SME development is a major focus area for the government and various initiatives and regulations have been implemented in this direction
Taking a cue from developed economies, few years ago, Oman has undertaken a series of major initiatives to strengthen the SME sector. Several policy measures, including additional funding and training programmes, to incentivise small and medium enterprises were undertaken, considering the important role played by SMEs in economic development, job creation and narrowing the gap between the rich and the poor.
In the case of most advanced export-oriented countries, including Japan, small enterprises constitute a sizable of chunk of manufacturing industry. However, the Sultanate has to go a long way to make a vibrant SME sector. This is evident from the fact that the contribution of 90,000 small units in the Sultanate’s gross domestic product (GDP) is estimated at merely 14 per cent against an average contribution of 55 per cent of GDP in developed countries. However, SMEs in Oman constitute 90 per cent of the corporate sector, which is giving the much-needed impetus to create self-employment opportunities for the youth.
The SME sector employs 40 per cent of the Omani workforce, which is against 50-60 per cent in developed economies. As per the norms in Oman, SMEs are enterprises which employ workforce up to 99 and turnover not exceeding RO1.50 million.
If the government can tap this sector effectively, the country can partly negate the recent adverse effects of a major drop in revenue from the hydrocarbon sector, especially on the employment front. This is all the more important since a third of Omani nationals are aged between 15 and 29 years and about 26 per cent are under the age of 15. The drop in oil prices from a peak of about $120 per barrel in 2014 to about $50 per barrel now has also badly dented the government’s ability to create jobs. On the one side, there is a freeze on new appointments in several government departments like any other GCC state, while private sector companies are unable to absorb them in view of a slackness in business due to the economic slowdown. Moreover, mega capital intensive projects, which require multi-billion investment, cannot resolve the Sultanate’s unemployment problem since these units cannot create jobs on a large scale. Of course, SMEs can definitely create vast employment opportunities in diverse sectors in the Sultanate including cottage industries.
In fact, Oman is also developing small and medium industries for diversifying its revenue sources by strengthening its export base. Development of industrial estates and free trade zones are all part of making the Sultanate a hub for manufacturing and exports to regional markets.
Although Oman government has attached special attention to the development of SMEs more than a decade ago, the sector received a shot in the arm with a major symposium on SME Development in 2013. Thereafter, the government has taken several bold measures recommended at the symposium, which included a minimum five per cent commercial credit of banks to SMEs, financial guarantees for SME loans through Oman Development Bank, a minimum of ten per cent contract from major contractors to small units, mentorship and assistance to young entrepreneurs and setting up of a special development fund to help university students aspiring to become entrepreneurs.
With banks asked to extend a minimum of five per cent of their commercial credit to small units, the availability of credit in the sector has increased in the last couple of years. Omani banks have not only created separate departments, but also launched special products to suit the specific financial requirements of small units. Apart from banks, various specialised lending institutions like Oman Development Bank (ODB) and Sharakah are also strengthening their lending programmes.
Recently, the state-owned Oman Development Bank has unveiled a new scheme to provide credit facilities to young entrepreneurs. The incentives of the scheme include a soft loan at two per cent interest per year (which is against ODB’s normal lending rate of three per cent). Also, the applicants are exempted from monthly repayments for the first 12 months. In the second year, they are required to pay only half the monthly repayment amount. From the third year onwards, these entrepreneurs need to make full monthly repayments.
Oman Development Bank is playing an important role in funding small enterprises over the years. The bank, which has 14 branches, continues its efforts to promote the industrial sector, diversify sources of national income, achieve self-sufficiency, enhance value addition of the projects and create at least four to five jobs for Omanis in each project.
A loan guarantee scheme from Oman Arab Bank and Bank Muscat, which was introduced in coordination with the Ministry of Commerce and Industry a few years ago was another major step in providing the much-needed fillip in developing small and medium enterprises. The credit guarantee scheme (or loan without the backing of collateral security) offered guarantee to a large number of small units.
Also, the SME Development Fund (SMEF) has raised RO20 million corpus in two tranches so far, out of its total envisaged corpus of RO100 million. So far, the fund has financed 160 projects by deploying RO15.8 million, which indicates an average funding size of RO100,000 per project.
Apart from providing leasing, project finance and working capital to SMEs, the fund supports them through their nurturing programme, comprising accounting support, monitoring, free software support and mentoring services. The eligible SMEs benefit from interest subsidies, which are provided by SMEF through a grant through the country’s offset programme.
The SMEF is supported by the Oman Authority for Partnership for Development, which provides the grants under the offset programme. In addition to interest subsidies, these grants are used for developing a culture of entrepreneurship among college students, training Ministry of Defence (MoD) personnel in entrepreneurship, running the nurturing programme and in providing advice for SMEs. The whole idea is to create 7,500 small units, which will contribute RO100 million to the gross domestic product every year for another ten years and a large employment potential of 50,000 job opportunities.
Agencies like Intilaaqah also play an important role in developing SMEs in the country. Intilaaqah provides funding, guidance and business development service to existing and new enterprises. The Fund for Development of Youth Projects, known as ‘Sharakah,’ also plays an important role in developing small and medium enterprises by providing necessary seed capital.
Riyada – the Public Authority for Small and Medium Enterprise Development, which was constituted some years ago, has set an objective of raising SME contribution in GDP to 20 per cent within three years.
The investment in new industrial estates and expansion of existing ones is also helping the aspiring entrepreneurs to set up small and medium units.
The Public Establishment for Industrial Estates (PEIE), which acts as a one-stop-shop for entrepreneurs, plans to build three industrial estates – one each in Thumrait, Shinas and Al Mudhaibi. There are also ongoing expansion projects for further developing existing industrial estates, which will help diversify the country’s economy and create employment opportunities for Omani youths. PEIE manages Rusayl, Raysut, Sohar, Sur, Nizwa, Buraimi and Sumail estates, which have a combined area of over three million square metres.
There are approximately 900 existing projects in various industrial zones in the Sultanate, which are mostly small units and employ more than 15,000 local people. Also, there are 242 projects under construction that will commence operation within two years and thus will provide 12,000 job opportunities. Plots have been allocated to more than 500 projects, which are expected to start operation in the next three years and they will provide more than 25,000 job opportunities, including 9,000 jobs for the citizens. This means that the projects under construction or those that have been allocated lands will provide more than 14,000 job opportunities for Omanis over the next three years.
A major industrial park for light industries called Sandan is another initiative from the private sector to boost development of small units. Sandan light industries park, which is taking shape in Mabela, is spread over an area of 250,000 square metres and will accommodate 2,400 workshops, automobile showrooms, building material shops, 450 office space and 1,400 residential units. As many as 15,000 people will be accommodated, who will have all facilities inside the park, which will be completed in 2018. Apart from infrastructure facilities, mega state-owned firms are giving priority for SMEs while awarding a sizable share of their contracts to small units. This was clearly reflected in recent awarding of contracts for building mega projects.
For instance, the state-owned Oman Oil Refineries and Petroleum Industries Company (Orpic) is offering business opportunities worth of $400 million for small and medium enterprises for developing its $6.5 billion-Liwa Plastics Industries Complex. These business opportunities, including sub-contracting works, are being awarded by four main contractors who have won these packages as part of the in-country value (ICV) obligation.
Orpic has already awarded four major packages to multinational contracting firms for building Liwa Plastics Industries Complex with a total cost of $4.5 billion.
The ICV initiatives cover four categories, including purchase of local materials and service, which has to be a minimum of 25 per cent. Local small and medium enterprises are expected to benefit immensely from such business opportunities, which include sub-contracting works, purchase orders, and support services, available from major contracting firms. Orpic has been conducting inter-active workshops between the main contractors and potential small and medium enterprises in Muscat and Sohar to help small units to get business from these projects. Several contract opportunities are available for small units, which include site preparation, transport, information technology, electrical and mechanical work and construction opportunities.
A similar initiative was taken by the majority state-owned Petroleum Development Oman (PDO). Of late, several major and minor contracts worth millions of rials were awarded to local community contractors, which include service contracts, supply deals and off-plot mechanical works.
However, SMEs face several challenges, especially in the wake of a severe drop in oil prices. The aspiring entrepreneurs lack marketing support, accounting knowledge and incubation support. While the number of work available in the country for SMEs came down, these units face payment delays. Payment delays of completed projects are still adversely affecting contracting companies, with a severe hit on the cash flow and liquidity of small units. When the main contractor is not getting paid, the sub-contractors and vendors do not get their payment. This is hitting smaller units harder than large enterprises. As small units depend on bank’s short term facilities for managing liquidity, an increase in interest cost is also affecting such units.
Although large contractors are willing to award sub-contracts to small units, the small units are facing difficulties in grabbing these opportunities. The main contracting firms prefer to award sub-contracts to those small firms who can complete work on time. Of late, the government has allowed public sector employees to start SMEs, but people are not coming forward because they do not know how to develop a small unit and how to manage risks. Yet another major concern of small enterprises is the lack of coordination among different agencies involved in developing these units. Several specialised departments and agencies, have been formed to provide necessary training and funds for small and medium enterprises, over the years but it lacks close coordination, causing hurdle for young entrepreneurs.
Like developed countries, a large scale penetration of SMEs in the economy is possible only when all agencies coordinate their work with a strong determination. On the positive side, Oman has already created a state-of-the art infrastructure facility with multi-billion rial investment in roads, sea ports and industrial estates, which are enabling factors for setting up small scale units. Further, opportunities exist in free zones (like Duqm, Sohar, Salalah and Al Mazyouna) in an array of areas, which include support services, logistics services, transport services and material supply.
For young hard working and aspiring entrepreneurs, there is no dearth of business opportunities. The need of the hour is to grab opportunities with the support of the government agencies.