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Creating a world of value in Al Batinah

Article - March 21, 2012
Jamal Aziz, CEO of Sohar Freezone and Deputy CEO of Sohar Industrial Port Company (SIPC), and Andre Toet, CEO of SIPC, share why Sohar is fast becoming the region’s center of attention

What was the vision behind the establishment of the industrial hub in Sohar and what were the milestones in the history of Sohar Industrial Port Company (SIPC)?

JAMAL AZIZ: The entire Sohar project started when the government decided that instead of solely relying on the sale of its natural resources of oil and gas to international markets as raw or as refined oil products, that value addition should be created in country with those natural resources. That is how the idea of having an industrial hub in Oman came up. Sohar was chosen as the primary location for the oil and gas industries because Sohar is one of the largest communities along the Al Batinah coastline, which is the most densely populated in the entire country. Two-thirds of Omanis live in the Al Batinah area. The idea is to take those natural resources and create industry to diversify the economy and add value, and likewise create jobs and economic wealth.
This process started in the early 1990s and in the late 1990s, the government started developing the infrastructure. In 2002-2003 SIPC was established as a joint venture between Oman and Rotterdam to actually develop and manage the port and industrial areas to cater to the oil and gas industries. The partnership between Oman and Rotterdam was really a meeting of the minds at that time. Oman wanted a partner with the knowledge, reputation and experience of developing industrial areas of this magnitude. For Rotterdam, it was a matter of gaining exposure and being seen as an international organization with worldwide experience that can be offered to many different places. Very close communication took place and the concession agreement between Oman and Rotterdam was signed in a relatively short period of time. Both parties could see the value for each other.

ANDRE TOET: This was totally new territory for Rotterdam. At the time, Rotterdam was very much focused internally and the German market, which is their biggest market. It was very important for them to go abroad and expose their skills and know-how to the world. Sohar and the Omani government came along at this time, and there were good personal relations between the two parties. This was the first international venture for the Port of Rotterdam.

JAMAL AZIZ: What is also unique about the SIPC model is that we have initiated the ‘landlord’ model, which is unknown throughout the region. You bring in a private entity – in this case SIPC – and they do what the government traditionally does; establish rules and regulations, build infrastructure, implement all the necessary policies, etc. This model removes that burden from the government, and puts it in the hands of an experienced special purpose vehicle that can actually accomplish these things on behalf of the government. So we build the infrastructure, create international standards for health, safety and environmental protection and the licensing, ourselves. We save the government and our customers’ time and money by trying to do things as efficiently and quickly as possible. We get reputed international operators to provide the services in the area.
If you follow other models of multi-industry ports in this region, the facility manager is also the operator in many ways. For example, you see that in the UAE and the rest of the Gulf Cooperation Council (GCC) region. So our model is quite unique and it has proven to be a good model to follow.

ANDRE TOET: As the government, you should not want to invest in supra-structures; you would rather ask internationally reputed firms to do the investment for you in, for instance, terminals. This model we call the Landlord model. Not having the Landlord model could become a very expensive investment for the government. In Sohar, you actually bring in the operator and compete with the international market. France for instance is an example changing from a fully owned port infra/supra structure to a Landlord model. Initially people were skeptical whether this model would work. Because people think that if you are not operating, you lose control. However, Sohar is a good example that this model is working.

JAMAL AZIZ: At the end of the day you have internationally reputed companies in the port that do all of their port operations and services themselves. For instance, Steinweg is known in 45-50 countries in the industrial community. When you have the Port of Rotterdam co-managing the port, with the likes of Steinweg, Oiltanking, Odfjell, Huchison and Tata as terminal operators, people begin to think that this is a world-class port in Arabia. That gives us credibility and accordingly Sohar is working to international standards. This is the first heavy multi-industrial hub in Oman. The environmental, health, safety and security laws related to smaller industrial estates have not yet matured to a heavy-industrial level. We came at a time when some of these standards were not clear or detailed enough, because that type of business did not exist in Oman.

In line with the Vision 2020, the ports that have been created along the coastline, in Sohar, Salalah, and most recently Al Duqm, have a specific purpose that has been strategically planned by the government. What is specific to Sohar Industrial Port?

ANDRE TOET: The port in Salalah is a completely different port, having been set up as a transshipment hub for the East-West routes. It has a very beautiful, strategic location, and it has been very successful. If you see what serves the Salalah and hinterland market, you will notice that it is actually very little. It is a strategic hub for a global network, which is done very well. The Omani government together with the late Sea-Land company, now Maersk, have made a beautiful concept there.
Sohar is an industrial commercial port that acts as a gateway for Muscat and Battinah region, since two-thirds of the population lives in the Al Batinah region. At the same time, it has developed several industries (oil, iron/ore, aluminum). The next step is to develop the downstream industries in the Sohar Freezone.
Sultan Qaboos Port in Muscat is a totally different story as a commercial port for the Muscat area. It is a beautiful area, but it cannot grow. It is confined in a mountainous area and the port is running at capacity and has no means to physically expand. Additionally, all of the traffic, every single container, has to go through the city. This creates congestion and environmental issues, so Port Muscat is not sustainable in the long term.
This was one of the reasons the government decided to consolidate cargo in Sohar. This was a very difficult process, because there is no room to maneuver your logistics and you will never be able to attract real volumes. Nowadays, volume is so important. You attract bigger ships, lower your costs and in doing so you also lower the logistics distribution costs for an entire country, and in the end the consumers benefit. That is the philosophy behind the development in Sohar.

The transition of the commercial activities from the Sultan Qaboos Port to SIPC is planned to happen over the coming two years. What impact you think it will have on the SIPC’s activities?

ANDRE TOET: In itself, the volumes are not even that big. The Port of Muscat has 350,000-360,000 twenty-foot equivalent units (TEUs) and general cargo/ break bulk. The idea is to consolidate all volumes in order to increase vessel size and reduce costs

JAMAL AZIZ: You need to create a critical mass to attract the main liner ships as they prefer a location where they do not have to venture all the way inside the Gulf, but rather a location from where its cargo can be delivered to the Gulf markets if need be. So you are not just looking at the port, but at your connections with the markets you want to serve. It is about looking at the entire network. So Sohar would be a more attractive option than ports in the Gulf if a critical mass can be achieved.

In order to make the Sohar destination more attractive to businesses you have also developed a one-stop shop. What other facilities and incentives are available at Sohar Port and Freezone?

JAMAL AZIZ: If we are talking about Sohar, we have to talk about the port, trade area, and airport all connected, since these are all branded collectively under the brand of Sohar. The Sohar offering is all of these things combined. We have a very strong industrial base in oil and gas, metals, petrochemicals, and so on, which is supported by modern, multi-modal transport infrastructure. This also comes with energy availability outside the Strait of Hormuz, with local manpower resources. This is really what Sohar is about.

Sohar’s location is very strategic in a market that has India and Pakistan on one side. Then you also have the GCC and the Middle East. Sohar sits in the center of all of that, so it is a great location for the consolidation and distribution of goods and to add value to those goods and serve those markets. Secondly, there is a multi-modal transport system. The airport will be ready next year, and the railway will be ready in four years, which is very important for containers and dry bulk commodities. There is also the new expressway, which passes through Muscat all the way to the UAE in the Gulf.

Another incentive is the investment climate for foreign investors in Sohar. I believe the most important thing for investors is the speed by which the service is offered. Taxes in Oman are very cheap when compared with other locations in the world. There is no personal income tax; the only tax that applies is a corporate income tax, which is only 12% of the net profits.

Customs should not be an issue, because when you come to a location where you are importing and re-exporting goods, the current law offers bonded status. But in the Freezone goods are imported and re-exported without any duty payment. Freezone investors are primarily concerned with how fast you can provide the service, how easy it is to do business, and if there are any restrictions on foreign-owned investments. Some countries in this part of the world demand a local partner. But in Sohar Free Zone, it can be 100% foreign owned.

The one-stop shop is actually that service – whereby the tenant does not have to go to any government or third-party institution to obtain permits, licenses, or visas. We do that on behalf of our customers. Some customers even require financing for their projects. We talk to the banking community ourselves, and try to bring our customers in to the banks and financial institutions.

What is the occupancy of the Freezone so far? What kind of investors would you like to attract in the future?

JAMAL AZIZ: So far $14 billion have been invested in Sohar, which includes investment in infrastructure, such as power plants, water services, port infrastructure, and all of the big industries that have been setup.

We only started just last year, since the Royal Decree was issued in 2010. Although there is slow recovery since the global financial crisis the world still has yet to reach the level of investment appetite that we had in the years before 2008. But we see value coming in from large industries, like the American industries, whether in agriculture, automotive, plastics, or petrochemicals. They are changing their strategies to make themselves more competitive, both in terms of the markets they want to reach, and operational efficiency.

Where Sohar comes in, is that this is a great industrial area with lots of land available, surrounded by huge markets which you can serve from this location. But we feel that we are still competitive in terms of our operational costs. If you look at the price of electricity, water, and even labor, we are very cost competitive. These are strategic reasons for some companies to start repositioning themselves. They can start out by creating a pilot project, similar to what we have done with the food hub with the South Africans, or going into a mass, central, regional distribution hub for the area.

ANDRE TOET: I find that in first instance investors usually have difficulties because they do not know where Oman/Sohar is located and when they hear ‘the Middle East’ they always think it is a problem. But then I love to see their faces when they actually visit Sohar. Until now, everyone who has visited Sohar – whether Americans, South Africans, Indians, or Chinese – is flabbergasted by the development taking place and the people working here. It is always an eye-opener for them. I believe that it is important that we get them into Oman, in order to showcase Sohar. They almost always leave gob-smacked. Just look at the strategic location of Oman. As a country, Oman has always played the role of peacemaker and dealmaker. From the point of view of a physical strategic location, it is a beautiful place to do business.

JAMAL AZIZ: The Freezone is twice as large as the port itself. But you cannot develop that all at once. For phase one, we started out with five square kilometers and have attracted so far 12 tenants in various fields. In metals, we have ferrochrome, steel-making, steel logistics, container depots, and the food hub. We expect that 2012 will be a good year. The response seems to be encouraging.

The space available in Sohar allows for the creation of big industries clusters…

JAMAL AZIZ: The clusters were created as part of the expertise we received from Rotterdam. You want to create economies of scale and have the production of one plant as a feedstock for the production of the next plant. That is the idea of co-siting and clustering. For example, the petrochemical cluster includes a refinery, which feeds two main projects in Sohar – the Aromatics Project and the Polypropylene Project. These two projects get their feedstock from the refinery.
On the metal side, we have the iron ore unit of Vale, which produces pellets. That in turn serves as a feedstock to the Jindal Shadeed DRI plant, which produces hot briquetted iron. The port produces the first line of primary products, from which you can go into any number of downstream industries, including steel rolling and fabrication, plastics and other chemical projects. We would like to do those sorts of projects in the Freezone. In minerals, we have begun a cluster of ferro-alloys, which is a type of metal with various applications. They use natural minerals available here in Oman, like copper, chrome, and silicone. There is also the aluminum smelter, which can enjoy many additional downstream applications in our Freezone.

ANDRE TOET: Then we re-export it, which is part of our end game as well. Sohar will become both an import and export port.

Such a groundbreaking project has a huge impact on the local community. How significant is the contribution of SIPC and Sohar Freezone to the social development of the region in terms of job opportunities and lifestyle?

JAMAL AZIZ: So far we have created 6,000 direct jobs in the port. However, these industries have allowed indirect employment into various sectors such as services, procurements, hospitality, real estate, and transport, and this has been huge. If you talk about the indirect jobs that serve those industries, you are talking about three to four times that amount.

ANDRE TOET: From Rotterdam we know that one job created in the port creates at least three jobs outside. The average age in Oman is 19, so you can see large quantities of young people coming to the market on a yearly basis to apply for jobs. We have to create more investment in the Freezone and the port in order to become a job creation vehicle, and to attract people with the right skills. You always have to find a balance between your investments in industry and your investments in the environment, so that people do not feel threatened by industry. Oman always makes a very strong effort in that respect by asking investors to employ the best available techniques. For the last few years, if you are coming to Oman and investing in the Sohar Freezone or the port, you have to be using the best available techniques. The Freezone and the port are vehicles of economic growth and wealth, which does not happen from one day to the next. It is a gradual process, but just remember that 6,000 jobs have been created, with $14 billion dollars in a mind-boggling time period of just four to five years. You cannot develop any faster.

JAMAL AZIZ: Education and training are extremely important cornerstones for this entire project. Jobs and people are the cornerstones of any development. Two-thirds of the Omani population lives in the Al Batinah area, and approximately 60% are young, and at an employable and trainable age. But the demand continues to grow to create further training infrastructure and educational platforms, to either teach them about work and work ethics, or bring them in to certain industries and start to learn. The first international maritime college was established in Sohar as part of the strategy, which is necessary to train and educate people so they can enter the workforce. Sohar has been a platform to train, educate and re-inject qualified workforce back into the national economy, not just in Sohar. We want to encourage the establishment of knowledge centers in the Freezone, not only to train and educate people for the jobs located in Sohar, but for the rest of the world. If we can bring in international educational institutes, we can market it as a hub for knowledge.

Out of the 6,000 direct jobs created, how many are Omanis?

ANDRE TOET: It varies a little bit from industry to industry, but on average I would say about 60%. In our organization, SIPC, it is 75% Omani. You will see those figures gradually increase year-on-year. Sohar is still quite a ‘new kid on the block’ when you look at ports. You have to appreciate the speed with which this was developed. Jamal told me once that the initial plan was that the first part of the port would be developed by 2025. This is a space of 2,000 hectares, about 80% of which is already committed. According to the concession agreement with the government, the obligation for development by this company was no more than 25 hectares a year. And now it is almost done. Five or six years down the road it will be fully completed.

JAMAL AZIZ: We have been fortunate that the markets have been very active and growing. This region is really growing, and has continued to grow year-on-year even during the financial crisis. We are taking advantage of that, again because of the location and Oman’s general attributes. Investors look around and somehow, the international investors that we have here find this to be an ideal location: financially, strategically, socially and politically.

ANDRE TOET: Of course we have to thank them that they were daring enough to invest in Sohar. There is not much we can do as SIPC being the landlord. They need to have the will and belief to invest in Sohar and in the Freezone.

What do you think is important for the international audience to know about Oman today?

JAMAL AZIZ: Unfortunately Oman has been perceived by many as part of a troubled Middle East region. In reality it is completely different. Although we had some labor unrest last year when there was a change of government, it has been very quiet, progressive, prosperous, and business as usual since then.

Mr. Toet, as an expat, what is it that you like most about Oman?

ANDRE TOET: What I like most is working with the Omanis. I worked for many years in Thailand, and I see many similarities between Thais and Omanis in terms of how service-minded, friendly, and open they are to expats. They listen to what you have to say, and if you do it the other way around by also listening to your counterparts, it is a very good place to be. That is not the case in every country. Sometimes you come and work in a country, and you are not really appreciated as an expat. If you come to Oman as an expat, you feel at home.