ECONOMIC OVERVIEW

Oman’s economy is based primarily on petroleum, which accounted for about 73 percent of government revenue in FY 2002. At the end of 2002, Ahmed bin Abdulnabi Macki, Minister of National Economy and Deputy Chairman of the Financial Affairs and Energy Resources Council, reported that Oman's recoverable oil reserves are estimated at 5.8 billion barrels. The main producer of oil is the government majority-owned Petroleum Development Oman (PDO, in partnership with Royal Dutch Shell), which controls 90 percent of reserves and the lion’s share of total production. Oman’s gas reserves stood at 33.4 trillion cubic feet (tcf) according to Omani government sources. Some analysts believe gas reserves can reach 40 tcf in the coming years, in light of efforts to encourage companies to actively explore for gas. Oman’s oil production throughout 2002 averaged 897,400 barrels/day, a 7% drop from the 2001 level of 955,700 barrels/day. In the first quarter of 2003, daily production averaged 847,900 b/d, another 8.2% drop compared to the first quarter of 2002. Occidental Petroleum is the second largest producer in Oman, and its daily production is estimated around 45,000 b/d.

The Omani government recently awarded a tender for the construction of a third liquefied natural gas (LNG) train to expand the existing liquefied natural gas (LNG) plant in Sur. Oman LNG began operations in April 2000 with two 3.3 MTPA LNG production trains for a total production rate of 6.6 million tons/year. The expansion will bring the company's production capacity to 9.9 MTPA and is expected to come online by 2005. Offtake of much of the production from this plant has already been locked into Korean and Japanese buyers. Oman signed a 20-year agreement to supply 1.65 MTPA of LNG to a Spanish firm, in 2002. In June 2002 Gas de France signed an agreement with Oman LNG for the supply of nine cargoes of 139,000 cubic meters of LNG each, and in June 2003 Oman LNG signed another six-year agreement with BP to supply 12 LNG shipments over the six years beginning 2004. The Dabhol Power Company (DPC) in India signed a 20-year agreement with Oman LNG in December 1998 for the purchase of 1.6 MTPA of gas. The Omani government is in the process of building its own fleet of LNG vessels to facilitate spot sales. Recently, the Omani government purchased a 40 percent stake in two LNG tankers in 2000, and the first has been delivered. In May 2003, Oman LNG awarded a tender to build an additional four vessels.

The government encourages the private sector to take on a greater role in financing infrastructure projects. The capital area and other population centers have modern, well developed communications, utilities, and road systems. Additional investment is extending infrastructure to rural areas. The long-term “Oman Vision 2020” development plan highlighted the need for the Omani economy to diversify beyond its present reliance on petroleum, through a process of Omanization, industrialization and privatization. The government has proceeded with several major privatization projects, including power generation projects in Salalah, Barka, Rusayl, and Sharqiya. In late 2001, a consortium led by the British Airport Authority became the strategic partner for Muscat’s Seeb International Airport and Salalah Airport as part of the Omani government’s privatization effort. Other privately-financed infrastructure projects still in the planning phase include a petrochemical plant, steel rolling mill, and aluminum smelter in Sohar.

One of the most successful diversification projects thus far is Salalah Port, a container transshipment port originally established jointly by Omani private investors (40 percent), the Omani government (30 percent), U.S. Sea-Land (15 percent), and Maersk (15 percent). Port Salalah opened in November 1998. The port handled one million TEUs (twenty-foot equivalent units) in 2000 and 1.2 million TEUs in 2001. (The 2001 figure was below the 1.6 million TEU’s forecasted for the year mainly due to the effects of the aftermaths of the September 11 events.) In 2000, Salalah Port ranked among the top 10 container ports in the world in terms of efficiency. In June 1999, the Omani government announced plans to launch an industrial free zone at Port Salalah, under the management of Salalah Port Services (SPS), the Omani-U.S. joint venture that runs the container port.

The number of expatriates in Oman is 668,000, one-fourth of the population. Despite government efforts to replace expatriate workers with Omanis, Oman still depends heavily on South Asian labor to fill jobs that require physical labor, clerical work, or certain technical skills. Oman’s population is growing at an estimated three percent annual rate, with 56 percent of the national population younger than 20 years old and 67 percent younger than 24 years. More than 45,000 Omanis graduate from secondary school each year. Most are unable to find work. The government encourages training for Omanis as a means to increase employment, and the Ministry of Social Affairs increasingly is using its authority to enforce Omanization efforts, particularly at the lower end of the wage scale.

Continued development and population pressures have also contributed to a growing water problem. Aquifers are being seriously depleted. There are increasing levels of salinity in groundwater in coastal agricultural areas. A Middle East Desalination Research Center officially opened in 1997 with headquarters in Muscat; funding for this center came from Oman, the United States, Japan, Israel, Korea, and the European Union.

Oman is developing more light manufacturing industries. In order to provide facilities for these efforts, the Public Authority for Industrial Estates manages industrial estates throughout the country. More than 200 factories operate in industrial estates, with a total investment of $800 million. Furthermore, 33 other production units are under construction in these estates. The original and most developed is Rusayl Industrial Estate, located on the outskirts of the capital.

The dramatic downturn in the Muscat Securities Market (MSM), which lost nearly 70 percent of its value from 1998 to 2001, hurt many small and first-time investors deeply and undermined confidence in the economy. The MSM dropped from an all-time high of 509 points in February 1998 to 152 as of the end of December 2001. However, in 2002 the market began to recoup some of its losses, ending the year at 191.9, a 26% gain. The momentum continued in the first six months of 2003. In mid-June 2003 the market was standing at around 240 points.

Since 1998, the government introduced numerous measures 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 strategic reserve fund, as well as offering incentives for investment companies to merge. The government's regulatory agency, the Capital Market Authority (CMA), also took steps to improve transparency in the market including the enforcement of the International Accounting Standard (IAS) 39 and setting up new corporate governance standards. Observers have attributed the MSM drop-off to overzealous speculation, combined with abnormally high equity valuations, the market's lack of transparency, and uninformed investors.

OPENNESS TO FOREIGN INVESTMENT

Oman actively seeks private foreign investors, particularly in the industrial, tourism and higher education fields. Investors transferring technology 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 become 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. 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 the joint venture. Except in the petroleum sector, new entities with over 70 percent foreign ownership are subject to the approval of the Minister of Commerce and Industry. As part of its WTO accession package, Oman is also expected to allow 100 percent foreign ownership in certain services sectors, such as banking, law, accountancy, and information technology.

Foreign-owned joint ventures with up to 70 percent foreign participation enjoy the national corporate tax rate of 12 percent, while foreign-owned joint ventures with Omani participation of less than 30 percent are subject to a maximum corporate tax rate of 30 percent. In early 1999, the government amended its corporate tax policy and lifted the requirement that foreign-owned joint ventures must include a publicly traded joint stock company listed on the Muscat Securities Market in order to enjoy national tax treatment. Since Omani labor and tax laws are complex, investors should consider engaging local counsel. As a condition of WTO accession, Oman is expected to eliminate all tax discrimination between foreign owned and national firms during 2003.

New majority foreign-owned entrants are barred from most professional service areas, such as the engineering, architectural, legal, or accounting fields. Existing foreign-owned professional service firms were, in 1996, given timeframes in which they needed to obtain Omani partners; e.g., five years for accounting firms. An exception exists for a professional services firm with a subspecialty of critical importance to Oman. Wholly foreign-owned U.S. services firms present in Oman include Citibank, Ernst & Young, 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 has been increased to 70 percent in privatization projects, due to Oman’s WTO membership. 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 will be applied to the state-owned telephone company, Omantel, where the government is planning to sell off 30 percent of its shareholding in the company and retain the balance of 70 percent.

Industrial establishments with a total capital of $52,000 or more must be licensed by the Ministry of Commerce and Industry. 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.

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 available on a very limited basis for smaller firms only),
• 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 ten years of a project.

CONVERSION AND TRANSFER POLICIES

Oman has no restrictions or reporting requirements on private capital movements into or out of the country. 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. The government, however, did not judge the devaluation productive. There have been no reports of difficulty in obtaining foreign exchange. Late in 2001, Oman began implementing a new law for the prevention of money laundering.

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, but in any event, were a property to be nationalized, we would expect the Government of Oman to provide prompt compensation under international law.

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. 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.

The Chamber of Commerce and Industry has an arbitration committee to which parties to a dispute may refer their case when jurisdictional amounts are small. Local authorities such as “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.

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 than U.S. $26,000. A Supreme Court was established in mid-2001, and 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 provision for the publication of decisions.

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. The Real Estate Committee hears tenant landlord disputes, the Police Committee deals essentially with traffic matters, and the Magistrate 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.

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 activities. Firms involved in agriculture and fishing can also be included.

Companies must have at least 35 percent 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 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 tourism 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 could 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 privatization of public utilities.

PROTECTION OF PROPERTY RIGHTS

Real property rights are recognized and enforced in Oman, and records are well kept. There is no contemporary history of arbitrary seizures of land. With the exception of G.C.C. nationals, who are allowed to own property subject to government approval, 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 May 2000, Oman revised the trademark law to be in compliance with TRIPS. Oman enacted a copyright protection law in 1996, but did not announce 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. Since January 1999, the government has enforced copyright protection for audio and videocassettes, and destroyed stocks of pirated cassettes seized from vendors. The government did not extend protection to foreign-copyrighted software until late 1998, when it declared that retailers must halt the importation and sale of non-licensed software by July 1, 1999. Thereafter, the government stepped up efforts to curtail software piracy in Oman, including raids on businesses to ensure that no pirated software is used by Omani businesses. In mid-2000, the government introduced new, WTO-consistent intellectual property laws on copyrights, trademarks, industrial secrets and integrated circuits. Further, in October 2000 Oman issued new intellectual property rights legislation on patents and intellectual property rights which is WTO-consistent.

Oman has joined the World Intellectual Property Organization (WIPO), and asked WIPO to register Oman as a signatory to the Paris and Berne conventions on intellectual property protection.

TRANSPARENCY OF THE REGULATORY SYSTEM

The government recognizes that its regulatory environment can hamper investment and commercial activity. In addition to the ownership, and agency requirements already mentioned, 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.

Oman’s tax laws can impede foreign investment. Although Oman amended its tax laws in 2000 to allow national tax treatment for joint ventures with up to 70 percent foreign participation, projects with higher foreign participation are taxed at 30 percent of income. Oman’s labor laws, which require minimum quotas of Omani employees depending on the type of work, form another potential impediment to foreign investment. The government’s Omanization effort has been the subject of criticism in the Omani private sector, which often complains that it can harm productivity and restricts hiring and firing policies.

Government red tape and slowness in official decision-making is also a frequent complaint among the local private sector. Because decisions often require the approval of multiple ministries, the government decision-making process can be tedious and non-transparent.

The government has issued a series of regulations aimed at increasing transparency and disclosure in the financial market. The Capital Market Authority (CMA) has ordered all public share-holding companies to comply with a set of standards for disclosure. Under the requirements, holding companies must publish the accounts of their subsidiaries with the parent companies' accounts. Companies must also fully disclose their investment portfolios, including details of the purchase cost and current market prices for investment holdings. The new initiatives also require publication of these full financial statements in the local press. At the same time, the Central Bank has also introduced new rules to limit the level of "related party transactions" (financial transactions involving families or subsidiary companies belonging to major shareholders or board members) in Oman's commercial banks. The new rules will help increase transparency in financial transactions in banks and the local securities market and help clarify the activities of listed companies.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

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 in excess of US$5.2 million must be listed on the Muscat Securities Market. According to the recently amended Commercial Companies Law, companies must exist for at least two years before being floated for public trading.

The Sultanate has two loan programs to promote investment. The Ministry of Commerce and Industry (MOCI) runs a program designed to promote industrial investment. Formerly interest free, the program now charges 4 percent interest, with long repayment terms. MOCI 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

Foreigners may invest in the Muscat Securities Market (MSM) as long as this is done through a local broker. Since the 1998 market downturn, MSM statistics show that the percentage of foreign investors in the market has remained small; as of May 31, 2003, non-Omanis held 15.6 percent of total investment in the MSM.

The legacy of the economic slowdown continued to impact banking profitability in 2002. Although banking sector profits improved in 2002 after a tough year in 2001, profits have recently remained low. Corporate profitability declined significantly in 1999, and has only marginally recovered in the subsequent years. This has created added strain for the banking sector. A new banking law issued in November 2000 allows more efficient control over the financial sector by the authorities. Furthermore, early in 2003 the Central Bank of Oman issued a circular promulgating new rules and regulations to ensure proper and efficient management of the banks. The effect of this circular was further enhanced by the implementation of a code of corporate governance, as well as amendments to the Capital Market Law and the Commercial Companies Law which stipulated that board of directors of all joint listed companies should appoint an audit committee from its members and appoint an internal auditor and a legal advisor.

POLITICAL VIOLENCE

Politically-motivated violence is virtually unknown in modern Oman. Since October 2000, however, there have been some demonstrations, but these were generally orderly.

CORRUPTION

Article 53 of the Basic Statute of the State, issued in November 1996, compelled ministers to resign their offices in public shareholding enterprises. As of 1999, undersecretaries (deputy ministers) were also required to resign from the boards of any public share holding enterprise. Most major contracts are awarded through a rigorous, typically slow, but generally clean tender process. Contracts awarded through the tender process internal to a given ministry are subject to fewer controls. Oman is not a signatory to the OECD convention on combating bribery. During his reign, Sultan Qaboos has dismissed several ministers and senior government officials for corruption.

BILATERAL INVESTMENT AGREEMENTS

Oman and the U.S. have discussed a Bilateral Investment Treaty (BIT); however, as of 2003, this issue remains in the discussion stage only. Oman is currently waiting for the U.S. to adopt a new model BIT text. Oman has investment treaties with 18 nations; the texts are not a matter of public record.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

Oman is eligible for Export Import Bank of the United States (EXIM) financing and insurance coverage. Oman has an agreement with the Overseas Private Investment Corporation (OPIC), and OPIC recently proposed a revised agreement.

LABOR

Oman relies heavily on expatriate labor, primarily from India, Bangladesh, Pakistan and Sri Lanka, to perform menial and physically taxing tasks as well as to fill managerial positions. Omani labor law stipulates basic practices to safeguard workers. Employers set wages for Omanis within guidelines delineated by the Ministry of Social Affairs and Labor. The minimum wage for Omanis working in the private sector, including salary and benefits, is 120 R.O. (about $312) per month. 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 petroleum fields typically work up to seven days a week, depending on their contracts.

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, unless the employer can show that there are no Omanis available for the positions. Only Omanis are permitted to work as taxi drivers, customs expediters, and fishermen. In 1999 and 2000, the government “Omanized” (i.e. banned expatriates from working in) a number of low-wage jobs, including water tank truck drivers, gas cylinder truck drivers, plow operators, and real estate agents. Through concerted training efforts, the government has also sought to increase the number of Omanis employed as gasoline station attendants, waiters, barbers, and hairdressers, while allowing expatriates to remain employed in such positions. The government recently announced its intention to Omanize 24 more occupation classifications over the next four years. The first phase of the plan will include 16 occupation classifications, mainly different varieties of shopkeepers and repairmen.

In 1994, Oman became a member of the International Labor Organization (ILO).

FOREIGN TRADE ZONES/FREE PORTS

Oman has no general provisions for the temporary entry of goods. In the case of auto re-exports, a company can import vehicles into the country for the purpose of re-export and have duties refunded if it re-exports the vehicle within six months. In 1999, the government opened a new free trade zone at an interior border crossing point with Yemen (al-Mazyounah). Oman is currently planning to develop a free trade zone in Salalah, adjacent to the international container transshipment port that opened in November 1998. The government has also expressed its intention to establish a free zone at Sohar port, in conjunction with plans to expand the existing port and industrial zone.

FOREIGN DIRECT INVESTMENT STATISTICS AND MAJOR FOREIGN INVESTORS

Systematic information on foreign direct investment is limited. Total investment in Omani companies with foreign participation was US$1.7 billion. Of that, 30.7% was in the oil and gas sector and 24% was in the financial sector. Investment in trading companies constituted 15% of total investment, or US$257 million, while foreign investment in the manufacturing sector was 7.8% of total foreign investment, or only US$132 million. Total foreign investment in the construction sector is US$105 million and in hotels and other tourism related companies is US$57 million. Total foreign investment in the mining industry was around US$13 million. Foreign investment in the agricultural sector was negligible at US$1.2 million.

The largest foreign investor is Royal Dutch Shell Oil, which holds 34 percent of the shares of Petroleum Development Oman, the state oil company, and 30 percent of Oman Liquid Natural Gas. Other companies, such as Occidental Petroleum, BP Amoco, Novus Petroleum, Hunt, and Nimr have also invested in the petroleum sector. Two U.S. firms, Gorman Rupp (water pumps) and FMC (wellhead equipment), have entered into industrial joint ventures with Omani firms. Both joint ventures involve modest manufacturing operations. Since 1999, Oman has witnessed increased foreign direct investment through the privatization process. Major foreign investors that have entered the Omani market recently include PSEG Global (U.S.), AES (U.S.), and National Power (U.K.).