Saturday, October 11, 2008

The ferry saga continued – Business Consultant Essa to the rescue!

I should have done a post on this last week, but, ah, work sometimes gets too crazy.

Essa Al Zedjali, Editor of the hard-hitting Times of Oman, and (according to the Times of Oman) one of Oman’s most eminent intellectuals and authors, took issue last week with the pricing of the infamous new ferries, saying they were far too expensive and should cut their prices, and effectively asking for public money to subsidise the ferries even more than they are already... (see below). I actually agree with him.

I’d have preferred he comment on the lack of jetties, the half-assed decision to buy them in the first place, the lack of trained Omanis to run it, and who's actually paying for all this, but let’s get the financials right first!

The details are below, but the bottom line is:
- Almost no matter what they charge, the ferries are highly uneconomic. The cheapest way to operate the boats is to, er, not operate them at all.
- The most likely face saving 'solution' is to write-off the capital investment of the boats and jetties, and then try to cover the visible running costs through fares. Thats what the NFC is for, and is trying to do at least on paper. Even then, the Government is effectively subsiding the tickets by a HUGE amount.
- By my estimate, the true cost to the Government of a return ticket is around 400 rials per person if they only run 3 times a week and get some money from transporting cars eventually. Not counting the 90% fuel subsidy, the cost is around 140 rials per person per trip.
- To break even just on running costs, with generous assumptions on occupancy and cheap fuel, prices would need to be ~twice what the NCA currently charge.

Taking account of the true value of diesel, running the trip only 3.5 times a week, the Government will need to provide an effective annual subsidy of ~12-13 million rials a year, mostly through cheap fuel and providing the boats for free.

Ignoring the cost for the boats and jetties, and the fuel subsidy, the Government will still have to subsidise operations to the tune of 1.5 to 2 million rials per year.

Countries all over the world subsidise their ferry’s for social benefit reasons. Its obvious from the basic calculations below that Oman will have to do the same. I think the real answer is that the subsidy should be transparent, so people are aware that it is NOT an economic business. And you have to avoid giving the ferry company principals a blank cheque to pay themselves a fortune for running a money losing business.

At current fares, they will only pull in at most about 1 million a year, and with Essa’s suggested prices about half that. Compared to the costs, it makes no real difference to the real subsidy either way.

So, as I said on this blog previously, this is a great trip, mostly paid for by the Ministry of National Economy. And I’m almost afraid to say, I amazingly find myself agreeing with Essa. (I know, I find it hard to believe too. That’s why I had to run the numbers myself!) The subsidy needed is so high, that the price of the tickets is almost immaterial. Better to make them as cheap as you can, at least for Omani’s or residents, and fill the boat. Make up some of the money in the Khasab hotels, and on food and booze.

Personally, I’d take the second ferry and turn it into a floating Casino, based out of Khasab. And maybe think about running the ferry to Dubai and or Iran, as well as the Muscat-Khasab route.

I'm just glad I don't own the ferries... But I wish I was able to be Chairman of the company that does, and pay myself heaps of Government money for running a loss making business. Nice work if you can get it.

Picture: One of Oman's ferries in its most economic setting: out of the water, unused.

I decided to try and guestimate the breakeven price for the tickets.
Capital Costs
2 Ferries: reported purchase price ~26 million rials
Jetties: I dunno, but lets say another 5 million
Assuming a 6% discount rate (seeing as how the Government effectively owns them and can borrow the money pretty cheaply), and a 20 year life, that means you need 2.6 million rials per year to pay all that off.

Operating Cost
Crew of 12 x 2 ferries, manpower to run the jetties, some marketing people, … Probably about 1 million rial per year at least
Maintenance: Those ferries are pretty high tech: say 200k per year
One Ferry return trip Muscat to Kasab burns about 60,000 litres of diesel. Even at Government subsidized rates of 130 biaisa per litre, that’s 7,800 rials per return trip. (You should note, at current international rates for diesel, the Government could instead sell that same diesel for ~60,000 rials!).

If we do a trip every day (just to try and get the investment back by working the ferries as much as possible) that’s 2.8 million rials worth of subsidised fuel per year.

So, combining the above, it means every trip costs the owners ~18,000 rials. Just to break even. Running on highly subsidized fuel. What a deal.

Now, the income side.
The boats seat ~200 people. I don’t have the exact numbers, but lets say 10 VIPs, 20 1st Class, and 170 Tourist class. At the current rates from NFC, assuming VIPs don’t pay, and a 90% capacity, they receive ~8,300 rials in fares if they fill the boat. At Essa’s suggested rates they would take in at most ~3,700 rials.

So, even with current NFC rates they lose at least 10,000 rials per trip, 3.6 million rials a year. If they cut them further as suggested by Essa you’d lose around 15,000 rials a trip, or 5.3 million a year. (Note: If they had to pay real prices for the fuel though, that would amount to annual losses of ~27 million rials a year, and they may as well give away the seats it makes so little difference).

Of course, if the boats are empty at current prices, Essa’s absolutely right that you are probably better of cutting prices to fill the boat. The NCA’s original prices seem to be designed to roughly cover visible running costs based on subsidized fuel and assuming almost full occupancy. Their latest fare cut is probably just to try and lose less money and get more than 5 passengers a day. And of course the last thing you actually want to do is run the boat at all, because it just burns more cash!

Opinion: Times of Oman 5th October 2008
Two giant ferries in the Gulf of Oman!
Essa bin Mohammed Al Zedjali
Sunday, October 05, 2008 11:57:50 PM Oman Time

A FEW weeks ago I had read a news item in local papers that the second ferry named ‘Hormuz’ had joined the fleet of the government-owned National Ferry Company (NFC). A few days ago the local papers reported that the NFC has reduced the Muscat-Khasab-Muscat ticket price from RO74 to RO44 for the economy class and to RO85 for the first class.

The news item has been warmly received by the citizens. But we still demand that the company offers further reductions which are more in line with the income of the citizens and take into account the cost of living and the price hike that has affected people from all walks of life. This reduction is demanded because the two-way air ticket costs only RO49 for the 45-minute flight while it takes 6 hours by ferry.

A committee comprising representatives of the Ministry of Tourism, the Ministry of Transport and Communications, the Ministry of Commerce and Industry, the Ministry of National Economy and Oman Chamber of Commerce and Industry should have been formed before the launch of the ferries to determine the right prices of tickets. But it seems the board of the National Ferry Company has fixed the prices without taking into account the opinion of the said authorities.

This shows that the decision to fix the prices of tickets is taken randomly by the NFC board, without any consultation or coordination with the government authorities concerned, which has shocked and upset the citizens and made this issue the talk of the town during the last two months.

This project is of vital significance and aimed at facilitating the movement of citizens and residents to and from the northern coastal areas as part of the government’s wise policy of boosting domestic tourism. For this purpose, the NFC should have financial support from the government in order to enable it to run such a project safely and efficiently. The company could, at present, reconsider the prices of tickets, though it may increase them gradually later on.

We once again appeal to the National Ferry Company to reconsider the ticket prices and suggest a two-way ticket of RO20 for adults and RO10 for children for the economy class provided the ticket price does not include provision of food and drinks. We also suggest that the two-way first class ticket should not cost more than RO50 and should not include food and drinks. The passengers could have their meals at the coffee shops on the ferry.

By doing this, the NFC could rightly achieve the objectives of its logo "navigation in nature" as many people will prefer to travel within the country by two of the fastest ferries in the world in complete comfort and safety.


  1. That is awful, did they not do any economic analysis at all before implementing the project? I reckon you should offer your consultancy services to Ministry of National Economy Mr. Dragon, they desperately need it based on this example.

  2. You should do a post on how these things actually manage to get themselves approved.

    Who's idea was this originally and how on earth did he (probably, he) get other people on board? (boom boom)

  3. By the way, i heard that there are more ferries to come and the no of routes is 5...

  4. Contrary to common belief, the people at the Ministry of National Economy, Ministry of Finance and even the Ministry of Commerce are actually really good at financial modeling and analysis. Despite that, the government does seem to take a lot of decisions that leave people scratching their heads. I don't think it's because of lack of planning. It's just that the people running the government (or is it just these ministries), don't believe that they need to justify their actions to the public. A minister only gets to confront the members of Majlis A'Shura once a year, if at all. And even then, the members have to submit their questions in advance so the ministers goes totally prepared. No surprises allowed.

    In an alternate reality version of Oman, the government would actually explain why it is still going ahead with the purchase of a $60 million high speed ferry even though the projections show it will never make money to even cover its running costs. In Oman, they just buy the ferry and never discuss why they did it.

    It's the same with our gas. Why are we still committing to long term gas supplies to industries when we no longer have the supply to provide it? Why are we importing gas and selling it cheap locally, while our local gas is sold below market prices? Nobody's pointing fingers at the government to demand a stop. All what we need is an explanation. We want to be as convinced as they are. Unfortunately, they they see it is that we are too dumb to understand, so they don't even bother to explain.

  5. Muscati, well done, best explanation of the country malaise I ever read.

    UD, riddle us this, why is this National Ferries Company owned by the Ministry of National Economy instead of the Ministry of Transport?

  6. The sales company gave me a freebie journey otherwise I would have missed the fun . Reading here the Ministry of National Economy owns each ferry. There are various reports of costs on this blog of 26millionOmaniRial for two? to elsewhere comments of 60milliondollar each. The sales team says there will be a total of five ferries during a presentation they gave on board. The sales team said that with the total of five the routes will include down to Masirah, Salalah and remarkably, Thumrait . Could somebody explain why there was not a single Omani member of staff – among those on the bridge or on the Oman Air ‘cabin crew’ or the Oman Air buffet attendants .

  7. Ali,
    I presume someone did do economics, but it would all depend on the assumptions you make especially on running costs and how popular the route will be. When the ferries were ordered in around 2004 the true price of diesel would have been a lot less., and running costs underestimated.

    It also depends on how much allowance is made for other benefits (eg employment, increased revenue in Musandam)

    No idea which tender board reviewed this decision or who was behind it. It would be brilliant to be able to see the economic justification that was used to justify the original order/tender. Anyone?

    Yes, more to come, but as these are operating different routes (shorter) the costs are probably less.

    Yes, it’s the assumption that no one in the public deserves to know anything that galls. And I agree its similar to the gas (although next to those deals, the money for the ferries is peanuts) with no transparent discussion of costs/benefits. But, of course, its not your money Muscati - no taxes also means no representation!

    Because the MONE has all the money I guess!

    Everyone seems to agree the deal was $66 mln for 2 ferries built in Australia by Austral. That’s ~26 mln rials total price for 2.

    Oman signed the $66 million deal for the vessels with Austal Ships in May 2006 following a competitive international tender process.


  8. Well – it appears that 6 months after all the comments here the Ferry Company still hasn’t got its act together. Read the comments from the type of well travelled tourist Oman is looking for His comments about the promotion for the multi million ferries makes one wonder who is has responsibility for their success/failure

  9. Nice of you to notice OV, that this was a bit foretold.

    Yes, still a total and utter cock-up, I'd say. Nice to see the little bit of power from independent media too. This guy just called it as he saw it...

  10. Yes these projects are expensive to run and often, are not financially feasible, but the projects are often established in interest of wider social benefits that are derived over a long period of time. With this ferry service Hotels at Khasab are maintaining a very high occupancy levels and encouraging related downstream economic and commercial activities. These projects are often an excuse to stimulate other economic activities. For example, try the Channel Tunnel, the project is still not viable even after all these years, but carries a lot of other economic and political benefits that cannot be entirely measured on a calculator. Though over a period of time, beneficial aspects come to light over a longer period of time.

    Oman is a developing country going through a certain phase of building experience and trying to do best possible. This best possible approach contextually in the present world may not seem the very best but it is part of its natural learning. This learning is accelerated when questions are raised and perspectives are accompanies with creative criticism.


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