'Manufacturing for Wellbeing': the Sultanate of Oman’s Manufacturing Strategy 2040

1.1 Economic and social development in the Sultanate of Oman 1970-2017: oil dependency ........ 1

1.2 Manufacturing development 1990-2017: diversifying into industrial commodities ................... 4

1.2.1 Early industrialization ........................................................................................................... 4

1.2.2 Shifting policy direction ........................................................................................................ 5

1.2.3 Structural transformation towards industrial commodities ................................................ 6

1.3 The Sultanate of Oman’s manufacturing in comparative perspective ....................................... 10 2 Emerging economic and social challenges ........................................................................13

2.1 Global trends affecting manufacturing ...................................................................................... 13

2.2 Key local economic and social issues.......................................................................................... 16 3 Why manufacturing matters ...........................................................................................21

3.1 Economic Growth ....................................................................................................................... 21

3.2 Linkages and exports .................................................................................................................. 22

3.3 Innovation and change ............................................................................................................... 22

3.4 Employment and quality of jobs................................................................................................. 25

3.5 Social wellbeing .......................................................................................................................... 27 4 ‘Manufacturing for Wellbeing’ ........................................................................................29

4.1 Strategy statement, objectives and rationale ............................................................................ 29

4.2 Drivers of ‘manufacturing for wellbeing’.................................................................................... 31

4.2.1 Natural resource-based industries ..................................................................................... 32

4.2.2 Capital-intensive industries ................................................................................................ 34

4.2.3 Knowledge-driven industries .............................................................................................. 36

4.3 Enablers of “manufacturing for wellbeing” ................................................................................ 40

4.3.1 People ................................................................................................................................ 40 -v-

4.3.1.1 Challenges related to the manufacturing sector and the 4th industrial revolution........ 41

4.3.1.2 Challenges at the level of the education and TVET system ............................................ 42

4.3.2 Technology ......................................................................................................................... 44

4.3.2.1 Challenges to Knowledge and Technology Generation .................................................. 44

4.3.2.2 Challenges to Knowledge and Technology Diffusion ..................................................... 45

4.3.2.3 Challenges to Knowledge and Technology Deployment ................................................ 46

4.3.3 Governance......................................................................................................................... 47 Contents

4.3.3.1 Policy and institutional coordination and implementation challenges .......................... 47

4.3.3.2 The challenge of having clear mandates ........................................................................ 48

4.3.3.3 The need for a lead ministry ........................................................................................... 49

4.3.3.4 Appropriate incentives, rules and regulations ............................................................... 50 4.3.3.4.1 Attracting investment............................................................................................... 50 4.3.3.4.2 Benefitting from location-specific advantages......................................................... 52 4.3.3.4.3 Growing SMEs........................................................................................................... 53 5 Linking the Sultanate of Oman’s 2040 strategy with other sectoral strategies and the Sustainable Development Goals (SDGs) ....................................................................................................57

5.1 Economic sectors’ strategies ...................................................................................................... 58

5.2 Social sectors’ strategies ............................................................................................................ 59

5.3 Services sectors’ strategies......................................................................................................... 60

5.4 SDGs ............................................................................................................................................ 61 6 Achieving Strategy 2040: Key Performance Indicators (KPIs) .............................................63

6.1 KPIs in the Sultanate of Oman Strategy 2020 and the Ninth Five-Year Plan (2016-2020) ......... 63

6.2 ‘Manufacturing for Wellbeing’ 2040 KPIs................................................................................... 63

6.2.1 Industrialization intensity (MVA) ........................................................................................ 65

6.2.2 Manufacturing exports in total exports (MEXP) ................................................................. 65

6.2.3 Medium- and high-tech MVA in total MVA (MHT MVA) .................................................... 65

6.2.4 Linking KPIs to the performance of strategic sectors ......................................................... 65

6.2.5 Characteristics of KPIs ........................................................................................................ 68 7 The making of the Sultanate of Oman’s ‘Manufacturing for Wellbeing’..............................71

7.1 Strategy and policy phases ......................................................................................................... 71

7.2 A brief description of the methodology ..................................................................................... 73

7.2.1 Production capacity ............................................................................................................ 73

7.2.2 Export potential .................................................................................................................. 74

7.2.3 Import substitution............................................................................................................. 74

7.2.4 Dynamism ........................................................................................................................... 75

7.2.5 The ranking of industries .................................................................................................... 76 8 List of references and contributors ..................................................................................79

8.1 List of references ........................................................................................................................ 79

8.2 Contributions to the report by international consultants .......................................................... 82 - vi - List of figures Figure 1-1: GDP per capita of the Sultanate of Oman (US$ current and constant) .......................................... 2 Figure 1-2: The Sultanate of Oman: Structure of economic activities (1970-2016, US$ constant 2011, UNSD) .. 2 Figure 1-3: The Sultanate of Oman export trends (US$, billion) ....................................................................... 3 Figure 1-4: The Sultanate of Oman: MVA and GDP real growth index ............................................................. 5 Figure 1-5: The Sultanate of Oman Structural change within manufacturing .................................................. 8 Figure 1-6: Sultanate of Oman: Structural change within manufacturing (change in shares) .......................... 9 Contents Figure 2-1: Population by region: estimates, 1950-2015, and medium-variant projection, 2015-2100 .......... 14 Figure 2-2: Omani Population by type, 2000-2017 ......................................................................................... 17 Figure 2-3: Number of employees (Sultanate of Oman), 2007-2017 .............................................................. 18 Figure 3-1: MVA and GDP real growth index (Sultanate of Oman) ................................................................. 21 Figure 3-2: Sultanate of Oman: Trends in Labour Productivity, 1970-2016.................................................... 22 Figure 3-3: Changes in manufacturing relative share as incomes grow (%) ................................................... 25 Figure 3-4: The wages in manufacturing industries (total manufacturing)..................................................... 26 Figure 4-1: Two interconnected circles framing the skills dynamics in the Sultanate of Oman ..................... 40 Figure 6-1: Manufacturing for Wellbeing 2040 KPIs ....................................................................................... 64 Figure 6-2: Medium- and high-tech projection 2040 ...................................................................................... 68 Figure 7-1: Stages for building the Sultanate of Oman’s Industrial Development Strategy 2020-2040 ......... 72 Figure 7-2: The performance of manufacturing industries (38,500 income per capita, PPP 2011): Pharmaceuticals, medicinal chemicals and botanical products industry ........................................................ 74 Figure 7-3: The performance of manufacturing industries (38,500-57,000 income per capita, PPP 2011): Pharmaceuticals, medicinal chemicals and botanical products industry ........................................................ 75 - vii - List of tables Table 1-1: Comparative Indicators (2016) ....................................................................................................... 11 Table 2-1: Pollutants resulting from manufacturing ....................................................................................... 16 Table 3-1: R&D expenditures, by income group and sector, 2011.................................................................. 24 Table 4-1: Natural resourced-based industries ............................................................................................... 33 Contents Table 4-2: Capital-intensive industries ............................................................................................................ 35 Table 4-3: Knowledge-driven industries .......................................................................................................... 37 Table 4-4: Investment incentives for foreign capital in the Sultanate of Oman ............................................. 51 Table 4-5: Special Economic Zone classification.............................................................................................. 53 Table 6-1: Industry conversion ........................................................................................................................ 67 Table 7-1: List of variables and thematic areas ............................................................................................... 73 - viii - Foreword: Oil has brought considerable progress to the handful of industrial commodities. Global Sultanate of Oman. The standards of living have manufacturing is the hotbed for innovation as the risen, Omanis enjoy access to goods, services and majority of research and development cultures from around the world, and the Sultanate investments and product and process has made significant strides in health, literacy and experimentation takes place in industrial firms. education. Oil revenues have also contributed to Many of the innovations being used in other the modernization of infrastructure that will be sectors originated in manufacturing. There is no available to our children and grandchildren. Oil reason why this should not be the case in the will surely continue to play a role in facilitating Sultanate of Oman as well. A small economy does development in coming years. not represent a constraint, as some of the top innovators in the world have a population size Unfortunately, reliance on oil also has its perils. It similar to the Sultanate of Oman’s. generates dependency and—like any dependency—limits potential, clouds judgment Manufacturing for Wellbeing sets a vision for and biases decision- making. The future is only the manufacturing sector of 2040, where seen in terms of the price and volume of oil, and knowledge-driven industries focused on health economic management is reduced to ensuring and environmental clusters produce goods that that all incentives and resources are geared will enhance the welfare of peoples around the towards oil activities and the prevention of world and that will sustain diversification, interruptions of the oil industry’s smooth innovation and high-tech development in the operation. The concentration of resources in the Sultanate of Oman. This will be supported by an oil industry crowds out other economic activities expanding, modern capital-intensive industry and exposes the economy to the oil market’s that is heavily involved in the emerging Fourth fluctuations, thus consolidating the country’s Industrial Revolution and hence continuously dependency on oil. adopts the most advanced production and communication technologies and the The Sultanate of Oman’s economic diversification accompanying cutting-edge sets of skills. cannot focus exclusively on achieving a more Natural resource-based industries will gradually varied portfolio of economic activities, but must, evolve away from their formerly dominant role above all, ensure that the country does not fall to one of supporting other industries and into a vicious dependency cycle. The sectors. The manufacturing sector of 2040 will diversification of the Sultanate of Oman’s be able to compete globally and will thus not economy already started over two decades ago, only serve the local Omani or GCC markets, but but we must continue to curb the present and the entire world, very much like Singapore or future instabilities caused by the vagaries of the oil Ireland currently do. market. Possibilities of diversification exist in all sectors of the economy, but the opportunities the Achieving the goals of Manufacturing for manufacturing sector provides are boundless. Wellbeing 2040 requires substantial efforts to be invested in building the necessary skills and Manufacturing today accounts for close to 10 technologies and embracing the most efficient percent of GDP. It has trebled in size over the last and effective forms of governance. Generating twenty years but is currently concentrated in a sophisticated skills means redirecting our - ix - academic education towards creativity and fundamental transformations in how we run application while integrating our technical and government business. By pursuing such vocational training system much more closely with transformations, we can take control of our future the workplace. Technological change entails a destiny and determine how manufacturing will focused expansion of research and development evolve in upcoming revolutions. This will fully and openness towards novel ideas and advanced depend on our creativity and resourcefulness. technologies that can be incorporated in our manufacturing strategy. Simplifying, upgrading and modernizing government procedures and Ministry of Commerce & Industry Foreword regulations, while at the same time making them attractive to local and foreign investors requires -x- Technical notes and abbreviations Reference to dollars ($) are to United States dollars, unless otherwise indicated. This report defines developed countries or developed economies as the group identified as “high-income countries” by the World Bank and developing countries or developing economies as all other economies. Components in tables may not sum precisely to totals shown because of rounding. 4ir Fourth Industrial Revolution IMF International Monetary Fund ALB Acid Lead Batteries INDSTAT United Nations Industrial Development Organization BN Billion Industrial Statistics Database BRI Belt Road Initiative IPA Investment Promotion Agency CBO Central Bank of Oman IPP Independent solar power CI Capital-intensive industries IPR Intellectual property rights CSP Concentrated solar power ISIC Industrial Standard Industrial DRI Direct reduction iron Classification ECGA Export Credit Guarantee Agency IT Information technology EEZ Exclusive Economic Zone of Oman ITHRAA Public Authority for Investment Promotion and Export Development EU European Union KD Knowledge-driven industries FDI Foreign direct investment KM Kilometre GCC Gulf Cooperation Council KPI Key performance indicators GDP Gross domestic product LLC Limited liability company GGDC Groningen Growth and Development Centre LNG Liquefied natural gas GHG Greenhouse gas MEXP Manufacturing exports HDI Human Development Index MHT Medium- and high-technology ICT Information and communications M Million technology MOCI Ministry of Commerce and IEA International Energy Agency Industry ILO International Labour Organization MOM Ministry of Manpower - xi - MVA Manufacturing value added PV Photovoltaic MW Megawatts R&D Research and development NCD Non-communicable diseases RB Resource-based industries NCSI National Centre for Statistics and SARDS Sustainable Agriculture and Rural Information Development Strategy NIS National Innovation Strategy SCP Supreme Council for Planning Technical notes and abbreviations NTF National Training Fund SDGs Sustainable Development Goals OAPFD Oman Authority for Partnership SEZ Special economic zone for Development SEZAD Duqm Special Economic Zones OCIPED Omani CENTER for Investment Authority Promotion and Export Development SOLS The Sultanate of Oman Logistics ODB Oman Development Bank Strategy OECD Organisation for Economic Co- SME Small and medium-sized operation and Development enterprise OFIC Oman Food Investment Holding Co. SQU Sultan Qaboos University OMIFCO Oman India Fertiliser Company TANFEEDH National Program for Enhancing SAOC Economic Diversification OMR Omani Rials TVET Technical and vocational education and training OMRAN Oman Tourism Development Company UAE United Arab Emirates OPAL Oman Society for Petroleum UN United Nations Services UNIDO United Nations Industrial ORPIC Oman Oil Refineries and Development Organization Petroleum Industries Company UNSD United Nations Statistical Division OSTC Occupational Standards and US United States Testing Centre USD United States Dollars PEIE Public Establishment for Industrial Estates WB World Bank Group PPP Purchasing Power Parity WDI World Development Indicators PPP Public private partnership WTO World Trade Organization - xii - Executive Summary • Manufacturing for Wellbeing: Strategy and • Manufacturing growth has been accompanied objectives by profound structural transformation. Industries such as textiles, wearing and • ‘By 2040, the apparel and handicrafts have disappeared and Sultanate of Oman will have been replaced by refined petroleum, have a modern and chemical, steel and aluminium industries, technologically advanced which on average accounted for more than 70 manufacturing base, percent of manufacturing during 2001-2016. fully utilizing the Diversification into these industries has creativity of the Omani reduced the Omani economy’s oil- population together with dependency but did not fully liberate it from the most innovative production techniques the perils of volatile prices, since the goods and focused on improving the wellbeing of the being produced were industrial commodities. peoples in the region and the world at large’. • Despite impressive growth, the Sultanate of • The 2040 manufacturing strategy pursues the Oman’s manufacturing industry remains the following objectives: second smallest in the GCC region with the o To diversify the Sultanate of Oman’s lowest productivity. The share of manufacturing into technology and manufacturing exports over total exports is knowledge-driven activities; lower than in Costa Rica, Norway or Jordan, o To develop unique products focused on which have similar populations or resource improving the health and welfare of endowments and far fewer workers are people; employed in manufacturing than Norway, a o To expand Omani industry into regional high-wage economy. and new markets; o To upgrade the Sultanate of Oman’s • Global and domestic societal trends affecting manufacturing to ‘state of the art’ manufacturing in the Sultanate of Oman technologies; • The world population is rapidly growing in o To create an industrial innovation culture. Asia and Africa. The two continents are • Background projected to account for 80 percent of the world’s population by 2050. Over the next 10 • The Sultanate of Oman’s manufacturing years, China will see a significant increase in industry has been growing steadily since the its wealthier population while India’s 1970s. The share of the manufacturing population will rise sharply, with a very large industry increased from 0.8 percent of GDP in youth population. Africa will account for 55 1970 to around 3 percent in 1999 and again to percent of the increase in world population around 9.9 percent in 2017. The country’s by 2050. The European and Japanese manufacturing industry has witnessed ups populations will decrease, resulting in a and downs but especially since the advent of marked shift in the geography of markets. the new millennium, manufacturing has • The world’s population will also continue to become a key driver of the Omani economy. age. By 2050, the number of people over the - xiii - age of 60 years will amount to 2.1 BN. This economic growth rate. This is because the phenomenon is not restricted to western potential for the division of labour, countries as China’s population is also aging. automation and process integration is more This trend will put considerable pressure on developed in manufacturing. Capital intensity social security systems around the world and leads to economies of scale and higher will require major investments in health productivity; continuous progress is only care. limited by the creativity of those involved in • The near future will also be characterized by manufacturing. rapid technological change. The so called • The impact of manufacturing on the economy Executive Summary Fourth Industrial Revolution (4ir), the is extensive. Manufacturing exhibits very high convergence of cyber and physical systems, is forward and backward linkages as measured already affecting production systems across by multiplier effects. For every US$ dollar the world and is expected to have pervasive spent in the US’s manufacturing sector, an effects on manufacturing and society as a additional US$ 1.33 was generated through whole. Production will become faster, more the activities it generated in the rest of the diverse and more automated, and integration economy. Multiplier effects in manufacturing within and between firms, between them and have been shown to be higher than in other their value chains as well as with consumers economic sectors. will grow. Employment could be affected • Manufacturing is the hotbed of innovation significantly, although less so, if at all, in and change. While it was traditionally believed companies and countries that have the ability that research and development (R&D) was to innovate. separate from production, experiences made • Global demands for the protection of the in recent years suggest deep interconnections environment will get louder. Since between product design and development manufacturing emits around one-fifth of and the production processes used to emissions and thus accounts for a major share manufacture these products. Around 60 of pollution, there will be growing pressure on percent of all R&D takes place in companies and countries to reduce emissions manufacturing. R&D intensity (the R&D share and other forms of pollution as well as to take of value added) in manufacturing is around 6 accountability for their environmental percent while it is only 0.5 percent in other footprint. sectors. • The Sultanate of Oman’s economy has created • Manufacturing is a major source of indirect

1.2 M jobs during 2008-2017. This impressive employment. It is characterized by a relatively growth in employment has not, however, low number of well-paid higher skill jobs, benefitted the local population. Lack of particularly when countries reach higher employment opportunities are being felt at all levels of per capita income. Manufacturing, levels of education: universities, technical and however, is second to none in its capacity to vocational schools. Employment challenges, generate indirect employment. For every job especially for the youth, could become created in manufacturing, it has been particularly acute as more advanced estimated that two to three additional jobs technologies are deployed in the country. are created elsewhere. Some industries, like the steel industry, can generate up to six • Why manufacturing matters indirect jobs. • Manufacturing is a well- • Drivers of ‘manufacturing for wellbeing’ known ‘engine of growth’ for many economies. There is • Establishing a modern manufacturing plenty of evidence that industry by 2040 will require the efforts of all manufacturing helps sustain industries, not only those of prioritized a high, stable and durable industries. No industry should be left behind - xiv - unless it can no longer o At the lower level and with a focus on the generate any value, in structural metals industry, the strategy which case it is envisages the adoption of advanced 4ir recommended to replace technologies as well as an increased it with an industry that product range destined for foreign can. At the same time, it markets. In the shipbuilding industry, the will be necessary to structurally transform intention is to move into small boat and the manufacturing sector so new industries trawler construction. can emerge in more advanced sub-sectors of o At the higher level, electric motors, Executive Summary manufacturing and already established firms generators, transformers and electricity and activities can improve their products, distribution and control apparatus activities quality and efficiency and upgrade their will tackle the challenge of increasing its production processes. There are 30 priority product range to cater to domestic industries expected to assume this role. construction and electricity projects, with • Natural resource-based industries include 15 some segments such as switchgears and industries whose main input is either electrical panels setting their eyes on the agricultural, oil, gas, bauxite, iron or other African markets. The pumps and valves minerals. They accounted for 58 percent of industry will need to modernize its total manufacturing value added in 2015. processes along 4ir lines and achieve These industries can be grouped into three economies of scale to export to clusters: food, oil and gas and other metals neighbouring countries. Demand for air and minerals. conditioning is high and rapidly rising hence o The oil and gas cluster will continue to play Manufacturing for Wellbeing explores the a key role in the development of potential for import substitutions. The manufacturing in the next 21 years. The future challenge for the wires and cable strategy aims to address the demands of industry will be to move further up the value energy allocation, improve energy chain to offer integrated solutions and efficiency and reduce emissions and the identify new markets. challenges of Omanization as its main • Knowledge-driven industries include six focus of attention. industries grouped into two activity clusters, o Developments in steel and glass activities namely health and environment. The industry are anticipated in flat steel and is minuscule, accounting for only 0.6 percent intensification of glass exports to Asia and of total manufacturing value added (2015) but Africa as well as an upgrading of the glass at the same time, the health and industry to higher quality containers in environmental industries are research- conjunction with the emergence of the intensive and high-tech industries that need to fragrances industry. be promoted if the Sultanate of Oman’s o In the food industry, the focus will be on economy is to diversify. complementing food security objectives o There is considerable potential for building by positioning existing activities in the a health cluster around three industries, healthy food segment. pharmaceuticals, medical instruments and • Capital-intensive industries include 9 fragrances. In pharmaceuticals, the patent industries with a relatively high capital-labour of several drugs to treat autoimmune ratio, accounted for around 10.8 percent of diseases are expiring, which could open an the Sultanate of Oman’s manufacturing opportunity for Oman. At the same time, industry in 2015 and are classified into two the Sultanate of Oman is well-known for its groups based on their relative labour and high medical standards, which can be technological intensity. leveraged to attract foreign investors into surgical and orthopaedic equipment - xv - industries. The fragrances industry, in The level of IT taught at schools appears to particular frankincense, is a well- be good, but this does not seem to carry established handicraft industry in the over to work. Sultanate of Oman that has not yet jumped o Several important changes in the onto the bandwagon of industrial curriculum have been recently made, and production. All of these industries would new methods of teaching as well as focus on global markets. teacher training programmes introduced o The environmental industry would be at schools, but they have yet to yield solid spearheaded with the establishment of a results. The education system needs to Executive Summary solar energy products industry driven by include more vocational training and the high future demand from industry and establish links with businesses. government. Considerable potential for o Enrolment numbers in the TVET system, recycling of waste from construction, albeit growing, remain marginal and it is derived fuel, steel, organic sources, fish perceived as being secondary to an and batteries is also anticipated. academic education track because manual labour ranks very low in Omani society. Skills • Enablers of ‘manufacturing for wellbeing’ standards among graduates from • For the industries to technological colleges have improved, but achieve their development instruction at colleges still focuses too much objectives by 2040, a on theory and there is very little exposure to number of challenges will the practical workplace. Internships are only have to be addressed. This mandatory in the last year of college due to will enable the achievement the lack of sufficient apprenticeships in of the industrial priorities of private sector companies. the Strategy 2040. The three o Company involvement in skills formation types of challenges include: people, in the Sultanate of Oman is fragmented technology and governance. and scarce. There are only few company • People: The Sultanate of Oman’s impending apprenticeships and there is insufficient industrial transformation will require people public-private dialogue to identify with a new and advanced set of skills that will occupational standards and develop have to be developed in parallel to the training curricula. establishment of new industries. Skills o A major share of the total student dynamics in the Sultanate of Oman appear to population at the tertiary level attends be framed by two interconnected sets of private universities and colleges, challenges, one related to the labour market accounting for over 50 percent in the context, the other to general education and academic year 2015/16. The quality of the Technical and Vocational Education and training provided at private universities Training (TVET) system. The labour market and colleges seems to be mixed, is not context arises from an economic model based particularly relevant for subsequent on the import of cheap labour and a lack of employment and biased towards incentives for Omani youth to find jobs in the academic rather than technical careers. private sector. General education and TVET, o A major paradox of the supply and for their part, faces the following challenges: demand of skills in the Sultanate of Oman, o There are substantial gaps in the general especially at the academic and education level, namely in basic language, professional level, is that many women mathematics and science skills. Technical graduated from universities and ICT- skills of operators and technicians, related training courses with very good especially mechanical, electronic and results do not enter the labour market or instrumental skills, seem to be lacking. limit themselves to the public sector. - xvi - • Technology: There is broad agreement in the • Governance: One important principle and a Sultanate of Oman that the country faces lesson for countries like the Sultanate of tremendous challenges in relation to emerging Oman is that if the 4ir and digital technologies. Furthermore, manufacturing sector is to overall consensus exists on specific become a key driver of shortcomings observed in the national economic growth and innovation system, which act as barriers to the transformation, the digitalization of Oman’s manufacturing sector. government should first and foremost Three areas, in particular, need to be addressed: develop a modern governance system that Executive Summary the generation, diffusion and deployment of delivers on developmental outcomes. Four technology: challenges emerge in relation to the Sultanate o As regards technology generation, while of Oman’s system of governance: policy research has been growing in terms of coordination, clear institutional mandates, volume and quality, overall R&D activity efficient ministries and effective rules and remains low, amounting to only 0.24 regulations. percent of GDP. Private R&D is also very low. o As economic development progressed in The most in demand skills for the 4ir have Oman, the executive branch of yet to be developed since local universities government also evolved institutionally. are not integrating digital manufacturing Increased government functions have also concepts and themes into their syllabus, meant more personnel and further resulting in graduates without adequate managerial complexity, with an increasing expertise in new digital technologies. risk of confusion, duplication and the o As regards technology diffusion, Omani emergence of “gaps” in the coverage of industry lacks mechanisms to spread critically interrelated activities, thereby knowledge and 4ir demonstration examples undermining the synergy needed to from which industry can learn. There are achieve national economic objectives. only few expert networks/ forums/ o A related problem is the plethora of communities that can compensate for this. institutions with similar mandates. While Companies, particularly SMEs, seem to the extent and depth of the duplication of struggle with the high investment functions and responsibilities vary, the requirements of advanced technologies as fact that different public institutions well as with the red tape challenges to believe that they have the mandate to import them. The digital infrastructure perform the same roles leads to needs to be developed for speedy man- fragmentation, lack of coherence and machine interaction to take place. poor policy coordination. o As regards technology deployment, the o Although the Ministry of Commerce and lack of labour and labour legislation Industry (MOCI) has relocated a number flexibility is often mentioned as a of operational functions over time, it still constraint. Official recognition of seems to be burdened with a number of reputable institutions’ online training responsibilities for which there is no clear programmes also seems to be a problem, line of authority while key regulatory although it is unclear why this is the case functions have yet to be fully dispensed in the private sector. Companies also for lack of adequate personnel. point out at difficulties in integrating their o Public sector governance is fundamentally existing technologies with new equipment determined by the nature and quality of and find the industrial support system to rules, regulations and incentives applied be too limited to deal with these or any to influence economic relationships and issue related to the deployment of new to achieve the desired development technologies. outcomes. Three types of incentives are - xvii - key for the Sultanate of Oman’s industrial at the core of food security, which by development: incentives to attract foreign definition involves healthy food. investment, location incentives and SME • The manufacturing sector’s strategy support. Significant progress has been converges with the 2040 education strategy achieved over the years, but the approach and the 2050 health strategy. Manufacturing to these three incentives now requires will require a consistent supply of skilled updating to adapt to the current era. personnel in coming decades, a factor that the Making foreign investment and SME education strategy must take into support mechanisms or ensuring that the consideration. The health strategy builds on Executive Summary benefits of special economic zones are ‘health security’, calling for the establishment distributed more widely are just some of of a thriving local pharmaceutical, the present challenges. instruments and equipment, which lies at the core of the manufacturing strategy. • Linkages with other sectors’ strategies • Manufacturing for wellbeing also builds on • Manufacturing for wellbeing can generate logistics and tourism strategies. Making full use synergies with economic sectors’ strategies of logistics services will require a flow of goods such as agriculture and fisheries inasmuch as in both directions, i.e. into and outside of Oman. it involves further processing and value As for tourism, manufacturing can supply the addition over the natural goods a growing tourism industry requires and resources. Furthermore, collaborate with the tourism industry to develop by emphasizing the joint approaches and branding. development of healthy • Manufacturing for wellbeing will be pivotal in and nutritious products, achieving Goal 9 of the SDGs and will at the the manufacturing same time contribute to the achievement of strategy positions itself many others as well. - xviii - Executive Summary Source: UNIDO elaboration based on United Nations Statistics Division (2018) and INDSTAT2 rev.3 (UNIDO, 2018) - xix - -xx- 1 Background

1.1 Economic and social development in Oman’s rise to an international player in the past, the Sultanate of Oman 1970-2017: oil came to a near standstill. Socially, there were clear dependency signs of collective discontent, high illiteracy rates, poor health conditions and widespread disease The Sultanate of Oman is and poverty. Oil, which had been discovered in privileged to have a diverse 1964 and began being produced in 1967, only took geography, abundant natural on the role of the country’s economic driver resources and a peaceful, towards the end of the decade. independent and stable population. Geographically, The assumption of power of His Royal Highness the Sultanate of Oman Sultan Qaboos bin Sa'id in 1970 was the starting benefits from a combination point of a remarkable turnaround of the Sultanate of of deserts, inland mountain Oman’s economy and society that continues to this ranges and associated valleys, very fertile soil in the day. Despite the fluctuations in economic growth, south of the country and a strategically located the country’s GDP per capita in constant terms grew coastline, all of which provide the Sultanate with at an average annual rate of 1.3 percent or 2.2 relatively rich agricultural, agro-processing and percent between 1970 and 2016, according to the fishing potential and unique maritime pathways to United Nations Statistical Division and the World India and the Far East as well as to Africa and Bank database, respectively (Figure 1-1). Europe. The Sultanate of Oman is rich in oil and gas, While the economy has been characterized by with an estimated proven reserve of 5.4BN barrels steady growth over the last 46 years, two distinct of oil and 23 trillion cubic feet of gas in 2017 and trajectories emerged from a structural annual LNG production capacity of 10.4 M tonnes. transformation perspective. The first one, which The Sultanate of Oman furthermore has roughly spanned the years 1970 to 1999, was substantive mineral reserves in copper, gold, iron, heavily dependent on the mining sector— cobalt, chromite, dolomite, silica, limestone and predominantly oil and gas—with the share of gypsum. The country is considered to be among the mining persistently accounting for over 70 percent most peaceful countries in the world and has coped of GDP. During this period, Oman’s economic particularly well with the social challenges that growth was largely dictated by the production and have affected other countries in the region in export of oil, with the rest of the economy, simply recent years. It is a beacon of stability in the Middle following the developments in the oil and gas East and Gulf Cooperation Council (GCC) and bases industry. Consequently, there was very little its international relations on cooperation rather change in the composition of the rest of the than conflict. The Sultanate of Oman ranks eighth economy. The second trajectory, which in the 2017 World Economic Forum’s ranking on commenced at the beginning of the new Safety and Security and 22nd happiest country in the millennium, has been characterized by a world in 2012-2014. significant structural transformation in production By the end of the 1960s, the Sultanate of Oman away from mining into transport, manufacturing faced dire economic and social conditions. The and construction. The fastest growing sector has country’s economy essentially relied on a few been manufacturing, which increased its share of agricultural, fishing and traditional handicraft GDP from around 2.8 percent in 1998 to 9.3 activities. Foreign trade, which had contributed to percent in 2016 (Figure 1-2). -1- Figure 1-1: GDP per capita of the Sultanate of Oman (US$ current and constant) 50,000 45,000 40,000 1 35,000 30,000 Background 25,000 20,000 15,000 10,000 5,000 - 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 GDP per capita (constant 2010 US$, WDI) GDP per capita (current US$, WDI) GDP per capita, PPP (constant 2011 international $, WDI) GDP per capita (constant 2011 US$, UNSD/WDI) Source: UNIDO elaboration based on World Development Indicators and UN Statistics Division (2018) Figure 1-2: The Sultanate of Oman: Structure of economic activities (1970-2016, US$ constant 2011, UNSD) 100% 80% 60% 40% 20% 0% Transport, storage, communication and other activities Wholesale, retail trade, restaurants and hotels Construction Manufacturing Mining, Quarrying, Utilities Agriculture, hunting, forestry, fishing Source: UNIDO elaboration based on UN Statistics Division (2018) Export figures seem to confirm this structural commodities such as copper, iron ore, gypsum and break and at the same time indicate a change in limestone as well as manufactured goods the composition of commodity exports. The bulk contributing very little to total exports. With the of the Sultanate of Oman’s exports consisted of oil advent of the new millennium, new commodities and gas until 1998, with other mineral as well as manufacturing exports have increased -2- their share in total exports, suggesting that economic growth, particularly in non-oil industries structural change has not only occurred towards and public services. The oil industry tends to be other sectors of the economy, but also within the capital intensive and generates only few direct mining sector. and indirect jobs. This, moreover, leads to gross disparities in income across sectors and Oil and gas, nonetheless, by far remain Oman’s contributes to the absorption of the most most important economic activity, particularly in qualified employees from other activities into the 1 terms of exports averaging more than 70 percent of oil and gas industry. In countries that are heavily total exports over the last few years (Figure 1-3). reliant on oil and in which oil reserves are Well known risks are associated with oil Background exhaustible, the consequence of resource dependency. One risk is the so called ‘Dutch depletion could prove severe as the ensuing Disease’ where the high income generated by a decline in aggregate and personal income results substantive oil exports appreciates the nation’s in an acute drop in the standard of living, poverty currency and crowds out the export of other and major social strife, all within a relatively short products, reducing the cost of imports but at the period of time. Environmental regulations are same time also reducing import substitution getting more stringent and it is furthermore opportunities. Oil dependency exacerbates conceivable that the day will come when macroeconomic volatility; when the price of oil environmentally conscious consumers across the drops, the balance of payments results and fiscal globe simply refuse to continue purchasing revenue decrease, thus severely impeding hydrocarbon-based energy. Figure 1-3: The Sultanate of Oman export trends (US$, billion) 60.00 50.00 40.00 30.00 20.00 10.00 - 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total gross exports (US$, billion) Oil gross exports (US$, billion) Manufacturing gross exports (US$, billion) Other exports (US$, billion) Source: UNIDO elaboration based on UN Comtrade (2018) One of the most important transformations in the facilities have been built in Muscat, Salalah, Duqm Sultanate of Oman in recent decades has been the and Khasab and represent a major driver of national upgrading of the country’s economic infrastructure. integration. The Sultanate of Oman also enjoys a Major investments have been made in roads, ports, high level of mobile phone and internet penetration, airports, telecommunications, electricity and water. but additional investments in broadband seem Over 35,000 km of paved roads connect the entire necessary. Today, around 97 percent of the country and link the Sultanate of Oman to population has access to electricity and gas and 93 neighbouring countries. New ports have been built percent have improved water sources. in Sohar, Salalah and Duqm, providing modern and Improvements have not only been recorded in competitive cargo and trans-shipment alternatives economic wellbeing but also in social welfare. to ports inside the Gulf. Modern airports and Between 1970 and 2010, the Sultanate of Oman -3- had the fastest growth in the Human Development beverages, wood and wood products, textiles, Index (HDI), with significant improvements in jewellery and some basic metal products. Basic education and health, particularly in gross foods, housing and commercial buildings were the enrolment in school, literacy rates and life main drivers of industrial demand during that expectancy. Life expectancy increased by 27 years period. Between 1970 and 1979, the share of during this period, from 49 to 76 years and the manufacturing value added in GDP remained at literacy rate stood at nearly 94% in 2015. Today, under 1 percent of total GDP. 1 Omanis have access to a variety of social services, pensions and health insurance, all of which ensure The early days of industrial development in the Sultanate of Oman also witnessed the a dignified life and old age. Background establishment of initial government regulations In parallel to—and to some extent underlying the and institutions to promote industry. In 1972, the economic and social progress achieved thus far— Department of Industry was established under the has been the progressive establishment of a then-Ministry of Development, and in 1974, the modern state. From a regionally and institutionally Ministry of Commerce and Industry (MOCI) was fragmented country in 1970, the Sultanate of Oman created with a Directorate General for Industry now has a partially elected consultative council, that was tasked with promoting and assisting which has some legislative and regulatory powers, Oman’s nascent industrial sector. To accelerate a relatively independent judiciary and several industrial development, the government oversight institutions. The country’s legislation is promulgated Royal Decree No: 1/79 in 1979, one based on Royal Decrees and it is governed through of the first laws that specifically encouraged and 11 governorates and 39 ministries or ministerial regulated industry in the Sultanate, introducing a level bodies, with the government’s executive number of income and custom tax exemptions for branch exercising significant influence over the industrial firms. Other policy instruments MOCI running of the country. Legislation has been used during those years included identifying and incrementally introduced to emphasize the role of making land available for industrial purposes; the free market, competition and free trade. The nominating companies for special land, electricity private sector is considered the main player in and water rates; preparing and offering feasibility economic growth. There has also been increasing studies to the private sector; assisting the interest in environmental protection and government in identifying and implementing sustainable development at the highest levels of investment opportunities in industry; and government. providing loans to manufacturing.

1.2 Manufacturing development 1990- The 1980s saw the consolidation of the first stage 2017: diversifying into industrial of industrial development and the onset of the commodities processing of natural resources. The government invested heavily in the food industry by

1.2.1 Early industrialization establishing a cattle feed facility with a capacity of 60,000 tonnes as well as the Sultanate of Oman The initial years of Fishing Company, which procured fish from own industrial development in deep-sea trawlers and from local fishermen along the Sultanate of Oman the Omani coast. The fish was kept in cold storage were fairly modest. A or processed before being sold in major cities. 1978 industrial survey Other large government projects involving natural found that the country’s resource processing included the Sultanate of manufacturing sector Oman Oil Refinery in Muscat, with an initial consisted of 357 establishments employing 3,926 refining capacity of 50,000 bd and a copper workers. The average size of an establishment was refining project in Sohar. Private investors 11 workers, with an average salary of OMR 1190 expanded the food industry by opening water, annually. The small size of Omani firms was juice and vegetable oil facilities as well as small confirmed in the first industrial census, which took chemicals, plastics and packaging plants. The place in 1980: there were only 53 establishments increase in natural resource processing capacity with a capital of OMR 50,000 or higher employing meant that the manufacturing share in GDP grew 10 workers or more. The main activities included from 0.8 percent in 1980 to 2.8 percent in 1989 cement and cement products, food and (Figure 1-4). -4- Figure 1-4: The Sultanate of Oman: MVA and GDP real growth index 200 180 Growth index (2005=100) 160 140 120 1 100 80 Background 60 40 20 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Manufacturing Value Added Gross Domestic product Source: UNIDO elaboration based on United Nations Statistics Division (2018) Industrial policy in those years lacked strategic exploitation of the national resources with which direction and focused primarily on providing God has blessed us.” This approach to natural adequate infrastructure for industry through the resource-based industrialization was picked up in establishment of the Rusail Industrial Park in 1985 the Fourth Five Year Plan 1991-1995, which and workers’ residences, which were eventually guided much of the public and foreign completed in 1989. A number of government investments in the following years. vocational training centres were created to meet the expected rise in demand for trained The direction given by the Sultan was further manpower. Key efforts, however, were reinforced in the Fifth Five Year Plan 1996-2000 and undertaken in industrial financing. The Sultanate Strategy 2020, published in 1995. Strategy 2020 was a long-term plan aimed at building on the last of Oman Development Bank, which launched its 25 years of Sultan Qaboos bin Sa'id’s leadership and operations in 1979, began taking a very active role in financing small and medium-sized enterprises to guide the Sultanate of Oman into the next (SMEs). For its part, MOCI increased its loans and millennium. It tasked the private sector with subsidies for industrial projects. Between 1980 becoming the main driver of structural and 1990, MOCI provided OMR 185 M in soft loans transformation and pledged commitment to the and grants to manufacturing firms. The Muscat diversification and globalization of Oman’s Securities Market as well as several financial economy. Manufacturing, together with tourism, institutions and funds—partially catering to was to become one of the leading sectors of the industry—were created during these years. economy through natural resource processing, including natural gas-based hydrocarbons such as

1.2.2 Shifting policy direction ammonia, urea, fertilizers, methanol and petrochemicals; by increasing domestic value Although it took another decade before structural added; by promoting exports; by attracting foreign transformation set in, the government efforts capital; by streamlining investment procedures; during the 1990s clearly laid the foundations for and by stimulating technology transfer. what was to come with the advent of the new millennium. The 1990s were marked not only by long- and While strongly emphasizing the importance of short-term plans, but also by a host of concrete diversification and industrialization for Oman’s interventions. The Export Credit Guarantee development in his 1991 national day speech, His Agency was established in 1991 to guarantee Royal Highness Sultan Qaboos bin Sa'id stated that Omani exports. The Public Establishment for industrial “initiatives must focus on the Industrial Estates (PEIE) was created in 1993, -5- based on the experience of the Rusail industrial free loans to partly foreign-owned industrial firms, estate. The Sohar (1992), Raysut (1992), Nizwa introducing export credit insurance and creating a (1994), Al Buraimi (1998), Sur (1998) and Al one-stop shop for investors. Two additional sets of Maziuma (1999) industrial estates followed. The measures were developed during those years. As Omani Center for Investment Promotion and regards the development of human resources, the Export Development (OCIPED), today ITHRAA, government allocated OMR 440 M to vocational 1 started its activities in 1997, focusing on training. As regards trade, the Sultanate of Oman promoting foreign investment in the Sultanate of joined the World Trade Organization (WTO) in Oman and developing Omani exports. Other 2000, ensured duty free access for its products to Background interventions included an investment by the Gulf Cooperation Council markets and began government in a 7 M tonne per year capacity of negotiating a free trade agreement with the US in liquefied natural gas (LNG) plant; quadrupling 2004, which it eventually signed in 2006. financial institution and government lending to The Seventh Five Year Plan (2005-2010) and the industry; leveraging gas allocation for power Eighth Five Year Plan (2011-2015) focused on generation as a mechanism to attract investors; knowledge and technology through the allowing 100 percent equity for certain foreign establishment of the Knowledge Oasis (2007), with investors; privatization; tax exemptions on income the aim of bringing together IT companies and tax for salaries and wages; increasing the entrepreneurs. Entrepreneurship and particularly proportion of local population in enterprises; youth entrepreneurship were to be promoted, and special local residency permits for foreigners; and support for companies facing difficulties due to attractive incentives for export-oriented external factors was introduced. Technical companies. cooperation programmes bringing together The tremendous policy efforts of the 1990s did government, academia and industry to solve the not, however, bear immediate fruits. During 1996- problems the industrial sector faced were 2000, 40 firms were established in Rusail, 34 in developed. Omanization, which entailed the Sohar, 22 in Raysut, 12 in Al Buraimi and 4 in development of local employment targets, became Nizwa. The firms included chemicals, food a central plank of economic policy, and was processing, pharmaceutical, marble and reinforced following the eruption of social unrest in mechanical engineering. The large LNG plant, as 2011. Equally important was the development of well as other planned investments in natural industrial SMEs, given their employment resource processing did not gain momentum until generation potential. In 2013, the Public Authority the following decade. As a result, the for the Development of SMEs was created and manufacturing share in GDP hardly changed, from tasked with providing technical, financial and 2.8 percent in 1990 to 3.2 percent in 1999. managerial support to local entrepreneurs.

1.2.3 Structural transformation towards There has been no lack of resolution by the industrial commodities government to bring about diversification and industrial development. The key objective of the Policy measures to Ninth Five Year Plan (2016-2020) is the reduction accelerate industrialization of the share of oil activities and the increase in the continued unabated with manufacturing share in GDP. Compared to the arrival of the new previous plans, it focuses on spatial and regional millennium. The Sixth Five aspects of development and on government Year Development Plan performance. In Manufacturing the Ninth Five (2001-2005) expanded some of the already Year Plan set a target of a 10% share of existing investment incentives to include loans at manufacturing value added on GDP by 2020, while reduced rates from the Sultanate of Oman the most ambitious 2020 Strategy sets a target of Development Bank, making land available to 15% MVA/GDP ratio for the same year. It investors at favourable rates, freedom to envisaged OMR 2.6BN investment in the sector repatriate profit and capital, providing interest- with the private sector taking a commanding role -6- in the execution of investment projects. The plan products), and food (processed vegetables, seafood, considered improving the business environment dairy, poultry and dates) will follow. through privatization, a special fund for Public Unlike the last years of the Private Partnership (PPP) Projects and the previous millennium, the attraction of foreign investment. The “Invest Easy” early years of the new program for making the process of establishing a millennium have been business more efficient and transparent was to be 1 associated with progressive, actively implemented and promoted together positive and radical changes with the cancellation of the minimum limit of to the Sultanate of Oman’s industry. Two trends Background capital requirements for establishment of a have been particularly notable during this period. business. The first one is the manufacturing sector’s very Perhaps the most novel policy mechanism rapid growth rate. It grew at an annual constant introduced by the plan was Tanfeedh. The National compound rate of around 10.7 percent between Program for Enhancing Economic Diversification 1999 and 2016. The rate has decelerated in recent (Tanfeedh) aims to address the challenges and years, turning negative in 2014 as the entire difficulties both the public and the private sector as economy slowed down. The long run rate has, well as civil society face in achieving the objectives of however, been very impressive. The share of the Ninth Five-Year Development Plan. It aims to manufacturing value added peaked at 11.4 percent identify the necessary responsibilities, available of GDP in constant terms in 2011, although it has resources and timeframe needed to implement dropped since to 9.7 percent of GDP in 2016 as initiatives that drive economic diversification; set prices of industrial commodities began to falter. clear standards and Key Performance Indicators The second notable trend has been the significant (KPIs) for said initiatives; and provide periodic change in the composition of manufacturing value reports on the progress achieved in the added. A major retrenchment took place in the implementation of the initiatives. Public awareness textile and garments, non-metallic minerals and of achievements—or lack thereof—is expected to food industries, although the latter began deliver implementation. While Tanfeedh is still recovering in 2014. The largest increases were underway, a number of projects in petrochemicals observed in the refined petroleum, chemical and (polyethylene terephthalate - PET and ammonium), basic metals industries, which at their peak basic metals (aluminium expansion), non-metallic accounted for nearly two-thirds of total minerals (cement expansion), castings and structural manufacturing value added and in 2016, still metal products (metal dies and moulds, scaffolding accounted for more than 50 percent of total and its parts, downstream steel and aluminium manufacturing value added (Figure 1-5). -7- Figure 1-5: The Sultanate of Oman Structural change within manufacturing 100% 90% 80% 70% 1 60% 50% Background 40% 30% 20% 10% 0% Food and beverages Coke,refined petroleum products,nuclear fuel Chemicals and chemical products Rubber and plastics products Non-metallic mineral products Basic metals Fabricated metal products Machinery and equipment n.e.c. Others Source: UNIDO elaboration based on INDSTAT2 rev.3 (UNIDO, 2018) Refined petroleum products include gasoline, which started production in Sur in 2005, with a kerosene, diesel oil and LPG. In addition to its Mina capacity to produce 2x1750 MT/day of anhydrous Al Fahal Refinery in Muscat, established in 1982 ammonia from 2 ammonia plants and 2x2530 with a present capacity of 106,000 b/d, the MT/day of granular urea from 2 urea plants, as well as Sultanate of Oman Oil Refineries and Petroleum the Suhail Bahwan Group, whose production started Industries Company (ORPIC) opened the Sohar in 2009 in Sohar, with a 2000 MT/day ammonia plant Refinery in 2006, adding an additional capacity of and a 2x1750 MT/day urea plant. 116,000 b/d. The Sohar Refinery also has a Companies in the iron and steel industry are polypropylene (used in plastics, clothing and divided into manufacturers of iron and steel medicine) plant as well as aromatics (paraxylene products from imported scrap and iron ore, and and benzene) plant. A new refinery with a capacity foundries that process imported scrap castings. of 230,000 b/d is being developed in Duqm. There is only one steel integrated company, Jindal Chemicals and chemical products include basic Shadeed, which began production in 2010 in Sohar chemicals, pharmaceuticals, paints and varnishes, and operates a 1.4 M tonne per year rolling mill, a detergents, soaps and cosmetics and other chemicals. direct reduction iron (DRI) plant and a steel melt The most important product by far is basic chemicals, shop. There are two other plants that produce iron, including chemicals such as ethanol, methanol, namely Vale and Sohar Steel. There is also only one ammonia and sulfuric acid as well as fertilizers. The aluminium producer, Sohar Aluminium, which basic source for these products is oil and gas. Two started operating in 2008 and whose smelter has an plants account for the bulk of methanol production: annual production capacity of 375,000 tonnes. the Salalah Methanol Company LLC, which started production in 2010 and has an annual capacity of 3 The quest for industrial diversification that started million MT mainly destined for export, and the nearly half a century ago has yielded substantial Sultanate of Oman Methanol Company, which results. Oman’s manufacturing sector is becoming started production in Sohar in 2007, with an installed larger, more complex and more broad-based, and capacity of around 1 M MT. There are also two large is moving away from labour intensive, low-tech players in the fertilizer industry: the Sultanate of goods into medium-tech, capital intensive products Oman India Fertiliser Company SAOC (OMIFCO), (Figure 1-6). This change in direction is what could -8- be expected for a country with the natural resource manufactured goods that are identical to those endowment and income per capita of Oman. being produced by the competition and are Government incentives seem to be effective, at therefore interchangeable in the production least as far as large natural resource-based process. Producing industrial commodities industries are concerned. But there are some requires large amounts of fixed assets and energy inherent risks in this industrial strategy that will to turn raw materials into finished products, and have to be addressed with further diversification to factories must achieve economies of scale to keep 1 ensure that the growing share of manufacturing costs low. The price of industrial commodities is value added remains sustainable and that a driven by the prices of their underlying raw Background ‘deeper’ and more advanced manufacturing sector materials, which normally constitutes a large can evolve in the future. share of their total costs. Profitability per unit of output is very low and depends on the volumes The biggest risk by far is for Omani manufacturing sold, and competition is based on the extent of to become heavily dependent on industrial investment in plants, equipment and related commodities. Industrial commodities are technologies to achieve efficiency. Figure 1-6: Sultanate of Oman: Structural change within manufacturing (change in shares) 11.3% Non-metallic minerals 18.8% Wearing apparel 0.4% 5.8% Textiles 0.2% 1.4% Rubber and plastics 1.8% 2.4% Food and beverages 7.8% 15.5% Fabricated metals 4.3% 5.8% 43.1% Coke and refined petroleum 25.8% Chemical 14.7% 6.2% Basic metals 7.5% 4.4% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2001-2016 1993-2000 VA shares: [Value added (US$ current prices) / manufacturing value added (US$ current prices)] x 100 Source: UNIDO elaboration based on INDSTAT2 rev.3 (UNIDO, 2018) Insofar as a large proportion of Omani industry is around the world and some countries have based on oil and gas either as a source of raw already started invoking protectionist measures to material or of energy, the problems associated shield their failing local industries. The profitability with oil dependency will continue to affect the and competitiveness of industrial commodities is performance of the Sultanate of Oman’s becoming even more sensitive to minor variations manufacturing sector and of the economy as a in the prices of their underlying raw materials and whole. Some types of plastics which have become the economic conditions surrounding them. commodities are facing severe scrutiny from An associated risk relates not so much to the environmentalists. Diversification into other overreliance on industrial commodities but to the industrial commodities has helped reduce fact that their production is concentrated in a few dependency on oil and gas prices, but they are plants. Around ten refineries, mills and plants nonetheless commodities. Steel and aluminium would seem to easily account for at least one-third are characterized by widespread over-capacity of manufacturing production in the Sultanate of -9- Oman. This makes the country’s industries and the relatively higher levels of manufacturing economy extremely vulnerable to natural employment. Costa Rica’s industrial strategy has disasters or man-made accidents, or even worse, focused on building an export-oriented terrorist attacks. While such events do not occur manufacturing base that is relatively advanced very often, when they do, their effect can be technologically while generating employment, devastating. Many industrial disasters have been especially in its free trade zones. Key industrial exports include medical instruments, integrated 1 associated with the oil and nuclear industries, but circuits and orthopaedic appliances, where Costa refineries, chemical plants and even large food Rica specializes in the labour-intensive steps of the processing facilities have been at high risk of fire, process. Background explosions or flooding. Jindal Shadeed, for example, had to close some of its facilities for Norway has a very similar endowment structure to several days as a precautionary measure due to the Sultanate of Oman, yet a very different flooding at its Sohar location. industrial base. A very high-wage economy which, nonetheless, is able to employ nearly double the

1.3 The Sultanate of Oman’s amount of people in manufacturing than the manufacturing in comparative Sultanate of Oman and also employ them much perspective more productively. Norway’s industry covers the metals, pulp and paper, chemical and petroleum Of the GCC countries, the industries, where the work is carried out in large Sultanate of Oman’s industry companies, with a vibrant textile and ready-made has been the fastest growing in clothing, wood products, mechanical engineering, the region since the beginning machine tools and graphic industries based on of the millennium, more than SMEs. Knowledge, research and innovation as well doubling the growth rates of as export orientation, particularly to Europe, are Kuwait and the UAE (Table 1-1). Oman’s the foundation of small Norwegian firms’ manufacturing sector is the second smallest after competitiveness. Bahrain’s and the second smallest after Kuwait in terms of manufacturing share in GDP, producing US$ At the other end of the industrialization scale,

16.6 BN (OMR 6.4 BN) in 2016. Of the GCC countries, measured by manufacturing value added as a Saudi Arabia has the largest manufacturing sector, percentage of GDP, countries like Jordan, Ireland producing US$ 80.5 BN in 2016. Normalizing by and Singapore can be identified. These countries population, however, the Sultanate of Oman’s are currently at different stages of development industry becomes the smallest in size among the but have made manufacturing the cornerstone of GCC countries, accounting for 4.4 percent of the their development strategy. Jordan, which has by GCC’s total manufacturing value added. The far the lowest income per capita of all comparator productivity of Oman’s industry is lowest in the countries and is home to millions of refugees from region at around US$ 48,511 per worker and less other countries in the region, is building a than half of the productivity of Qatar, Saudi Arabia relatively large and highly productive industry and the UAE. Low technological and capital intensity focused on fertilizers, including potash and would seem to account for this. phosphates; as well as other industrial products such as cement, clothes, pharmaceuticals and It is worth exploring what the economies of general-purpose machinery. It benefits from a free countries around the globe with small populations trade agreement with the US. The largest like the Sultanate of Oman look like. Compared to pharmaceutical company in Jordan, Hikma, Costa Rica, a country with substantive agricultural reported an income of nearly US$ 2BN in 2017. exports, and to Norway, rich in oil-based exports, Singapore and Ireland are notable for the large set at two very different levels of income, the employment the manufacturing sector has sultanate of Oman’s manufacturing sector trails generated in the former and the tremendous behind in absolute and relative size and export productivity in the latter associated with the high- share. Oman’s manufacturing productivity is tech industry. higher than Costa Rica’s due to the latter’s -10- Table 1-1: Comparative Indicators (2016) United Saudi Costa New Bahrain Kuwait Oman Qatar Arab Jordan Ireland Norway Singapore Arabia Rica Zealand Emirates Population (Total, WDI) 1,425,171 4,052,584 4,424,762 2,569,804 32,300,000 9,269,612 4,857,274 9,455,802 4,755,335 4,693,200 5,234,519 5,607,283 Total employment (headcount, UNIDO 698,370 2,023,410 2,331,000 1,832,210 10,300,000 3,950,180 2,912,240 1,550,350 1,794,780 2,266,850 2,900,000 3,775,000 elaboration) 1 Manuf. employment (headcount, UNIDO 83,791 116,487 131,000 126,026 753,164 305,869 254,538 119,230 194,303 251,388 252,547 559,495 elaboration based on Background ILO and other sources) Manuf. employment share (UNIDO 12.0% 5.8% 5.6% 6.9% 7.3% 7.7% 8.7% 7.7% 10.8% 11.1% 8.7% 14.8% elaboration, based on ILO and other sources) Income per capita (US$, 22,561 27,368 15,102 59,324 19,982 38,518 11,733 4,088 64,100 40,332 70,890 55,243 current, WDI) Income per capita (PPP, 43,643 68,862 39,884 118,207 50,423 67,706 15,195 8,390 63,227 35,777 64,160 82,622 constant 2011, WDI) GDP growth 1999-2016 (US$, constant 2011, 4.8% 4.3% 3.7% 9.9% 3.9% 4.6% 4.2% 4.9% 4.8% 2.7% 1.7% 5.3% UNSD) MVA (US$ M, current, 5,835 6,679 6,355 13,792 80,505 32,230 6,968 6,191 97,967 20,475 25,009 54,497 UNSD) MVA share (US$, 15.5% 3.9% 9.3% 9.5% 11.0% 8.5% 14.0% 17.0% 33.1% 11.4% 7.1% 17.6% constant 2011, UNSD) MVA growth 1999-2016 (US$, constant 2011, 5.7% 0.5% 10.7% 7.7% 6.2% 5.3% 1.8% 6.3% 7.6% 0.7% 0.8% 4.8% UNSD) MVA per worker (US$, 69,642 57,340 48,511 109,436 106,889 105,371 27,376 51,925 504,200 81,446 99,025 97,405 current, UNSD) Oil export share (SITC 46.9% 89.6% 63.4% 81.6% 78.9% 15.3% 0.0% 0.1% 0.6% 1.4% 53.0% 11.1% rev.3, UN Comtrade) Manuf. export share (SITC rev.3, UN 29.5% 8.6% 17.1% 0.4% 17.7% 24.0% 52.1% 74.7% 87.6% 21.1% 23.0% 76.4% Comtrade) Other export share (SITC rev.3, UN 23.6% 1.8% 19.5% 18.0% 3.4% 60.7% 47.9% 25.2% 11.8% 77.5% 24.0% 12.5% Comtrade) Source: UNIDO elaboration based on International Labour Organization (2018), UN Comtrade (2018), United Nations Statistics Division (2018) and World Development Indicators (2018) The Sultanate of Oman’s industry clearly has a skills achieved very high levels of industrial long road ahead, but much can be learned from productivity. High levels of manufacturing these comparator countries. Size, income levels employment were also possible by selecting and high wages were not obstacles to a modern appropriate industries. Large resource processing productive industry. Specific areas in which plants could be combined with an efficient countries could excel domestically and ecosystem of internationally competitive SMEs. internationally were identified and developed. Clear strategic direction and industrial policies Those comparator countries that undertook have come a long way in these countries to extensive measures in technology, research and achieve sustainable industrialization. -11- -12- 2 Emerging economic and social challenges

2.1 Global trends affecting manufacturing rapid increase in life expectancy over the last decades, there will be over 2.1 BN people—over Industrial development in one-fifth of the global population—aged 60 or coming years will be older by 2050. This trend is already evident in profoundly affected by a some developed countries but is also becoming number of global trends that apparent in developing countries such as China. will also influence the Aging will impact the ratio of workers to retirees, Sultanate of Oman’s with consequences for the sustainability of health economy. These trends are care and old-age social protection systems. Japan pervasive in that they will affect all aspects of has the lowest ratio of employees to retirees in the manufacturing and will have to be taken into world, with 2.1 workers between the age of 20 and account when preparing any industrialization 64 years to one retiree. On the supply side, a strategy. growing number of retirees may result in Two key features of world population trends have difficulties for firms to find workers with the emerged. The first is related to the changing appropriate skills. On the demand side, lifestyle location of the world population as its number and consumption patterns of an aging population grows. By 2030, the world population will amount may significantly differ from those of today’s to 8.6 BN, rising to 9.8 BN by 2050 (Figure 2-1) population, with health and old age care, medical Africa and Asia are expected to account for around treatment and medicinal expenditures becoming 80 percent of the global population by 2050, with a larger product in the global consumption basket. 55 percent of the global increase expected in Africa. A related trend is the growing concentration of The African population will tend to be young. people living in cities. In 1950, 30 percent of the India’s total population is also expected to increase world’s population resided in urban areas, while considerably. Europe and Japan’s populations are today 55 percent of the global population live in expected to decrease while increases in North cities. By 2050, 68 percent of the world’s America’s population by and large will be the result population is expected to live in cities. Urban of migration. The upshot of this trend is that global growth is driven by overall population increase markets will continue shifting into Asia and expand and rural urban migration, with nearly 90 percent into India. The emergence of a large middle class of this growth being concentrated in Asia and with significant purchasing power is already evident Africa. India, China and Nigeria are expected to in Asia. China is already becoming one of the largest account for 35 percent of the growth in the luxury goods markets in the world. In the medium world’s urban population between 2018 and 2050, to long run, provided that population growth is with India alone adding 416 million urban accompanied by rises in income, markets will residents. The growing concentration of people in predominantly shift towards Africa. By 2050, Africa cities will intensify demand for urban alone will account for more than 25 percent of infrastructure to address the growing demand for world population. Rapid access to these markets urban mobility, energy, housing and and the exploitation of first mover advantages will telecommunication solutions, and will hence be key to benefit from these emerging markets. become a leading driver of new manufacturing The second population trend is aging. Due to the activities. -13- Figure 2-1: Population by region: estimates, 1950-2015, and medium-variant projection, 2015-2100 6 5 4 2 Total population (billions) 3 Emerging economic and social challenges 2 1 - 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100 AFRICA ASIA EUROPE LATIN AMERICA AND THE CARIBBEAN NORTHERN AMERICA OCEANIA Source: United Nations, Department of Economic and Social Affairs, Population Division (2017) Another major trend that has already had global manufacturing complexity. At the level of effects is technology, the so called Fourth organization, data processing (data gathering, Industrial Revolution (4ir). The 4ir involves the analysis and data sharing), improved control convergence of a number of technologies, mechanisms (machinery and manpower) and including cyber-physical systems that allow real greater connectivity will become more time interaction between machines and entrenched in day to day operations. At the level computers (thanks to very fast sensors and of the individual, demand for product variety, actuators and related software), the internet of personalized products and services will increase things, big data or very large databases, artificial and faster response to requests, including intelligence that allows the use of data to make advanced tracking systems, will become decisions and learn and advanced automation (3D necessary. Major increases in productivity and printing, automation technologies and robotics). cost reductions are expected once technologies Rapid advances have been made in other are mastered, but this requires new skill sets. technologies, some of which may eventually Employment will decrease in firms that adopt the converge into the 4ir, like photonics that allows new technologies but will increase in those that the carrying of information signals, biotechnology develop new products and processes, with the (especially since deciphering of the genetic code), aggregate effect yet to be defined. Corporate nanotechnology that allows the construction and competitiveness and aggregate growth will be use of functional structures designed from atomic contingent on the capacity to create new products or molecular scales, and advanced materials such and production processes and hence innovation as super-alloys, novel and advanced polymers, will be at a premium. advanced ceramics and superconductors, novel It is difficult to treat globalization as a continuing composites and biomaterials. worldwide trend when one of the major These technologies are expected to have international players is erecting protectionist pervasive effects on manufacturing and on society barriers around its economy. Powerful national as a whole. At the level of industry, the 4ir will movements across the world are also voicing their grow the need for asset and resource efficiency, concerns about globalization. Nonetheless, reduce product lifecycles and open opportunities globalization has been a prevailing trend over the for creating new products and increase last decades and many of its achievements cannot -14- be easily overturned. International production but it will have to gradually systems and value chains have progressively redesign products and become more integrated over the years. Specific processes so that they are activities in value chains have reached such less resource and energy degrees of specialization (upstream activities) intensive, it will have to use while other downstream activities cannot be more environmentally disentangled without causing major corporate friendly materials that can be 2 disruptions. Globalization has gone beyond easily disassembled and recycled. Consumer production since R&D, design and professional boycotts and environmental protectionism are the Emerging economic and social challenges services have also been offshored around the mechanisms that some governments and world as part of global industrial restructuring. environmental groups have been using, and these While some reshoring is taking place where it may are likely to intensify to steer manufacturing make economic sense, the bulk of global towards a more environmentally friendly path. corporations are practically keeping their Manufacturing is making a comeback into the international production systems untouched and world scene. One of the reasons may be because when they do end up yielding to political old industrial powerhouses may want to recover pressures, compensate by offshoring other lost jobs, due to the role manufacturing has played activities to keep costs down. Reshoring demands in raising countries like China or the Republic of have been made by western countries, but 2030 Korea out of poverty and turning them into major trade estimates envision the bulk of intrafirm world economic players, or because of the close trade—and trade in general—to take place in Asia, connections between manufacturing and a region that remains firmly committed to innovation, in particular in the context of the 4ir. globalization. The fact of the matter is that manufacturing is Global environmental concerns will also shape the drawing far more attention than it has in previous way manufacturing develops in the near future. decades. The consequence of the resurgence of Industry emits around one-fifth of all CO2 manufacturing is that developed and developing emissions and hence has always been a target to countries alike are carefully designing their reduce emissions. Continuous process industries industrial and technological strategies and policies such as oil refineries, chemical, fertilizer, cement, that will allow them to improve their international steel and other similar industries are energy competitiveness and maximize the economic intensive and as a result, heavy emitters of CO2. benefits of manufacturing. They are also Yet the environmental impact of manufacturing refocusing their investments and incentives to the goes well beyond a few energy intensive sector. Whether this will lead to increased industries and calls for decisive action across manufacturing activities worldwide is unclear, but manufacturing (Table 2-1). countries that do not carefully rethink the role of their manufacturing industry in their development Calls for ‘circular economy’ approaches are processes will certainly miss out on rising increasingly being heard around the world. It will opportunities. not suffice for manufacturing to reduce emissions, -15- Table 2-1: Pollutants resulting from manufacturing Pollutant Effect Greenhouse gas (GHG) emissions from direct and indirect energy Global climate change use, landfill gases Emission of toxins, carcinogens, etc. including use of heavy Human organism damage metals, acids, solvents, coal burning 2 Water usage and discharges, e.g. cooling and cleaning use, in Water availability and quality particular Electricity and direct fossil fuel usage, e.g. power and hearing Depletion of fossil fuel resources Emerging economic and social challenges requirements, reducing agents Land use, water usage, acid deposition, thermal pollution Loss of biodiversity Emissions of CFCs, HCFCs, nitrous oxides, e.g. cooling Stratospheric ozone depletion requirements, refrigerants, cleaning methods, use of fluorine compounds Land appropriated for mining, growing of bio-materials, Land use patterns manufacturing, waste disposal Material usage and waste Depletion of non-fossil fuel resources Sulphur and NOx emissions from smelting and fossil fuels, acid Acid disposition leaching and cleaning

2.2 Key local economic and social issues been in the expat community and this is a relatively recent phenomenon. The demand for There are four key aggregate challenges the employment seems to have fuelled an overall Sultanate of Oman has faced for some time and/or increase in the expat population, which rose that will need to be addressed in the next few from 31 percent in 2008 to 45 percent in 2016 years: employment generation, the fixed and climbed again to 45.1 percent in 2017 exchange rate, raising the populations’ standard (Figure 2-2). From 74.6 percent of total of living and the Sustainable Development Goals employment in 2008, expat employment grew (SDGs). to 81 percent in 2016. In 2013, foreign workers While the economy as a whole has recorded tended to be male, young and unskilled. They sustained growth over the last few years, predominantly took blue collar, industry or employment generation has not increased at the handicraft jobs and accounted for nearly 90 same pace. the Sultanate of Oman’s economy percent of private sector employment. Around employed around 2.4 M people in 2017. Between 50 percent worked in the construction industry, 2008 and 2017, the economy generated 1.2 M while manufacturing accounted for around 13 jobs, a remarkable feat by any standard given the percent of the total. country’s size. This does not suffice, however, to The bulk of Omani employment is in the public address a population that is growing at around 4 sector with most of the jobs being clerical in percent per annum. nature. The private sector mostly consists of large The most recent International Labour Organization capital intensive, resource-based industries, (ILO) estimates of unemployment in the Sultanate requiring staff of all skill levels. The high level of of Oman was 17 percent in 2017, with youth unemployment clearly disproportionately affects unemployment even higher, a rather worrying the local Omani population despite the high trend since over 40 percent of the population is demand for manpower, especially for unskilled under the age of 25. labour. Recent regulations and incentives for hiring local staff have been successful in attracting The aggregate employment and unemployment nationals to government jobs but have yet to figures mask a number of important underlying significantly change the hiring practices of the trends. Most of the employment generation has private sector. -16- Figure 2-2: Omani Population by type, 2000-2017 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2 2,000,000 1,500,000 Emerging economic and social challenges 1,000,000 500,000 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Omani Expatriate/ Non Omani Source: UNIDO elaboration based on NCSI (2018) The Sultanate of Oman’s exchange rate has been the fluctuations of oil prices and the continuous pegged to the US dollar at one Omani Rial worth devaluation of the value of the US dollar. US$ 2.6 since 1986. Given the country’s Monetary policy has focused on keeping the dependency on oil and the open nature of its exchange rate anchored to the US dollar, economy, the fixed peg system has provided implying that fiscal policy has been the main exchange rate stability and allowed for systematic policy response to external trends. However, and disciplined monetary policy management. falling oil prices have left little room for However, maintaining a fixed exchange rate may manoeuvre on the fiscal front, resulting in limit the potential for further diversification away soaring deficits and debt. Furthermore, demands from oil-based products and industrial for higher wages have grown, increasing commodities. inflationary pressure and adding to the fiscal burden. The upshot has been that according to In oil-exporting countries with fixed exchange rate the International Monetary Fund (IMF), since regimes, changes in the price of oil have significant 2010 the Omani Rial has kept appreciating more effects on real exchange rates, induce imported than the weighted average of the 18 currencies inflation and reduce the competitiveness and of its major trading partners (95 percent of total profitability of the manufacturing industries (the imports), making exports of non-oil goods more Dutch disease effect referred to earlier). Positive expensive and imports more affordable. oil price shocks appreciate the exchange rate Diversification into new non-oil economic while falling oil prices tend to depreciate it. To the activities and managing a more complex extent that the currency is only pegged to the US economy will require a fundamental rethinking of dollar, US inflation and variations in the US the exchange rate policy in the near future. exchange rate vis à vis other currencies may affect the local economy in the shape of domestic Another major challenge the Sultanate of Oman’s inflation and higher/lower prices relative to economy faces is how to sustain its current high foreign prices. As the elasticity and structure of standard of living, particularly once oil exports and supply and demand of oil exporting economies reserves become exhausted, or if there is a global differ considerably from US’s, changes in domestic reduction in demand for fossil fuels as concerns prices may add to the higher/lower prices relative about climate change become more urgent, or to foreign ones. simply to reduce dependency on the oil sector. In other words, the key challenge will be how to Since the Sultanate of Oman’s currency is pegged continue growing while diversifying the economy. to the US dollar, it has been difficult to adjust to -17- Figure 2-3: Number of employees (Sultanate of Oman), 2007-2017 2,500,000 2,000,000 1,500,000 2 1,000,000 Emerging economic and social challenges 500,000 - 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Omani Expatriate/ Non Omani Source: UNIDO elaboration based on NCSI (2018) The Sultanate of Oman’s GDP per capita growth of adapted to the rapidly changing communication 2.2 percent lies in the top third of all countries’ and information technologies and education and growth rates during 1970-2016. It has by far health systems would have to be modernized outperformed all GCC countries, as well as while training its employees in order to address comparator countries such as Costa Rica and new learning and medical challenges. Jordan. Singapore and Ireland lie far ahead of the Transformational changes would have to take Sultanate of Oman in terms of growth place against the background of rapidly changing performance and Norway ranks just one position technology, i.e. a continuously moving target, above Oman. China with a constant GDP per which would increase the pressure even further capita growth rate of 7.7 percent and the Republic for economic and social change. of Korea with a constant GDP per capita growth rate of 5.9 percent lead all countries. The Sultanate of Oman’s signing of the SDGs adds two critical dimensions to the emerging Halving the oil-based economy from its recent challenges: inclusiveness and environmental average of 44 percent of GDP in the next 10 years sustainability. Inclusiveness, in a nutshell, stands while keeping the same standard of living based for leaving no one behind, i.e. all social groups on the Sultanate of Oman’s past population shall benefit from economic growth. It addresses growth rate will demand substantive societal and glaring distributional issues. Whatever their individual efforts. The non-oil economy would causes, the labour market distortions mentioned have to grow at around 8.2 per annum in constant above, and their related income disparities would terms, higher than any of the 10-year averages need to be addressed to ensure that economic ever achieved in Oman. This growth rate, growth benefits all. Equally important will be the however, only reflects the profound changes the development of a growth trajectory that is country would have to undergo. Shifting resources environmentally sustainable. A large body of away from old into new industries would involve scientific and technical analysis shows that man- new considerable investments and the made activities have put the long-term survival of development of new managerial, organizational the planet in peril. The Omani population will have and technological capabilities. New skills and to also make adjustments, some of which will be professions would need to be created and former difficult, to ensure further economic growth is also ones transformed to meet growing demand. environmentally viable. Inclusive and sustainable Manufacturing would, without a doubt, play a manufacturing could contribute to addressing crucial role in driving this technological and skills these challenges through skilled job creation and transformation process. Beyond manufacturing, new, environmentally friendly products and the economic infrastructure would need to be production processes. -18- 3 Why manufacturing matters

3.1 Economic Growth This correlation also holds when examining the components of growth that are necessary to Manufacturing is associated with economic sustain robust increases in living standards. The growth. Indeed, the Sultanate of Oman’s higher the value of the growth rate (size), the economic growth has been ‘pulled’ since 1999 by lower the growth rate’s volatility or variability manufacturing’s expansion (Figure 3-1). And there (stability), and the longer the growth rate remains is plenty of evidence that this is the case worldwide. stable (durability), the better a country performs It is difficult to find a developed country today that in the long run. For example, China kept its growth has not industrialized over the last 200 years. Since rate of 10 percent, with deviations of no more the 1950s, there is clear correlation between a than 2 points above or below this figure, for growing share, or a large share of manufacturing periods of five to ten years. Research suggests that value added and growing income per capita in manufacturing is correlated with size and stability, developing countries. Manufacturing industry has though the jury is still out on variability. been the ‘engine of growth’ in countries like China, the Republic of Korea, Singapore and Ireland. Figure 3-1: MVA and GDP real growth index (Sultanate of Oman) 600 Growth index (1999 = 100) 500 400 300 200 100 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Manufacturing Value Added Gross Domestic product Source: UNIDO elaboration based on United Nations Statistics Division (2018) Several mechanisms make manufacturing an insignificant level of manufacturing labour ‘engine of growth’. Opportunities for division of productivity in 1970, the Sultanate of Oman has labour, automation and sub-process integration are seen its value added per employee increase and much larger in manufacturing than in most eventually surpass the productivity of all other economic activities. Capital intensity leads to sectors by 2009, including the non-manufacturing economies of scale and to fast progress along the sector, which includes the oil industry (Figure 3-2). experimental learning curve, as much of the The only limit to the continuation of this process knowledge is embodied in the equipment. Further lies in the creativity of entrepreneurs to improve capital intensification leads to more output, thus to production processes or to generate new products, a continuous increase in labour productivity, which whose production can be increased over time. is generally larger than in other sectors. From an Shifting resources to manufacturing therefore leads -21- to improved economic performance and higher higher today given the extent of forthcoming GDP growth. The benefits of doing so may be even automation linked to 4ir. Figure 3-2: Sultanate of Oman: Trends in Labour Productivity, 1970-2016 1,000,000 Value added per employee (US$ 2011 900,000 3 800,000 700,000 600,000 Why manufacturing matters 500,000 400,000 constant) 300,000 200,000 100,000 - Agriculture Manufacturing Non-manufacturing Services Total Source: UNIDO elaboration based on United Nations Statistics Division (2018), Groningen Growth and Development Centre (2012) and International Labour Organization (2012, 2018)

3.2 Linkages and exports Manufacturing can also help to alleviate balance of payments constraints as the high elasticity of Industrial linkages refer to the contacts and flows demand of especially high-tech exports can provide of materials and products between two or more sustained growth of foreign exchange. As people’s industrial sectors or firms. Backward linkages income rises, they increasingly demand high-tech relate to demand from inputs and forward consumer electronics or health-related products, for linkages relate to the use of outputs by other example, which the countries that produce and sell sectors. The extent of inter-firm or inter-sectoral them abroad will benefit through higher exports. linkages is important because it generates This will improve their balance of payments results. interdependencies between firms and sectors and determines the impact of the economic multiplier 3.3 Innovation and change of specific industries. Industrial linkages are also a The strongest argument for key driver of industrial agglomerations and hence the special role of influence location decisions. manufacturing in economic Manufacturing’s linkages are much stronger than development arguably those of mining or agriculture, which generally refers to technology and have weak connections with the rest of the innovation. Insofar as the economy. Research on the US economy in 2012 Sultanate of Oman showed that for every US$ dollar spent in emphasizes innovation as a major source of future manufacturing, an additional US$ 1.33 was upgrading, exploring the connections between generated, while transport and warehousing only innovation and manufacturing becomes generated 1 additional US$ dollar for every US$ particularly relevant. Since technology has already dollar spent. The information technology services been mentioned when referring to the role of industry and the retail sector only generated US$ capital goods and equipment in economic growth, 0.8 and US$ 0.66, respectively, for every US$ the focus here will be on innovation. spent. The stronger sectoral linkages generated by It is commonly believed that manufacturing is manufacturing have been confirmed in multiple exclusively about producing goods. Due to its input-output studies. success at mass production, manufacturing is often -22- considered a ‘low value’ activity compared with industries. Scaling up manufacturing in emerging other corporate functions, and hence prone to be industries today requires much more investment outsourced to low cost locations. This is far from it. than in previous stages of the development of a Manufacturing firms are complex organizations product, and there is less experience in building that include ‘downstream’ production activities to new factories, so outsourcing is riskier. R&D is ‘upstream’ activities such as the generation of difficult to separate, as much of the innovation ideas, designs and drawings for new products, potential in new industries involves more efficient 3 which are often attributed to research and and cheaper ways of manufacturing emerging new development (R&D) departments as well as products. A recent well-known example is the Why manufacturing matters marketing activities. While some degree of solar panels industry, where the most important decoupling of downstream activities and relocation advances have been made in automation and in to low-cost sites has been taking place, it is well wafer manufacturing, which lies at the core of researched that there are very close photovoltaic technology. interconnections between research and Perhaps the best evidence of the knowledge development and production. Product and process intensity of manufacturing is in R&D’s sectoral knowledge are often interdependent; having a allocation. As presented in (Table 3-1), around successful product requires a production process 60.3 percent of all R&D takes place in that ‘understands’ the product and can produce it manufacturing, while R&D intensity (R&D as a in the most efficient way. The reverse is also true; share of value added) is close to 6 percent in design and production are often carried out within manufacturing and only 0.5 percent in other the same firm and in the same place. This close sectors. Large countries like China, the US, interaction between ideas and processes also Germany, Japan and the Republic of Korea spend seems to explain the growing relocation of R&D as more than 70 percent of their total R&D on production has moved around the world. manufacturing, but so do smaller countries such The connection between production and R&D may as Slovenia, Finland or Sweden. be even more closely interlinked in new emerging -23- Table 3-1: R&D expenditures, by income group and sector, 2011 Mining, Construction Agriculture Manufacturing Services and Utilities US $ Shares of Sectoral US $ Shares of Sectoral US $ Shares of Sectoral US $ Shares of Sectoral Billion total R&D R&D Billion total R&D R&D Billion total R&D R&D Billion total R&D R&D (PPP) expenditure intensity (PPP) expenditure intensity (PPP) expenditure intensity (PPP) expenditure intensity (percent) (percent) (percent) (percent) (percent) (percent) (percent) (percent) 3 Low - and middle - income countries China 0.48 0.26 0.04 162.47 86.56 3.78 12.69 6.76 0.64 12.05 6.42 0.21 Poland 0.01 0.77 0.06 0.95 49.15 0.7 0.05 2.76 0.05 0.91 47.32 0.19 Why manufacturing matters Turkey 0.01 0.27 0.01 2.59 53.34 1.23 0.07 1.36 0.06 2.19 45.04 0.3 High - income countries Australia 0.13 1.04 0.56 2.98 24.57 4.29 3.51 28.94 1.85 5.51 45.46 0.86 Austria 0 0.03 0.04 4.34 63.69 7.02 0.09 1.29 0.27 2.38 34.98 1.04 Belgium 0.03 0.46 1.09 4.21 62.93 7.13 0.14 2.14 0.4 2.3 34.48 0.75 Canada* 0.11 0.83 0.55 6.03 46.62 4.41 1.05 8.11 0.48 5.75 44.44 0.63 Czech 0.01 0.33 0.13 1.46 56.23 2.19 0.04 1.5 0.11 1.09 41.94 0.66 Republic Denmark 0.01 0.14 0.21 2.48 51.94 9.34 0.05 0.99 0.21 2.24 46.92 1.43 Finland 0.01 0.1 0.11 4.27 76.83 12.06 0.12 2.17 0.64 1.16 20.9 0.9 France 0.18 0.52 0.44 17 49.75 6.82 0.91 2.37 0.44 16.18 47.36 0.94 Germany 0.16 0.25 0.65 55.77 85.62 7.93 0.35 0.53 0.15 8.86 13.6 0.42 Italy 0 0.03 0.01 10.36 73.6 3.43 0.15 1.07 0.09 3.56 25.3 0.25 Japan 0.03 0.02 0.05 100.35 87.87 12.35 1.56 1.37 0.47 12.26 10.74 0.39 Korea. 0.04 0.09 0.12 39.11 87.54 8.81 1.57 3.51 1.58 3.96 8.85 0.47 Republic of Norway 0.08 3.14 1.98 0.98 37.07 4.66 0.35 13.08 0.37 1.23 46.7 0.78 Portugal 0 0.24 0.09 0.7 35.48 2.16 0.05 2.42 0.21 1.21 61.86 0.64 Slovenia 0 0.08 0.07 0.76 72.08 7.07 0.02 1.69 0.35 0.27 26.15 0.81 Spain 0.14 1.32 0.4 5.85 55.7 3.1 0.68 6.44 0.42 38.84 36.54 0.38 Sweden 0.02 0.25 0.38 6.59 71.86 9.91 0.05 0.51 0.13 2.51 27.38 0.98 United 0.02 0.07 0.13 9.18 36.9 4.39 0.35 1.4 0.16 15.33 61.63 0.95 Kingdom United - - - 201.36 - 10.56 3.79 - 0.3 88.95 - 0.37 States Source: Jacob and Sasso (2015) Manufacturing also contributes to economic areas of excellence, smaller countries are also able development through knowledge spill overs. to compete and thrive in the world economy. Of Knowledge spill overs refer to inter-sectoral flows the top ten countries in the Bloomberg 2018 of knowledge that stimulate innovation in other Innovation Index, half of the countries have companies as a result of one’s own innovation. populations under 10 M: Singapore, Sweden, Knowledge spill overs derive from the Switzerland, Denmark and Israel. specialization of companies within industries that Because of the intensity of innovation and often require complementary developments to technological change, the continuous shifting of make an initial innovation a success. Technological resources across industries and the linkages and spill overs have been shown to be one of the major spill overs that emerge as manufacturing develops, factors through which the manufacturing sector the sector has become a hotbed of change. Change fuels economic growth. within manufacturing is directional in that it One important point worth stressing with regard normally shifts away from low-tech, low wage to innovation is that country size does not seem to activities, which in certain situations have been play a role for the capacity to innovate. While large associated with ‘sweatshop’ and exploitative countries may be able to develop a wider range of conditions, towards more capital and knowledge innovation capabilities and may be involved in intensive activities as incomes rise. The change can several economic activities, by focusing on a few be very rapid as a doubling of GDP per capita, say -24- from US$ 5,000 to US$ 10,000, which took place in tech industries (Figure 3-3). This is a significant many countries within 10-20 years between 1990 structural transformation that few other sectors and 2016, could lead to decreases in the share of deal with so soon. If there is a feature that low-tech industries of 15 percent to 20 percent and characterises manufacturing, that is change. a parallel increase of around 10 percent in high- Figure 3-3: Changes in manufacturing relative share as incomes grow (%) 3 Why manufacturing matters Source: UNIDO 2013a, pg.61. While change for the sake of change (and not all Examining direct employment trends around the changes), are useful, the relentless shift towards world shows that while in absolute numbers more advanced technologies and knowledge- manufacturing employment is growing, their based industries, and the more sophisticated relative share rarely exceeds 20 percent of total competition that comes with it requires countries employment and slightly declines in the world as a and companies to keep abreast of developments whole over the long run. Because of the interplay in their industries and to continuously adapt their with technology, direct labour absorption in strategies to changing conditions. Efforts from manufacturing will not be a major contributor to individuals and corporations to continuously addressing employment challenges around the upgrade their skills and capabilities need to go world as well as in Oman. hand in hand with global industrial trends in order to sustain economic growth. Growing demand for The employment prospects of manufacturing are better education and training accompanies far more promising if indirect and induced effects manufacturing growth, helping to improve the are taken into account. Indirect effects are those overall level of education. Individuals and created through linkages and induced effects are corporations become more inquisitive, flexible those arising out of the growth generated through and receptive to new ideas and challenges, all of manufacturing. This is because as manufacturing’s which contributes to the improvement of the share in GDP expands, the demand for personal population’s living standards as a whole. services and social services rapidly increases, also drawing people from the informal into the formal

3.4 Employment and quality of jobs sector, thus increasing formal services jobs. As manufacturing grows, its impact on all types of Manufacturing directly and indirectly employs producer (finance, professional services, cleaning, about 500 M people around the world. maintenance and security), distributive Manufacturing employment in the Sultanate of (transport, communication, wholesale and retail Oman was around 131,000 people in trade); personal (domestic services, hotels, establishments of 10 or more people in 2016. restaurants, repairs, entertainment) and social -25- services (public administration, health and differences. Benefits such as retirement plans, education), increases dramatically. paid holidays and life and health insurance also tend to be higher. Manufacturing jobs fetch higher A major beneficiary of a large manufacturing salaries because of the high costs of downtime, expansion could be the Sultanate of Oman’s which requires high motivation and skills, and software and ICT’s support industries, which has because workers need to act independently most attracted significant interest among young Omanis of the time and thus need to be trusted. What was 3 in recent years. PEIE’s planned industrial cities found for the US has been confirmed in other combining manufacturing, services activities and studies all over the world. living spaces may facilitate these complementarities Why manufacturing matters in the future. Manufacturing wages are not also higher, but continuously grow as industry shifts from lower to Manufacturing employment multipliers are higher levels of technology. This is particularly demonstrably higher than in most other economic relevant for the Sultanate of Oman since the activities. Manufacturing creates large numbers of country already pays relatively high salaries due to indirect and induced jobs with studies suggesting the high wages being paid in the oil industry and to that for every job created in manufacturing, two Omani staff. Hence, manufacturing may be one of to three additional jobs are created elsewhere. the few sectors that could help the Sultanate of When looking into the employment impact of Oman as a whole keep up with the set wages in the manufacturing, it is critical to consider its indirect oil industry. Also, at Oman’s 2016 GDP per capita of impact as well to better gauge the sector’s job USD 19,560 (constant 2011 prices), current Omani generation potential. manufacturing salaries of around USD 18,000 Direct manufacturing jobs could benefit the (world estimate approximately USD 24,000) were Sultanate of Oman’s development in another just too high to justify low wage industries, implying respect. Manufacturing jobs tend to be high that the establishment of medium- and high-tech quality jobs with higher wages and more indirect industries as well as a focus on quality, uniqueness benefits. In the US, for example, manufacturing and brand are the only possible future industrial wages are higher than non-manufacturing wages, development trajectories for the Sultanate of even after taking into account educational Oman (Figure 3-4). Figure 3-4: The wages in manufacturing industries (total manufacturing) Oman’s manufacturing wages Source: UNIDO elaboration based on INDSTAT2 rev.3 (UNIDO, 2018) -26-

3.5 Social wellbeing and tertiary education, the ratio of females to males in primary and secondary education, the Manufacturing development is share of population completing secondary not only beneficial to economic schooling and the youth and adult literacy rate. growth but also to social development. There are two Turning to health, like with education, even aspects of social development though the causality can go in both ways, worth mentioning: education evidence shows that manufacturing is correlated 3 and health. Manufacturing with growing life expectancy at birth, a reduction development involves improved education and in infant and under-5 mortality, falls in the Why manufacturing matters skills, but the reverse causation is also possible, maternity mortality rate, reductions in the depth since enhancing education can lead to of food deficit, a falling prevalence of child manufacturing growth as the new knowledge malnutrition and access to improved water arising in educational institutions may lead to sources. new goods or product and process improvements. Be that as it may, the evidence Manufacturing hence seems to be associated suggests that manufacturing measured in with more educated people at all levels of different ways tends to be positively correlated education, and with people living longer and with net enrolment rates in primary, secondary healthier lives. -27- -28- 4 ‘Manufacturing for Wellbeing’

4.1 Strategy statement, objectives and necessary financial resources in the foreseeable rationale future for other industries to flourish. Yet the perils of not creating alternative industries are all too Strategy is about the long-term positioning of a obvious. Dutch disease, instability and inequality country with the aim of improving its performance. are just a few of the economic problems associated It is about establishing a unique set of differences with natural resources and industrial commodity that are difficult to imitate, if at all. It rests on dependence. New industries or industry segments identifying and performing activities that need to evolve to complement oil, gas and differentiate the country from others. It involves industrial commodities. These will need to follow a establishing priorities and making choices about different cycle of accumulation, which depends far future directions. These directions in less on construction, energy and transport, and manufacturing are essentially about what types of more on complex industrial structures and manufacturing industries should be established, consumer demand both locally and abroad. what existing industries should be doing, what types of new products should be manufactured, Location is another major advantage for the Sultanate and which markets should be served. of Oman. The country enjoys a unique and privileged position in the Indian Ocean close to the region’s A strategy needs to be based on the country’s major markets. It also has good access to European strengths and potential opportunities but must at markets. But more importantly, the Sultanate of the same time be aspirational and thus entails a Oman is a gateway to the largest and fastest growing degree of ambition. Aside from being ambitious, a present and future markets in the world, namely Asia strategy must also be realistic, i.e. there must a and Africa. It has a special relationship with Africa due clear understanding of the weaknesses and to their historical connections, as well as with India, obstacles that the country could face and how to whose economy based on current growth rates will deal with these. A strategy must also include a quadruple in the next 20 years. It can perform a capacity to adapt to changing conditions. The pivotal role in China’s Belt and Road Initiative (BRI). Sultanate of Oman has three basic strengths on The Sultanate of Oman’s location is accompanied by a which to build its manufacturing strategy 2040: relatively stable social and political situation. While natural resources, location and people. there have been occasional disturbances and upheavals, the country has generally remained The Sultanate of Oman has abundant hydrocarbons peaceful for close to half a century in a region and minerals. A 10-20-year strategy needs to focus otherwise characterized by conflict. The country’s on the country’s resource endowments and build unique location and level of stability does not only on them as well as diversify away from them. The mean it has potential for transport and logistics but Sultanate of Oman‘s manufacturing sector has been can also function as an important base for export- building on its natural resources for 20 years by oriented manufacturing. Indeed, manufacturing and shifting towards oil-based industrial products and logistics can be combined in the Sultanate of Oman to diversifying into steel and aluminium. It would be establish a strong and competitive position that will daft to discontinue benefitting from the goods, be difficult for other countries to contend with and technology and foreign exchange these industrial that will allow the Sultanate of Oman to overtake commodities bring to the country. In fact, these other countries that already enjoy a strong position in industries will have to continue providing the logistics. -29- The Sultanate of Oman’s domestic market size will inclination and ability of graduates, engineers and remain small. This is not to say that no import technical experts to push manufacturing. substitution possibilities exist, but that foreign In addition to the opportunities arising from exports markets will be a key factor of Oman’s industrial to the regional markets and the growing Asian and development strategy. Much like size is not an African markets, the ageing global population also obstacle to achieving technological progress, it opens new markets for health-related industries. 4 also is not a deterrent to becoming an advanced Opportunities related to 4ir are emerging and will export location as the cases of Jordan, Ireland or require highly paid skilled graduates and technicians Singapore have demonstrated. Even Norway, in order to materialize. Unemployed graduates may which has a very similar economic structure to 'Manufacturing for Wellbeing’ also benefit from more demand for skilled jobs. that of Oman, or Costa Rica and New Zealand, From a manufacturing perspective, growing which heavily depend on agricultural environmental considerations open new possibilities commodities, have a much larger share of in renewable energy and environmental industries. manufacturing exports. A major threat to implementing a strategy for 2040 While natural resources and location are key to may be the high levels of unemployed unskilled the Sultanate of Oman’s future industrialization, it workers, but if the manufacturing sector is able to will be the Omanis who will be the driving force of grow rapidly enough and contribute to enhancing manufacturing upgrading. Oman’s population is national wealth creation, ample employment young, self-sufficient and there is general opportunities will open up in the services and other awareness for health and wellbeing as well as sectors due to the indirect and induced effects of family life. Health care is free for Omanis and the manufacturing employment. standard of care is high for a country at its income Given the strengths of the Omani economy, the level yet demands have been raised to further values and preferences of Omani society and the develop the health care sector. Family, both emerging global opportunities, the strategy is to nuclear and extended, represents an important build a “manufacturing sector for wellbeing” by dimension of Omani life. Although around 78 2040. Wellbeing implies that the condition(s) an percent of the population lives in urban areas, individual or a group of people live in make them people still have strong links with their villages and feel positive. The aspiration for 2040 is for Oman’s visit them regularly. Omanis are generally also manufacturing sector to generate material and non- environmentally conscious and promote material conditions that will raise society’s living friendliness and sustainable lifestyles. standards and its overall wellbeing both locally and There is an emerging middle and professional class abroad. The strategy statement thus reads: of university graduates, although graduate ‘By 2040, the Sultanate of Oman will have a unemployment remains relatively high. Around 24,000 students graduate every year, with roughly modern and technologically advanced half graduating from public and the other half manufacturing base, fully utilizing the from private universities. The government creativity of the Omani population together supports higher education through the provision with the most innovative production of grants and fosters the rapid growth of private techniques and focused on improving the universities. It has also been encouraging research wellbeing of the peoples in the region and the and innovation, particularly in the areas of world at large.’ information technology (IT) and industrial technology. Loans and financing have also been The 2040 manufacturing strategy therefore will made available to potential entrepreneurs. To pursue the following objectives: advance Oman’s industrial transformation, the • To diversify the Sultanate of Oman’s country will need to draw from this large pool of manufacturing into technology and existing and future higher education graduates, knowledge-driven activities; both technical and academic. Industrial development will therefore depend on the -30- • To develop unique products focused on firms in developing capabilities to identify and improving the health and welfare of prepare for major changes in their external people; environment and to commit resources to respond • To expand Omani industry into regional quickly to those changes. Together with speed, the and new markets; ability to adjust responses to the given • To upgrade the Sultanate of Oman’s circumstances will be crucial for the manufacturing to ‘state of the art’ competitiveness of Omani firms in gaining access to 4 technologies; new local, regional and global markets. • To create an industrial innovation culture. Leaving no one behind is a principle that is not only 'Manufacturing for Wellbeing’ The 2040 strategy will be based on three principles: applicable to individuals and social groups, but also 1) niche markets, 2) speed and flexibility, and 3) to specific manufacturing activities. In identifying leaving no one behind. Oman’s economy is small and the drivers of strategic diversification, great will remain small regardless of how rapidly it grows. emphasis has been focused on identifying new A small economy is not necessarily an obstacle but activities. This is to be expected as the extent of can actually be a blessing if the country builds on it. diversification necessary to break with oil, gas and Building on a small economy starts with the industrial commodity dependence requires a large acceptance that it is not possible to purse a number of new industries to be established. Yet multiplicity of manufacturing activities, but very few there are many existing undertakings among the selected ones. The Sultanate of Oman’s future emerging ‘driver industries’ that can be as manufacturing sector will be concentrated and successful as any new ones, requiring relatively complex but specialized in activities in which it can little support or nudging. The focus of this strategy become a world leader and achieve world class will therefore be as much the creation of new standards. Niche products do not only refer to activities as it will be the upgrading or improvement specific industries but also—and perhaps specially— of existing ones, particularly in ‘driver industries. to concrete activities within those industries. They

4.2 Drivers of ‘manufacturing for also target specific market segments, which, however, are usually not the mass market targeted wellbeing’ by many large companies and countries. Specific Establishing a modern market segments can be more rewarding than larger manufacturing industry by markets and countries have built successful 2040 will require the industrial strategies based primarily on niche efforts of all industries, not markets. Large countries and firms tend to build only the prioritized ones. their industrialization strategies on organization, Consistent with the procedures and rules, which slows down the supply principle of no industry should be left behind— and demand adjustment process. By contrast, unless there are activities that can no longer smaller countries and firms thrive on their ability to generate value, in which case it is better to replace respond rapidly, providing quality and unique them with others that can—all manufacturing characteristics and be more in line with the activities are considered essential. At the same requirements of demand. time, it will be necessary to structurally transform The principle of strategic speed means that the the manufacturing sector so new activities emerge Sultanate of Oman’s industrial firms will be in more technologically advanced manufacturing encouraged to gain competitive advantage by, inter sub-sectors, while already established ones in alia, reaping first mover advantages both in delivery prioritised sub-sectors enhance their products, to markets and adoption of new technologies. Only quality and efficiency. by taking quick actions will Omani firms be able to The 2040 industrial strategy identifies 30 industries challenge and gain advantages over the more or activities at the Industrial Standard Industrial powerful firms and multinational corporations in Classification (ISIC) 4-digit level as those that will neighbouring countries and further afield. Strategic provide strategic direction for the development of flexibility requires commitment to support Omani -31- the manufacturing sector up to 2040. These are the generation of value. The company has also driver industries and they are grouped into three promoted the establishment of downstream users types of activities based on the nature of their main of its product and there are several initiatives to inputs: natural resources, capital or knowledge. The use aluminium in three main products down the classification is not perfect as it draws on the value-added chain: wheels, valves and flanges. majority rather than the totality of industries within each activity type, but it provides a good general In the cement industry, plans to expand capacity 4 to meet the growing demand in construction are overview of industry groups. already under discussion. Cement consumption in

4.2.1 Natural resource-based industries the Sultanate reached 9 million tonnes in 2015, 'Manufacturing for Wellbeing’ with 54 percent of local consumption being Natural resource-based imported from the UAE. Initiatives include industries include 15 establishing two cement plants in Duqm, a white industries (Table 4-1) whose cement plant and two cement grinders. main input is either agricultural, oil, gas, The major challenges these energy intensive aluminium, steel or any industries face are energy allocation, compliance other mineral. They with increasingly stringent environmental standards accounted for 58 percent of total manufacturing and meeting Omanization targets. An immediate value added in 2015. The industries can be grouped task for the strategy 2040 will be to address these into three clusters: food, oil and gas and other challenges and to ensure that these projects come metals and minerals, with furniture remaining as a on stream if they have not already. Since it is not separate activity. The largest industry group by far clear whether gas production will continue to grow among these clusters is oil and gas, accounting for in the future, the approach will be to assume there 82 percent of the total, followed by other minerals will be no gas to supply to industry and gradually accounting for 11 percent of the total, and the food reduce or phase out gas allocation as an industrial industry accounting for 6 percent of the total. With incentive. Indeed, industry may have to prepare the exception of basic chemicals, a medium high- itself for a future with no more ‘cheap energy’ and tech industry, these industries are low-tech or rather turn their attention to energy conservation medium low-tech industries according to the OECD and energy efficiency approaches to remain classification of technological intensity by industry. competitive. Energy efficiency schemes do not only Many of these industries are already performing save the planet, they can be quite profitable too. quite well in terms of levels of production, Hence, consistent with international agreements employment, efficiency of processes and/or and the SDGs, Manufacturing for Wellbeing, will exports. The refined petroleum industry will be focus on protecting the environment through constructing a new refinery in Duqm soon, with an ensuring limited CO2 and other dangerous gasses estimated capacity of 230,000 bd, double the emissions and on less industrial pollution. Industrial Sultanate of Oman’s refining capacity. There are recycling will also be heavily encouraged. also several plastic projects in the pipeline including The most important among the steel and other the Liwa Plastics Industries Complex, OCTAL’s minerals industries by far is steel. The global steel initiative to optimize the production capacity of its industry faces overcapacity, falling prices and polyethylene terephthalate sheets and PET resins growing protectionism. In 2017, global demand for plant in Salalah, and the production of 16,000 steel was around MT 1.6 BN and could rise to tonnes of polyethylene triflate sheets and rolls between MT 1.83-2.0 BN by 2040. The Sultanate of annually, which will substitute imports. Oman’s current steel demand is MT 2 M and is Sohar Aluminium, a key player in the non-ferrous expected to rise to MT 4.5-5.0 M by 2040, which will metals industry, already started delivering some be primarily covered by imports, since the local of its output in hot liquid form to downstream production of steel is exported. The products sold in producers as part of its strategy to develop its the domestic market are mostly long bars and rods industrial ecosystem and to contribute to the for the infrastructure and construction industries. -32- The key challenge the steel industry faces is buyers. Demand for special steels is growing at the product diversification. Long steel products are a global level, with similar qualities of iron in terms distinct necessity for building in Oman. Yet a vast of toughness but light in weight and rust proof range of the steel market primarily requires flat characteristics. Steel alloys are a completely steel. Ship building, automobile, fabrication, different market segment, one that is usually consumer durables, etc. use flat steel as their regarded as a premium segment and requiring primary input. Steel products are also large R&D investments. 4 experiencing a change in the preferences of Table 4-1: Natural resourced-based industries 'Manufacturing for Wellbeing’ Industry Cluster Processing/preserving of meat Food Processing/preserving of fish, crustaceans and molluscs Food Vegetable/animal oils and fats Food Dairy products Food Grain mill products Food Bakery products Food Basic chemicals; except fertilizers Oil and gas Refined petroleum products Oil and gas Plastic products Oil and gas Glass and glass products Other metals and minerals Cement; lime and plaster Other metals and minerals Articles of concrete; cement and plaster Other metals and minerals Basic iron and steel Other metals and minerals Basic precious and non-ferrous metals Other metals and minerals Furniture Various natural resources Tapping into new types of steel products, certainly obstacles are addressed. Entering the high-income starting with flat steel, will be important not only to segment could depend on the establishment of a increase value added and exports, but also for local large-scale perfumes industry that would pull employment. Although the steel industry generates the production of sophisticated containers. little direct employment, steel plants that produce Attracting foreign capital to the industry is also a the full range of products can generate a large possibility, but this may partially depend on the number of indirect and induced jobs, which some availability of silica raw material. In this context, estimates put at 6.5 workers for every worker the possibility of a silica sand processing unit will employed in basic steel production. Diversification need to be explored. into new steel products, however, should be The global food industry is facing a major eventually profitable and not put unduly high costs challenge. For the first time in history, non- on consumers during the learning period. communicable diseases (NCDs) are killing more Glass and glass products are another industry that people than infectious diseases. Every year, more has the potential of growing in the future. The than 35 million people die from NCDs—nearly local industry mainly produces glass bottles and two-thirds of the world’s annual deaths. NCDs containers with a significant share being exported, are not just a growing global public health mainly to neighbouring countries, the Philippines emergency. They are also financially costly and Kenya. Although the Sultanate of Oman has because they reduce productivity and increase had difficulty penetrating the high end of the glass the load on health care systems worldwide. and container bottle market, such as perfumes, Cardiovascular diseases (heart attacks and there are possibilities for further exports, strokes), cancer, diabetes and chronic respiratory provided some non-tariff barriers and red tape diseases are responsible for most NCD-related -33- illnesses and death. The main behavioural risk industrial classification). Two industries, structural factors for these diseases are tobacco use, metal products and insulated wires and cables, harmful use of alcohol, physical inactivity and account for more than 80 percent of the total of unhealthy diets (diets that are based on a low capital-intensive industries. fruit and vegetable intake and are instead characterized by high saturated fat, salt or sugar The structural metal products industry intakes). comprises around 60 enterprises of various 4 sizes. It produces bridges and their parts, towers Due to the improved access to information, and lattice masts, doors, windows and their consumers around the world are demanding frames, equipment for scaffolding and 'Manufacturing for Wellbeing’ healthier foods and allergen-free products, and an prefabricated buildings for oil refineries, increasing number are changing their habits and factories and similar buildings as well as their choosing healthier diets. As a result, demand for parts. Iron, steel and aluminium are the specific foods or types of food has decreased industry’s main inputs. The structural metal considerably or have even been banned by some products industry is fairly mature, with the governments. This trend has been accompanied by majority of its companies being in operation for an increasing variety of human taste, the use of over 20 years. The industry’s turnover was exotic flavours, higher consumption of vegetables, around USD 634 M in 2016, with exports less waste and more traceability and transparency in increasing from 6 percent of total output in 2015 the labels. People are increasingly connecting food to around 23 percent in 2016. It caters mainly to consumption patterns to negative environmental the construction, infrastructure and oil impacts, such as in the case of beef consumption. industries. The Sultanate of Oman has also witnessed an Given this industry’s increase in NCDs at all age levels in recent years relatively high labour which also in part relates to the change in eating intensity compared to other habits towards less healthy foods as people move metal bashing industries, it to cities. Attempts are already being made by the is likely to face challenges of government to increase awareness of this automation associated with problem, to improve food quality generally and to 4ir. Laser technologies, 3D reduce the content of harmful ingredients, printing, novel control particularly in food targeted at the young. Since systems and robotics have the Sultanate of Oman has already introduced a already penetrated the food security strategy, its industrial strategy will industry internationally. These technologies should complement it—at least as far as food processing be arriving in the Sultanate of Oman in the near is concerned—with an emphasis on healthy foods future, changing the nature of required skills and the (see Chapter 5). demand for labour. The industry could also develop

4.2.2 Capital-intensive industries along the product differentiation and product quality axes, since its product range is widening Capital-intensive industries include nine industries significantly and consistently internationally with a (Table 4-2) that are grouped by technological definitive potential for new projects aimed at import intensity in terms of a high capital labour ratio. substitution and exports to regional markets. A These industries accounted for 10.8 percent of wider range and higher quality products will help to manufacturing value added in 2015. Structural increase value added. The industry, however, is metal products and the building and repair of ships highly cyclical and ways to stabilize demand will have industry also tend to be labour intensive. Electric to be found in coming years in order to sustain motors, electricity equipment and other electrical growth. equipment include a family of very similar products often produced under the same roof, so they are The shipbuilding industry for its part consists of small grouped together as a single industry (they make shipyards, and the Sultanate of Oman Drydock up a single industry in ISIC rev.4, the most recent Company in Duqm, with two dry docks and a floating -34- dock, which can accommodate the largest tankers in transformers. The technology is fairly well- the world. The docks are mainly used for repair, but established but requires local certification, and they are expected to gradually shift to building larger buyers prefer collaborating with a foreign partner vessels, moving progressively from smaller fishing because the likelihood is higher that the and recreational boats to larger trawlers. Building technology will be accepted in Oman. Demand is ships and tankers could be contemplated in the long driven by projects from the electricity, run. construction or manufacturing industries. 4 The transformer, switchgear and electrical panel industry is undergoing considerable change, 'Manufacturing for Wellbeing’ mainly at product level. High-tech devices that can send the performance of the product to the Turning to medium-/high-tech products and customer in real time are being tested in specifically to the manufacturing of electric transformers. If this industry is to grow, scale motors, generators, transformers and electricity economies will need to be improved and the distribution and control apparatus, sales have product range broadened and modernized, proceeded apace in recent years, reaching USD something that may require future mergers and 178 M in 2016, of which around 12 percent was acquisitions. There is also some potential for being exported. The main products being expanding exports, particularly to Africa. As is the produced are transformers, switchgears and case for the structural metal products industry, electrical panels. The main components of demand is highly cyclical; for example, the switchgears include switches, breakers, relays and upcoming World Cup in Qatar has significantly controls, which are all imported. There are about boosted current demand, but ways to stabilize 30 manufacturers for switchgears and electric demand will also have to be found for these panels and about 3-4 firms producing products in the long run. Table 4-2: Capital-intensive industries Industry Cluster Structural metal products Medium-/Low-Tech Building and repairing of ships Medium-/Low-tech Electric motors; generators and transformers Medium-/high-tech Electricity distribution & control apparatus Medium-/high-tech Other electrical equipment Medium-/high-tech Pumps; compressors; taps and valves Medium-/high-tech Other general-purpose machinery (air conditioning) Medium-/high-tech Insulated wire and cable Medium-/high-tech Automobile bodies; trailers & semi-trailers Medium-/high-tech Pumps, condensers, valves and tips are other Iraq, and once they stabilize, to Syria and Yemen. locally manufactured medium/high-tech products, Pump demand is growing internationally, which although only three firms are engaged in their may open opportunities elsewhere as well. Product production. Building, water, oil, sewage and other and process technology is evolving rapidly, with types of specialised pumps are produced by the improvements to control and design in the former industry. Sales amounted to USD 10.7 M in 2016, and automation and 3D printing of hydraulic components in the latter. Pumps, as well as many while imports amounted to USD 750 M in the same other similar products, will become sophisticated year. products with a lot of electronics embedded into This industry has obvious import substitution them and connected to suppliers or to internal potential as well as export potential to Iran and maintenance departments that will monitor them -35- constantly. It will be unwise to consider these types Industries and Nuhas Oman. A third player, of products as old technology as the extent of National Cable Factory, has entered the market in product transformation will be significant. 2018. Oman Fiber Optics is the only domestic Automation is also making inroads into assembly. manufacturer of fibre optic cables in Oman. In Economies of scale will also have to be reached to addition to supplying the local market, these firms reduce costs and become price competitive, and also export their products. The market also, hence investments will need to be made, possibly however, relies on imports. There are two market 4 by foreign investors in partnership with local ones, segments: insulated electrical wires and cables for the industry to be successful in the next 10 to 20 and optical fibre cables. Sales in the former are years. USD 599.2 M and USD 83.3 in the latter, with exports amounting to 25.9 percent and 10.9 'Manufacturing for Wellbeing’ Demand for air conditioning and refrigeration percent, respectively. The major export market is systems is steadily growing around the world as the UAE. disposable incomes increase, especially in hot and (possibly) humid climates with large and growing Although the industry is small and young, it has populations, such as India, China, Brazil and the matured and is capable of producing goods of Middle East. Presently, the global market for air international standards. Benchmarked against the conditioning equipment reaches close to a USD 100 GCC competitors, the local producers are equally BN. The International Energy Agency (IEA) projects poised with regard to technology but room for that air conditioning energy consumption will modernization exists when compared with global increase 4.5 times the 2010 level by 2050 for non- leaders. The future challenges are to move further OECD as compared to 1.3 times for OECD countries. up the value chain to offer integrated solutions to the Sultanate of Oman’s manufacturing capabilities end users. There is potential to expand into other in the air conditioning systems industry are, products in the longer term, especially into electrical however, limited to a few firms which mainly cables and HV cables. Cables for renewable energy assemble air conditioning systems for the applications could be a focus in the immediate term. residential sector and are almost non-existent in A further expansion into foreign markets would be the commercial sector. necessary going into 2040. Demand for air conditioning systems in the 4.2.3 Knowledge-driven industries country is likely to grow in the near future. Oman’s Knowledge-driven industries air conditioning market imports were estimated at include six industries (Table 4-3) USD 426 M in 2017. One of the major reasons for grouped in two activity clusters, the high import content is the lack of production namely health and environment. facilities in flat steel products. With the exception Data is available for medium, of electronic parts and compressors for air medium high- and high-tech conditioners, all components are manufactured industries, but they account for a negligible 0.6 from flat steel products, which range from percent of total manufacturing value added. The galvanized sheet vents to assembly housing and industry is R&D intensive, employs skilled labour fins. In the Sultanate of Oman’s air conditioning and professionals and pays higher wages. The market, centralized air conditioners have captured working environments tend to be clean, except the majority share and are further projected to perhaps parts of the recycling industry, involve maintain their dominance in the future. Demand expensive equipment and are normally connected for window air conditioners has decreased due to to laboratories for quality control. There is no data the increasing acceptance of mini-split air available for the Sultanate of Oman’s recycling conditioners in the residential sector. There is a industry, international data is generally deficient, huge potential for import substitution in this and part of the industry is being reclassified out of industry, with neighbouring countries also among manufacturing into the newly created activity the largest markets in the world. Competition is, “Waste Management and Remediation Activities”. however, tough and entering this industry should Knowledge-driven industries will need to grow avoid long infant industry periods and consumers fastest in order to attain significant structural paying above market prices for too long, if at all. change in Oman’s manufacturing sector. The Sultanate of Oman’s electrical wires and cables industry is dominated by Oman Cables -36- The pharmaceutical industry in the Sultanate of university to test biological treatments and to find Oman consists of three firms, one of which is in its way to produce the drugs locally. Biological inception phase. In 2016, sales accounted for products have represented the strongest around USD 50 M, mainly in generic products. pharmaceutical innovation in the past 15 years. These include anti-cholesterol, cardio-vascular, anti-bacterial, anti-allergic, anti-inflammatory, The Sultanate of Oman has built an international gastro-intestinal, anti-diabetic, anti- depressant reputation as applying high standards to and analgesic-antipyretic drugs. Drugs are supplied procedures and compliance by pairing its 4 in capsules, tablets, solutions and other forms. requirements with those of the European Despite the small size and wide variety of products, Medicines Agency and is a strong advocate of 'Manufacturing for Wellbeing’ the industry exports around USD 20 M, mainly to Intellectual Property Rights (IPRs). This should GCC countries, but imports a staggering USD 437 M. attract foreign investors to Oman. The country also has privileged access to the GCC and U.S. Possibilities for developing the Sultanate of Oman’s markets, with the U.S. avid to purchase cheap pharmaceutical industry in the near future arise reliable drugs to reduce its growing health from the fact that several drugs to treat immune expenditures. Two possible long-term directions mediated diseases (rheumatoid arthritis, psoriasis, emerge for the pharmaceutical industry in Oman. Crohn’s disease), metabolic disorders (diabetes) First, focusing on generics and building an own and even some oncology disorders, will see their domestic industry following the examples of patents expire in the next few years. Treating these Jordan and India. Second, concluding diseases has a large impact on the health care costs manufacturing agreements with pharmaceutical of governments and individuals. Health multinational corporations for the local expenditures are poised to rise significantly in manufacturing of generics or brand name drugs, coming years. Sultan Qaboos University is said to and gradually building local R&D and have the capacity to establish the first bio- manufacturing capacities in the sector. A equivalence centre in Oman. This would allow the combination of both is also possible. Table 4-3: Knowledge-driven industries Industry Cluster Manufacture of pharmaceuticals, medicinal chemicals and Health botanical products Manufacture of medical and surgical equipment and Health orthopaedic appliances Manufacture of soap, detergents, cleaning and polishing Health preparations, perfumes and toilet preparations (fragrances) Manufacture of electronic valves and tubes and other Environment electronic components (solar panels) Recycling of metal waste and scrap Environment Recycling of non-metal waste and scrap Environment Related to the pharmaceutical industry and as a limited opportunities may emerge here, perhaps way to initiate the development of a strong health linked to local or GCC public procurement. On the care cluster is the manufacturing of medical and other hand, therapeutics is highly regulated and surgical equipment and orthopaedic appliances. requires medical expertise. Offshoring is uncommon This would be a greenfield activity in the sense as the high share of U.S. and the EU-15 exports that it currently does not exist in the Sultanate of demonstrate. Capital equipment is produced in low Oman. volumes with manufacturing ties to countries engaged in electronics manufacturing. Medical Moving into the medical device industry is instrument manufacturing is comparatively less challenging because products that have the lowest concentrated (in terms of firms and countries), with degree of risk and regulation such as disposables and some offshore manufacturing in place and relatively supplies are produced in large volumes and are lower regulatory hurdles. Instruments also have the already being manufactured in China at prices most highest export value of their product categories. As countries cannot compete with. Nonetheless, some -37- such, this product category may offer the biggest have growing populations. These markets also potential for entering the medical device industry. tend to have lower regulatory access hurdles, giving smaller firms the chance for entry. The Sultanate of Oman will be better off if it pursues the The third industry in the health care cluster is not development of an export- so much focused on physical health, but more on oriented, globally focused improvements in quality of life through the use of 4 medical instruments industry fragrances. The focus, in particular, is on instead of focusing on domestic developing a frankincense perfumes industry. Like and regional demand alone. the pharmaceutical or medical instruments There is potential in the medical industries, this industry has high R&D and 'Manufacturing for Wellbeing’ instruments manufacturing for marketing expenditures, and production export activities, for example, in minimal invasive processes take place under similar conditions as in instruments, endoscopes and single-use the pharmaceutical industry. instruments, where technological learning could begin before progressively moving on to more The Omani frankincense sophisticated products. High quality products and industry has several large stringent process controls could be a distinctive international companies and competitive advantage of Omani manufacturers. numerous family businesses The aim should be a cluster or industrial park- that produce cosmetics and focused development strategy centred on a specific perfumes in their homes. end market or final product category. This could Essential oils of frankincense evolve in one of two directions: are said to be distilled in private residences and all other raw • Identify a niche area of medical instruments materials, packaging materials, bottles, containers and target key foreign companies and designed boxes are imported from abroad, a. Location: Salalah area mainly from France and China. Small Omani family b. Focus: foreign medical device MNEs as firms producing incenses and perfumes do not seem a supply base for global sales or R&D to export their products but focus instead on the c. Investment funds for JVs could be an local market. One firm mentioned that it sells its incentive for smaller, niche players products online, although the amount of sales was d. Strategy should align with unclear. On the other hand, large companies like pharmaceutical industry development Amouage have sales points in the most exclusive markets around the world. Perfumeries is an • Target Asian medical companies for sales extremely profitable industry. in Asia a. Location: SEZAD Duqm The development of a modern global frankincense b. Who: Chinese medical device industry requires production of the necessary companies (The Sultanate of Oman essential oils. The Sultanate of Oman has been included in China’s BRI) and possibly producing these for centuries but in an artisanal companies from other countries such manner, which creates problems such as lack of as Iran standardization and variability in quality, and c. Promote the industry based on hence reliance on foreign raw materials. In 2016, proximity to GCC and Asian markets USD 4.9 M in essential oils and USD 47.1 M in (India and China). odoriferous substances and mixtures were Targeting investors from emerging Asian markets imported. Compared to these figures, Oman’s with growing demand for medical devices may frankincense exports are negligible. The challenge provide easier entry than the U.S. or EU markets. is therefore to produce the necessary essential oils China represents a growing market opportunity, at industrial scale so downstream mixers can especially considering the potential for increased develop their own fragrances. economic cooperation under the Belt and Road The global market of essential oils has a turnover Initiative. Other Asian markets like India or of USD 6.5 BN with a projected increase in the Singapore may also offer promising alternatives. range of 8.4 percent to 11.3 percent to USD 15.8 These nations are increasing their health care BN in 2024-2025. Estimates for 2020 are 370.000 expenditures, expanding insurance coverage and -38- tonnes valued at over USD 10 BN. Essential oil Opportunities for manufacturing will emerge in cultivation areas cover 600.000 hectares and 1 secondary (low-tech) components for PV and million farms are producers of essential oil- Concentrated bearing plants. The market of essential oils does Solar Power (CSP) not include only perfumes, but food and systems, capital- beverages (35 percent), fragrances, cosmetics and intensive raw aromatherapy (29 percent), household products materials for PV 4 (16 percent) and pharmaceuticals (15 percent). (i.e. polysilicon), The market price of essential oils depends on quality factors, economic factors such as supply manufacturing of core (high-tech) components for 'Manufacturing for Wellbeing’ and demand conditions and international PV and CSP and for research on next-generation certification. The quality of essential oils is PV and CSP components and systems. Attracting determined by geographical aspects such as foreign investors and developing technological country of origin and climate. In frankincense, the capabilities in this field will be key to building Sultanate of Oman would have a distinct Oman’s solar energy manufacturing industry. advantage. At present, the Sultanate of Oman’s recycling Much is being said about the Sultanate of Oman’s industry is not active, with the exception of the potential in the use of solar energy, but the reprocessing of end-of-life car tires and acid lead country also has immense potential in the batteries. Reprocessing is carried out by private manufacturing of solar energy components and entrepreneurs in contact with be’ha and Haya, the parts. This is another green-field industry that public sector waste management companies, for could open a door to a modern technologically the supply of waste and the recovery of treated advanced industry. sewage and oil well waters. At the same time, the The Sultanate of Oman is a net importer of solar export of a few recyclable materials—Acid Lead energy manufactured goods, such as photovoltaic Batteries (ALB), tires, plastics, iron scrap—has cells. Between 2006 and 2016, Oman, on average, been ongoing for some time, operated mainly by imported USD 1.02 M per year worth of photovoltaic expats. Be’ha has set an ambitious target to cells, mainly from China and India. This can partly be reduce amount of waste going into landfills by attributed to the early stage of the domestic solar diversion rate of 60% moving towards 80% by energy industry’s development. Photovoltaic (PV) 2030. cells are imported by local firms specialized in The following selected industries of “recovery downstream design, installation and maintenance of from waste”, identified in collaboration with PV systems for domestic and industrial use. This value be’ha, could be developed in the Sultanate of chain segment shows a high concentration of local Oman in the short-term to obtain inputs for firms in comparison to upstream manufacturing domestic production: activities. • Construction & demolition waste, usable for Oman’s installed solar energy generation capacity has road construction witnessed considerable growth in the last five years. • Refused derived fuel (from undifferentiated Additional developments suggest this growth might municipal waste, tires, plastics), usable in continue in future years. For example, the energy recovery in cement plants enhancement of the north-south interconnect • Waste from steel production, usable in road project and a wholesale electricity spot market, construction enabling the potential for future electricity trading • Source segregated food/agro waste, usable from 2020 onwards, which could drive demand for for anaerobic digestion in energy recovery (biogas and bio-methane) and compost solar energy. Furthermore, leading authorities have issued a renewable energy development plan that • Fish industry, usable for fish fertilizer includes four independent solar power (IPP) projects, • ALB, usable for lead and plastics. adding a planned 2,000 MW of solar generation capacity to the electricity supply landscape by 2024. -39-

4.3 Enablers of “manufacturing for processes as they occur in various institutions wellbeing” and which should be addressed by policy. The key issue here is persisting quality deficiencies that For the industries to achieve their development derive from a set of structural (outer) and objectives by 2040, some challenges will have to functional (inner) challenges. The two circles be addressed. Addressing these key challenges mutually reinforce each other and jointly inhibit will enable the achievement of the industrial the emergence of vibrant national skills 4 priorities discussed in the previous section. Three development dynamics. types of challenges must be dealt with: people, technology and governance. Structural challenges (outer circle) arise from an economic model based on cheap foreign labour.

4.3.1 People While cheap labour has been at the base of the 'Manufacturing for Wellbeing’ country’s impressive economic and social The Sultanate of Oman’s impending development, it seems to have become an industrial transformation will obstacle in times of stagnation and increasing require people with new and demand for Omani employment. Reliance on advanced sets of skills, which will cheap foreign labour does not stimulate have to be developed in parallel to technological and skills upgrading in the private the establishment of new industries. sector, consolidating labour-intensive, low Skills dynamics in the Sultanate of productivity patterns of industrial production. Oman appear to be framed by two interconnected sets of challenges, Even though the number of Omanis working in the one related to the labour market context, the other private sector has increased over the last few to the education and TVET system. These two sets of years, Omani youth still view, especially unskilled challenges are reminiscent of circles that mutually employment in the private sector as a secondary reinforce each other. choice compared with employment in the public sector. This is mainly due to the lower salaries and In Figure 4-1, the outer circle comprises unfavourable working conditions leading to lack of structural challenges. It sets the general context motivation, weak commitment and Omani youth for the social processes related to the skills- not finding the private sector jobs stimulating labour nexus and shapes the social imaginary of enough. In fact, such jobs are often only work and education, which influences study and considered intermediate jobs while vying for a job work behaviour. The inner circle comprises in the public sector. proper educational and skills development Figure 4-1: Two interconnected circles framing the skills dynamics in the Sultanate of Oman -40- These employment patterns lead to a lack of an of thorough assessments of digital skills among incentive structure in the private sector to replace secondary school and college graduates as well as a foreign workers with Omanis. Incentives for lack of assessments of future digital and employers to hire Omanis instead of cheaper and technological skills needs. Second are the relatively better skilled expatriates are weak. They are weak quality standards of basic skills in the general equally weak for Omanis to seek work in the education system, an issue that is examined in the private sector rather than in the better paid public next section. Solid basic skills will be of key 4 sector. Under these circumstances, support for significance if the future workforce is to adapt the emergence of vibrant national skills quickly to rapidly changing technological skill 'Manufacturing for Wellbeing’ development dynamics is clearly necessary. requirements and to develop analytical and creativity-based skills that complement automation Policy and functional skill-related challenges (inner processes. Third is the limited and disjointed supply circle) in the Sultanate of Oman comprise the of technical training. For example, vocational education and technical and vocational education training is not available for machine operators in and training (TVET) system as well as the concrete the pharmaceutical industry and there is no processes of skills development that take place specialized college in metallurgy. TVET delivery is inside and outside of these systems. There are, in particularly fragmented at low and medium skill turn, two levels that need to be looked into: levels, a worrying problem since employment in challenges to the forthcoming 4ir and those related these segments is most at risk of being replaced by to the education and TVET system itself. automation. Lack of standardization, quality

4.3.1.1 Challenges related to the assurance and alignment across the growing manufacturing sector and the 4th private training sector and between the public and industrial revolution the private TVET sector are starker than for other education sub-sectors, and result in particularly There are substantial gaps weak skills dynamics in the low and medium skill between the education and skills segment. acquired in schools, colleges and vocational training institutions Company involvement in initial skills formation is and the manufacturing sector’s fragmented and scarce. Official data indicate very skill requirements. The most low enrolment in the TVET apprenticeship track (34 common cognitive and technical skill gaps are the apprentices in 2016). Private companies often lack lack of knowledge, and the required depth, of the commitment to skills formation and technological English language, mathematics and science. But upgrading, instead preferring to run labour- there are also deficiencies in critical and analytical intensive businesses based on cheap expatriate thinking and in data handling. In the private sector, labour. Hence, their interest in skills formation is skills for operators and technicians are lacking, i.e. even lower with regard to the expatriate mechanical, electronic and instrumental skills. workforce. There are some indications that private Studies point to relatively good digital preparation firms resisted assessing migrant workers’ skills for in schools, but it does not seem to be carried over quite some time out of fear that this would lead to to work, where reports suggest weak digital skills higher salary demands. However, employers’ among employees and limited interest in ICT- awareness of the importance of skills improvement related training. There seems to be a lack of and skills testing, also among the expatriate machine operating skills in the pharmaceutical workforce, is beginning to change. industry, which will be an even greater problem as A government-private sector dialogue to identify machines become more sophisticated. At the occupational standards and training curricula is professional level, biotechnology expertise, in incipient and has not yet yielded significant particular, biomedical engineering, is urgently results. Some blame this on low private sector needed. interest to cooperate with government agencies The lack or limited availability of skills is either in terms of the curriculum or at the practical compounded by several factors. First is the absence training level. Continuous and intense private -41- public dialogue will be key to respond to 4ir public sector, meaning a substantial loss of skills changes, both because of their speed and the and capabilities for the manufacturing sector. unpredictability of upcoming change. The low standard of education is attributable to Manual labour has conservative teaching methods that focus on the a low social status acquisition of factual knowledge and rote learning among Omanis. rather than on knowledge application, creativity 4 Workers point to and analytical thinking. The government has low wages and poor undertaken efforts to reform the curriculum and working conditions teacher training to make teaching more learner- 'Manufacturing for Wellbeing’ as key reasons for this attitude. Manual work also centred and more relevant for the acquisition of lacks social recognition as opposed, for example, transferable skills, but reforms have not resulted to clerical jobs. A common problem reported at yet in a tangible transformation of teaching the workplace, particularly in the private sector, is methods. low work ethics, weak commitment to jobs and Recent curriculum reforms have focused on poor time management skills. introducing new subjects, such as information A major paradox of the supply and demand of technology; science and the environment, and life skills in the Sultanate of Oman, especially at the skills; limiting the amount of theoretical content; professional level, is that many more women than making learning more meaningful by relating men attend ICT-related training courses. In some content to the students’ practical world; reducing cases, female participation accounts for up to 80 emphasis on memorization; and reducing percent of the total. This high potential in terms of dependence on textbooks as an information digital skills, including highly specialized skills, risks source. However, one major problem is that the to be at least partially lost for the Omani private curriculum is not always appropriately applied in sector since employment rates among women are the schools. In practice, lessons are still mostly low. restricted to theoretical knowledge and not closely linked to the concept of work. Research

4.3.1.2 Challenges at the level of the suggests that teachers experience difficulties in education and TVET system applying learner-centred approaches as well as Assessment tests and evaluations highlights that being reluctant to adopt modern approaches to quality standards need to be improved in the delivering knowledge. education system (grades 1-12) leading to low The school year is short and instruction times are basic skills among secondary school graduates, shorter than in other countries due to school both at the level of key cognitive skills and closures for national holidays, religious events, transferable skills. This negatively affects any type public examinations and some adverse or unusual of subsequent education or training. As a result, circumstances. An estimate of total instruction secondary school graduates require a time amounts to approximately 690 hours per foundational year at universities, colleges and year. In sharp contrast, most countries allocate vocational colleges and often entail lengthy between 700 and 800 hours of instruction time retraining in companies. annually for pupils in grades 1 to 4 and between Performance assessments, however, show that 800 and 900 hours annually in grades 5 to 8. Pupils like at the graduate level, girls outperform boys in already start disadvantaged due to the virtually all grades, subjects and regions, traditionally low participation rates at the pre- irrespective of whether achievement is measured school level. by teachers’ grade, national assessments, The general education system also lacks international assessments or public examinations. vocational preparation and inter-linkages with Yet as is the case in the professional level, working environments. This hampers students employment rates among women are much lower from acquiring a positive view of work processes than among men, and women mostly work in the as valuable learning opportunities early in life. -42- Enrolment numbers in the TVET system, albeit craftsmanship. Although a thorough evaluation of growing, remains marginal and is perceived to be standards is due, there is a widespread belief that second best compared with academic education. the quality standards among private training Technical colleges are a major provider of institutes represent a major problem. vocational skills. In terms of enrolment numbers, Furthermore, there is a lack of standardization and they outnumber vocational colleges more than alignment at various levels. The Ministry of tenfold. High unemployment rates among college Manpower (MoM) is responsible for certification 4 graduates indicate that professional qualifications and quality assurance for industry-related skills acquired in Omani institutions are not sufficiently but due to a lack of institutional capacity, it has 'Manufacturing for Wellbeing’ competitive to make up for the perceived thus far not been possible to standardize “advantages” of expatriate employees. The low certifications and quality assurance across the social status of manual work translates into public and private sector of TVET provision. vocational training also lacking social recognition Clearly, MoM needs to improve its administrative and, hence, low enrolment. and technical capacity to supervise the growing private training sector in terms of quality TVET deals with weak basic skills of newly enrolled assurance and standardization. students, outdated teaching and learning methods, lack of common standards and not being well There has been more progress in developing connected to industry. There are no nationally occupational standards at the national level. To standardized skills assessments and skills date, the National Training Fund (NTF) and the requirements assessments. The government is Occupational Standards and Testing Centre (OSTC) working on and has launched “The Sultanate of have developed 50 national occupational Oman Qualification Framework”, but the initiative standards in cooperation with the Oman Society has only just begun. Skills standards among for Petroleum Services (OPAL) in the oil and gas graduates from technological colleges have industry. However, many industries need to follow improved, but instruction at colleges still focuses too suit, particularly such industries like much on theory and there is hardly any exposure to pharmaceuticals. the practical workplace. Internships are only Frequent shifts in TVET policymaking with regard mandatory for the last year of college due to the lack to policy transfer from foreign models have led to of sufficient places in private sector companies, strategy inconsistencies and a loss of capacities. which for some is the result of the reluctance by From following the UK model of National companies to provide internship places. Vocational Qualifications in the 1990s, TVET Private universities and colleges have a major share policymaking shifted to following the German of the total student population at the tertiary level model of defining national occupational standards accounting for more than 50 percent in the based on work process analyses in the mid-2000s, academic year 2015/16. The quality of training and back again to the UK model of a National provided at private universities and colleges seems Qualifications Framework, which is based on a to be mixed, is not particularly relevant for market-led system of private TVET provision and subsequent employment and biased towards academic rather than technical careers. The public subsidies received by private universities are not always invested in the improvement of the quality of education and their strategies are often dictated by profit maximization instead of academic quality or social equity. The quality of private training institutes is also mixed. Some are perceived to provide very low- quality training. Many focus more on certification. It is unclear what were the administrative rather than on technical fields and shortcomings that led to the policy reversal. -43- Social dialogue as a basis for the design and 4.3.2.1 Challenges to Knowledge and continuous adaptation of the national skills Technology Generation system is only now emerging in Oman. The parties involved are mainly the government and Over the last years, research capacity has been employers, while there is no evident participation improving at universities and some quality of a third partner in this dialogue, namely research is already taking place, mostly sponsored employee or civil society associations. To date, the by the Research Council. Notable examples are the 4 research being conducted at the University of dialogue still lacks a systematic scope and its effectiveness and outreach is unclear. Nizwa on frankincense oils or the newly establish centre on dyes and moulds at the University of 'Manufacturing for Wellbeing’ All in all, the challenges described above limit the Sohar. This research will in due course have an capacity of the Sultanate of Oman’s skills impact on upcoming manufacturing efforts to development system to respond to private sector develop the related industries. requirements and as a result, limit the private sector’s demand for Omani workers, who tend to At the same time, it is clear that overall R&D require timely and costly retraining. Likewise, the activity remains limited both in terms of funding private sector’s reluctance to get involved in initial as well as research outputs. There are only few skills formation and in an institutionalized PhD students in the Sultanate of Oman, and the dialogue about a national skills formation system PhD projects being pursued hardly ever have a reinforces the functional and structural commercial impact. This was particularly obvious weaknesses of the latter. in ICT-related research, the cornerstone of the forthcoming 4ir. What little state funding is As outlined, the outer and inner circle of structural available does not focus on basic and applied constraints and skills and related policy gaps research activities that manufacturing firms mutually reinforce each other, resulting in engaged in digitalization could tap into. enablers that are too weak to unleash a vibrant national skills dynamics process for increased Overall, the Sultanate of Oman’s R&D expenditure employment and productivity. is just over 0.2 percent of GDP in 2015, among the lowest in GCC countries, with the exception of

4.3.2 Technology Bahrain. UAE leads with nearly 1% of GDP while There is a wide Saudi Arabia spends around 0.8% of GDP. The convergence of Omani world average in 2016 was 2.3% of GDP. Low opinions in terms of the knowledge and technology generation therefore huge challenges arises partially from a small public R&D budget. associated with low But it is also attributable to low private R&D labour productivity and emerging 4ir and digital investment. Although some companies, such as technologies. Furthermore, an overall consensus Oman Cables, have their own internal R&D exists on specific shortcomings observed in the budgets and capabilities, the bulk of Omani national innovation system, which act as barriers manufacturing firms are not involved in R&D. to the digitalization of Oman’s manufacturing Linkages and partnerships between industry and sector. While some companies are making efforts academia are also very sporadic, which is an at preparing themselves for the 4ir by and large additional constraint to the development and use the Sultanate of Oman still needs to make of emerging digital technologies in manufacturing. significant efforts to be ready and reap A number of new promising initiatives have been productivity gains. Three areas, in particular, need introduced in support of local R&D capabilities to be addressed: generation, diffusion and development in the private sector. These are deployment. supported by the Research Council, Oman Technology Fund and the Industrial Innovation Centre, and are clear steps in the right direction towards building a local innovation base. There -44- are growing opportunities to make research technologies to firms or through policies and projects more business-oriented, which might support mechanisms/ initiatives would have gone a create or improve communication channels and long way to convince them to adopt new collaboration mechanisms between industry and technologies. On the whole, although the academia. The majority of Omani firms, however, willingness to learn exists, firms often find it still perceive these initiatives as a drop in the difficult to address information deficits and related ocean and not fully accessible to the bulk of them. uncertainties, which works as a disincentive for the 4 application of new technology. The availability of skills for new 4ir knowledge and technology generation is also lacking. Local Omani firms are concerned about the high costs of 'Manufacturing for Wellbeing’ universities are not integrating digital and lack of accessibility to new technology, manufacturing concepts and themes as part of their particularly SMEs. Automation involves heavy capital syllabus, resulting in graduates without the right expenditures and normally requires increasing scale expertise in new digital technologies. In particular, to amortize investments. This creates additional a lack of practical experience in 4ir concepts is burden to the adoption of 4ir technologies. Many evident among Omani university graduates. This is countries have schemes to provide firms with limited seen not only as a challenge for the development of resources and skills access to low-cost digital local research capabilities (PhDs) but also for the applications and solutions. These schemes usually creation of a skilled workforce capable of bringing support the adoption of new technologies through and adapting foreign technology into Oman. New training, demonstration campaigns and machinery is expected to be more digitalized in the international visits as well as through the provision future and the Sultanate of Oman will require both of finance, sometimes at preferential rates, to pay the capability to develop their own technology for their costs. through R&D as well as a skilled workforce to One rather bothersome barrier to the adoption of understand foreign technologies. new technology is associated with the difficulties

4.3.2.2 Challenges to Knowledge and manufacturing firms face to import foreign Technology Diffusion machinery and components. The process for importing new technologies is long and costlier One key challenge than in competitor countries. As a result, Omani to the spread of companies adopt preventive measures such as knowledge and minimizing the variability of equipment and 4ir technologies technologies they use in their operations in order across the to reduce the complexity of maintenance and Sultanate of Oman’s manufacturing sector is the service requirements (i.e. standardized appropriate information and demonstration technology/equipment used across firms to examples deficit that companies are facing. Local minimize variability in spare parts and firms, especially SMEs, struggle to fully grasp the components). The same constraints could apply to extent of the upcoming technological changes and new industrial machinery equipped with new to navigate through the huge amount of digital technologies, so companies may avoid information, and misinformation, provided by introducing them to get around sourcing and international technology suppliers, consultancies maintenance issues. The current regulatory and the internet. They find it difficult to determine framework for imports represents an area of which solutions are best for their organizations, opportunity, as it could be simplified to facilitate including how new digital technologies and access to new foreign technology and the required applications can deliver value to their businesses maintenance and service expertise. through existing activities or through new data- based business models. They are confused about There are constraints in the digital infrastructure the strategic priority of 4ir for the government, as well. Low internet connection speeds, lack of since strong government leadership in this field by optical fibre data connections and limited demonstrating the value of emerging digital broadband coverage are some of the key issues. -45- Similarly, despite significant legal and regulatory attention towards new skills development efforts by the Information Technology Authority programmes, markedly for digital manufacturing business concerns about cyber-security and data technologies such as machine learning, artificial sharing confidentiality in the current Omani intelligence, cloud computing, robotics and cyber- network infrastructure may have become a security. The other challenge is the inability to disincentive to use digital tools in some firms’ leverage Oman’s education system, and a potentially 4 operations. A number of initiatives were improved supply of trained personnel in the above- mentioned as already aiming to address these mentioned skills, as a magnet for bringing FDI both barriers. For example, wireless and 4G networks to install R&D facilities in the Sultanate of Oman and have nearly full country coverage, and a broad to initiate green-field activities with advanced 'Manufacturing for Wellbeing’ fibre optic installation across the country is technologies. expected to be completed by 2021. The third challenge is the incapacity to issue Rapid routes for the diffusion of advance knowledge special labour laws and providing privileged are industrial networks/ communities/ forums, treatment and incentives for attracting highly which bring together stakeholders to discuss and skilled expat workers related to 4ir technologies. share their experiences, something that is Revamped labour laws could also be used to particularly important when great uncertainty exists attract investment and to provide legal protection regarding the performance of new technologies. and certainty for companies willing to transfer 4ir The Sultanate of Oman, however, lacks many of technologies into Oman. A fourth challenge these industrial networks and even less so, relates to the lack of recognition of foreign online technological partnerships. This is seen as a missed learning certificates from reputed international opportunity to develop linkages to other industrial educational institutions by Omani education players with similar issues and concerns, as well as authorities. Indeed, more international linkages to increase visibility of potential technology and between local and foreign institutions could be solutions providers. Information sharing through used as a mechanism to develop suitable online specialized industrial forums help firms become training programmes for Omani workers. Finally, aware of emerging digital technologies and the ability to identify and distinguish between applications and to better understand their industry-specific skills and cross-cutting skills is a potential value for their organizations. crucial challenge in the training of workers that Governments frequently take the lead by organising will be capable of using the new technologies at forums for companies to network and exchange their maximum potential. views on critical 4ir common issues. Knowledge Beyond skills, there are fundamental challenges on networks help avoid silos and connect the public how to integrate digital technology with legacy and private sectors with each other and with other systems. The required expertise to realize such actors of the innovation system. integration seems to be missing in the country.

4.3.2.3 Challenges to Knowledge and Furthermore, integration challenges add Technology Deployment uncertainty to making a business case in support of digital solutions adoption, as there is huge Knowledge and technology uncertainty in terms of resources and time required deployment refers to the use of for successful implementation of new technologies. new technologies within a firm. The possibility of new technology add-ons leading One main factor easing to operational disruption needs to be minimized to technology deployment is skills convince managers about the value of new availability to which reference technology adoption and often, it is not all that was made earlier. Nonetheless, there are a few obvious how new and old technologies will interact. additional issues from the perspective of technology use. The first one is that the limited flexibility in the Challenges are also evident in the ecosystem of supply of training in the Sultanate of Oman, which industrial support. The deployment of 4ir in many focuses on outdated skills rather than shifting its countries takes place in a context in which firms -46- have programmes at their disposal that provide undertaken by other institutions which also follow advice and guidance on best available their individual mandates. The Ministerial Council technologies, their related costs and is the authority responsible for ensuring that implementation requirements, and incentives for policy is implemented. The Council also sets out the technology adoption. Moreover, for digital general goals and policies for economic, social and manufacturing, in particular, governments in administrative development and proposes many countries provide subsidized consultancy methods and ways for implementing measures to 4 services, soft loans for technology adoption and ensure the efficient use of financial, economic and automation, and a host of other incentives that human resources. 'Manufacturing for Wellbeing’ make it worthwhile to invest and use new As economic development progressed, the technologies. There is great interest among executive branch of government has also grown individuals and firms in the Sultanate of Oman, institutionally. It currently has 39 ministerial level both large and small, to enter the 4ir. However, posts, 11 governorates with their corresponding with the exception of ICT, where some efforts to provinces, as well as a large number of public support deployment have been introduced by the institutions and enterprises across all economic government, there are hardly any support sectors, many of them offspring of other programmes that can be leveraged by government agencies. Increased government manufacturing firms. functions have also meant more personnel and

4.3.3 Governance further managerial complexity with an increasing risk of confusion, duplication and the creation of Getting governance ‘right’ is a “gaps” in the coverage of critically interrelated challenge that many governments activities, thereby undermining the synergy face in the delivery of a wide range needed to achieve the national economic of essential services – from objectives. infrastructure and implementation of industrial strategies to the functioning of the To deal with the more complex nature of legal system and enforcement of rules and government and to ensure better coordination, regulations. the Sultanate of Oman abolished the former Ministry of National Economy in 2012 and instead One important principle and a lesson for countries established the Supreme Council for Planning like the Sultanate of Oman is that if the (SCP). The SCP has a secretariat and serves the manufacturing sector is to become a key driver of Ministerial Council, which prepares periodic their economic growth and transformation, the reports on economic progress, initiates processes government should first develop a modern for preparing five-year plans and the national governance system that delivers on strategy and follows up on the work of the developmental outcomes in general and that committees established by the Council. Although promotes inter-sectoral linkages and the the secretariat consults with and solicits operation of efficient domestic supply chains. suggestions and inputs from various ministries Four challenges emerge in relation to Oman’s and major public institutions and authorities, it is system of governance: policy coordination, clear not entirely clear whether this information is institutional mandates, efficient lead ministries routinely used to set the Council’s agenda. While and effective rules and regulations. some of these mandates have a strategic dimension, the SCP was not established with a

4.3.3.1 Policy and institutional coordination think tank capacity or a coordinating role but and implementation challenges operates with its old ministry structure and work culture. In reality, the SCP’s responsibilities would In the Sultanate of Oman, like in any other country, seem to be predominantly centred on planning, regulations, incentives and programmes are follow-up and setting standards for the planning designed by different entities that usually work in process, which are mainly operational activities. isolation. Their implementation is, in turn, -47- The other mechanisms responsibilities are performed by a single introduced to improve ‘national’ IPA, collaborating closely with relevant coordination and public institutions and other stakeholders. Having implementation is a single agency taking the lead—either as an Tanfeedh. While it is autonomous entity or linked to a specific too early to judge the ministry—helps avoid competition between 4 effectiveness of Tanfeedh, it has some elements different institutions in attracting investment and that have helped coordination and implementation reduces the possibility of transmitting conflicting across the government. Key Performance or confusing policy signals to foreign investors. Indicators (KPIs) were introduced to measure Even in a federal government system, where 'Manufacturing for Wellbeing’ progress in the implementation of projects agreed regional investment promotion agencies operate, under the Tanfeedh initiative. KPIs are not only concerted efforts are made to ensure used to monitor those directly involved in a specific coordination between a single national project, but all those contributing to its investment agency and other regional or sectoral implementation. As such, it is a very powerful investment offices so that duplication of roles and coordination tool for achieving individual targets confusion is prevented. which all stakeholders must communicate and coordinate with others. Tanfeedh has also been In the Sultanate of Oman, the Public Authority for successful in bringing together public and private Investment Promotion and Export Development sectors. The ‘Lab’ workshops held between (Ithraa) plays the role of ‘national’ investment September and October 2016 were unprecedented promotion and facilitation. In addition to in the Sultanate of Oman’s history and provided an promoting Oman’s exports, Ithraa’s primary goals are to perform the functions and roles of an IPA innovative approach for the mobilization of private sector resources, and the financing and described above. In effect, therefore, as far as implementation of priority areas in the ninth five- foreign investors are concerned, Ithraa is the year plan. However, Tanfeedh is an ad-hoc and official body or the front desk for investment promotion and facilitation in Oman. Yet, a number temporary coordination and implementation mechanism, and the Sultanate of Oman will have to of other public institutions believe that they also face the challenge of institutionalizing it without have the mandate to attract investment, in most muting all the advantages this one-off initiative has cases, performing the same functions and generated. providing the same services as Ithraa. These include, among others, Oman Authority for

4.3.3.2 The challenge of having clear Partnership for Development (OAPFD); the Public mandates Establishment for Industrial Estates (PEIE); and the Duqm Special Economic Zones Authority (SEZAD). In many countries—the Sultanate of Oman being There is also an Investment Centre within the among them—mandates among ministries, public Ministry of Commerce and Industry (MOCI), institutions and specialized public entities are established by Royal Decree, to assist ‘strategic’ unclear or vaguely defined, creating duplication of investors—mainly local but also foreign—in roles and responsibilities and in some cases turf establishing their businesses. Although the Centre wars. For example, practically all developing focuses on manufacturing activities, it also countries have Investment Promotion Agencies provides services to investors in other industries, (IPAs) that attract and facilitate inward particularly priority industries. investment, provide after-care services to investors, and monitor and advise the government While the extent and depth of the duplication of on investment-related incentives, rules and functions and responsibilities vary, the fact that regulations. IPAs also coordinate the contributions various public institutions believe that they have of foreign investment to skills formation, the mandate to perform the same roles as the technology transfer and domestic economic country’s official investment promotion agency and development. Normally, these functions and that they perform these functions to attract investment, in some cases without coordination -48- with Ithraa, should raise concern as it is likely to and competent minister—was given full authority create duplications and confusion on the roles and to oversee the implementation of industrial responsibilities of different public agencies, strategy, including the rules, regulations and particularly among foreign investors. Moreover, incentives related to trade and industry. this is not a problem confined to investment. Across One of the key lessons from the Japanese model ministries and public institutions, the that other successful countries found useful and fragmentation and poor coordination of policies 4 pragmatic is the notion that in order to grow, and mandates are repeatedly highlighted by public initiate industrialization and catch-up, officials who point out that although this is widely governments do not have to improve public sector 'Manufacturing for Wellbeing’ known, there is no national level governance effectiveness across all sectors at once. There was framework to enforce coherence in mandate a deliberate policy in Japan to build a few setting and inter-ministerial policy coordination. strategically important ministries and public Ultimately, good governance requires clarity over agencies—by devoting a large amount of who does what, how and when to deliver public resources and the best skills and most committed services, and that the respective responsibilities are public servants available—to create role models of communicated to stakeholders. Clarity about roles excellence and efficiency in policy implementation helps stakeholders understand how the governance that other sectoral ministries and public entities system works and who is accountable for what and could imitate and use as an example. to whom. For the Sultanate of Oman, these basic but critical governance issues will become even more In the Sultanate of Oman, a good place to start is with priority sector ministries where some important as the economy expands and deepens its level of sophistication and begins to implement the experience in international competitiveness and new industrial strategy as an integral part of the competences in policy design and implementation 2040 strategy and national development agenda. already exist. The Ministry of Oil and Gas and the Ministry of Commerce and Industry (MOCI) are the

4.3.3.3 The need for a lead ministry two palpable ministries where these basic criteria apply. The formulation and execution of the new One important lesson from industrial development strategy is the mandate and successful countries is the responsibility of the MOCI – an institution with a delegation of strategic long history, and one of the dynamic and highly leadership to sectoral ministries respected public institutions in the country. The key that are charged with question that both the Ministry and the supervising the development of Government of the Sultanate of Oman have to the real economic sectors such address is whether, at this particular juncture, the as industry, commerce, MOCI, as an organization, is ‘fit for the purpose’ and agriculture, tourism, etc. ready to provide the sectoral-level governance In countries that have successfully industrialized, needed. The ultimate objective is to see MOCI such as South Korea, Japan or Singapore, the lead emerge as a champion of good development ministry with authority and the necessary policy governance practices and a role model that other tools to become a one-stop centre for initiating public institutions will replicate. and implementing industrial policy and kick- Over the years, the primary mandates and starting the industrialization process has been the responsibilities of the MOCI have been reduced to Ministry of Trade and Industry. Sectoral level two key economic sectors: commerce (including both policy design, cross-sectoral coordination, domestic and external trade) and industry (mainly implementation of the industrial strategy and manufacturing). Whether these reforms, which were consultation with the relevant business undertaken over a period of three decades, have community were the direct responsibilities of the been sufficient to streamline and refocus MOCI’s Ministry of Trade and Industry. The Ministry of mandates and responsibilities is not clear. There are Trade and Industry—often led by a charismatic still signs that MOCI is overstretched and that the -49- boundaries between its policy/regulatory-related 4.3.3.4 Appropriate incentives, rules and roles and operational functions remain blurred. The regulations distinction between its generic objectives and the specific goals that the Ministry is expected to achieve Public sector governance is is also unclear. As a result, measuring the fundamentally determined performance of the diverse activities performed by by the nature and quality the Ministry and their impact on commerce and of rules, regulations and 4 incentives that are applied industry and on the economy as a whole, including the contributions towards the national development to influence economic relationships and to achieve strategy, is a challenge. A basic principle of good the desired development outcomes. One 'Manufacturing for Wellbeing’ development governance is that organizations important policy tool in the development of the should not only have generic objectives and industrial sector is the package of incentives the responsibilities, but also clearly defined specific goals government offers the private sector to encourage with guidelines on how to implement them and investment in priority sectors and/or activities, and indicators to measure performance. to encourage technology transfer and local capability building through linkages. Three types of MOCI remains associated with many public incentives are key for Oman’s industrial institutions (including offshoots from MOCI such as development: incentives to attract foreign PEIE), but the precise role or influence of MOCI is investment, location incentives and SME support. unclear. While MOCI’s Minister is the chairman of the boards of several public institutions, including 4.3.3.4.1 Attracting investment RIYADA, the Omani Authority for Partnership for The Sultanate of Oman Development (OAPFD) and Oman Tourism offers an attractive Development Company (Omran) and the package of incentives to Undersecretary of MOCI is chairman of the PEIE’s foreign companies to board, there is neither a statutorily defined invest in the country delimitation of roles and functions between MOCI (Table 4-4) In addition to location- and geographic- and these organizations nor any organic links that specific advantages, the Sultanate of Oman has a bind them. However, what is clear, even from a stable political and economic environment. The scant glance at the organigram of the Ministry, is country has signed free trade agreements with the that MOCI’s responsibilities are still overextended, USA, Singapore, EFTA, Iceland, Norway, Switzerland although much less so than in the earlier days of its and Liechtenstein. It is part of the GCC common existence. market, the Greater Arab Free Trade Area (GAFTA) Building a dedicated, technically competent and and a signatory to the WTO. The Sultanate of Oman professional staff is an essential prerequisite for also offers an investor-friendly legislative and legal creating a lead ministry that excels in its functions environment and has a rapidly improving transport and contributes to the attainment of the national and logistics infrastructure. development goals. Ultimately, government is With a few modifications, the package of only as good as the people in it and the incentives has remained largely the same for organizational culture and setting in which they several years. It was quite successful during the work. Thus, policies that allow lead ministries to first decade of the millennium when FDI averaged recruit and retain “the brightest and the best” will over USD 2 BN per year related to industrial help achieve the maximum excellence in policy commodities investments. However, since 2010, design and execution. Equally important is the the inflow of foreign direct investment has need to adopt a modern and open organizational decreased to USD 0.5 BN per year, with the net working culture. This does not mean adopting inflow practically drying up. International “alien” values and cultures but working towards competition for investment has become fierce in common goals, sharing common philosophy and recent years and many countries now offer similar beliefs and the collective determination to achieve or better incentives than Oman. the agreed strategy and development goals. -50- Among GCC countries, the Sultanate of Oman Investors are pointing out that former costs also seems to be falling behind. While it scores advantages of the Sultanate of Oman are eroding. higher than many GCC countries in the World While the local infrastructure is good, except Bank Doing Business ranking (position 78 in perhaps for internet bandwidth, costs are incurred 2018), it is not the most attractive outlet for due to red tape and delays at ports and borders. foreign investors. Bahrain and Kuwait have the Energy costs, a former selling point of the lowest corporate income taxes. The UAE is Sultanate of Oman are becoming similar to those 4 virtually tax-free, except for the oil and gas and of competitors and are no longer considered financial services industries. In Qatar, a 10 attractive. 'Manufacturing for Wellbeing’ percent flat rate income tax is levied on Other obstacles to FDI usually raised by foreign businesses that are not wholly owned by GCC investors include availability of skilled personnel, nationals. More GCC countries now allow cumbersome administrative and procedural companies to operate at 100 percent foreign requirements related to the establishment of a ownership. Like in Oman, 100 percent foreign new activity or the expansion of an existing one, ownership is also only allowed in the UAE for weak entrepreneurial culture and lack of companies operating in the free zones. In Bahrain incentives for investing in the green economy. and Saudi Arabia, the limits to 100 percent foreign ownership only apply to companies The challenge is therefore to create a competitive operating in industries that are specifically listed. package of incentives that attracts FDI to the In Kuwait, the new FDI law allows companies to selected industries. A new FDI law is being have full foreign ownership outside the free discussed which entails a more comprehensive zone. The new investment law in Qatar allows and selective set of incentives but has not yet 100 percent foreign ownership in all industries been promulgated. Export processing zones also (provided the non-Qatari has a Qatari services offer more flexible incentives, but they are limited agent). to the export sector. Table 4-4: Investment incentives for foreign capital in the Sultanate of Oman Custom duty and Activity Income tax Ownership General withholding taxes Manufacturing 5-year Exemptions on imports of Up to 70% Free repatriation of capital Greenfield exemption plant, machinery and raw allowed and profits materials for 5 years after (further under starting production (renewable special once) circumstances) Tax losses during No import registration of Minimum capital requirements exemption production accessories, of OMR 150K, 500k or 2000K period may be machinery, spare parts, depending on type of claimed against material, transport equipment enterprise future profits (upon one-time approval by the relevant authority) No personal No withholding of tax on Double taxation treaties with income tax dividends and interests, but several countries 10% on royalties and management fees Corporate tax Safeguards against rate of 15% expropriation Manufacturing 5-year Exemptions on (5-year MOCI may also provide: Expansion exemption renewable): incentives, machinery and spare parts subsidized utilities, raw materials and partially preferential land allocation, processed goods trade promotion No personal income tax -51- 4.3.3.4.2 Benefitting from location-specific development. Indeed, there is a remarkable advantages difference between the economic performance of firms located inside IEs and those located outside, Turning to location- although other factors besides the presence of an specific incentives, the IE may be at play as well. government has been very active in issuing The growth of special economic zones in its 4 policies to establish different forms and with different authorities has special economic zones generated a governance dilemma. Varying (SEZ) (Table 4-5). The reporting lines with diverse promotion schemes in 'Manufacturing for Wellbeing’ first industrial estate different parts of the country have increased the (IE) in Al Rusail, near Muscat, was established in complexity of the SEZ governance system. A 1983. The Rusail Industrial Estate is managed by number of problems have followed. First, the Public Establishment for Industrial industrial promotion policies have become Establishments (PEIE), today known as Madayn. fragmented and may be diverting investment from Since the creation of the first IE in the Sultanate of industrial estates. Second, there is minimal Oman, the development of SEZ has undergone coordination and cooperation between industrial several changes to attract investment, support poles. Third, there is reduced potential for the employment and achieve industrial intra- and inter-area externalities that normally diversification. develop in well-connected areas. Finally, there is also lower potential for knowledge spill overs, Different types of zones have emerged in the which are very important for industrial innovation. Sultanate of Oman and the institutional setting of On the whole, there is no ‘system’ or coordinated these structures is evolving. In addition to IEs, policies for SEZ. ‘SEZ systems’ and intense these include free trade zones (duty free), export collaboration within and across SEZs have processing zones (focused on exports), historically allowed many countries to move comprehensive special economic zones towards more advanced industrial clusters. (multifunctional), bonded areas (warehousing), specialized zones (activity-focused) and eco- A related problem SEZs face, but even more so industrial parks (environmental performance). free and export processing zones, is their lack of The management of the different types of zones integration into the local economy. Due also varies. In addition to PEIE, which reports to sometimes to over-specialization in export- MOCI, the ports and the Salalah and Sohar Free oriented products, many of the zones’ managerial Zones are governed by ASYAD, which reports to and engineering expertise are not being shared the Ministry of Transport, while the Duqm Port with or disseminated to other firms in the and Comprehensive Zone is presided over by a surrounding areas. SEZs are beneficial to industrial Special Authority, reporting to the Council of development when they attract new investment Ministers. and the interest of specialist suppliers and the There are currently 1,852 firms registered in IEs, of services industry around it. But this is not yet the which 1111 are active. Around two-thirds of them case in the Sultanate of Oman. Furthermore, a are manufacturing firms. Total investment is brief examination of the size of firms in industrial estimated at OMR 4.9 BN, of which around 17 estates suggests that they tend to be medium or percent is FDI. In 2017, the two other large large, while small enterprises tend to be locations, the Sohar Port and Free Zone and the concentrated in urban areas away from SEZs. A Salalah Free Zone had in operation, construction vibrant zone usually attracts large numbers of or under consideration, 57 active firms and 35 SMEs into its midst to cater for the various types active firms respectively. In terms of performance, of demands that arise from the larger companies research suggests that IEs have positively in the area. impacted the Sultanate of Oman’s industrial -52- Table 4-5: Special Economic Zone classification SEZ CLASSIFICATION ECONOMIC ZONES Free Export Comprehensive Eco- Industrial Bonded Specialized IN OMAN Trade Processing Economic Industrial Park Area Zone Zone Zone Zone Zone or Park RUSYAL INDUSTRIAL X 4 ESTATE SOHAR INDUSTRIAL X 'Manufacturing for Wellbeing’ ESTATE SOHAR PORT & X X X FREE ZONE RAYSUT INDUSTRIAL X ESTATE NIZWA INDUSTRIAL X ESTATE SUR INDUSTRIAL X ESTATE BURAIMI INDUSTRIAL X ESTATE KOM (TECH. PARK) X MAZUNAH FZ X SUMAIL INDUSTRIAL X ESTATE DUQM PORT X X DUQM SPECIAL X X X ECONOMIC ZONE SALALAH PORT X SALALAH FREE X X X ZONE KHAZAEN X 4.3.3.4.3 Growing SMEs (6,210) are small enterprises (6-25 workers) and 10 percent (3,400) are medium-sized enterprises As regards SMEs, there are some indications that (26-99 workers). they play a limited economic role, but even more importantly, they seem to exhibit a continuous SMEs face several obstacles in their development. decrease in their number, share of output and Arguably, the most significant problem is the lack employment, which if confirmed, would be a very of entrepreneurship. At the cultural level, the troubling development for the Omani economy. predominant mind set is based on security and The Public Authority for Small and Medium safety rather than risk, experimentation and Enterprises Development (RIYADA) has currently innovation. The Sultanate of Oman’s registered 34,000 business units (data March entrepreneurial diaspora has not returned in 2018) which represent about 30 percent of the sufficient numbers to make a dent on that mind total number of SMEs in the country. Of these set and universities, while undertaking some 34,000 SMEs, 72 percent (24,480 units) are micro efforts to promote courses that focus on enterprises (five or less workers); 18 percent entrepreneurship, have not stimulated enough -53- ‘go-getter mentality’. Very few role models exist initiatives have yet to build a dynamic for those who might be exploring entrepreneurial sector. entrepreneurship as a viable career option. And The Omani ecosystem is also weak on there is also a notable absence of women starting partnerships, networks and associations; both businesses, although they tend to be highly within the Sultanate of Oman and across the qualified and skilled. region. Hence, there is limited idea exchange and 4 There have been many public and private access to resources and markets. While some initiatives to build an SME ecosystem, especially public and private efforts have been undertaken by Riyada, which provides support to Omani SMEs. to improve market access in the Sultanate of 'Manufacturing for Wellbeing’ The package of services includes training, Oman itself, these have not extended to consultancy support in the preparation of enhancing entrepreneurs’ access to other markets business plans and feasibility studies, the in the region. provision of land at subsidized rates, access to a The Sultanate of Oman’s investment, and SME variety of funding mechanisms, incubators and incentives and regulation system are sophisticated accelerators, possibility of hiring foreign workers and comprehensive. It uses most of the and the right to enter public tenders. Bank Muscat instruments that are also applied internationally introduced an initiative called Al Wathbah, which and seems to be clear and transparent. Yet it fails provides non-collateral SME financing while Bank at the implementation level, as the intended Sohar launched a programme in 2013 to support effects do not seem to follow. It also seems to lack SMEs in the Sultanate of Oman through monitoring, evaluation and learning mechanisms workshops and seminars for entrepreneurs. These that would allow it to improve its degree of workshops centre on business planning, cash flow implementation. management and marketing. Unfortunately, these -54- 5 Linking the Sultanate of Oman’s 2040 strategy with other sectoral strategies and the Sustainable Development Goals (SDGs) The Royal Directives of His Majesty Sultan Qaboos stakeholders and activities. Since attracting bin Sa'id stipulate that the strategy “The Sultanate investment into manufacturing is particularly of Oman 2040” should centre on comprehensive challenging, the sector will be the test run for and sustainable development while preserving Oman’s future investment-promoting environment, Omani values and identity. The Strategy 2040 SME development and direct and indirect identifies three themes: 1) People and Society, 2) employment generation. Manufacturing will also Economy and Development and 3) Governance contribute to an optimal and balanced use of natural and Institutional Performance. resources and sustainable development by shifting resources away from resource-intensive industries, The Manufacturing 2040 Strategy “Manufacturing promoting energy efficiency and a ‘circular for Wellbeing” focuses on human capital as one of economy’ as well as developing productive the three enablers related to the people and capacities in renewable energy. society theme. The objective is to build skills and develop an education system that is compatible Governance, the third theme of the Strategy 2040, with emerging work environments and adequately also overlaps substantially with ‘Manufacturing for prepares students for the technological demands Wellbeing’. Key enablers for upcoming of the future, in particular the 4ir. It coincides with manufacturing development include clear the health objectives of the people and society institutional mandates, efficient lead ministries for theme insofar as it pursues the building of local manufacturing and associated SME ecosystems, productive capacities and a unique food and raising the technical competence of processing approach that can underpin the manufacturing-related government officials even creation of a society that benefits from further, which would greatly contribute to the sustainable health and fosters a health culture overall improvement of government performance. that all assume responsibility for, including An additional contribution in this regard that could industry. This, more importantly, closely connects perhaps be highlighted more forcefully in Strategy with the people and society theme since an 2040 is the emphasis in ‘Manufacturing for environmentally sustainable future and the social Wellbeing’ on improving intra- and inter-sectoral wellbeing of Omani’s population lies at the heart policy and implementation coordination. This is of the manufacturing sector’s 2040 strategy. crucial for developing an effective state apparatus. Finally, the manufacturing strategy coincides with ‘Manufacturing for Wellbeing’ will also play a major Strategy 2040 in proposing a clear, transparent, role in achieving the objectives of the economy and specialized and proactive set of rules, laws and development theme. It will represent the backbone incentives backed by an independent judiciary that of the Sultanate of Oman’s diversification, while attracting investors, is perceived by all as innovation and technological advancement being fair and straightforward. objectives and be the gateway for entering the 4ir. In this regard, manufacturing will be key to providing ‘Manufacturing for wellbeing’ also has many dynamic economic leadership to other economic points in common with specific sectoral strategies. -57-

5.1 Economic sectors’ strategies (EEZ); 2) A national shared fishery focused on cuttlefish, for example, also a high value resource Strategy 2040 entails two available in the entire EEZ of Oman; 3) A regional economic sector strategies, shared fishery centred on kingfish, which is namely agriculture and fishing, as available within the EEZs of the Gulf Cooperation well as a strategy for the food Council (GCC) states; 4) An international shared processing industry, which 5 although prepared outside the Strategy 2040 fishery focused on large tuna fished within country waters and on the high seas, and which attracts context, provides a good sense of the direction the coastal state fishers as well as fishers from foreign industry is pursuing. The Omani government has Linking the Sultanate of Oman’s 2040 strategy with other sectoral strategies and the Sustainable Development Goals (SDGs) flagged nations. also been working on an innovation strategy, which albeit cross-cutting, will have a significant In its 2018-2027 strategic plan which underpins economic impact. SARDS 2040, Oman Food Investment Company (OFIC), the government holding for the food The Sustainable Agriculture and Rural processing industry, emphasizes the role of self- Development Strategy towards 2040 (SARDS sufficiency and food security as key strategic 2040) states that agriculture can make a objectives in Oman’s economic development. substantive contribution to diversification, food Drawing on the Food and Agriculture security and sustainable development by Organization’s (FAO) definition, food security increasing agricultural productivity and the value exists when all people have physical, social and of domestic production, while reducing its economic access to sufficient, safe and nutritious environmental footprint (primarily, water and food at all times, which meets their dietary needs energy). Rural development, which is closely and food preferences for an active and healthy associated either directly or indirectly with life. Food security is expected to be achieved in the agriculture, can help reduce social and economic Sultanate of Oman by increasing the availability of imbalances in regional development. To achieve sufficient quantities of food of appropriate its objectives, SARDS 2040 proposes three quality; providing access to individuals to measures: 1) enhancing the economic efficiency, adequate resources for acquiring appropriate profitability and competitiveness of crops and foods for a nutritious diet; using food through livestock, 2) improving environmental adequate diet, clean water, sanitation and health sustainability and resilience to natural disasters care to reach a state of nutritional wellbeing; and and crises, and 3) reducing regional imbalances access to adequate food at all times. between rural and urban areas and promoting social inclusion. There are obvious synergies between ‘Manufacturing for Wellbeing’ and the strategies In the fisheries and aquaculture industry, the main of the agriculture, fisheries and food industries. objective is to create a profitable world-class Processing agricultural, livestock and fisheries industry that is ecologically sustainable and a net products ensures that harmful bacteria and other contributor to the Sultanate of Oman’s economy by 2040. The approach is to develop a framework and processes in which Omanis will determine how to achieve the aim on a ‘fishery-by-fishery’ or even ‘community-by-community’ basis. Given the rich mix of fisheries with differing management demands, the strategy elaborates four approaches during its initial implementation, each representing a distinct type of harvesting: 1) A local shared fishery concentrated on abalone (and nowadays perhaps also shrimps), which is a high value, single stock resource available within a sub- area of the Exclusive Economic Zone of Oman -58- microorganisms are eliminated, making food safer 2040 to “equip human resources with the values, and last longer. Processed food can easily be made knowledge and skills that enable them to be available, irrespective of season or location, and productive in the world of the knowledge economy, can travel far, giving consumers a wider range of keep pace with the continual changes in the world, products and choice. Processed food together maintain their national identity and intrinsic values, with pre-cut vegetables and meat has become a and contribute to the advancement of human staple food for busy city dwellers and has civilization”. The strategy is based on five pillars. 5 triggered a burgeoning packaging industry. The first is to improve education management by Growing urbanization is generally accompanied by identifying roles, responsibilities and a rising food processing industry. Several interrelationships among educational institutions industries considered a priority in ‘Manufacturing and making them more effective in the fulfilment of for Wellbeing’, such as the meat, fish, dairy, grains their objectives. The second pillar is to ensure a and animal oils industries, are also a priority in the clear path all the way from pre-school, compulsory other sectors’ strategies. basic education, secondary and higher and technical education to the labour market based on It is worth noting that there are some progress and advancement according to each disadvantages to food processing, especially when individual’s abilities and qualifications. The third it involves removing nutrients, vitamins and fibre pillar focuses on raising the quality of education in present in the food. Trans-fats and sugar present line with international standards. The fourth pillar in processed items can pose health risks as is to build research capacities in educational frequent intake of processed food leads to institutions so they can better contribute to the accelerated aging and kidney damage as they knowledge economy. Finally, the last pillar seeks to contain phosphates or may affect people’s mood. develop new financing mechanisms to improve Manufacturing for Wellbeing emphasizes the educational funding. development of healthy food processing, with lower fat, salt and sugar content and as natural The Health Strategy’s and nutritious as possible. This lies at the core of 2050 vision is for the the food security concept. “Omani people to live healthy and productive Turning to innovation, the Research Council has lives, through the produced a National Innovation Strategy (NIS) establishment of a well-organized, equitable, with the vision of joining the top 20 leading efficient and responsive health system, grounded innovation countries by 2040. The four pillars of by societal values of equity and social justice”. this strategy include improving human capital Achieving these objectives requires a transparent, through the upgrading of education and skills, accountable, customer responsive and universal economic diversification, institutional and health care system. It also requires far more community integration, including higher R&D funding than is available today, partially generated expenditure, and efficient management and through efficiency gains and insurance and private protection of intellectual property. Much has health schemes. It includes the rebalancing of roles already been said in ‘Manufacturing for Wellbeing’ of primary, secondary and tertiary health care to about the close links between innovation and improve the quality of care. It also entails training manufacturing. The only aspect worth reinforcing and increasing the number of health-related is the importance of intellectual property personnel as well as ensuring that they are ‘fit-for- protection for the development of this strategy’s purpose’ and better distributed regionally. The priority industries, namely high-tech industries strategy highlights that the local availability of such as pharmaceuticals or photovoltaic. medicine and consumables as well as the

5.2 Social sectors’ strategies procurement of instruments and equipment that are in line with the actual demands of the Omani Social sectors’ strategies comprise the National population needs to be ensured. More research Strategy for Education 2040 and the Health and information on the diseases that affect the Strategy 2050. The Education Strategy envisages by -59- local population most needs also to be carried out. perceived as a global logistics hub (2030). Finally, significant inter-sectoral collaboration will Achievement of these goals requires a number of be necessary as the health sector cannot resolve all changes. Exploring new markets by identifying health problems of Oman’s population on its own. business opportunities, raising awareness of Oman’s logistics potential and leveraging existing The potential synergies between the economic and new free trade agreements are expected to and the education and health sectors could be 5 significant. One notable aspect in the education significantly increase the size of Oman’s logistics sector. Trade facilitation, or the easing of strategy is its emphasis on the quality of education administrative and customs procedures, is Linking the Sultanate of Oman’s 2040 strategy with other sectoral strategies and the Sustainable Development Goals (SDGs) to meet the demands of the labour market. This is anticipated to enhance the flow, speed, reliability clearly a major point of convergence with and consistency of operations and hence improve ‘Manufacturing for Wellbeing’, although the the perceptions of Omani logistics. The use of new challenge will most likely not be agreeing on this technologies, which is projected to increase the objective but rather on how to implement it. The transparency, visibility and efficiency of pace of the education and manufacturing sectors communications and facilities, will contribute to the tends to differ, and it is not always easy to align expansion of logistics volume. And, finally, the both of them. The need for more research is also development of human capital through vocational highlighted in both strategies but academic and training, increasing the attraction of logistics jobs applied research are likewise driven by very and introducing more favourable employment different incentives. legislation is expected to improve both the size as The points of convergence between the well as the perceptions of local logistics services. manufacturing and health strategies are starkly The tourism industry for its part aims to become evident. For the health sector, a thriving local “a top-of-mind destination for vacations, pharmaceutical, instruments and equipment discovery and meetings, attracting more than 11 industry is a matter of ‘health security’. The million international and local tourists” by 2040. rationale behind this is an unreliable supply of The elements of competitive advantage that will medicines and escalating costs. The Health 2050 allow it to reach this aim include a number of Strategy goes to the extent of requesting the tourism ‘business models’: relaxation, touring and government to collaborate with pharmaceutical culture, nature and adventure, special interests, manufacturers exactly in the same way it is festivals, meetings and events, day visitors and envisaged in ‘Manufacturing for Wellbeing’. visits to relatives and friends. The strategy Moreover, health authorities seem to be very identifies five target traveller profiles that the aware of the extensive coordination failures of the Sultanate of Oman could attract: millennials government and seem to be willing to address (people under 30), vacationists (middle-class them, although as in the case of education and families), sophisticated travellers (high-income given the different objectives being pursued, this families), discerning travellers (mature and may be easier said than done. educated) and special interest travellers.

5.3 Services sectors’ strategies Travellers will be sourced internationally from Germany, France, India and the United Kingdom In the services sectors, two main strategies for and regionally from the UAE and Saudi Arabia. 2040 have been developed: logistics and tourism. Business models and travellers’ profiles will be The Sultanate of Oman Logistics Strategy (SOLS) combined so that an exceptional menu of unique 2040 aims to achieve five goals by 2040: 1) to tourism experiences and positive emotions are increase their contribution to GDP in real terms by generated. Three types of experiences are more than 9-fold, 2) to increase its contribution to envisaged: top (nature and landmarks), signature employment by 10-fold (300,000 workers), 3) to (culture and nature) and brand (situations, e.g. be positioned among the top 5-10 in the relevant frankincense ceremony or coffee drinking). trade and logistics rankings, 4) to be perceived as Market positioning will be at the premium level, a regional logistics hub (2020), and 5) to be addressing the affluent and luxury category of -60- travellers. This positioning attracts fewer tourists 5.4 SDGs than pursuing a mass strategy, but increases per ‘Manufacturing for Wellbeing’ does not only have capita tourism revenue. connections with local sectoral strategies but also An ambitious logistics strategy can accompany a has important links with the SDGs. The SDGs are a growing manufacturing industry quite well, global development strategy that, as already particularly if manufacturers seek to compete in mentioned, the Sultanate of Oman is a signatory foreign markets such as China, India and Africa. All of. The SDGs consist of 17 goals that the signatory 5 too often, there are reports of trucks and ships countries have committed to achieve by 2030. delivering goods in one direction but coming back empty due to the lack of productive capacity in By committing to importing countries. SOLS objectives will only be increase the role and achieved if a local industrial capacity is established size of Oman’s that is able to sell goods regionally and manufacturing industry, internationally, so the trucks and ships do not the country is on the return empty. It is as much in the interest of the right path to achieving logistics industry as it is in that of manufacturing Goal 9 on “Building industries for both strategies to be successful. resilient infrastructure, promoting inclusive and sustainable As for tourism, a larger number of tourists will industrialization and fostering innovation”. require a host of foods, hotels and journey-related Specifically, the Sultanate of Oman would be on products that can be manufactured locally. track to achieving by 2030 Goal 9’s target of Frankincense is an obvious example, where significantly raising industry’s share of employment production at industrial scale as anticipated in and gross domestic product in line with national ‘Manufacturing for Wellbeing’, can generate high circumstances. ‘Manufacturing for Wellbeing’ can income to local producers and through word of also contribute to the achievement of Goal 1, no mouth and demonstration effects, increase the poverty; Goal 2, zero hunger; Goal 3, good health export potential of this unique Omani fragrance. But and wellbeing; Goal 7, affordable clean energy; Goal more importantly, the emphasis on ‘Manufacturing 8, decent work and economic growth; Goal 10, for Wellbeing’ together with the type of experiences reduction of inequalities; Goal 11, sustainable cities and premium tourists to be attracted by the tourism and communities; Goal 12, sustainable production industry can easily lead to new types of premium and consumption; and, Goal 13, climate action. market tourism, such as ‘health tourists’, and result Indirectly, ‘Manufacturing for Wellbeing’ can in the Sultanate of Oman developing a unique type contribute to the achievement of all the other SDGs. of branding related to health, fragrances, nature and industrial wellbeing. -61- -62- 6 Achieving Strategy 2040: Key Performance Indicators (KPIs)

6.1 KPIs in the Sultanate of Oman Strategy prices between 2016 and 2020, while oil activities 2020 and the Ninth Five-Year Plan are expected to witness a slight increase of 0.2 (2016-2020) percent pa on average in real prices. The 9th Plan also anticipates that the manufacturing The key performance sector will experience constant growth at 6 percent indicators (KPIs) represent pa, which means the sector will reach a share of 10 and benchmark percent of GDP by the expiry of the Plan. To achieve competitiveness and the this figure, the Plan envisaged investments of OMR performance of the

2.6 BN during 2016-2010. While the share of GDP manufacturing sector, defined as the capacity of target is certainly achievable by 2020, it will not the Sultanate of Oman to increase its presence in suffice to reduce dependence on oil- and metal- international and domestic markets. The KPIs also based industrial commodities, which has become indicate the manufacturing activities’ progression the new form of resource dependence of the towards higher value added and higher Omani economy since around the turn of the technological content. It captures Oman’s ability millennium. From 2014 to 2016, the refined to produce and export manufacturing products petroleum industry alone accounted for 31 percent competitively and reflects the progress of of total manufacturing value added, followed by structural transformation to diversify growth non-metallic mineral products and basic metals sources to participate in reducing the national jointly contributing another 32 percent. The economy’s dependence on oil. strategic direction therefore needs to focus on new As the 9th Plan (2016-2020) represents the last of industries that will further diversify the productive the plans of the Sultanate of Oman Strategy 2020 base. More specifically, this implies a gradual shift and paves the way for the Sultanate of Oman away from resource-based activities into capital- Strategy 2040, the new KPIs must build on Oman’s intensive industries and subsequently into economic performance in the previous knowledge-driven industries. development plans. The previous plans provide a

6.2 ‘Manufacturing for Wellbeing’ 2040 point of reference about which of the objectives formulated in the Strategy (The Sultanate of Oman KPIs 2020) were actually accomplished. Despite the fact that the Sultanate of Oman’s economic performance depends on overcoming Economic diversification was defined as a strategic the obstacles they face, it is expected that the priority for economic growth in Strategy 2020, given economy will grow annually at 6 percent (2018- the uncertainties surrounding global oil markets and 2040) based on preliminary estimations by the the resulting necessity of shifting to other sectors as Supreme Council of Planning. Given this growth sources of growth. The economic diversification of rate for the economy as a whole manufacturing is the Sultanate of Oman was linked to the expected to grow in real terms 6.3 times, from exploitation of alternative natural resources as well MVA 3.2 BN OMR in 2016 to 20.2 BN OMR in 2040, as the development of non-oil producing activities. with 30 percent of the manufacturing value added The Sultanate of Oman has made significant generated by 2040 being contributed by medium- progress in terms of economic diversification, with and high-tech industries (Table 6-1). Industrial the share of oil activities decreasing from 66 percent exports, for their part, are targeted to increase by of GDP in 2000 to 42 percent of GDP in 2015. Over 16 percent of total exports in 2015 to 28 percent the period of the 9th Plan, non-oil activities are of total exports in 2040 (from 1.9 BN OMR to 13.4 anticipated to rise at 4.3 percent pa in constant BN OMR). -63- Figure 6-1: Manufacturing for Wellbeing 2040 KPIs Achieving Strategy 2040: Key Performance Indicators (KPIs) Source: UNIDO elaboration based on United Nations Statistics Division (2018) and INDSTAT2 rev.3 (UNIDO, 2018) -64-

6.2.1 Industrialization intensity (MVA) 6.2.3 Medium- and high-tech MVA in total MVA (MHT MVA) The first KPI relates to the degree of industrialization intensity and captures the role The third KPI, which represents the medium- and and contribution of the Sultanate of Oman’s high-tech MVA (MHT MVA), is aimed at reflecting industrial production to economic development. a more complex production structure. It signals The underlying idea of this target is that the industrial maturity, a research and knowledge- 6 manufacturing industry will increase by 50 percent based manufacturing industry and the ability to by 2040 over the anticipated level for 2020. This is compete internationally through innovation. The expressed by the manufacturing value added KPI captures the technological complexity of the Achieving Strategy 2040: Key Performance Indicators (KPIs) (MVA) in OMR term. manufacturing activities in Oman. Target A: 20.2 BN OMR of Target C: 6 BN OMR of medium- and manufacturing value added by the end high-tech MVA in 2040 of 2040 Countries at the income level and with the Based on the baseline scenario of an annual real resource endowment of the Sultanate of Oman economic growth rate of 6 percent (2018-2040), it is typically have comparative advantages in certain expected that GDP will grow from 33 BN OMR to resource-based and a few capital-intensive 134.8 BN OMR (2011 constant). With a target of industries. However, to achieve successful manufacturing value added to GDP at 15 percent in diversification, it is necessary for other capital- 2040, it is anticipated that 20.2 BN OMR (2011 intensive and knowledge-based industries to constant) in manufacturing value added would have emerge. Hence, the underlying idea behind this to be generated by 2040, for which the KPI is that these advanced industries increase their manufacturing sector has to maintain an annual MVA considerably over the next 22 years. This will growth rate of 7.9 percent over the next 22 years. require these industries to grow at 9.4 percent annually in constant prices.

6.2.2 Manufacturing exports in total exports (MEXP) 6.2.4 Linking KPIs to the performance of strategic sectors The second indicator is based on the same backdrop as industrialization intensity (MVA). It To link Strategy 2040 KPIs to the performance of reflects the competitive status of a country’s strategic sectors, it must be reiterated that in manufacturing sector in international markets; an order to achieve 20.2 BN OMR of manufacturing increase in the manufacturing export share value added by 2040 (Target A), the indicates advancement in relative industrial manufacturing sector has to grow at 7.9 percent competitiveness while a decrease indicates annually in constant prices. Using this average deterioration. The country’s manufacturing growth rate and because strategic sectors are exports are measured by the manufacturing expected to be supported during the exports (MEXP) in OMR term. implementation of Strategy 2040, it is expected that the strategic sectors would expand at a higher Target B: 13.4 BN OMR of growth rate than non-priority industries. On the manufacturing exports by the end of assumption that non-priority industries will 2040 continue to grow at average rate of economic If the target of a 7.9 percent annual growth rate of growth at 6 percent, the strategic sectors should the manufacturing sector and 6 percent (2018- expand at 8.4 percent annually until 2040. 2040) aggregate economic growth rate is achieved The classification of industries by technological in the next 22 years, manufacturing exports are intensity (technology classification) is a widely targeted to contribute to trade in the amount of applied method for grouping industries for the

13.4 BN OMR (2011 constant) in 2040, which would purpose of policy-relevant analysis. The technology account for around 28 percent of total exports. classification is based on research and -65- development (R&D) expenditure incurred in the MHT target is based on the aggregated figures production of manufactured goods. Manufacturing combining medium high-tech and high-tech industries with a higher R&D intensity are industries into a single group “medium and high- considered high-technology industries. R&D tech industries” (Table 6-1). intensity refers to the ratio of R&D expenditure to The selected 30 strategic industries have their an output measure, usually gross value added. Data equivalences in terms of technological intensity 6 for R&D intensity in 2016 is provided by the OECD, (except recycling, for which there is no which also proposes a taxonomy for industry equivalence due to a change in the statistical groups with different ranges of R&D expenditure classification). Among the 30 strategic industries, Achieving Strategy 2040: Key Performance Indicators (KPIs) relative to their gross value added. it is expected that 30 percent of manufacturing The taxonomy used for Strategy 2040 KPIs differs value added will be contributed by the medium- slightly from the OECD classification which entails and high-tech industries in 2040, that is, 4.6 BN four categories with a separate group for high- and OMR. This requires a constant annual growth rate medium high-technology industries. This KPI uses of 11.4 percent by medium- and high-tech three groups (low-tech, medium low-tech, industries among the 30 strategic industries. By medium high- and high-tech) for the practical 2040, these would generate about 22.5 percent of consideration that high-tech manufacturing total manufacturing value added, with 7 percent industries accounted for less than 1 percent of being contributed by others. manufacturing value added in Oman. Thus, the -66- Table 6-1: Industry conversion Industry ISIC4 rev.4 Industries by cluster Technological classification Processing/preserving of meat 1010 Resource-based industries Low-tech Processing/preserving of fish, crustaceans and 1020 Resource-based industries Low-tech molluscs Vegetable/animal oils and fats 1040 Resource-based industries Low-tech Dairy products 1050 Resource-based industries Low-tech Grain mill products 1061 Resource-based industries Low-tech 6 Bakery products 1071 Resource-based industries Low-tech Furniture 3100 Resource-based industries Low-tech Achieving Strategy 2040: Key Performance Indicators (KPIs) Refined petroleum products 1920 Resource-based industries Medium low-tech Basic chemicals; except fertilizers 2011 Resource-based industries Medium high-tech Plastic products 2220 Resource-based industries Medium low-tech Glass and glass products 2310 Resource-based industries Medium low-tech Cement; lime and plaster 2394 Resource-based industries Medium low-tech Articles of concrete; cement and plaster 2395 Resource-based industries Medium low-tech Basic iron and steel 2410 Resource-based industries Medium low-tech Basic precious and non-ferrous metals 2420 Resource-based industries Medium low-tech Structural metal products 2511 Capital-intensive industries Medium low-tech Building and repairing of ships 3011 Capital-intensive industries Medium low-tech Electric motors; generators and transformers 2710 Capital-intensive industries Medium high-tech Electricity distribution & control apparatus 2710 Capital-intensive industries Medium high-tech Insulated wire and cable 2732 Capital-intensive industries Medium high-tech Other electrical equipment n.e.c. 2790 Capital-intensive industries Medium high-tech Pumps; compressors; taps and valves 2813 Capital-intensive industries Medium high-tech Manufacture of electronic valves and tubes and 2813 Knowledge-driven industries Medium high-tech other electronic components (solar panels) Other general-purpose machinery 2819 Capital-intensive industries Medium high-tech Automobile bodies; trailers & semi-trailers 2920 Capital-intensive industries Medium high-tech Manufacture of soap, detergents, cleaning and polishing preparations, perfumes and toilet 2023 Knowledge-driven industries Medium high-tech preparations Manufacture of pharmaceuticals, medicinal 2100 Knowledge-driven industries High-tech chemicals and botanical products Manufacture of medical and surgical equipment 3250 Knowledge-driven industries High-tech and orthopaedic appliances Recycling of metal waste and scrap 3710* Knowledge-driven industries Related to specific industry Recycling of non-metal waste and scrap 3720* Knowledge-driven industries Related to specific industry * ISIC4 Revision 3. The recycling industry has been partially reclassified into a newly created Waste Management and the Wholesale sections in ISIC4 Revision 4. Waste collection and treatment, including material recovery, and wholesaling of waste and scrap are now part of these sections. The transformation of secondary recovered material that is used in the production of new products is now classified in Revision 4 in its corresponding industry (textiles, glass, steel, paper and so on). To avoid naming all corresponding industries and given that many countries still use Revision 3 in their industrial statistics, for these two industries we use the ISIC4 Revision 3 classification. The rationale for targeting a 6 BN OMR share of Furthermore, pharmaceutical, medicinal chemical medium- and high-tech industries is based on the and botanical products and the medical and dental experience of comparator countries (Figure 6-2). instruments and supplies industries (both belong In 2014 alone, medium- and high-tech industries to the cluster of knowledge-based industries in comparators (Costa Rica, Jordan) and among the 30 strategic sectors) jointly contributed neighbouring countries (Saudi Arabia) contributed about 45 percent of total manufacturing value about 30 percent of total manufacturing value added in Ireland and 18 percent in Singapore. added. In more technologically advanced Since the Sultanate of Oman’s medium- and high- countries like Ireland and Singapore, it is tech industries already account for 20 percent of estimated that medium- and high-tech industries manufacturing value added, an additional 10 contributed between 50 percent and 80 percent percent was considered feasible, particularly in of total manufacturing value added. the light of expected greenfield investments. -67- Since non-priority industries are expected to grow industries) would have to be achieved if medium- at 6 percent annually, a 9.4 percent annual growth and high-tech manufacturing value added is to rate of medium- and high-tech industries (of both reach a 30 percent share in total manufacturing the 30 strategic industries and traditional value added by 2040. Figure 6-2: Medium- and high-tech projection 2040 6 Achieving Strategy 2040: Key Performance Indicators (KPIs) Source: UNIDO elaboration based on United Nations Statistics Division (2018) and INDSTAT2 rev.3 (UNIDO, 2018)

6.2.5 Characteristics of KPIs be it at industry level or economy level, is a long, path-dependent process. When leaps do occur, The three key manufacturing performance they signal responses to major improvements or indicators are performance (or “outcome”) deterioration in the basic conditions of industrial indicators consisting of output sub-indicators that activity. describe to what extent the Sultanate of Oman is performing as expected. Such indicators reflect The downside of industrialization intensity (MVA) the status of manufacturing development; is that it does not capture the technological indicate whether industrial policies have produced upgrading within manufacturing activities and results or not, and in turn how to make the tells us little about the technological structure of manufacturing sector more efficient and effective. production: a high value of the manufacturing This lies in contrast to so-called “process” sector’s share to GDP could cover both a very large indicators, which are based on research-based output with low value added per unit, or vice evidence and can only be used to validate or versa. To account for these important aspects of identify the processes that contributed to the industrial competitiveness, the medium high-tech observed outcomes. They contrast too MVA (MHT MVA) is used as the level of ‘perception’ indicators, which are subjective. technological deepening and upgrading. Because manufacturing development is a It is worth mentioning that both industrialization cumulative process that takes place over time, intensity (MVA) and the medium high-tech economic activities tend to remain relatively stable manufacturing value added (MHT MVA) focus on in the short run. Only in the medium to long term domestic production only and does not look at a will industrial statistics and structural economic country’s international presence through exports. variables reveal the effect of such developments. In this way, the three indicators may serve to This demonstrates that structural transformation, complement one another. -68- 7 The making of the Sultanate of Oman’s ‘Manufacturing for Wellbeing’

7.1 Strategy and policy phases focused groups. The output of this stage was the list of strategic industries discussed above. Industrial development is a complex process, involving The field research stage brought a number of several phases that take international consultants to the Sultanate of Oman decades, sometimes even and drew on local consultants and the expertise longer, to materialize. available within MOCI to collect primary data and Industrial policymaking, further interview stakeholders to ascertain although it takes less time, is whether the list of priorities and strategic industries no less complicated and also involves a number of was reasonable. Twelve international consultants, phases. A solid diagnosis of the Sultanate of Oman’s three local consultants and the MOCI strategy team industrialization experience and identification of its were involved in preparing 19 industry and cross- industrial potential constituted the first phase of cutting studies. Recent industry studies prepared the preparation of this strategy. The main objective for MOCI were also drawn upon. During this stage of this phase was to prepare a strategy, objectives some 100 firms were interviewed or involved in and priorities for industrialization in the Sultanate workshops, 30 government ministries and of Oman (Figure 7-1). It addressed two key regulatory agencies were queried, 27 government questions: what needs to be changed, if anything, support and operational agencies were visited, 14 and why should it be changed. This phase did not universities and research centres were quizzed, 12 address the way change will take place. financial institutions and funds were sounded, and eight chambers and private sector representative The process involved, first, undertaking extensive organizations were talked to. More than 250 capacity building efforts aimed at those involved in individuals were contacted during this stage. the preparation of the strategy as well as potential public sector partners to be called upon at a later The fifth stage involved the final identification of stage. Three seminars were part of this effort and priorities on the basis of the accumulated work their approach was hands-on, in that they aimed at carried out. It involved the preparation of the draft initiating the development of data and reports that strategy and its discussion and validation with would be necessary to elaborate the strategy. different stakeholders. A key input to this stage was the strategy workshop, held on December 12th, With the strategy team being trained in the first 2018 at the Crowne Plaza Convention Centre Hotel, stage of this first phase, the long-term patterns of which brought together 150-200 stakeholders from industrial development in the Sultanate of Oman the public and private sector to discuss different and the status of Omani manufacturing today were aspects of the draft report. The final draft was an examined. This stage also involved understanding outcome of this stage. why such trends had taken place. The next stage involved preparing all the The next stage involved evaluating the potential of documentation for the strategy, including finalizing industries in the Sultanate of Oman. The productive consultant reports and preparing the final version and trade capacity of all industries in the Sultanate of the draft strategy. It will involve the final of Oman were evaluated on the basis of a range of approval and validation of the documents within methodologies described in the next section. This MOCI. stage also involved interviewing and consulting a broad range of public and private stakeholders. The final stage of Phase One will be government More than 50 stakeholders were consulted during approval of the final version of the strategy. this stage through individual interviews and several -71- Figure 7-1: Stages for building the Sultanate of Oman’s Industrial Development Strategy 2020-2040 The making of Oman’ s ‘ Manufacturing for Wellbeing’ -72- Phase Two will move on to address the question 7.2 A brief description of the methodology of how to implement the strategy and when to do The potential of the Sultanate of Oman’s so. The first part involves preparing detailed policy manufacturing industries was assessed across four instruments, regulations and incentives that will thematic areas (Table 7-1). The first thematic area be used to implement the strategy. It will include was the country’s production capacity or its ability investment requirements and possible sources of to create value added, generate employment and finance for implementation. It will be the ink in the improve labour productivity. Second was the 7 pen or the bullets in the gun of Omani’s industrial Sultanate of Oman’s export potential, namely the policy. Without them, the strategy will remain basket of manufactured products that the Sultanate The making of the Sultanate of Oman’s ‘Manufacturing for Wellbeing’ only a list of potentials. The second part of Phase of Oman has potential to export. Third was the Two will focus on the corresponding action plans, that is, sequencing the application of the dynamism or possibility of sustaining high growth and a set of dynamics industries, particularly in instruments and mechanisms chosen over time. connection with rising global demand at current and Phase Two will be followed by the third future stages of development. Fourth was the implementation phase, which will involve potential for import substitution, meaning organizing and managing the application of the emerging opportunities for the Sultanate of Oman instruments and action plans. This will be to develop promising yet nascent industries by accompanied by proper monitoring mechanisms producing locally. and followed by evaluation and learning procedures to complete the policy process. Table 7-1: List of variables and thematic areas Thematic areas Indicators Production capacity Real value added per capita (constant 2011 US$), 38,500 Production capacity Employment to population (%), 38,500 Production capacity Real output per worker (constant 2011 US$), 38,500 Export potential Gross export per capita (US$), 38,500 Export potential The Sultanate of Oman gross export share (%), 2016 Export potential The Sultanate of Oman revealed comparative advantages, 2016 Export potential World gross export share (%), 2016 Dynamism Real value added per capita (constant 2011 US$), 38,500 - 57,000 Dynamism Employment to population (%), 38,500 - 57,000 Dynamism Real output per worker (constant 2011 US$), 38,500 - 57,000 Dynamism Gross export per capita (US$), 38,500 - 57,000 Dynamism The Sultanate of Oman gross export growth (%), 2007-2016 Dynamism World gross export growth (%), 2007-2016 Dynamism Intrinsic attractiveness, 2016 Dynamism The Sultanate of Oman gross import growth (%), 2007-2016 Import substitution The Sultanate of Oman gross import share (%), 2016

7.2.1 Production capacity captures differences in population structures across countries. The values of the variable were estimated Production capacity included three indicators. The at all levels of income for all countries from 1990 to first one was each industry’s real value added per 2016. Each estimate represents the expected capita (constant 2011 US$). The indicator is meant to performance for a given level of income, with USD determine the value added by each member of the 38,500 (PPP 2011) being the income per capita of the Omani population. By including population rather Sultanate of Oman in 2016 (Figure 7-2). than employment in the denominator, the indicator -73- The second indicator is each industry’s share of estimated at all levels of income for all countries employment to population. The underlying idea of from 1990 to 2016. Each estimate represents the this indicator is to determine how many people are expected performance for a given level of income, employed by a specific industry. It aims at capturing with USD 38,500 (PPP 2011) being the income per employment potential, taking into account the capita of the Sultanate of Oman in 2016. population structure. The values of the variable were 7 Figure 7-2: The performance of manufacturing industries (38,500 income per capita, PPP 2011): Pharmaceuticals, medicinal chemicals and botanical products industry The making of the Sultanate of Oman’s ‘Manufacturing for Wellbeing’ Source: UNIDO elaboration based on INDSTAT2 rev.3 (UNIDO, 2018) The third indicator is each industry’s real output per performance and further describes the country’s worker (constant 2011 US$). This is an indicator of export structure. productivity since it measures the contribution of The third indicator is revealed comparative each worker in a particular industry to the economy advantages. This indicator allows us to assess in as a whole. The values of the variable were which industries the Sultanate of Oman has a estimated at all levels of income for all countries comparative advantage based on its export from 1990 to 2016. Each estimate represents the performance relative to the industry’s global expected performance for a given level of income, performance. with USD 38,500 (PPP 2011) being the income per capita of the Sultanate of Oman in 2016. The fourth indicator is world export share (%) in 2016, which reflects the export share of a

7.2.2 Export potential particular industry in the world export basket. Export potential entails four indicators. The first is

7.2.3 Import substitution each industry’s gross export per capita (US$) of the Sultanate of Oman in 2016. This indicator Import substitution is represented by the import denotes the export performance and competitive share of industries in the Sultanate of Oman in advantage of the Sultanate of Oman relative to 2016. By assessing Oman’s import structure, it other countries. allows us to assess the domestic demand of certain goods/industries and identify import The second indicator is each industry’s gross export substitution opportunities to foster domestic share to total exports (%) of the Sultanate of Oman value-added generation. in 2016. This complements the indicator of export -74-

7.2.4 Dynamism adjusted for purchasing power parity for cross- country comparisons, as in this case (Figure 7-3). Apart from the intrinsic attractiveness index, the other seven indicators of dynamism capture the The dynamic aspects for gross export growth (%) dynamic aspects of those indicators in production 2007-2016, world gross export growth (%) 2007- capacity, export potential and import substitution. 2016, gross import growth (%) 2007-2016 can be For real value added per capita (constant 2011 expressed as the emerging trends over the past 10 US$), employment to population (%), real output years. These allow the Sultanate of Oman to 7 per worker (constant 2011 US$), and gross export identify industries that experienced the most per capita (US$), the dynamic aspects of these rapid growth in terms of export and import in the The making of the Sultanate of Oman’s ‘Manufacturing for Wellbeing’ four indicators can be gauged as how the country and export in the world at large over the performance of the Sultanate of Oman in a past decade. particular industry evolves from the current to the The intrinsic attractiveness index presents the next stage of development, with USD 38,500 (PPP normalized average of the share and growth rate of Int$ 2011) being the current income per capita of each industry (2007-2016) of the high-income OECD the Sultanate of Oman adjusted for purchasing countries, the share and growth rate of each power parity, and USD 57,000 (PPP Int$ 2011) industry (2007-2016) of the world and the being the projected income level of the Sultanate sophistication of industries based on the PRODY of Oman in 10 years with a 4 percent annual measurement (2016). It is used to assess the constant growth rate. The income per capita term dynamism and complexity of industries by can be expressed in constant prices for the examining their development trends in advanced purpose of delineating growth patterns or countries. Figure 7-3: The performance of manufacturing industries (38,500-57,000 income per capita, PPP 2011): Pharmaceuticals, medicinal chemicals and botanical products industry Source: UNIDO elaboration based on INDSTAT2 rev.3 (UNIDO, 2018) -75-

7.2.5 The ranking of industries used to shortlist industries that appear to be in the top-30 list of each indicator. Each industry’s The 16 variables in the four thematic areas were potential was then further examined individually to used to assess each of the 119 manufacturing validate their feasibility on the basis of global and industries. Of these, eight were estimated (real domestic trends, availability of technological value added per capita, employment to population, capabilities and former Omani policy decisions. real output per worker, gross export per capita) for 7 the current (USD 38,500 Int$ PPP 2011) and future Expert judgment was sought where there was doubt and some industries ended up being (USD 57,000 Int$ PPP 2011) levels of income of eliminated. Likewise, some industries whose The making of the Sultanate of Oman’s ‘Manufacturing for Wellbeing’ Oman. Industries were then ranked according to potential may have been overlooked by the the 16 criteria. A common weight point system was methodology were included. -76- 8 List of references and contributors

8.1 List of references EIA (Energy Information Administration), 2017. Country Analysis Brief: Oman. United States: Alkasmi, A. J., Hamamsy, O. E., Khoury, L. and Independent Statistics and Analysis. Syed, A., 2018. Entrepreneurship in The Middle East and North Africa. United Arab Emirates: Ennis, C. A. and Al-Jamali, R. Z., 2014. Elusive Dubai. Employment Development Planning and Labour Market Trends in Oman. United Kingdom: Chatham Alshoaibi, H., 2015. Evolution of The Omani Higher House, The Royal Institute of International Affairs. Education System and Economic Challenges 1970- 2014. The Sultanate of Oman: Southern Illinois GOIC (Gulf Organization for Industrial Consulting), University Carbondale. 2015. A Study on the Development of Industrial Facilities in the Sultanate of Oman. The Sultanate Al-Wahaibi, M., 2017. The journey of the Sultanate of Oman: Muscat. of Oman with economic diversification. United States: University of Illinois. 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8.2 Contributions to the report by Spitzer, J., 2018. SMEs & entrepreneurship in international consultants Oman: A Diagnosis. Austria: United Nations Industrial Development Organization. BAŞER, K. H. C., 2018. Preparation of Studies on the Fragrances. Austria: United Nations Industrial Tesfachew, T., 2018. The Sultanate of Oman Development Organization. development governance and industrial development strategy 2040: Learning from ‘best 8 Di Maio, M., 2019. Manufacturing investment and practices’. Austria: United Nations Industrial financing in Oman: Challenges, opportunities, and Development Organization. policy recommendations. Austria: United Nations Industrial Development Organization. Tomasin, G., 2018. Healthy food manufacturing List of references and contributors industry in Oman. Austria: United Nations Frederick, S., 2018. Potential for manufacturing Industrial Development Organization. medical devices in Oman. Austria: United Nations Industrial Development Organization. Tunesi, S., 2018. The development of the recycling industry in Oman. Austria: United Nations Gurunath, R., 2018. Diagnostic sector study for Industrial Development Organization. glass and glass products. The Sultanate of Oman: Muscat. By staff of Ministry of Industry and Commerce: Integlia, D., 2018. Diagnosis report study Industrial Eng. Al-Jadeedi, J. S., 2018. Pump, compressor, Plan 2020-2040 – the Sultanate of Oman taps and valves: Industrial strategy 2040. The Pharmaceutical Industry. Austria: United Nations Sultanate of Oman: Ministry of Commerce and Industrial Development Organization. Industry. Kaushik, P. D., 2018. Iron and steel. Austria: United Eng. Subramani, R., 2018. Electrical industry: Some Nations Industrial Development Organization. consideration for the report. The Sultanate of Oman: Ministry of Commerce and Industry. Kaushik, P. D., 2018. Air conditioning equipment. Austria: United Nations Industrial Development By Industrial Strategy Team: Organization. Overall responsibility: King, D., 2018. Report on diagnostic sector studies Eng. Sami Salim Alsahib for structural metal products and fabricated metal Eng. Nahla Abdulwahab Al Hamdi (until September products. The Sultanate of Oman: Muscat. 2018) Kishore, K. B., 2018. Report on diagnostic sector Prof. Dr. Ludovico Alcorta studies for insulated wire and cable. The Sultanate of Oman: Muscat. Team members: Langthaler, M., 2018. Vocational education and Prof. Dr. Ludovico Alcorta, UNIDO industrialization in Oman. Austria: United Nations Eng. Jasim Saif AL-Jadeedi, MOCI Industrial Development Organization. Eng. Abdullah Rawahi, MOCI Leal-Ayala, D., Kuta, K., and López-Gómez, C., Eng. Nashla Mashikari, MOCI 2018. Developing domestic manufacturing for the Eng. Raj Subramani, MOCI solar energy sector in Oman: Opportunities and challenges. Austria: United Nations Industrial Dr. Charles Fang Chin Cheng, UNIDO Development Organization. Dr. Shahid Al Balushi, SQU Leal-Ayala, D., López-Gómez, C., and Palladino, M., Dr. Mahmut Boz, SCP 2018. A study on the digitalization of the Mr. Mohammed Al-Jahwari, CBO manufacturing sector and implications for Oman. Austria: United Nations Industrial Development Organization. Spitzer, J., 2018. Industrial parks in Oman: Diagnosis. Austria: United Nations Industrial Development Organization. -82-