The government’s privatisation scheme aims to cut public expenditure and ramp up returns

In an effort to reduce state expenditure and boost revenues, the government recently announced a plan to sell shares in a wide variety of state-owned entities in the coming years. The privatisation effort, which could eventually result in the transference of a substantial percentage of more than 60 state-held firms to public ownership, is widely expected to have a transformative impact on Oman’s fiscal position, not to mention the capital markets sector, as well as the broader financial system. In line with this effort, the government is also working to boost private involvement in a series of large-scale infrastructure and development projects. “Instead of the government carrying the burden of 100% of the big projects, the private sector should be allowed and encouraged to take part,” Darwish Al Balushi, Oman’s minister of financial affairs, told local media in early 2014. “This is one way to control expenditures.”

Overstretched

Controlling public expenditure is widely considered to be a necessity in Oman at the moment. In mid-2013 the IMF released a report on the sultanate, stating, “spending restraint and non-oil-revenue enhancing measures are needed to support a sustainable fiscal policy in the medium term.” These recommendations come after three years of rapid increases in public expenditure.

From 2012 through 2013 budgeted state spending increased by 29%, up significantly from a 10% increase from 2011 through 2012. The majority of this spending has gone towards expanding the social safety net and boosting employment and wages in response to social unrest in 2011. In early 2013 the government increased the minimum wage for Omanis working in the private sector by more than 60%, from OR200 ($518) per month to OR325 ($842) per month in an effort to encourage Omanis to apply for positions at private firms and, as a result, reduce public sector employment.

Ensuring that Oman’s population is employed remains a key challenge moving forward. Under the sultanate’s eighth five-year plan, which covers the period 2011-15, the government expects to create between 200,000 and 275,000 new jobs, which represents annual job growth of 40,000 to 55,000 new positions. According to the Central Bank of Oman’s 2013 annual report, “the government is focused on creating employment through increased investment, developing labour-intensive industries, promoting small and medium enterprises and expanding the public sector. … Employment opportunities created in the public sector during 2012 increased by 5.4% as compared to 12.5% in the previous year.” As of the end of 2013 public sector jobs were primarily performed by Omanis, who accounted for around 86% of public sector positions, while foreigners made up more than 89% of the private sector workforce. The government’s longstanding Omanisation scheme aims to boost the percentage of Omanis in both the public and private sector workforce (see analysis).

Balance Of Payments 

According to the IMF, Oman’s government spending increased by 70% between 2010 and 2012. While the numerous programmes financed by this jump have had a positive impact on employment and quality of life in the sultanate, they have cost the government a substantial amount of money, and have had an adverse impact on Oman’s fiscal situation. According to the IMF, so long as the state continues to spend at this pace, the sultanate could potentially fall into a deficit of around 4% as soon as 2015. Depending on the price of oil, this figure could jump to more than 13% by 2018. The IMF’s deficit projections take into account both increased government expenditure and steadily increasing uncertainty in oil markets. Indeed, despite rising levels of GDP diversification in recent years, oil exports made up nearly 80% of government revenues in 2013.

Released in January 2014, Oman’s 2014 budget reflects the sultanate’s fiscal situation. The document lays out a 5% increase in public expenditure against an expected 5% jump in revenues. According to the official budget document the government expects to see a budget deficit of OR1.8bn ($4.7bn) in 2014, which it is planning to make up with a mix of existing reserves, borrowing and financing from domestic financial markets.

The sultanate’s 2014 projected revenues are based on the conservative oil price of $85 per barrel. However, the drop of the Brent crude oil price to around $80 a barrel in the autumn of 2014 and then to close to $60 in December 2014 from around $115 in June is likely to push Oman’s budget into deficit in 2015 unless oil rebounds sharply.

Privatisation At The Forefront 

It was against this economic backdrop that the government’s privatisation drive was announced in late 2013. “We have a privatisation strategy, which was approved by the government,” Minister Al Balushi told local media in late September 2013. “[It] is a two-fold strategy, which opens the doors for the private sector to venture into new projects and reduces the government stake…[in] companies that are wholly or partially owned by the government.” According to the Ministry of Finance, which is overseeing the divestment scheme, the government could eventually sell partial stakes in around 65 state-owned companies. Major areas of focus for privatisation include the telecommunications sector, the transport industry and public utilities, among others.

In April 2014 the state kicked off the privatisation drive by selling 19% of the Oman Telecommunications Company (Omantel) in two tranches. Half of the stake was sold in a private placement to wealthy Omani individuals and institutional investors, while the remaining 9.5% was sold to retail investors in an initial public offering (IPO) on the Muscat Securities Market (MSM), the sultanate’s stock exchange. Each tranche was made up of a 71.25m shares. According to data from the MSM, the institutional tranche was 1.99 times oversubscribed, while the retail tranche was 1.05% oversubscribed. In total the sale raised around OR204m ($528.2m) in capital for state coffers, while allowing the government to retain control of Omantel. Prior to the share listing the state owned 70% of the company; after the sale of 19% this stake dropped to 51%.

Retail investors, for their part, have benefitted substantially from the deal as well. According to calculations carried out by Reuters, the 9.5% of the firm that was listed on the MSM sold for around OR1.35 ($3.50) per share in early April 2014. As of the end of August 2014 Omantel’s share price had risen to OR1.73 ($4.50) per share.

Upcoming Listings 

As of December 2014 the government had yet to move forward with other privatisation efforts, though this situation is widely expected to change soon. “We have only seen the Omantel listing thus far,” said John Spencer, the head of the department of strategy and business development at the Capital Market Authority, the sector regulator. “However, we expect to see a growing number of new privatisations in the next few years. The government’s spending needs are huge right now.” Indeed, as part of the late-2013 announcement of the privatisation programme, the government listed a handful of firms that would likely eventually be at least partially privatised.

In June 2014 the Ministry of Finance and the Public Authority for Electricity and Water launched an effort to privatise various components of the state-owned Electricity Holding Company, which owns a group of firms involved in electricity generation, transmission and distribution in Oman.

The Muscat Electricity Distribution Company, which is involved in supplying electricity in the capital region, is first on the privatisation docket, with other firms to follow. These public utilities companies – the majority of which have a large customer base and long-term contracts in place – are widely expected to attract a considerable amount of attention from investors when launching an IPO.

Other sectors that will likely be tapped for privatisation in the coming years include the construction materials industry – particularly the cement segment – and various agricultural concerns. According to the authorities the oil and gas sector, which accounts for a majority of government revenues in Oman, will likely not be privatised anytime soon. That said, in early 2014 the Ministry of Finance announced that it would potentially be open to partnering with foreign direct investors in the hydrocarbons and tourism sectors, both of which are considered to be key long-term drivers of economic growth in the sultanate. Regardless, with more than 60 firms currently being considered for privatisation, local investors are looking forward to new investment opportunities for years to come. “This is a huge opportunity for investors and the capital markets sector,” said Spencer. “Depending on the number of firms the government decides to list, the MSM could potentially double in size in the coming years.”