GCC Insights: Oman must cut red tape to attract foreign investment

Authorities in Oman need to streamline government operations in order to attract foreign direct investments. Investors complain of excessive red tape and slow implementation of economic reforms. Recent problems related to the oil and gas sector only add to the urgency of opening up the economy for competition.

Press reports suggest that Oman's oil production capacity is on the decline. Crude oil output fell from 849,000 barrels per day (bpd) in mid-2001 to 750,000 bpd by November, 2002. The output is projected to fall to 703,000 bpd by year-end and possibly plunge to 650,000 bpd unless the authorities commit fresh investments.

Also, a projected drop in oil prices next year, partly attributed to the return of Iraq to the oil market, further deepens the dilemma.

To make matters worse, revenue from exports of liquefied natural gas (LNG) has declined by 9.1 per cent last year, reflecting tighter international gas markets. In 2001, the first full year of operation, Oman LNG generated a turnover of $1.18 billion.

By accounting for 70 per cent of treasury income, the petroleum sector is the mainstay of the economy. Accordingly, problems in the petroleum sector add to the sense of urgency for opening up the economy.

Over the last few years, red tape was blamed for the failure to attract foreign partners in port and waste management services. Plans for a 6,000-acre free zone in the southern port of Salalah suffered a blow following the withdrawal of Hillwood Strategic Services from the proposed venture.

The American company pulled out from the project in 2001 in response to excessive bureaucracy. Fortunately, the government has opted to develop a free zone through a group of investors led by Salalah Port Services Co.

Also in 2001, Ogden Yorkshire Water withdrew from a plan to privatise Muscat's wastewater system. The joint American and British firm was involved in lengthy talks with authorities but the two sides could not agree on financial terms.

The Sultanate tends to be slow in delivering on planned reforms, a matter that draws criticism from prospective investors. A scheme designed to turn the power and water divisions of the Ministry of Housing, Electricity and Water into companies for power generation, transmission and distribution is yet to be approved.

In March last year, the authorities commissioned ABN Amro, Denton Wilde Sapte and Mott MacDonald to draw up plans to deregulate the power sector.

In the telecom sector, the authorities have all but given up hope of attracting a strategic partner to join Oman Telecommunications Co (Omantel).

The government-owned Omantel had been offering a 40 per cent stake to a prospective strategic partner. Originally, the government intended to keep 51 per cent of Omantel and offer 40 per cent to a strategic partner and 9 per cent to institutional investors.

A new proposal calls for placing 20 per cent of the firm through an initial public offering, possibly later this year. A further 10 per cent of Omantel shares might be sold to numerous state institutions.

Failure to attract foreign investors for the development of a free zone in Salalah and Muscat's wastewater system as well a strategic partner for Omantel clearly demonstrate that it is a buyer rather than a seller's market. Thus, foreign investors can only be attracted to good deals.

The government can refer to the success achieved in enticing foreign interest in taking over the operations of Oman's two airports.

Vision 2020, the blueprint for Oman's economy, calls for reduced dependence on oil together with a more diversified liberal economy. The Knowledge Oasis Muscat initiative, Oman's response to Dubai Internet City, is a step in the right direction.

Another recent correct stance was an official promise to allow foreign firms to operate without the need for local joint venture partners with full repatriation of profits in activities deemed strategic to the economy.

The authorities are seeking private investors, local and foreign, notably in the areas of electricity, telecom and wastewater management. The government needs to liberalise the investment environment in order to attract foreign investors. The IMF has asked the authorities to do more to open the economy for competition.

The author is Assistant Professor, College of Business Administration, University of Bahrain.