Ex Shell boss discusses Omanisation conundrum

Nick Pattison is a former chairman and managing director of Shell Oman

Former Shell Oman chairman and managing director Nick Pattison discusses the issue of Omanisation in his latest article for OmanGBnews.com.

On the face of it, Oman should be the perfect investment location for any company wishing to exploit the vast and dynamic markets of the Indian Ocean trading area, writes Nick. With world-class ports already in operation, a railway soon to thread its way across the Arabian Peninsula and a tax regime that can only be described as “benign”, Oman should be the place where everyone is clamouring to invest.

One perceived cloud, which may put people off though, is the issue of Omanisation. On the face of it, it is eminently reasonable for the Government to encourage the employment of Omanis at the expense of expatriates, and that it certainly does with a whole series of complicated and bureaucratic rules.

How come then that for every 1 per cent increase in GDP more than 20,000 expat workers enter the country? How come there are 2.4 million Omanis of all ages and 1.8 million expatriates (mainly workers)? And together with these statistics can be added the fact that there are well over 100,000 Omanis who are un-and under-employed and that 10 per cent of GDP is remitted overseas thus reducing demand locally.

The reason is simple. On the doorstep of the Arabian Pensinsula and nearest of all to Oman there is a hinterland of around 1.7 billion people, many of whom live in mind-numbing poverty. Thus there is a ready-made wage deflator which turns the less-skilled Omanis away from working. There is also a ready-made demand for this almost infinite supply since few local owners of businesses will reject cheap labour, particularly when their management itself comes from these countries.

The response of Government, perhaps understandably, has over the years, been to erect a labyrinthine set of rules, barriers and bureaucracy which, while calming social tensions, does tend to discourage investment. To offset this they have, however, created free trade zones where virtually none of the constraints apply and a company has the freedom to set up and operate as flexibly as it may wish.

However, while investing in these zones is for the few, it does not resolve the underlying problems. Expats come with a lot of hidden costs. They need schools, roads, electricity, water, hospitals, vehicles, all of which add to an infrastructure cost which is increasing at around 10 per cent per annum. If labour were a smaller component of the cost of production, higher wages could be afforded and less people would be needed for a given level of output. In such a scenario Omanis would be prepared to work as the reward would be greater. The proviso would be that they were appropriately skilled and this indeed is an issue, though one that is being addressed.

But the key question is how one can go from the current situation where Oman is a low-ish wage/low-ish output economy to one where it is a medium wage/medium output economy? No longer can we afford to be a medium-wage economy masquerading as a low-wage economy.

I don’t believe the answer lies in constraints of the sort that are currently placed on labour. Ultimately an economy where people are free to employ who they wish will serve Oman’s needs better.

The problem and its solution lies in the private sector. To put it bluntly the private sector has simply not done enough to assist in resolving the issues, though there are many honourable exceptions among some excellent companies.

As one travels down the ranks of the 2nd, 3rd and 4th grade companies, however, any attempts at Omanisation basically fizzle out. Omanisation in the private sector has in effect, therefore, flat-lined. The Government cannot be expected to solve the problem: most Ministries and Government institutions have too many employees themselves. So how do we square the circle of maximising the employment of Omanis and minimising the employment of expats while at the same time maintaining optimal rates of economic growth?

I believe there are a number of potential approaches. In no particular order, I would suggest that all Omani companies must have 25 per cent Oman employees. This is certainly not a tough target on the surface, but there are many thousands of single proprietor businesses which employ only one or two people and not one will be an Omani. At a stroke these will disappear or have to adapt - all companies with four or fewer employees will have to employ an Omani.

The second reform is to re-introduce training levies. These would be paid by every company on a capitation fee basis for all their employees and repaid to that company as it trains and develops Omanis on recognised courses. Companies that don’t train in effect pay a tax through not recovering their fees. Those that do, don’t.

The only constraint would be that the company would have to find a job for that Omani. This should encourage the employment of Omanis and also, equally importantly, their development. The scheme could be managed through the 12 sectoral boards recognised by the Government. They could also be charged with looking at ways businesses are managed in high wage economies and implementing those ways in Oman. Companies which invested capital rather than labour could be given tax breaks.

I believe that an approach of this sort, with no constraints placed on who one employs, would over time lead to a natural increase in skilled hard-working Omanis and a natural decline in expats as the training levy costs begin to bite in favour of those who train and employ Omanis.

It will take time, but frankly a major shift of this sort needs to take time. Short-term, patchwork solutions will never work.