Legislative changes to boost Oman's FDI and build public partnerships with private sector

The question of how to shift the economy to be more focused on the private sector is a central government concern. In early 2018 the Ministry of Finance published its annual statement on Oman’s general budget for 2018, setting out the strategic objectives that public spending is driving towards. Among the many budgetary goals referred to in the 2018 statement was a welcome reiteration of the government’s plans to significantly enhance the legislative framework applied to investment.

The decision to overhaul the laws supporting business growth is an important one. While Oman performs well relative to its regional peers in global indices such as the World Bank’s ease of doing business index – ranking 78th out of 190 countries in 2019 – there is still room for improvement in areas such as the protection of minority investors and resolving insolvencies. The three pieces of investment-related legislation that the most recent budget drew attention to are therefore of interest to the investment community both home and abroad.

PPP

One way in which the government intends to accelerate investment projects and private sector initiatives is through an enhancement of the public-private partnerships (PPPs) framework and a reform of the legislation governing these agreements. Long-term arrangements between government entities and private parties have become increasingly common globally, as states seek to reduce capital costs and shift development risk and managerial responsibility onto the private sector.

Large-scale infrastructure projects such as hospitals, schools, roads and telecommunications systems are all common targets for PPP project contracting, but in the GCC the power and water sectors have emerged as the most frequent recipients of funding through this model. This is the case in Oman, which was one of the region’s early adopters of the PPP framework. The first PPP in the country was the Al Manah independent power project, established in 1994. The sultanate has since deployed the model on a regular basis to develop its power and water infrastructure. For example, in April 2018 the Oman Power and Water Procurement Company signed agreements to develop the Salalah Independent Water and Power Project in partnership with a consortium led by Saudi Arabia’s ACWA Power, which also included French water and management company Veolia and Oman’s Dhofar International Development and Investment Holding Company (DIDIC). On completion, the plant will be run by Veolia Middle East, DIDIC and Nomac, a Jeddah-based operation and maintenance company that specialises in power production and water desalination.

New Legislation

For the past quarter of a century PPP projects in Oman have been undertaken according to a loose regulatory framework, determined by the Privatisation Law of 2004 and the Tenders Law, key legislation that regulates government procurement in Oman. The new PPP law, which the government has been working on since late 2017, is intended to establish a clearer legislative platform, although the finer details of the law have yet to be revealed. The most significant challenge for the government as it finalises and implements its new legislation will be extending the use of the PPP model into segments beyond power and water.

Other than a small number of independent privatised airports, the PPP model has yet to gain real traction in the region, accounting for an estimated 5% of contract awards between 2011 and 2017, according to MEED, a regional business intelligence firm. In many instances, such as Qatar’s FIFA World Cup stadiums and Abu Dhabi’s Al Mafraq-Ghuwaifat Road, attempts to develop projects as PPPs have been abandoned, and the standard engineering, procurement and construction (EPC) model returned to. The reasons for the muted growth of the PPP model in the GCC are numerous. One notable challenge, common across all markets is correctly assessing return on an investment in the absence of demand data, as this makes PPPs a risky undertaking for developers. How the new legislation will affect the risk allocation between the government and the private partner is therefore a key question that will need to be answered.

Foreign Investment Law

A proposed foreign capital investment law is also expected to act as a stimulant to inflows of investment over the coming years. The legislation has been in the pipeline for some time, and its main precepts presented in its third and final draft form in 2016. The proposed law represents a comprehensive overhaul of the Foreign Capital Investment Law of 1994, which an assessment by the Ministry of Commerce and Industry, with assistance from the World Bank, found to be inadequate in a number of areas.

The draft law includes important definitions that are absent from the current legislation, and more clearly outlines the rights and obligations of foreign investors. It also removes a number of restrictive provisions which are believed by many in the investment community to have hindered the flow of global capital into the country. The most significant of these is the requirement for local participation in commercial companies, which has been a barrier to investment to a varying extent across the GCC. Tackling this issue has proved politically challenging in the region, but governments around the Gulf have begun to take steps to dismantle what is increasingly seen as an unproductive legal framework.

The most important question for Oman as it introduces its new law is which parts of the economy are to be exposed to 100% foreign ownership. Some economic segments will be protected from the change by being included on the negative list on the grounds of national interest or security. The constituents of the list will be one of the more hotly debated aspects of the legislation as it nears promulgation.

Other significant components of the draft law are the removal of a minimum capital requirement for foreign investors and the complete removal of tax incentives and exemptions, which are instead to be addressed in the income tax legislation.

Bankruptcy

The lack of a bankruptcy law is also seen as a significant obstacle to foreign investment in Oman. While the Commercial Code of 1990 and the Commercial Companies Law of 1974 provide a framework for the bankruptcy of traders, the emphasis of the framework is on liquidation of insolvent companies rather than the rights of investors in the case of a failing company. A comprehensive bankruptcy framework acts as an important filter in any given business universe, ensuring the survival of economically viable companies while reallocating the resources of the economically inefficient.

A bankruptcy law by which troubled companies can cheaply and quickly return to normal operation and more efficiently honour obligations to creditors is a central component of advanced economies. Insolvency legislation is also increasingly being viewed by emerging economies as a useful means to encourage lending to the small and medium-sized enterprises (SMEs), upon which much of their future economic expansion depends. The establishment in law of the responsibilities of creditors and debtors allows banks to make proper risk-assessed decisions, in turn enabling them to extend credit that they might have previously declined. This is an important benefit of modern insolvency frameworks, and in the context of Oman’s long-running determination to boost its SME sector, reinforced by the launch of a OR70m ($181.8m) government-backed fund first launched in February 2017 for the creation of more SMEs in the sultanate, the promulgation of a dedicated bankruptcy law would be a significant step.

As with the Foreign Capital Investment Law, Oman’s bankruptcy legislation has been in the development phase for some time. A draft was reportedly 70% complete in 2012, during a period in which governments across the region were considering passing similar legislation as a response to some of the systemic weaknesses exposed by the economic downturn of 2008. The promulgation of the law, if implemented as it has been in the neighbouring UAE, would provide much-needed clarity regarding bankruptcy procedures, and allow for quicker and simpler settlements. This would encourage an improvement in investor confidence, as well as having the potential to move Oman up the rankings of the World Bank’s ease of doing business index.

Taken together, the triumvirate of PPP legislation, Foreign Capital Investment Law and a new Bankruptcy Law are one of the most significant tranches of legislation seen in Oman for years. As always, however, their impact on the economy will lie in the detail of the legislation when it is finally promulgated, as well as the efficacy of its implementation.