US embassy cable - 04MUSCAT1942

C O N F I D E N T I A L SECTION 01 OF 02 MUSCAT 001942 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/TRA, NEA/RA, AND NEA/ARPI 
USDOC FOR 4520/ITA/MAC/AMESA/OME/MTALAAT 
ROME FOR FAA/GJOYNER 
 
E.O. 12958: DECL: 11/02/2014 
TAGS: EAIR, EINV, EFIN, PGOV, ECON, MU, Domestic Politics, Ports, Export Control and Border Security, Economic Affairs 
SUBJECT: AIRPORT PRIVATIZATION GROUNDED 
 
 
Classified By: Ambassador Richard L. Baltimore III 
for reasons 1.4 (b) and (d). 
 
Contains sensitive business information.  Please handle 
accordingly. 
 
1. (SBU) Summary: A long-expected pullout by British Airports 
Authority from the privatized consortium managing Oman's 
international airports means that the government will now run 
the airports in Muscat and Salalah.  One of the alleged key 
sticking points was the failure of the government and the 
private consortium to agree on the financial terms for 
constructing a new passenger terminal in Muscat.  Originally 
slated for completion by 2007, the new terminal likely will 
now be erected on a longer timetable under government 
control.  A new 100 percent Omani government-owned company 
will be formed to assume control of the airports; the 
government has agreed to buy out the shares held by the 
private consortium. Most staff will be retained by the new 
company, including administrators and consultants from the 
previous consortium who will be invited to stay on for the 
first six months during a transition phase.  End Summary. 
 
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Rough Landing 
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2. (SBU) Airport management had long been viewed as an area 
where privatization could proceed in modernizing Oman's 
transport infrastructure and achieving key efficiencies in a 
growing regional marketplace. On September 10, 2001, a 
consortium led by the British Airports Authority (BAA) and 
the local firm Bahwan Trading Company (BTC) established the 
Oman Airports Management Company (OAMC).  The largest 
shareholder in OAMC was an entity called Capital Aviation 
Services (75 percent shareholding), with the remaining shares 
held by the Omani government and Oman Aviation Services. 
Operating under a 25-year license granted in January 2002, 
OAMC's mandate was to modernize the existing airport 
facilities at Seeb International Airport in Muscat and 
Salalah International Airport in southern Oman, and lay the 
groundwork for the construction of a new passenger terminal 
at Seeb Airport by 2007.  On October 20, 2004 newspaper 
headlines declared that Oman's privatization of airport 
management had come to an end with the pullout of BAA from 
OAMC, reportedly due to substantial disagreement over the 
financial terms of constructing the new terminal. 
Administration of the airports should revert to the 
government within 30 days according to the terms of the 
original concession agreement. 
 
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Company Never Truly Took Flight 
------------------------------- 
 
3. (C) General Manager Alex Borges of BTC (strictly protect) 
told Econoff that the blame lies squarely on the government's 
shoulders for failing to approve a single expansion plan 
submitted by OAMC in slightly over two years of operation. 
Whereas the contract called for renegotiation clauses, 
company insiders claim that the government never appreciated 
the increased aviation security costs associated with the 
September 11 terrorist attacks and the resulting decline in 
Middle East passenger traffic, but rather showed complete 
unwillingness to accept any long-term proposal floated by the 
company.  Borges pointed to the Finance Ministry in 
particular as being uncompromising during the negotiations. 
 
4. (U) In a local newspaper interview, OAMC CEO Colin Hobbs 
expressed his own frustration over the inability of the 
government to understand the scarcity of commercial financing 
for expanding Middle Eastern airports in the wake of 
September 11th.  In addition, Hobbs intimated that Omani 
officials no doubt saw major airport projects being carried 
out by the governments of Doha and Dubai and decided to force 
OAMC's hand in order to reassume control and proceed with a 
publicly financed terminal project.  Hobbs echoed separate 
comments from Borges in saying that OAMC succeeded in 
operating the airports effectively, reducing their costs, and 
enhancing their commercial viability; the only thorny issue 
in the end was building the new terminal. 
 
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The Flying Public Demanded More Change 
-------------------------------------- 
 
5. (SBU) News of the failed privatization generated mixed 
reaction around Muscat.  The business world was not greatly 
surprised that OAMC would fail to deliver on airport 
expansion after a series of difficult circumstances for the 
regional tourism industry (e.g., September 11, OEF and OIF, 
Bali bombings, SARS).  The local and regional media gave the 
matter greater attention, particularly given the 
ramifications for the government's privatization and tourism 
promotion efforts. 
 
6. (SBU) Average Omanis were, if anything, pleased with the 
news.  Most Omanis we have spoken to comment that apart from 
a significant facelift for the Muscat Duty Free shopping 
area, there were no major visible upgrades made to the 
existing terminal at Seeb under OAMC's tenure.  Moreover, the 
Omani public's skepticism toward the government is only 
exceeded by its distrust of foreign companies and the local 
burgher class represented by family firms such as the 
Bahwan's.  Much of the public therefore believes OAMC was 
likely unfairly benefiting from its deal with the government, 
and credits the Ministry of Transportation for finally 
putting an end to it.  These factors gave OAMC a serious PR 
headache, even as it tried to parlay public dissatisfaction 
with the existing terminal into some sort of accord on 
constructing a brand new terminal.  In the end this balancing 
act proved too difficult and costly for OAMC, leading to the 
company's dissolution. 
 
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The Government's Thrust 
----------------------- 
 
7. (C) For its part, the government believes that OAMC never 
fully delivered on its core promises of upgrading facilities 
and laying out a feasible plan for future airport expansion. 
Acting Director General of Civil Aviation and Meteorology 
Sultan al-Saifi (strictly protect) described to Econoff the 
current situation, whereby a 100 percent Omani 
government-owned company called OMC will assume control of 
the airports.  Following the most recent 90-day period of 
discussions, the government agreed to buy the shares of 
Capital Aviation Services.  The original handover date of 
November 17 was accelerated because of Eid holidays and 
National Day celebrations, and the assets will now change 
hands no later than November 10.  Nearly all staff members of 
OAMC are expected to remain with the government company, 
including technical and managerial personnel from BAA who may 
stay aboard for up to six months.  Plans will move forward 
for a new terminal at Seeb airport under government guidance, 
and al-Saifi left open the possibility that private investors 
might be allowed to take equity stakes in future airport 
development projects. 
 
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Comment 
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8. (SBU) Beyond the finger-pointing and the disappointment on 
both sides, this development casts a shadow over the pace and 
scope of privatization in Oman.  Earlier hailed as a model of 
privatization for the GCC, Oman's airport management 
experiment appears for now to have failed, or at least been 
dealt a significant set-back.  Bureaucratic obstacles remain 
in other privatization fields as well. One prominent American 
businessman confided that the government does not want to see 
a foreign company make too much money in a privatized 
venture, lest it be perceived as a net loss for the Omani 
people.  Other commentators view the airport development as a 
"black eye" for Oman's investment climate, even if it is more 
a perception than the overall reality. 
BALTIMORE