The southern Omani town of Salalah is better known for its tourism than for its rapid economic development. But in recent years the city’s port and free zone have become the quick, yet quiet, success stories that Gulf states hoping to diversify their economies dream of.

The emergence of the city as an industrial hub is largely down to its port. The expansion of Salalah port has helped to support the local economy, generate jobs, fuel industrial development, and support the local service sectors. But oddly, in a country where most new economic developments are planned by the government, its development was driven by interest from the private sector.

“It was really generated by private interests,” says Peter Ford, chief executive officer at Port of Salalah, the public-private company that runs the port. “It developed from a market need and that is best foundation for any business -– for someone to want to use something, rather than build it and hope it gets used.”

Salalah port

In the mid-1990s, Norway’s AP Moller-Maersk and the US-based Sea-Land approached the Omani government to discuss building a port at Salalah to service their needs and expand their network around the Indian Ocean, helping to connect Asian and European trade lines with the rest of the world.

In 1996, the government signed a deal with APM Terminals, a subsidiary of AP-Moller Maersk, which allowed the firm to build a new terminal at Salalah. Construction started in 1997 and the terminal was commissioned in November 1998, with two berths. An additional two berths had been added by 1999.

The port is owned and run by Salalah Port Services Company, which was established in 1998. AP-Moller Maersk has a 30 per cent stake in the firm, while the Omani government owns 20 per cent, the state pension fund 11 per cent, and local private sector firms 19 per cent. A further 20 per cent is listed on Oman’s stock exchange, the Muscat Securities Market.

The port, originally designed just to support ships owned by AP-Moller Maersk and Sea-Land, has since become one of the top 30 transshipment hubs in the world thanks to its unique geographical location.

Salalah lies at the meeting point of the Arabian Sea, Indian Ocean and Gulf of Aden, making it an ideal stopover point for ships on their way to Europe or Asia from the Gulf, to Asia from Europe, or vice versa. Ford sees the port as a perfect mix of private sector demand meeting government development strategy.

“It works incredibly well because it’s private interests focused on returns,” he says. “There has been this very fast evolution now from 1999 when we started operating, and it really was focused on trying to service Maersk and Sea-Land, to a private operator in the mid-2000s where really we wanted as many customers as we [could get].”

In May, the Ministry of Transport and Communications awarded a $143m contract for the construction of a new general cargo and liquid bulk terminal at the Port of Salalah. The new terminal, to be built by Dutch-based Archirodon Construction, will increase the port’s dry bulk cargo handling capacity to 20 million tonnes and liquid cargo to more than 6 million tonnes annually.

If ports have been a key part of the development strategies of the Gulf states, then free zones represent a logical extension of those plans. Again, the biggest success story in Salalah’s free zone, which was set up in 2006, came not so much from government initiatives, but from a private investor looking to capitalise on the area’s strategic location.

Octal uses Salalah’s position to produce 927,000 tonnes a year (t/y) of the basic plastic polyethylene terepthalate (PET). But rather than source the basic chemicals used to make PET domestically like other petrochemicals producers in the region, it makes use of Salalah’s port to import the necessary feedstocks, process them into sheet and pellet PET, before re-exporting the final product.

Today, the Muscat-based company accounts for 10 per cent of all non-oil exports from the sultanate and 2 per cent of gross domestic product growth in Oman.

Octal set up its business in Salalah just as the free zone was being set up, says Ali Tabouk, chief operating officer at Salalah Free Zone (SFZ), the state-owned company formed in 2006 to draw investment in chemical processing and manufacturing into Salalah. “They came to the free zone just after the royal decree to form the zone was signed,” he says. “They set up during the transition period when the zone was being put together and they showed how Omani systems can be flexible.”

Business incentives in Oman

Octal was the first company to make use of free zone status, which allows for full foreign ownership of businesses, no corporate taxes, and the repatriation of all profits. The government also offers preferential loans to companies making use of the free zone. In its first five years of full operations, the free zone has attracted $3.5bn of investments from 18 investors, creating 1,200 new jobs.

“By offering these incentives, the country isn’t directly benefiting financially from the free zone,” says Tabouk. “But it is creating jobs [and] transferring technical knowledge to Omanis. It is about attracting business into the country, giving them a reason to come here rather than somewhere else in the Middle East.”

Deutsche Post DHL, the German logistics giant, is in the process of establishing a major logistics hub in the free zone. The company is also expected to announce a major new venture at Salalah in the near future. 

The city is not limited to trade and industry. Future expansion at the port will include building a breakwater to separate its container business. On one side, huge containers will pass in and out with their cargo. On the other side, if all goes to plan, cruise ships will stop off on their way around the coast, helping to support Salalah’s swelling tourism trade.

The industry is poised for rapid growth in the coming years, but its success depends in part on Salalah’s ability to attract tourists throughout the year. Currently, the city’s popularity is limited to the khareef, or monsoon season, which lasts for about one month annually. This makes it difficult to justify a major new tourism development in the area, says a real estate developer in Muscat. “What we need to see is the development of a market for conferences, something that will keep the hotels, apartments and resorts occupied year round,” he says.

Benjamin Cullum, general manager of the Oman branch of UK real estate agency Hamptons, says that Salalah also holds huge appeal as a place to live. “Out of all the places, for me Salalah has the greatest potential,” he says. “It’s a perfect location – the closest port to Africa, the closest to the Red Sea, it’s easiest to get into the Indian Ocean.”

To support Salalah’s economic growth, Muscat is taking steps to improve transport links and social infrastructure. The main airport is in the process of being revamped and expanded to accommodate 7 million passengers a year at a cost of more than $2.5bn. A joint venture of the local Galfar Engineering & Contracting and India’s Larsen & Toubro was awarded the main construction contract for Salalah aiport in November 2010. The project is expected to be completed in first quarter of 2014.

In 2010, the Tourism Ministry announced that it had signed an agreement with Kuwaiti real estate developer Al-Reef to build a new shopping mall in the city. The facility is scheduled to open in early 2013.

However, the development with the biggest potential to overhaul Salalah’s fortunes is Oman’s planned railway and its integration in to the wider GCC network, Ford says.

“If we can complete a facility to reach the markets of the GCC five or six days faster than they can today… it’s of huge value. It will capture some people’s imaginations, the ability to reduce their supply chain.”