VII. Investment Climate Economic Overview Oman's economy runs on petroleum. Total recoverable proven reserves are now estimated to be about 4.8 billion barrels; the level of these reserves has been steadily rising. Current production is 800,000 barrels per day, the result of a gradual increase in production over recent years. The main producer of oil is Petroleum Development Oman (PDO), which is majority government owned. In addition to oil, the government is beginning to develop its natural gas reserves. These stand at proven exportable deep reserves of 7 trillion cubic units (tcus), although they are expected to be as high as 14 tcus. Oman's overall gas reserves are often reported at 20 tcus but this amount includes reserves not yet proven as well as others difficult to export. In May 1994, the government announced that it had chosen to give priority to a USD 9 billion liquefied natural gas (LNG) facility to be located on the coast southeast of Muscat. The government will continue to review a usd 5 billion undersea gas pipeline to India but the LNG project will be given priority. The government hopes that construction of the LNG facility and required infrastructure can begin within the next year, with the first exports of lng by 1999. The construction phase of this huge project, in particular, should boost Oman's economy for the latter half of this decade. Government investment in infrastructure projects continues. The capital area and other population centers have modern, well-developed communications, utilities and road systems. The 1991-1995 development plan calls for additional investment in infrastructure outside the capital area and this focus will continue in the next five year plan (1996-2000) currently being drafted. The government is also emphasizing the training and employment of Omani workers. Oman currently depends heavily on expatriates, primarily from South Asia, to fill jobs which require physical labor, clerical work and certain technical skills. However, Oman's population is growing at a rate of approximately 3.8 percent and half of the population is age 15 years or younger. These pressures will lead to further government emphasis on Omanization. Continued development and the population pressures have also contributed to a growing water problem. Wells in several villages in Oman's interior have dried up and groundwater aquifers are being seriously depleted. There are increasing levels of salinity in groundwater in coastal agricultural areas. Sultan Qaboos, for the first time, has publicly highlighted the need for water conservation. In the context of the multilateral talks which are part of the Middle East Peace Process, Oman has proposed that a desalination research institute be established in the Sultanate. The government is proceeding with a policy of trying to diversify the economy and government revenues away from heavy reliance on oil. In addition to the LNG project, Oman is developing light manufacturing industries. In order to provide facilities for these efforts, the Public Authority for Industrial Estates manages a number of industrial estates throughout the country. The largest is Rusayl Industrial Estate, located on the outskirts of the capital. There are over 65 factories operating at Rusayl with a number of others currently under construction. Other estates are located in Salalah in the southern Dhofar region and in Sohar up the coast from Muscat. Others are planned for Nizwa, Buraimi and other locations. Section A: ------------------------------ Openness to Foreign Investment ------------------------------ The government's emphasis on income diversification has opened the country to foreign participation in the economy, particularly in the form of joint ventures. Oman is actively seeking private foreign investors, particularly in the industrial field. Those investors who allow technology transfer and provide employment and training for Omanis are particularly welcome. Omani law relating to foreign investment is contained in the Foreign Business Investment Law of 1974. The current Minister of Commerce and Industry is backing a number of laws and regulations aimed at attracting foreign investment but few have yet come into effect. Oman's labor law and the Oman tax law also affect a foreigner's ability to do business in Oman. Since there is no complete body of regulations codifying these laws and many government decisions are made on an ad hoc basis, investors should consider engaging local counsel. Recent changes in the tax law have, for the first time, required Omani companies to pay taxes on profits. The taxes levied against foreign companies and joint ventures were not changed and remain markedly higher than those charged to solely Omani-owned firms. Foreign investment in Oman is allowed only through joint stock companies or joint ventures. In both forms, majority Omani ownership is generally required, although joint venture industrial projects may be up to 65 percent foreign. For firms with foreign participation, the general requirement is that paid up capital must be at least USD 390,000. The Ministry of Commerce and Industry can, upon application by the interested parties, reduce that requirement to usd 78,000. An Omani stock exchange, the Muscat Securities Market, began operation in 1989. However, nationals of the Gulf Cooperation Council (GCC) states are the only foreigners who may invest in traded equity shares. Nevertheless, it is possible for foreigners to invest in Omani shares in the various public companies which the government is gradually privatizing. Industrial establishments with a total cost of USD 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 approvals from other ministries, such as the Ministry of Regional Municipalities and Environment. Foreign workers must obtain work permits and residency permits. In terms of entry requirements, business visitors must obtain in advance permission to enter the country. This can be done either by applying for a visa at an Omani diplomatic mission abroad or by obtaining a No Objection Certificate (NOC). Local hotels can apply for NOCs for their guests, usually for a fee, and local businesses may also apply for them for sponsors. Oman's investment incentives focus on industrial development and include the following: - Five year renewable tax holiday - Low interest loans from the Oman Development Bank - Interest free 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 - Occasional imposition or increase of protective customs tariffs on similar imported goods -------------------------------- Conversion and Transfer Policies -------------------------------- Oman has no restrictions on capital movement into or out of the country. The government has established one offset program connected to a British sale of naval vessels to Oman. Interestingly, there are no restrictions on the nationality of joint ventures established under this program. The first joint venture set up was one with a U.S. company. The Omani rial is pegged to the dollar at a rate of 1 Rial Omani to USD 2.60. The rial was devalued in 1986 due to the collapse in oil prices. The government, however, did not judge the devaluation productive. It is not likely that another will occur in the near future. ------------------------------ Expropriation and Compensation ------------------------------ The dollar value of U.S. investment in Oman is small. To the knowledge of the U.S. embassy, there have been no investment disputes involving American companies over the past several years. There was one case in which an American firm selling goods in Oman was sued by its former agent and was ordered to pay a settlement. This was not, however, a dispute over an investment but over compensation for ending an agency agreement. Oman's belief in a free market economy and desire for increased foreign investment and technology transfer make expropriation or nationalization extremely unlikely. Currently, Oman is moving more towards a free market economy with its modest privatization program. ------------------ Dispute Settlement ------------------ Oman is not a member of the International Center for the Settlement of Investment Disputes. The ultimate adjudicator of business disputes in Oman is the Authority for Settlement of Commercial Disputes (ASCD), an independent judicial body. The Chamber of Commerce and Industry has an arbitration committee to which parties to a dispute may refer their case for less formal and smaller matters. Minor disputes are also handled by local authorities such as walis, the district governors appointed by the central government. The ASCD was originally founded to provide a settlement mechanism more in keeping with international standards than traditional Islamic law. Nearly all international investors use the ASCD exclusively. The ASCD is composed of seven members: a chairman appointed by the Sultan, a representative appointed by the Minister of Commerce and Industry, a local merchant appointed by the Chamber of Commerce and Industry, and three judges trained in law. The ASCD has the jurisdiction to decide cases directly or to arbitrate whenever the contesting parties agree in writing to submit claims to arbitration. The contesting party may be the government of Oman or one of its administrative units. Like most governments, Oman retains the right of immunity. While there is no established mechanism for petitioning the government to waive immunity and appear before the court, some governmental bodies have in the past been persuaded to accept the jurisdiction of the ASCD as the most equitable method of settling a dispute. Decisions of the court are final if the value of the case does not exceed USD 26,000. A court of appeals exists for cases where the sum disputed is greater than USD 26,000, but 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. The Authority sends the opinion only to the disputing parties. The fees for filing a claim are 5 percent of the value of the claim with a maximum of USD 26,000 and a minimum fee of USD 26. Business representatives generally feel that the ASCD's use of general principles of equity in deciding cases not directly covered by Omani commercial law is fair. The ASCD is generally considered to be fair to foreigners. There have been complaints, however, that powerful businessmen with the best legal representa- representa have an unfair advantage. 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 Sharia 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/Incentives ----------------------------------- All enterprises operating in Oman are expected to comply with Omani laws. The law applies equally to all business representatives. Matters such as the replacement of expatriate workers with Omanis, the development of Oman's image as a quality producer, and protection of the environment all affect government regulations on firms. The government recognizes, however, that the market is the most efficient business regulator. 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 are also 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 similar studies if the proposed project is considered sufficiently important to the national economy. ------------------------------------------ Protection of Intellectual Property Rights ------------------------------------------ Oman has a trademark law. Trademarks must be registered and noted in the Official Gazette. Local legal firms can assist companies in registration of trademarks. Draft laws covering patents and copyright protection are under consideration by the government. The proposed patent law is based on standards set by the Gulf Cooperation Council. Some local agents have successfully defended copyrights against pirates by invoking provisions of the exclusive agency agreement law. Oman is not a member of the World Intellectual Property Organization (WIPO) but has coordinated with it in drawing up its draft laws. The government has not yet addressed the issues of the protection of trade secrets or of semiconductor chip layout design (no semiconductors are currently manufactured in Oman). --------------------------------------- Regulatory System: Laws and Procedures --------------------------------------- Although the government officially supports the free market, the regulatory environment it fosters hampers investment and commercial activity. In addition to the ownership, visa and agency requirements already mentioned, general 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 the market or inputs to a project. Oman is also moving forward with a variety of environmental regulations but enforcement of the rules is incsistent. -------------------------------------------------- Efficient Capital Markets and Portfolio Investment -------------------------------------------------- As noted earlier, 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 capitalization of more than USD 360,000 must be publicly traded on the Muscat stock exchange, providing an alternative means to raise capital. The government has two loan programs to promote investment. The Ministry of Commerce and Industry runs one designed to promote industrial investment. The loans are interest free, with long repayment terms. 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 industry, agriculture, fisheries, petroleum, mining and services. Various limits and terms are ascribed, depending on the type and size of the project. For most types of projects, the interest rate is six percent in the capital area and four percent outside the capital area. Individuals who are not nationals of the GCC are unable to invest directly in the Muscat Securities Market. However, a portfolio investment fund was recently established in which non-GCC nationals can invest. Oman's banking sector is stable. Several Omani banks connected with the BCCI scandal have recovered. The Central Bank has raised the capital adequacy requirements for the sector so that they meet internationally-agreed standards. Three bank mergers have reduced the number of banks in what is still a somewhat over- banked market. Because there are still too many banks, most are small. The five largest have combined assets of USD 2.1 billion. The sector suffers from some level of non-performing, largely consumer loans. It is impossible to determine the overall level of these loans but they clearly constitute a drain on the sector's profitability. Regarding cross-shareholding and hostile takeovers, Oman is a small country. Most major businessmen and senior government officials are well-known to each other. These individuals are shareholders in a broad range of commercial ventures and serve on a variety of Boards of Directors. This system is not intended to restrict foreign investment. In such a small community of interwoven relationships, the concept of a hostile takeover is both unknown and unlikely. ------------------ Political Violence ------------------ Politically-motivated violence is unknown in Oman. There appears to be no growing politicization which would make civil disturbances likely. ------------------------------------------- Section B: Bilateral Investment Agreements ------------------------------------------- There is no Bilateral Investment Treaty between the U.S. and Oman. ----------------------------------------------- Section C: OPIC and Other Investment Insurance Programs ----------------------------------------------- Oman is eligible for Export-Import (EXIM) Bank of the United States financing and there are several projects which have used EXIM financing. Oman has an agreement with the Overseas Private Investment Corporation, but OPIC has not been active in Oman for a number of years. ----------------- Section D: Labor ----------------- Oman relies heavily on expatriate labor, primarily from India, Pakistan and Sri Lanka, to perform menial and physically taxing tasks. The Omani labor law stipulates basic practices to safeguard workers. Wages are set by employers within guidelines delineated by the Ministry of Social Affairs and Labor. 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. 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. In 1994, Oman became a member of the International Labor Organization (ILO). In June 1994, Oman's Minister of Social Affairs and Labor headed the Sultanate's first delegation to the annual ILO conference in Geneva. ------------------------------------------ Section E: Foreign Trade Zones/Free Ports ------------------------------------------ Although there have been government discussions in the government about establishing free trade zones in Oman, none has been established so far. ---------------------------------- Section F: Capital Outflow Policy ---------------------------------- As noted above, Oman places no restrictions on capital. There are no government incentives for Omani investments in developing countries. -------------------------------------------- Sections G and H: Foreign Direct Investment Statistics and Major Foreign Investors -------------------------------------------- No systematic information on foreign direct investment is available. The largest foreign investor is probably Shell Oil, which holds 34 percent of the shares of Petroleum Development Oman, the state oil company. Other companies, such as Occidental Petroleum, Japex, Amoco and Elf Aquitaine, have also invested in the petroleum sector. In addition, a few foreign firms, including two U.S. ones, have entered into industrial joint ventures with Omani firms. The two U.S. firms are Gorman Rupp (water pumps) and FMC (wellhead equipment). Both joint ventures will involve modest manufacturing operations.