Expanding the private sector

Government’s readiness to increase its spending and financial support for the SME sector will enable the private sector to play a bigger role in driving economic growth and creating jobs.

Despite envisaging a budget deficit of $3.1bn for 2012, the high price of oil has meant the Sultanate is set to enjoy a comfortable surplus again. This is news in itself, but all eyes are now turning to 2013. What lies in store? And how will the surplus be spent?

The Sultanate’s answer to these questions is clear. In addition to the stated goals of the current Five-Year Plan, and initiatives announced in 2011, the government wants to offer a boost to the estimated 100,000 small and medium-sized enterprises (SMEs) operating in the country, as well as encourage new SME start-ups. This will enable the private sector to play a bigger role in driving economic growth and creating jobs – a particularly pressing issue since, every year, around 17,000 Omanis graduate and enter the job market.

Three key areas
Broadly speaking, the government has identified three key areas that will assist the development of the SME sector: first, the need for new regulations that are more SME friendly; second, increased – and more efficiently targeted – financial assistance for start ups; and third, improved training and entrepreneurial skills education.

The SME sector has tremendous potential for growth. However, it is fair to say that the potential has long lain dormant. It has been estimated that about 80-90 per cent of start-up businesses fail in Oman due to undercapitalisation and poor management resources. Moreover, starting up a company in Oman has traditionally been very difficult, sometimes taking up to 12 months. Add to that the perceived unattractiveness of the private sector – most Omanis would still prefer a job in the public domain – and one can understand why SMEs contribute 16 per cent of Omani GDP, compared to over 50 per cent in the UAE, according to Qatar Development Bank statistics.

More positively, the budget surplus has led to a renewed effort to address these issues, and 2012 has already seen number of landmark developments come into effect. In June, the Ministry of Commerce and Industry (MoCI) revised the definition of SMEs, in an effort to improve the flow of credit and provide more efficient training and guidance to SMEs. Under the previous definition, the number of employees was the only criteria used to define a company as a small or medium enterprise. The new definition, in line with international benchmarks, takes into account the annual sales turnover of businesses. It also includes a category for micro-sized enterprises, and it is hoped this new classification will enable the government to provide stronger and more effective support to SMEs.

Reluctance to lend
Indeed, the difficulties involved in obtaining start-up capital for micro and small businesses is a second factor that has long stifled SME growth, an issue not only here in Oman, but also elsewhere in the GCC, where banks remain largely reluctant to lend to SMEs. Research conducted as part of the Regional Oman Economic Association Conference in January 2012 saw respondents agree the process of obtaining financial assistance was too long. And, according to a 2008 study by business information firm Dun and Bradstreet, banks in the UAE rejected 50-70 per cent of credit application from SMEs that year, due to a perceived high level of risk and applicants’ failure to meet loan conditions.

Yet this situation now looks set to change in the Sultanate. The government is not only looking to increase its spending and financial support for the sector, it also wants to take advantage of international expertise to identify how that money should most effectively be allocated. In November, Bank Muscat and the International Finance Corporation (IFC) signed an agreement to facilitate financing access to SMEs, in order to help them expand and create jobs. Within this partnership, the IFC will advise the bank as it launches new products and services aimed at micro, small, and medium enterprises. Furthermore, Bank Muscat will also offer support to women-owned businesses, helping them become more active players in the economy.

The second measure will see SMEs enjoy some RO100m of increased funding, that will meet around 50 per cent of the financing needs of existing and new SMEs at subsidised interest rates. Launched in April, the SME Development Fund will make investments via private sector pension funds, financial institutions and large business groups, distributing government grants towards financing Omani entrepreneurs, as well as providing training and mentoring.

The general picture then is that, across the board, the government is looking to SME development with a new vigour. Earlier this year, for example, the Telecommunications Regulatory Authority (TRA) unblocked a number of Voice over Internet Protocol (VoIP) services, a move that paved the way for cheaper international communication and providing a boost to SMEs, helping them to keep costs down in the early stages of their growth.

Developing skills base
Of course, while the success of the SME sector is in large part reliant on regulation and funding, it is unlikely that Oman will see a rise in the number of privately-owned business without working to further develop the skills base, something that the authorities are aware will take time. In the aforementioned research as part of the Oman Economic Association Conference, it was found that Omani financial institutions still believe that the quality of business plans, coupled with the business owners that represent them, are generally “very poor”, with a general weakness in entrepreneurial capabilities amongst locals.

To counter this, and to spur SME growth, the Ministry of Commerce and Industry agreed in August 2012 to expand the role of Sanad – its SME incubator programme. The programme has raised the ceiling of loan funding, as well as the age-group of prospective entrepreneurs. The new services are aimed at diversifying the national economy by fostering entrepreneurship. To achieve this, Sanad raised the upper limit of its loan programme for start-ups to RO50,000 – a move which Ibrahim bin Said al Alawi, Sanad’s Executive Director hopes will spread a “culture of free business.”

In addition, more emphasis is to be laid on women’s training. While the participation rate of women in the labour force remains low, there has been a marked improvement in the availability of education and training. The women’s training programme launched by Sanad, for example, offered training in tailoring to 473 women in the months leading up to August 2012. Overall, around 27 per cent of the beneficiaries of Sanad funding are women.
Going forward, it will take all three aspects of this SME development plan – business-friendly regulations, adequate funding and a healthy dose of entrepreneurial spirit – to get the sector flourishing and meeting its true potential. The current moves are a significant step in the right direction, though it will, of course, take time for them to bear fruit.

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