2008 OMAN INVESTMENT CLIMATE STATEMENT: PART I

UNCLAS MUSCAT 000099 SIPDIS SIPDIS STATE FOR NEA/ARP, EEB/IFD/OIA, EEB/CBA STATE PASS TO USTR COMMERCE FOR ITA THOFFMAN TREASURY FOR OTA VALVO E.O. 12958: N/A TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC MU SUBJECT: 2008 OMAN INVESTMENT CLIMATE STATEMENT: PART I REF: 07 STATE 158802 The following message contains the first part of the 2008 Oman Investment Climate Statement. The second part will be transmitted septel. -------------- Economic Overview -------------- Oman's economy is based primarily on petroleum and natural gas, which are expected to account for 78% of the government's revenue in calendar year 2008. Oman's proven recoverable oil reserves are estimated at 4.8 billion barrels, though the Ministry of Oil and Gas estimates that there are potentially 38 billion barrels of recoverable oil. Oman's oil production for the first ten months of 2007 averaged 707,500 barrels per day (bpd),a 4.5% drop from the 740,700 bpd over the same period in 2006. The government has estimated, for budgetary purposes, production at 790,000 bpd over the course of 2008. The Oil and Gas Ministry projects that the current dip in production, which has fallen from close to 1 million bpd in 2000, will reverse this year. The government has committed to making significant investments in enhanced oil recovery techniques on behalf of majority state-owned Petroleum Development Oman (PDO) during the course of the current five-year economic plan (2006-2011). In 2008, the government will invest $1.74 billion in petroleum production. PDO, in partnership with Royal Dutch Shell, controls 90 percent of reserves and the lion's share of total production. Over the course of 2007, PDO invested approximately $2 billion in its operations. Further PDO exploration will result in production increases in smaller fields, rather than larger ones. The company focuses on using more nimble foreign operators to obtain better production from its mature fields, such as the Harweel cluster, which is geographically difficult to produce, and the Daleel cluster, which produces only about 15,000 bpd. Complementing PDO's production is U.S.-owned Occidental Petroleum, which is investing over $3 billion in its Mukhaizna field. The government expects the investment will result in an increase in the field's production from 10,000 bpd to 150,000 bpd over the next several years. Occidental is Oman's second largest producer, with a current production rate of 50,000 bpd. The combined efforts by PDO and Occidental could potentially boost production numbers to approximately 900,000 bpd by 2011. Oman has developed its natural gas industry to the point where liquefied natural gas (LNG) will account for an estimated 11% of government revenues in 2008. Oman LNG began operations in April 2000 with two 3.3 metric ton per annum (MTPA) LNG production trains. The addition of a train has brought Oman's total production capacity to 10.3 MTPA, representing approximately 8% of LNG shipped worldwide annually. Off-take of much of the production has been contracted to Japanese, Korean, and Spanish buyers on a long-term basis. A September 2004 agreement guaranteed a long-term natural gas supply from the government to Qalhat LNG, which operates the third train, and outlined the terms of an investment partnership between Oman LNG, Qalhat LNG, and the Spanish firm Union Fenosa. As a result of investment in this sector, gas production is up 2.6% over the first 10 months of 2007 compared to the same period in 2006. Six LNG transport vessels currently operate under Omani flag, with three other vessels expected to join the fleet by 2008. With a significant amount of its gas committed to long-term LNG export contracts, strong concerns have been raised about the availability of sufficient natural gas reserves to power Oman's industrialization plans. Oman's gas reserves were revised downward from 30.3 trillion cubic feet (tcf) at the end of 2004, to 24.2 tcf in 2005, according to the Ministry of Oil and Gas. Official estimates claim that potential gas reserves stand at 33.8 tcf, reflecting efforts to encourage international companies to actively explore for gas. The government, which has allocated over $1 billion in the 2008 budget to invest in gas production capabilities, awarded a tender to BP in December 2006 for the exploration of a deep gas field recently discovered by PDO that potentially holds 10 tcf of recoverable gas. BP will invest $650 million to develop the Khazan and Makaram gas fields over the next five years. With the new fields being developed by British Gas along the Saudi border, the government is optimistic that indigenous reserves will increase by a sufficient amount to narrow the gap between projected supply and forecasted demand. Oman, which exported gas to the United Arab Emirates, now will import gas in 2008 to support its own growing industrialization initiatives. The government is also investigating the use of imported coal as an additional source of energy. With limited energy reserves, Oman is focused on diversifying its economy away from oil and gas production. The long-term 'Oman Vision 2020' development plan highlighted the need for the Omani economy to diversify through a process of Omanization, industrialization and privatization. The largest single industrial investment target is the port city of Sohar, near the UAE border. It has witnessed approximately $14 billion in government investment alone in the financing of several industrial projects, including a refinery, polypropylene plant, steel rolling mill, a fertilizer plant, and an aluminum smelter. The permitted level of foreign ownership in privatization projects is 70 percent, with up to 100 percent in certain cases. The government has proceeded with several major privatization programs, including power generation projects in Salalah, Sohar, Barka, Rusayl, and the Sharqiyah region, and a water production plant in Sur. Other power and water generation projects are scheduled for Salalah, Barka, and Duqm, and is proceeding with plans to privatize its wastewater and solid waste management operations. Oman is developing its light manufacturing sector through industrial estates managed by the Public Establishment for Industrial Estates (PEIE). More than 235 factories operate in the industrial estates, with a total investment of $1.3 billion. The most developed is Rusayl Industrial Estate, located on the outskirts of the capital. The government is looking to further promote small and medium-sized enterprise development through the establishment of a SME Directorate General in the Ministry of Commerce and Industry and its association with the Sanad and Intilaaqah ("take-off") programs. These initiatives provide counseling and training assistance for microbusiness formation. In addition to industrialization efforts, Oman is aggressively marketing itself as an upscale, environmentally conscious tourist destination. Through aggressive marketing campaigns and improved infrastructure, Oman hopes to triple the industry's one percent contribution to GDP and eventually create over 114,000 tourism-related jobs. International investors are taking advantage of significant improvements in local infrastructure to develop ambitious new tourist projects. Investors hope to lure 3 million visitors annually with multi-faceted resort complexes located in Muscat, Sawadi, Yiti, Sifah, and Salalah. The Ministry of Tourism, through OMRAN, the government's tourism investment company, is moving forward on plans to construct 16 hotels and a convention center within the next several years, which will alleviate the chronic hotel room shortages in Muscat. OMRAN primarily serves as the government's investor in tourism projects, either as the sole investor or in partnership with the private sector. The Wave, which represents the first opportunity for non-GCC residents to purchase freehold property, is under construction, as are multi-hotel complexes near the towns of Yiti and Sifah, just south of the capital. Blue City recently initiated construction, and the government is planning to finish a three-hotel convention center complex by ¶2010. Complementing Oman's development as a tourist destination is the government's commitment to fund the expansion plans of Oman Air. To support the expected increases in air traffic, the government will build a second runway and much-needed new terminal at Muscat International Airport by 2011, a new terminal and taxiway at Salalah Airport by 2010, and new airports at Sohar, Ras al-Hadd, and Duqm. Oman is focusing on its port infrastructure as well. Two of Oman's principal ports, Sohar and Salalah, are aggressively moving forward on expansion of their respective operations. The Port of Sohar, a 50-50 joint venture between the Sultanate and the Port of Rotterdam, anchors the $14 billion industrial development planned for the region. Oman is confident that the Port's advantageous location outside the Strait of Hormuz, approximately 160 kilometers by road east of Dubai, and within 300km of three large gas reserves will lend to its success. In addition to its berths for industrial liquids, Sohar is positioning itself as Oman's largest container port with over 7 square kilometers of land and a projected 10 dedicated shipping berths. The Port of Salalah is a key container transshipment hub for Maersk and its parent company, A.P. Moller (APM). Operated by Salalah Port Services (SPS),which is 30% owned by APM Terminals and 20% owned by the government (with the remaining 50% owned by pension funds, Omani corporations, and private investors),the port handled approximately 2.5 million 20-foot equivalent units (TEUs) in 2007. The port is adding two berths to the existing four in operation. Once completed, the $234 million expansion, shared roughly evenly between SPS and the Omani government, will increase capacity by 1.8 million TEUs, bringing total capacity to 4.38 million TEUs. The government is promoting the free zone adjacent to the port with a package of incentives and is in partnership discussions with the Jebel Ali Free Zone Authority in Dubai. Gas availability, however, may hinder the pace of the zone's expansion. The Omani government is developing a port at Duqm, a lightly populated area along the Arabian Sea. Master plans call for the construction of a drydock facility, oil refinery, petrochemicals complex and fish processing center to compete with Dubai's Jebel Ali port complex. The Duqm development plan also calls for the construction of an airport to facilitate cargo shipments and tourism. In moving forward on these initiatives, the government encourages job-related training for Omanis as a means to spur employment, and the Ministry of Manpower increasingly uses its authority to enforce Omanization efforts, particularly at the lower end of the wage scale. According to the government's Human Development Report, Oman's population is growing at an estimated 3.3% annual rate, with 45.2 percent of the national population younger than 20 years old and 56 percent younger than 24 years. (Note: This growth rate is considerably higher than the 1.9% annual rate reported in the 2003 national census. End Note.) More than 50,000 Omanis graduate from secondary school each year; most are unable to find immediate work or continue with higher education. The number of expatriates working in Oman's private sector at the end of October 2007 was around 615,000, roughly one-quarter of the population. The Ministry of National Economy reported a 20.4% increase in the number of expatriates working in the private sector over the same period in 2006. Most heavily affected were the construction, automotive, and tourism sectors. By contrast, the Ministry of Manpower reported that only around 123,300 Omanis are formally working in the private sector. Despite government efforts to replace expatriate workers with Omanis, Oman still depends heavily on South Asian and other foreign labor to fill jobs that require physical labor, clerical work, or certain technical skills. Public companies are traded on the Muscat Securities Market (MSM). A dramatic downturn in the MSM, which lost nearly 70 percent of its value between 1998 and 2001, hurt many small and first-time investors deeply and undermined confidence in the economy. Observers attributed the sell-off to overzealous speculation, combined with abnormally high equity valuations, uninformed investors, and a lack of transparency. The market has since rebounded to close at an all-time high of 9658 in January 2008, close to double its January 2007 value. During this time, the MSM witnessed several high-profile offerings. AES Barka Power Company, a subsidiary of the AES Corporation of Virginia, mobilized capital equal to seventeen times the amount of shares offered through its IPO. Similarly, strong investor interest propelled the IPOs of Omantel, Dhofar Power Company, Taageer Finance Company, Bank Sohar, Galfar Engineering, Oman Oil, and Talamul. The strong performance of the MSM is partly reflective of the government's efforts to revive the market and regain investors' confidence. The government announced a $260 million bailout in November 2000, offering to aid "small investors" and creating a national investment fund made up of contributions from government pension funds and the State General Reserve Fund, as well as offering incentives for investment companies to merge in the interest of enhancing efficiency and service offerings. In 2007, the government's regulatory agency, the Capital Market Authority (CMA),moved to encourage additional foreign investment in the market with the complete lifting of the 49% cap on foreign holdings in mutual funds. The CMA took steps to improve transparency in the market, including the enforcement of the International Accounting Standard (IAS) 39 and the establishment of new corporate governance standards. The CMA also held seminars emphasizing the importance of accurate media reporting for market confidence and growth. -------------- Openness to Foreign Investment -------------- Oman actively seeks private foreign investors, especially in the industrial, information technology, tourism, and higher education fields. The government hopes to attract over $12 billion in new foreign investment over the next 25 years. Investors transferring technology and management expertise, and providing 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. A Commerce Ministry spin-off, the Omani Center for Investment Promotion and Export Development (OCIPED),opened in 1997 to attract foreign investors and smooth the path for business formation and private sector project development. OCIPED also provides prospective foreign investors with information on government regulations, which are not always transparent and sometimes contradictory. Nevertheless, despite OCIPED's efforts to assist new business development, and the Ministry of Commerce and Industry's efforts to establish a 'one-stop shop' for government clearances, the approval process for establishing a business can be tedious, particularly with respect to land acquisition and labor requirements. With Oman's accession to the World Trade Organization in October 2000, automatic approval of majority foreign ownership (up to 70 percent) is available. Registration of these joint ventures is treated in the same manner as that common to all registrants, though foreigners must meet a capital adequacy requirement of 150,000 Omani rials (USD 389,610). The foreign firm must supply documentary evidence of its registration in its home country, its headquarters location, its capital holdings, and its principal activities. If a subsidiary, it must demonstrate its authority to enter the joint venture. Except in the petroleum sector, where concession agreements with the Ministry of Oil and Gas determine the terms of investment, new entities with greater than 70 percent foreign ownership are subject to the approval of the Minister of Commerce and Industry. In early 1999, the government amended its corporate tax policy and lifted the requirement that foreign-owned joint ventures include a publicly traded joint stock company listed on the MSM in order to enjoy national tax treatment. In 2003, Oman extended national tax treatment to all registered companies regardless of percentage of foreign ownership, i.e. a maximum rate of 12% tax on net profit. Omani branches of foreign companies are treated as foreign companies and therefore taxed at a maximum of 30%. Since Omani labor and tax laws are complex, investors should consider engaging local counsel. New majority foreign-owned entrants are barred from most professional service areas, including engineering, architecture, law, or accountancy. In 1996, existing foreign-owned professional service firms were given timeframes within which to obtain Omani partners (e.g., five years for accounting firms). An exception exists for professional service firms with subspecialties of critical importance to Oman. Wholly U.S.-owned service firms present in Oman include KPMG and the law firm Curtiss, Mallett, Colt, Mosle, and Prevost. Under Omani commercial law, wholly foreign-owned branches of foreign banks are allowed to enter the market. The permitted level of foreign ownership in privatization projects increased to 100 percent in July 2004, based on a Royal Decree providing an updated privatization framework. By privatization, Oman refers not only to the conversion of a state-owned or mixed enterprise into 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. For example, the government completed a tender in 2006 that included the privatization of an existing power plant in Rusayl in addition to the construction of a new power plant in Barka. One approach to partial conversion was applied to the state-run telephone company, Omantel, in which the government floated 30 percent of its stake in the company, while retaining the remaining 70 percent. The government is currently seeking foreign strategic partners to purchase approximately 20% of Omantel, with tender documents due to be released in April 2008. Industrial establishments must be licensed by the Ministry of Commerce and Industry. In addition, a foreign firm interested in establishing a company in Oman must obtain relevant approvals from other ministries, such as the Ministry of Environment and Climate Affairs. Foreign workers must obtain work permits and residency permits from the Ministry of Manpower and the Royal Oman Police's Immigration Office. Oman's investment incentives focus on industrial development and include the following: - Five year tax holiday, renewable once for an additional five years; - Low-interest loans from the Oman Development Bank (now available on a very limited basis, and only for small firms); - Low-interest loans from the Ministry of Commerce and Industry; - Subsidized plant facilities and utilities at industrial estates; - Feasibility studies supplied by the Ministry of Commerce and Industry; and - Exemption from customs duties on equipment and raw materials during the first ten years of a project, with packaging materials exempted for five years. -------------- Conversion and Transfer Policies -------------- Oman has no restrictions or reporting requirements on private capital movements into or out of the country, and there have been no reports of difficulty in obtaining foreign exchange. The Omani Rial is pegged to the dollar at a rate of 0.3849 Omani Rials to the U.S. dollar. The rial was devalued slightly in 1986 due to the collapse in oil prices, although the government did not find the devaluation productive. In spite of recent speculation, the government has firmly and publicly stated that it is committed to maintaining the current peg. Oman maintains a strong and effective regulatory regime with respect to its formal financial institutions, and local banks are subject to Central Bank regulations on lending practices to individuals and corporations outside the Sultanate. The government reinforced its anti-money laundering regulations through the March 2002 ratification of the "Law of Money Laundering" and the July 2004 promulgation of implementing regulations. Under these provisions, the commercial banks work closely with the Central Bank and the Royal Oman Police to identify suspicious transactions. Individuals have to be resident in Oman to open a bank account and transfer funds. For foreign bank transfers, Omani banks require complete documentation of the source of funds before approving the transaction. Omani banks, which maintain a strict "know your customer" policy, will not process transfer requests from unknown or suspicious foreign financial institutions. The government is also in the process of further strengthening its regulatory regime by incorporating several Financial Action Task Force recommendations into law. -------------- Expropriation and Compensation -------------- Oman's belief in a free market economy and desire for increased foreign investment and technology transfer make expropriation or nationalization extremely unlikely. In the event that a property must be nationalized, Article 11 of the Basic Law of the State stipulates that the Government of Oman provide prompt and fair compensation. Furthermore, under the U.S.-Oman Free Trade Agreement, Oman will follow international law standards for expropriation and compensation cases, including access to international arbitration. -------------- Dispute Settlement -------------- Oman is a party to the International Center for the Settlement of Investment Disputes (ICSID). However, 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 has jurisdiction over most tax and labor cases, and can issue orders of enforcement of decisions (the ASCD was limited to issuing orders of recognition of decisions). The Commercial Court can also 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, however. Decisions of the Commercial Court are final if the value of the case does not exceed $26,000. A Court of Appeals exists for cases in which the sum disputed is greater than $26,000. A Supreme Court was established in mid-2001, and decisions of the Supreme Court are final. However, a case may be re-opened after a judgment has been issued if new documents are discovered or irregularities (e.g., forgery, perjury) are found. There is no provision for the publication of decisions. Oman maintains other judicial bodies to adjudicate various disputes. The Labor Welfare Board under the Ministry of Manpower hears disputes regarding severance pay, wages, benefits, etc. The Real Estate Committee hears tenant-landlord disputes, the Police Committee deals with traffic matters, and the Magistrate Court handles misdemeanors and criminal matters. All litigation and hearings are conducted in Arabic. The Oman Chamber of Commerce and Industry has an arbitration committee to which parties to a dispute may refer their case when the amounts in question are small. Local authorities, including 'walis' (district governors appointed by the central government),also handle minor disputes. While Oman is a member of the GCC Arbitration Center, located in Bahrain, that center has yet to establish a track record. -------------- Performance Requirements and Incentives -------------- Since Oman's accession to the WTO in November 2000, it has been subject to TRIMs obligations. 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 operations. Firms involved in agriculture and fishing may also be included. Companies must have at least 35 percent Omani employees, distributed evenly among different administrative levels, to qualify for these incentives. In addition, companies selling locally produced goods are given priority for government purchases, provided that the local products meet standard quality specifications and their prices do not exceed those of similar imported goods by more than 10 percent. 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 other studies if the proposed project is considered sufficiently important to the national economy. Only in the most general sense of business plan objectives does proprietary information have to be provided to qualify for incentives. -------------- Right to Private Ownership and Establishment -------------- Under Oman's foreign capital investment law, non-Omanis are not allowed to conduct commercial, industrial, or tourist-related businesses, or participate in any Omani company without a license issued by the Ministry of Commerce and Industry. According to Oman's commercial companies law, all actions by private entities to establish, acquire, and dispose of interests in business enterprises must be announced in the commercial register, and may be subject to the approval of the Ministry of Commerce and Industry. Subject to the licensing and taxation previously noted, foreign and domestic entities can engage in all legal forms of remunerative activity. Government entities do not compete with the private sector, and public policy favors the privatization of public utilities. GRAPPO