Industrial zones to play key role in releasing Oman's economic potential

 

Manufacturing is on track to reach the target contribution of 15% of GDP by 2020 laid out by Oman’s Vision 2020 economic development plan, which was first announced in 1995. Indeed, Oman has accomplished 70% of its ambitions in Vision 2020, Talal bin Sulaiman Al Rahbi, deputy secretary general of the Supreme Council of Planning (SCP), told local media in October 2019. Past decades have seen manufacturing’s contribution to GDP rise from less than 1% in 1980 to 9.6% in 2018, and it is expected to increase further over the near term.

Room remains to broaden the industrial base: under the long-term plan Vision 2040, the government is looking to encourage the adoption of technology in manufacturing to enhance competitiveness and increase output. Specifically, by 2040 the government wants industrial exports to reach OR13.4bn ($34.8bn), or 28% of total exports, up from 16% in 2015. Oman’s industrial and free zones are already attracting significant investment in manufacturing, petrochemicals and other segments, and are instrumental to achieving these goals.

Structure & Oversight

The main government body responsible for overseeing policy decisions in the industrial sector is the Ministry of Commerce and Industry (MoCI). It is currently headed by Ali bin Masoud bin Ali Al Sunaidy, who is also the deputy chairman of the SCP. The SCP is a key agency for the sector, as its Secretariat General has been tasked with developing and overseeing implementation of Oman’s economic diversification strategy.

Strategy for the industrial sector has been guided by a series of five-year development plans, the latest of which covers 2016-20. Under the current fiveyear plan the authorities launched the National Programme for Enhancing Economic Diversification, commonly known as Tanfeedh. The aim of this programme is to coordinate development plans for the manufacturing, tourism, transport and logistics, mining and fisheries industries based on a sustainable partnership between the private and public sectors. The Public Authority for Investment Promotion and Export Development (Ithraa) also plays a role in driving Oman’s economic growth and diversification through its focus on securing foreign investment. Established in 1996, Ithraa’s mission is to attract sustainable investment to Oman while also promoting the export of non-oil goods and services. Meanwhile, representing private sector interests, is the Oman Chamber of Commerce and Industry, and each region also has its own local chambers.

There is also the overarching long-term Industrial Strategy 2040, developed as a collaboration between the government and the UN Industrial Development Organisation. The strategy focuses on ensuring that Oman keeps abreast of global Fourth Industrial Revolution trends through investments in technology and capital-intensive, resource-based activities, such as the manufacturing and export of chemicals, petrochemicals, fertilisers, plastics, spare parts and processed foods. Oman also plans to take advantage of the strategic location of its ports and their proximity to the Indian Ocean. The second phase of the strategy was launched by the MoCI in August 2019 and will lay out a timetable for the shift to more capital-intensive and resource-based industries. Phase two aims to improve coordination between government entities by outlining roles, and draft laws and regulations to support manufacturing.

Sector Size

According to the National Centre for Statistics and Information (NCSI), in 2018 industrial activities contributed OR5.5bn ($14.3bn) to GDP, with manufacturing comprising 52.7% of overall industrial output, at OR3bn ($7.8bn). Within the manufacturing segment, chemicals and chemical-related products accounted for 42.7% of output, while refined petroleum products comprised 14.7% and other manufacturing products 38.3%. Another essential segment is building and construction, whose output was OR1.9bn ($4.9bn), or 35.3% of the total that year.

Manufactured goods accounted for 22.4% of total exports in 2018, while chemicals and related products came in second at 20.6%, followed by machinery and transport equipment at 19.6%. Manufacturing exports reached OR5bn ($13bn) in 2018, a 6.2% rise from the year before, according to the NCSI. The UAE was the top market by export volume, at 20.9%, followed by Qatar (11.9%), Saudi Arabia (9.1%), India (6.3%) and China (5.6%). Given its close geographic proximity, India has become an increasingly important trade partner for Oman. Exports to India doubled between 2014 and 2018 to reach $4.3bn, with the main products being fertilisers, minerals, aluminium and aluminium articles, organic chemicals, salt, sulphur, plastering materials, lime and cement.

While exports are on the rise, challenges remain for local firms. ”The government has been pushing for the manufacturing sector to increase exports, but this needs to be stimulated through a more enhanced in-country value (ICV) programme which promotes a fairer playing environment, namely to protect local companies from international players who have their own manufacturing bases in neighbouring countries,” Said bin Saif Al Maskery, director at local firm Composite Pipes Industry, told OBG.

Local industrialists also have to contend with progressively inward-looking policies of trade partners and shifting regional geopolitics. “Omani manufacturers are facing difficulties in exporting their products given the increasing protective trade policies in some countries worldwide. However, there are export benefits within the GCC according to a unified Customs duty law,” Salem Nasser Al Bortmany, CEO of Areej Vegetable Oils and Derivatives, told OBG.

Performance

Industrial output has remained broadly flat over the past five years, with 1.5% growth recorded between 2017 and 2018. However, there has been promising growth in several sub-segments. Manufacturing grew by 7.6% in 2018, for example, and electricity and water supply also recorded a 3.9% expansion the same year. Both segments outpaced Oman’s overall GDP growth of 2.1% in 2018. At the same time, mining and quarrying dipped by 2.3% and while building and construction decreased by 6.6%. According to some industry stakeholders, activity in the industrial sector is getting tougher due to the reduction of government subsidies and Omanisation quotas. Both have a significant impact on production costs and products’ competitiveness.

Average unit labour costs (ULCs) across various industrial segments have decreased in recent years. According to a 2017 study published by the Local Economy Policy Unit, there was a 3% and 1.6% annual average fall in ULC between 2010 and 2014 in Oman’s manufacturing and construction segments, respectively. Over the same period labour productivity in these two segments saw an annual decrease of 6.6% and 1.6%, respectively. The average labour productivity growth in Oman’s private sector is far lower than international standards, suggesting inefficiencies in production processes and personnel.

Free & Industrial Zones

To encourage investment, the government has established special economic zones (SEZs) where investors enjoy tax exemptions, 100% foreign ownership allowances, trade facilitation services and competitive advantages on imports and Customs duties. The four such zones are in Al Mazunah, Sohar, Salalah and Duqm – each at different stages of development – and all are designed in a manner that allows foreign companies to leverage Oman’s position to build a regional manufacturing and distribution base.

Of the four, Al Mazunah Free Zone and Salalah Free Zone are the oldest, opening in 1999 and 2005, respectively. The former is oriented towards trading, light industry and assistant services, while the latter, which is under development, is geared towards manufacturing and assembly, logistics, and chemicals and material processing. Sohar Port and Freezone is also under construction, with planning under way for the first phase of the site’s expansion, known as Sohar Port South. The plan is expected to add 200 ha of land to Sohar Port’s current 2000 ha as part of the free zone’s long-term strategy to grow the industrial and maritime hub by as much as 50%.

Each of Oman’s SEZs are managed by dedicated agencies, including the Special Economic Zone Authority Duqm (SEZAD) and Sohar Industrial Port Company. As stipulated by Royal Decree 103/2005, the Al Mazunah Free Zone, located on the border with Yemen, falls under the purview of the Public Establishment for Industrial Estates, commonly known as Madayn. Madayn also manages Knowledge Oasis Muscat, an IT zone located near Muscat International Airport, along with seven industrial cities: Rusayl, Sohar, Raysut, Nizwa, Sur, Buraimi and Samail. The estates are scattered across the country and offer similar incentives for the businesses located within them, including five-year tax exemptions on net profits and attractive lease rates.

Total investments in Madayn’s various industrial cities increased by 3.6% in 2018, with the cumulative total value of investments reaching OR6.6bn ($17.1bn) by the end of 2018, an increase of OR230m ($597.3m) from 2017. During the same period, the workforce increased by 10% to 60,070 personnel, with the Omanisation rate touching 35%. In 2018 the number of investment projects in various phases within Madayn’s estates reached 2211, of which 1519 were operating, 291 were under construction and 401 were allotted with space.

Two additional industrial cities are also under development: Thumrait in Dhofar governorate and Shinas in the Al Batinah North governorate. In January 2019 Madayn handed over management and development operations at the OR372.5m ($967.4m) Al Rusayl Industrial City (ARIC) to privately owned Oman Investment and Development Holding Company, commonly known as Mubadrah. Under this agreement, ARIC is the first industrial city in Oman to be managed and operated by a private sector player. This comes as Madayn looks to open Oman’s industrial cities to public-private partnerships (PPPs).

Oman’s SEZs have also seen significant growth in investment. SEZAD, which is touted as Oman’s largest heavy industries hub, had attracted $14.2bn worth of investments in the form of usufruct agreements by the end of 2018. Occupying an area of 1745 sq km, with 70 km of coastline along the Arabian Sea, SEZAD will be one of the largest developments of its kind in the Middle East and North Africa.

Technology is playing a major role in facilitating investment in Oman’s SEZs. “Previously, companies needed to complete a physical registration that could take up to two years,” Said Al Balushi, director general of Al Mazunah Free Zone, told OBG. “However, now there is a website that requires minimal information and forms can even be completed from a mobile device.” Some of the e-services available include approvals and choosing land plots.

Manufacturing

One of the key sectors identified by the government as part of its economic diversification drive is manufacturing. Moves to open industrial cities to greater private ownership, along with growing investment in SEZs, are already having a significant impact. The sector’s contribution to Oman’s GDP grew by 7.6% in 2018 to OR3bn ($7.8bn), up from OR2.8bn ($7.3bn) in 2017. The government is hoping to increase the manufacturing segment’s contribution to GDP from around 9.6% in 2018 to 15% in 2020, a goal well within reach. In the longer term authorities aim to have the sector grow over six-fold by 2040, reaching OR20.2bn ($50.5bn), with 30% of the future manufacturing value-added generated by medium- and high-tech industries.

As of 2018, 236,951 workers were employed in manufacturing, or around 12% of the private-sector workforce. Expatriates comprised 87% of all manufacturing employees. Oman is home to wide range of light manufacturers, as well as companies involved in chemicals, petrochemicals and metals production. As of August 2018 there were 35,596 small and medium-sized enterprises registered in Oman, with many involved in the sector. These companies included those in marble and granite processing, as well as glass, plastics, furniture, textiles, tile, block, cement and limestone producers.

Oman’s SEZs host a range of manufacturers. For example, in Sohar’s industrial estate, Indian alloy wheel producer Synergies Castings is looking to build a $100m production facility. Also in Sohar Indian yarn spinning company SV Pittie Sohar Textiles launched a textiles manufacturing cluster in December 2018 that houses the latest and most efficient automated technology in the textile segment. This followed the launch of an on-site training centre at its facilities in July 2018. Elsewhere, in the Salalah Free Zone Dunes Oman – a diversified unit producer – supplies brake parts and truck components for automotive manufacturers around the world.

Boosting the output of auto parts in Oman feeds off a strong base of local aluminium producers and smelters, including National Aluminium Product Company (NAPCO) and Sohar Aluminium. Established in 1984, NAPCO is one of the leading producers of aluminium in the GCC, with an annual production capacity of 42,000 tonnes. From its plant in Rusayl Industrial Estate, NAPCO produces numerous extruded aluminium products such as door and window frames for the local and regional construction industries, as well as products for manufacturing. In 2018 NAPCO started producing extruded aluminium for more high-tech projects, including the $600m Miraah solar plant in southern Oman. New niche products and aluminium designed to meet the charging specifications of the expanding construction sector helped the company double its production and revenue in 2018, despite competition from China and other foreign competitors.

Chemicals & Petrochemicals

Chemical and refined petrochemical products comprise a significant portion of Oman’s industrial output, and their contribution to GDP has seen steady increases over the years. The segment’s economic contribution was OR1.24bn ($3.2bn) in 2018, up from OR1.19bn ($3.1bn) in 2017 and OR976.2m ($2.5bn) in 2016.

Chemicals manufacturing in Oman consists of various subsectors, including fertilisers, paints and detergents. Fertilisers make up half of the physical output, but account for 20% of revenue. Major players in fertiliser include Oman Oil Refineries and Petroleum Industries Company (ORPIC), the Oman India Fertiliser Company (OMIFCO), Suhail Bahwan Group (SBG), Oman Formaldehyde Chemical Company, Oman Methanol Company and Salalah Methanol Company. SBG has a 2000-tonne-per-day ammonia plant and a 3500-tonne-per-day urea plant in Sohar. OMIFCO is based at the Sur Industrial Estate, where it operates a two-train ammonia-urea fertiliser plant. Its ammonia plants each have a 1750-tonne-per-day anhydrous ammonia capacity, and its urea plants have a 2530-tonne-per-day granular urea capacity.

There were major foreign investment developments in Oman’s petrochemicals and chemical segments in 2019. The ongoing construction of the Duqm refinery in SEZAD has put several large contracts at the petrochemicals complex on the table. In June 2019 Wood Group, an Aberdeen-headquartered multinational energy services company, was awarded a petrochemicals project feed contract for a $9bn mixed-feed steam cracker. The facility will have an annual capacity of 1.6m tonnes of ethylene when construction wraps up in 2025.

ORPIC’s Liwa Plastics Industries Complex (LPIC), located in the north of the sultanate, is also set to be a major contributor to the local petrochemicals market once completed in 2020. The $6.7bn complex is expected to increase annual plastics production by more than 1m tonnes, giving ORPIC a total 1.4m tonnes of polyethylene and polypropylene production. Moreover, the project will further increase the value-added that can be derived from Omani crude oil and natural gas, creating significant business opportunities and employment.

“The plastics industry in Oman really depends on the raw materials that are available,” Ahmed Al Barwani, deputy CEO of local plastic pipe manufacturer Muna Noor Manufacturing and Trading, told OBG. “Today many raw materials are imported from other GCC countries. When ORPIC’s Liwa petrochemicals plastics facility is complete, however, 50% of raw material for the local plastics industry can be supplied from this facility. This project will be important for satisfying local demand.”

Food & Beverages Processing

Oman has historically depended on imports to supply much of local demand for food and beverages (F&B). However, with the emergence of several free and industrial zones, efforts are under way to develop F&B processing, given the potential of this industry.

There has been a strong focus on ICV in F&B manufacturing. The 40-ha food cluster at Sohar Port and Freezone, which will include a flour mill, sugar refinery and grain-silo complex, is one of the most prominent of such projects under development. The aim of this cluster is to promote the entire value chain of food processing and logistics support in the expanding multibillion-dollar regional food market.

Similar projects are also in the pipeline at the Duqm Free Zone. “We are in the process of finalising construction of a fishing harbour, which will be able to accommodate sea-going vessels,” Lee Chee Khian, advisor to the chairman of SEZAD, told OBG. “We are also developing a value-added fisheries centre where the catch can be processed, canned and exported from SEZAD.” The free zone is looking to build on growth in the agriculture and fisheries sector, which the government has also targeted to further diversify the economy. In 2018 agriculture and fisheries comprised around 2.2% of total GDP; the authorities want to increase this share to 3.1% by 2020, with an annual target growth rate of 4.5%. Oman’s 3165 km of coastline produces 500,000 tonnes of fish per year, highlighting the potential for food processing to add value to an already productive sector.

Construction

One of the strongest-performing sectors in recent years has been construction, and it continues to drive Oman’s economic growth, with trickle-down effects into industry. In late 2018 construction accounted for 9% of GDP and was the largest employer, with a workforce of 621,478 – 90.4% of which were expatriate. Construction is expected to register a compound annual growth rate of 6% between 2019 and 2024, with economic diversification plans driving the expansion.

The investment pipeline into construction will remain strong into 2020, creating opportunities for companies and cement producers. Local production has the potential to play a greater role in meeting local demand. “The total production of cement in Oman is about 6m tonnes each year, whereas the demand is about 9m tonnes,” Salem Abdullah Al Hajri, CEO of Oman Cement Company, told OBG.

Investment

According to a MoCI report released in July 2019, total foreign direct investment (FDI) reached OR9.7bn ($25.2bn) by the end of the third quarter of 2018, a sharp rise from OR8bn ($20.8bn) during the same period in 2017. Manufacturing was the third-largest FDI recipient at 11%, behind oil and gas (56.6%), and the financial sector (14.5%).

The MoCI’s Manufacturing Steering Committee continues to oversee the implementation of Tanfeedh, making significant progress in 2019. It currently manages 23 investment projects in the sector. These projects are in the areas of food security, petrochemicals, metals and pharmaceuticals, as well as other innovative segments. Five new investments were made in the first half of 2019, bringing the value of ongoing projects to OR3.4bn ($8.8bn) as of July 2019, with a target of OR5.4bn ($14bn) worth of investments by the end of the year.

One notable project is Khazaen Economic City (KEC), a 52-sq-km integrated city near Barka and the largest PPP project in Oman to date. Construction at the site started in mid-2019, and investors are already taking note of KEC’s strategic location between Sohar Port, Muscat International Airport and the capital. Agreements have been signed to build manufacturing plants, such as the OR1.5m ($3.9bn) National Fibreglass Factory to produce output for glass-reinforced plastics used in commercial and residential construction. The first phase of the project will see investment of OR500,000 ($1.3bn) and is expected to be completed in 2021.

Local Procurement

A decade-long government campaign to promote Omani products has had a positive impact on some local manufacturers. In 2008 the government launched the Origin Oman campaign aimed at encouraging local consumers and organisations to buy domestically produced goods. A 2019 study conducted by Sultan Qaboos University showed that most Omanis prefer to buy specific local brands when they shop for food products, and many cited a preference for fresher Omani produce.

While government campaigns like Origin Oman have helped local food producers, some firms continue to struggle in the face of international competition. Import tariffs remain low, even for importers from countries that do not have free trade agreements with the sultanate. Furthermore, local manufacturing or construction companies do not receive preferential treatment when it comes to bidding on government tenders.

“Many materials are dumped in the local market,” Hamed Al Rashdi, deputy CEO of NAPCO, told OBG. “We are in discussions with the government on how to manage this issue and to reduce the dumping of foreign metals. For instance, in the Omani market the thickness of the profile of aluminium products is not specified and correctly measured. This allows any importer to enter the market and claim they have a thickness profile of 1 mm, but it is actually 0.9 mm or 0.8 mm. NAPCO is in consultation with the government and the Oman Chamber of Commerce, and there have been serious efforts to minimise the effects of this, but it is taking a long time.”

NAPCO is looking to link up with Sohar Aluminium to increase local procurement and ICV. NAPCO currently imports most of its aluminium billets from Qatar, India and the UAE, but Al Rashdi said his company is in discussions with its local counterpart to source inputs locally. “If we can buy locally produced billets from Sohar Aluminium, we could significantly reduce our inventory costs and increase the local content percentage,” he told OBG.

Steel manufacturers are facing similar challenges. “It is very important for Oman’s steel industry to levy taxes on iron and steel scrap, otherwise financial losses will continue to be incurred,” Ghassan Musabbeh, managing director of Muscat Steel Industries, told OBG. “There also needs to be legislation allowing for the export of steel scrap; currently, individual producers have to sell the material to third parties for export. The establishment of formal steel scrap recycling facilities in Oman should also be prioritised.”

Outlook

Oman’s industrial segments, particularly manufacturing and petrochemicals, continue to drive the sultanate’s economic diversification programme. The country’s SEZs and industrial cities remain the engine of the sector’s growth, providing attractive incentives to investors such as tax and Customs breaks, as well as trade facilitation through the ports. Looking ahead, the opening of petrochemical complexes in Duqm and Liwa is expected to notably boost the sultanate’s output in this segment. Smaller segments such as F&B also present strong prospects for expansion. Furthermore, moves to promote enhanced local procurement and ICV appear to be creating stronger domestic supply chains that can lead to more high-tech methods of manufacturing in emerging segments such as automotive parts.

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