas is thwarting approvals for
gas-based industrial projects. Theeb remarked that there are
currently "serious inquires" totaling $6 billion in potential
investment that need access to cost-effective gas reserves.
The government is aware of the gas shortage's impact on
Salalah's development, according to Theeb, and is making
efforts to increase the supply of gas to Salalah.


5. (SBU) Theeb added that the lack of sufficient
infrastructure in Salalah to accommodate the zone's future
growth plans could stunt growth. On the positive side, Theeb
commented that both National Economy Minister Ahmed bin Abdul
Nabi Macki and Commerce and Industry Minister Maqbool bin Ali
Sultan have been supportive of the SFZC's request for
additional infrastructure improvements. For example, the
government gave 4 million Omani rials (USD 10.4 million) to
enhance the zone's utility network, as well as an undisclosed
amount to augment water access. Nevertheless, the deputy CEO
noted that the planned 400MW power station to be constructed
for Salalah was not enough for the needs of the zone, which
anticipates needing 400MW alone in 10 years. For this
reason, the company will not accept additional clients until
it resolves the question of utility availability.


6. (C) Theeb also expressed concern about the execution of a
2006 memorandum of understanding with the Jebel Ali Free
Zone. Even though the SFZC is supportive of the partnership,
the deputy CEO believes that there are those in the
government who are not as keen on it. At issue is the 50%
stake Jebel Ali is requesting, as well as the willingness of

MUSCAT 00000939 002 OF 002


the Omani Ministry of Finance to inject 32 million Omani
rials (USD 83 million) to develop an additional 5.6 hectares
of land. Theeb speculated that there is concern in the
government that Jebel Ali will eventually take over the zone,
or conversely, use Salalah as a dumping ground for
second-tier candidates. He lamented that the interest is
there (52 out of 120 companies based in Jebel Ali are
interested in investing in Salalah),but that the length of
time it may take for the Omani government to make a decision
might cost SFZC promising investors.
FONTENEAU