GLOBAL MARKET BRIEFINGS
Doing Business with
A Guide to Investment Opportunities and Business Practice SECOND EDITION
Series editor:
Anthony Shoult Consultant editor:
Dr Marat Terterov Associate publisher:
Jonathan Wallace
Published in association with: Economic Development Board, Bahrain Big On Group UK Trade & Investment
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Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published 2005 by GMB Publishing Ltd.
© GMB Publishing Ltd. and contributors Hardcopy ISBN 1-905050-02-X
E-book ISBN 1905050526
British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library
Contents Foreword HE Abdulla Bin Hassan Saif Minister of Finance and National Economy and Acting Chief Executive Officer, Economic Development Board
xvii
Foreword Mr Esam Janahi, Chairman Bahrain Financial Holding Company BSC (c)
xix
List of Contributors
xxi
Part One: Country Background 1.1 1.2 1.3 1.4 1.5
Geography and History 3 Economic Development Board The Political System 6 Economic Development Board Bahrain’s Economy 11 Denzil Pereira, Senior Economist, Arab Bank plc (OBU), Bahrain Foreign Trade 21 Ministry of Commerce and Industry, Kingdom of Bahrain The Bahrain–US Free Trade Agreement 30 Ministry of Finance and National Economy, Kingdom of Bahrain
Part Two: The Investment Climate 2.1
2.2
2.3
Current Strategies in Attracting Investment and Fostering Development Economic Development Board Investment Flows in Bahrain Rima M Bhatia, Group Economist, Gulf International Bank, B.S.C. The Development of Corporate Governance in Bahrain Dominic O’Neil and Roly Denman, Trowers & Hamlins Law Firm, Bahrain
41
48
58
Contents
2.4 2.5
Living and Working in Bahrain Leon Fabrikanov, Ecka Granules GmbH & Co Market Research in Bahrain Aldrin Stephen Luiz, Research Director, InCite Marketing Research WLL
64 69
Part Three: Bahrain: The Regional Financial Hub 3.1 3.2
3.3
3.4
3.5
3.6 3.7
Bahrain: The Financial Capital of the Middle East Bahrain Monetary Agency The Regulatory Framework for the Financial System Dominic O’Neil and Roly Denman, Trowers & Hamlins Law Firm, Bahrain Bahrain as an International Centre for Islamic Banking Farah Khalid, Supervising Consultant, Islamic Financial Services Group, Ernst & Young, Bahrain Retail Banking in Bahrain: An Overview Elham Al-Koohiji, Project Manager, Research & Development, Business Development Division, Bank of Bahrain & Kuwait Bahrain Financial Harbour: Reinforcing Bahrain’s Position as the Financial Capital of the Middle East Bahrain Financial Harbour Company Profile: Gulf Finance House Company Profile: Stratum
77 84
93
103
109 116 120
Part Four: Prospective Sectors for Investment Natural Resources 4.1 The Oil and Gas Sector Mohammed Al Sayyad, Director, Economic Research, Ministry of Oil, Kingdom of Bahrain 4.2 Bahrain’s Electricity Sector Ministry of Electricity and Water, Planning and Studies Directorate, Kingdom of Bahrain Manufacturing Sectors 4.3 Bahrain’s Aluminium Industry Taimour Raouf, Senior Public Relations Officer, Aluminium Bahrain 4.4 Company Profile: Midal Cables 4.5 Company Profile: Bahrain Atomisers International BSC Services 4.6 Bahrain’s Telecommunications Sector Bahrain’s Telecommunications Regulatory Authority (TRA) 4.7 Bahrain’s Telecommunications Sector: The Regulatory Framework Bahrain’s Telecommunications Regulatory Authority (TRA)
127
135
138
147 152 158 164
Contents
4.8
Tourism Development Department of Tourism, Ministry of Information, Kingdom of Bahrain 4.9 The Residential Property Market Susan Neal, Cluttons, Bahrain 4.10 The Commercial Property Market Andy Hinson, Cluttons, Bahrain 4.11 The Insurance Environment Richard Morrison MA ACII, Country Manager, Bahrain, Norwich Union Middle East 4.12 Company Profile: The Bahrain International Circuit
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179 184 189
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Part Five: Bahrain Business Guide 5.1
5.2
5.3 5.4
5.5
5.6
5.7
5.8
The Legal Regime and Regulatory Environment for International Business Dominic O’Neil and Roly Denman, Trowers & Hamlins Law Firm, Bahrain Business Structures and Company Incorporation Hugh Stokes, AlMahmood & Zu’bi, Attorneys and Legal Consultants, Bahrain Accounting, Auditing and Taxation in Bahrain Doug Tait, KPMG Employment Law and Work Permits for Foreigners Hugh Stokes, AlMahmood & Zu’bi, Attorneys and Legal Consultants, Bahrain Commercial Agency Agreements Hugh Stokes, AlMahmood & Zu’bi, Attorneys and Legal Consultants, Bahrain Legal Regulation of the Ownership of Land and Real Estate Dominic O’Neil and Roly Denman, Trowers & Hamlins Law Firm, Bahrain The Legal Environment and Settlement of Disputes Hugh Stokes, AlMahmood & Zu’bi, Attorneys and Legal Consultants, Bahrain Forms of Intellectual Property and their Registration Mazin M Ajawi, Intellectual Property Manager, Abu-Ghazaleh Intellectual Property, TMP Agents, Bahrain
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214
222 230
235
240
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Part Six: Appendices Appendix I: Transport Infrastructure Appendix II: Contributor Contact Details
255 261
Index Index of advertisers and sponsors
269 279
Ahli United Bank: A banking solution for the Gulf and beyond Ahli United Bank BSC (AUB) is a fully-fledged commercial and investment banking group, providing wealth management, retail, corporate, treasury, offshore and private banking services through wholly-owned subsidiaries in Bahrain and the UK, and in Kuwait, through the Bank of Kuwait and the Middle East, in which it has a 48 per cent stake. AUB was formed following the merger of United Bank of Kuwait Plc and Al-Ahli Commercial Bank in 2000. Based in Bahrain, AUB has strengthened its position in the regional markets and its strategic prospects by expanding its base of experienced staff, capital and technical resources. Today, AUB is able to offer a comprehensive range of services to a wider customer base in the Gulf and beyond, and benefits from diversified sources of risk income and business flows with Gulf counterparts. AUB’s stated mission is to create an unrivalled ability to meet customer needs, provide fulfilment and development for staff and to deliver outstanding shareholder value. AUB’s strategy is to expand through both organic growth and acquisition, in order to act as a ‘multifaceted financial bridge’ between the international financial markets and its Gulf clients. To this end, AUB continues to develop and invest to increase its ability to acquire new businesses and rapidly integrate them with the bank’s systems. This has helped accelerate progress in the delivery of financial services and penetration into targeted geographical markets. The business area strategies are geared to achieve stable and sustainable income growth, operational competitiveness, a higher quality of service, maximum cost efficiencies and greater risk assessment capabilities. Clearly the bank’s strategic direction has yielded excellent results. AUB has continued to show a solid increase in revenues and assets, together with a substantial reduction in its costincome ratio over the past four years. Some of the highlights of the bank’s performance have been:
• net profit has grown from US$40 million in 2000 to US$87 million in 2003; • total assets have grown from US$3.51 billion in 2000 to US$6.27 billion in 2003; • cost-income ratio has come down from 50.2 per cent in 2000 to 39.4 per cent in 2003. In 2003, AUB registered strong financial progress, with net profit growing by 46 per cent and total assets growing by 22 per cent year on year. This growth was underpinned with very solid capital adequacy and liquidity ratios. The cost-toincome ratio also improved due to enhanced revenues and continued rationalization of non-essential expenditure. Solid performance across all the bank’s activities have contributed to this result and reflect the progress made in developing business lines, despite the competitive market environment. 2003, was also marked by an increasing external recognition of AUB’s financial performance and risk profile, AUB received a long-term investment grade rating of BBB+ (stable) from Fitch. The bank was also selected Bank of the Year for Bahrain by The Banker in 2003 and 2004. It is also interesting to note that AUB’s shares are currently the most actively traded stock on the Bahrain Stock Exchange and one of the largest in terms of market capitalization. AUB also has a 40 per cent share in Ahli Bank QSC (formerly known as Al-Ahli Bank of Qatar QSC), a commercial bank in Qatar with the second largest capital base, post 100 per cent participation by AUB in its capital increase. AUB has also entered into a joint venture with Bank Melli Iran and Bank Saderat Iran, and formed Future Bank BSC (c), a joint venture commercial bank in the Kingdom of Bahrain, with an equal one-third shareholding. Going forward, AUB will continue to pursue new growth opportunities while remaining focused on strict cost and risk management, thereby maximizing shareholder value.
The Arab Bank Group The Arab Bank Group is one of the principal financial institutions in the Arab world and ranks among the leading international banks in terms of equity, earnings and assets. Established in 1930 in Jerusalem, Arab Bank’s general management was subsequently moved to Amman in 1948 and was later reincorporated in Jordan as a public shareholding company. The Arab Bank Group has a diversified network of over 400 branches, subsidiaries, affiliates, representative offices and sister institutions worldwide. It is engaged in providing a wide variety of financial services to individual, corporate and institutional customers and government agencies. These services include corporate, institutional, private and retail banking. Arab Bank takes pride in its professional and experienced global team, which is committed to further solidifying the future success of the bank. Ongoing efforts continue to be made in providing premium quality services, increasing operational effectiveness, fortifying the strategic position, and further building on the bank’s 75 years of outstanding achievements. A worldwide network Arab Bank has maintained a policy of steady geographic expansion from its earliest days. In our first decades we concentrated on establishing a solid branch network throughout the Arab world, moving steadily from Palestine into Jordan, Syria, Lebanon, Egypt and Iraq. In the 1970s the rapidly expanding oil economies of the Gulf were a major focus. From 1960 onwards we began to take our services out to Arab individuals and communities around the world. We were the first Arab financial institution to establish a presence in Switzerland with the opening of Arab Bank (Overseas) in Zurich in 1962 and Geneva in 1964. These, plus other European branches in the United Kingdom, France, Italy, Greece, Cyprus and sister companies in Austria and Germany, have subsequently been joined by our branches in the United States and our wholly-owned subsidiary in Australia. The opening of our representative offices in China and most recently in Kazakhstan in addition to our branch in Singapore are a recognition of the growing importance of economic ties between Asia and the Arab world. Today we have a presence in every Arab country in which private sector banking services are permitted – a global network of more than 400 branches and offices on five continents – and we are still growing. Arab Bank Bahrain Arab Bank Bahrain established its commercial operations in Bahrain in the late 1950s, and since then it has been providing all commercial services to its clients in Bahrain. Furthermore, Arab Bank established its Offshore Banking Unit in 1975 to participate in the mega projects outside Bahrain. Today this Unit has a specialized team working in its Corporate and Project Finance, Financial Institution, Sovereign and Islamic Banking and Treasury sectors. This Unit covers, in addition to GCC countries, subcontinent countries, CIS countries, Iran, Turkey, South Africa and Central Europe.
Spreading the Seeds of Growth In 1930, when Arab Bank was established in Jerusalem, our capital was of over US$ 3 billion and a network of 400 branches, subsidiaries and affiliates spanning the globe. We are one of the largest financial institutions in the Arab world, and we continue to grow in order to meet the demands of our clients.
www.arabbank.com
AQUAMEDIA
15 thousand Palestinian Pounds. Today, we have grown with an equity
Message from HE The Governor, Bahrain Monetary Agency The Kingdom of Bahrain is the financial capital of the Middle East, enjoying a geographical and time-zone location mid-way between the Asian and European markets. The economic and financial environment, amongst the freest in the world and first in the Middle East, is underpinned by a transparent legal system. The currency is fully convertible and has been pegged effectively to the US dollar since 1980. There is no corporate or personal income tax and capital movement is unrestricted. Intellectual property rights are recognized and protected. The Bahrain Monetary Agency (the central bank of the Kingdom) is the single regulator for the whole financial sector and oversees a clearly defined regulatory and supervisory framework constructed to the highest international standards. BMA currently licenses over 360 banks, insurance companies and other financial institutions incorporating local, regional and international names. These institutions, applying both conventional and Islamic principles, offer a wide range of services. The Kingdom of Bahrain is internationally regarded as the regional banking and financial centre, as well as a global leader in Islamic banking services. The consolidated balance sheet of the banking sector alone is over US$100 billion. The Bahrain Monetary Agency has gained international credibility due to its rigorous supervisory and regulatory regime, which is based on latest international standards of best practice. Consequently Bahrain enjoys a long-standing, worldwide reputation as a safe place in which to conduct business. Ahmed bin Mohammed Al Khalifa Governor
Foreword Long recognized as a regional pioneer in the fields of education, healthcare and economic diversification, Bahrain is once again in the process of reinventing itself to confront the new challenges posed by a fast growing population and depleting natural resources. Under the leadership of HM the King, Shaikh Hamad bin Isa Al-Khalifa, and with the support of his government headed by HH the Prime Minister, Shaikh Khalifa bin Salman Al-Khalifa, HH the Crown Prince Shaikh Salman bin Hamad Al-Khalifa, and the additional support of the people of Bahrain, the country has embarked on an ambitious programme of political and economic reform. In the last few years, Bahrain has witnessed far-reaching changes that have altered its political reality, transforming it from a sheikhdom to the Gulf ’s first constitutional monarchy. The nascent democracy has had two immediate effects: it has led to the forging of a partnership between Bahrain’s leadership and civil society, which has given rise to an all-inclusive national dialogue; and it has set the stage for sweeping economic reforms. Today, Bahrain is putting in place the mechanisms and policies that will allow the economy to realize its potential. Bahrain is pursuing a comprehensive approach to development by focusing on two principal objectives: first, strengthening the Bahraini labour force to constantly improve its competitive position, and second, spurring the creation of high value added private sector jobs. Achieving these objectives requires reform in three key areas: labour, education and the economy. What this translates into is reinforcement of a business environment that is highly conducive to free enterprise, and an economy equipped to compete regionally and globally through its highly-skilled, highly-motivated human capital. I thus invite you to be a part of this promising future that is unfolding here in our country and explore the various opportunities that Bahrain presents as gateway to the region. HE Abdulla Bin Hassan Saif Minister of Finance and National Economy Acting Chief Executive Officer Economic Development Board
Foreword The Kingdom of Bahrain stands out in the Arab world as a pioneer of economic, social and political reforms. Bahrain has laid out the path for economic reforms much ahead of others in the GCC. Credited with a high GDP growth rate, which Moody’s has forecast to be in the range of 5–6 per cent in the medium term, the Kingdom has been ranked as the freest economy in the Arab world by the UN report on economic freedom, and in the Middle East and North Africa (MENA) region by the US-based Heritage Foundation. According to the provisional data by the Bahrain Ministry of Finance and National Economy, GDP growth rate in 2003 was to the tune of 6.8 per cent compared with 5.2 per cent in 2002. Bahrain has a highly qualified workforce, ranked first in the Arab world in the UNDP Human Development Index (2002). The Kingdom is also the undisputed hub of the financial industry in the Middle East. Thanks to its policies of fiscal prudence and transparency in its policies, Bahrain continues to attract foreign, regional and local financial institutions. According to the Bahrain Monetary Agency (BMA), the region’s single most well-known regulator, there are more than 360 financial institutions in Bahrain. At the end of September 2003, the total asset size of the consolidated balance sheet of the banking system in Bahrain stood at US$94.8 billion, an increase of 28.1 per cent compared with US$73.9 billion in 2002. Oil still contributes a large share to Bahrain’s GDP, but the non-oil sector is experiencing an accelerated pace of development. The Kingdom, like many other countries in the GCC, is actively pursuing economic diversification to reduce dependence on oil and the results are increasingly being felt with the non-oil sector’s contribution to the GDP on the rise. The development of the non-oil sector also entails attracting inward investments. Bahrain has an array of economic sectors that are ideal investment avenues for potential investors. These include the financial industry, manufacturing, tourism and a host of others. The government
Foreword
of Bahrain, in partnership with a dynamic private sector, is actively engaged in creating investment avenues for investors from across the world. The Kingdom, the only country in the GCC that has a Free Trade Agreement with the USA, offers a tax-free environment to investors. Investors are permitted to own 100 per cent and there are no restrictions on the movement of capital. In keeping with its status as the financial industry hub of the Middle East, Bahrain is now developing the US$1.3 billion Bahrain Financial Harbour (BFH), which will offer a vantage point for global financial industry players keen on the region. BFH is envisaged as a mixed-use development, offering opportunities to invest in the financial sector, real estate, tourism, financial media-related industries and leisure. The Kingdom of Bahrain offers world-class infrastructure, technology, education, healthcare and a cosmopolitan lifestyle. With a proactive government and a vibrant private sector, the Kingdom is the ideal choice for investors. Mr Esam Janahi Chairman Bahrain Financial Holding Company BSC (c)
Foreword I am delighted to introduce this edition of Doing Business with Bahrain, the latest in the Global Market Briefings line of UK Trade and Investment endorsed publications on how best to approach business in this market. I know that the previous version was well received and am certain that this updated edition will prove just as successful. We have seen Bahrain’s reputation as a regional hub grow in recent years. The Tourism, Financial Services and Healthcare sectors are particular areas of current direct focus, while Bahrain’s traditional role as a regional trading point, reinforced in modern times by the Causeway linking it to other regional markets on the mainland, remains strong. Diversification in the market has paid off for Bahrain. Economic growth is solid with over 6% seen in 2004. Work on large-scale government projects picks up, and the signs look good for a further increase in 2005. We are fortunate that many British companies have been doing business with Bahrain for many years, ensuring a continued high business profile here for the United Kingdom. The recently opened Bahrain Investment Centre, a joint initiative between the Ministry of Commerce and Bahrain’s Chamber of Commerce and Industry, paves the way for a seamless introduction to the business world for the new investor. This, and recent moves by the Economic Development Board to attract investors and encourage foreign business participation, are to be commended. The US/Bahrain Free Trade Agreement (FTA), signed in 2004 is expected to generate increased interest and activity in the market, as will the conclusion in due course of an equivalent EU/GCC FTA. Doing Business with Bahrain brings together in one handy reference work a great deal of useful information for newcomers to the market. A breakdown by sector industries, followed by practical advice on living and working here, makes for a useful guide to this vibrant and friendly Kingdom where exciting market opportunities are to be found for those who look. Doing Business with Bahrain is undoubtedly useful for newcomers to Bahrain’s market – but those of us who are
Foreword
already familiar with the local business environment will also find something of interest. I commend this useful publication to you and would encourage UK companies to contact my trade and investment team who stand ready to welcome you to our market. For further information on how we can help you succeed in Bahrain, email the head of my trade team:
[email protected].
H.E. Robin Lamb British Ambassador to the Kingdom of Bahrain
List of Contributors AlMahmood & Zu’bi was established in 1971 by Mr Hatim S Zu’bi, Barrister-at-Law, and specializes in banking, company and commercial law and arbitration. E Hugh Stokes of the law office AlMahmood & Zu’bi has practised law in the Arabian Gulf for over 30 years. He received an MA from Oxford University and is a Solicitor of the Supreme Court of England and Wales. Aluminium Bahrain (Alba) is a 526,000 tonnes per annum aluminium smelter. As well as its reduction lines and cast houses, the company has a dedicated carbon department and a 1500MW power plant. A 450,000 tonnes per annum coke calcining plant is also in operation at the company’s marine terminal. The company was officially opened in 1971 and its shareholders, today, are the Government of Bahrain (77 per cent), SABIC Industrial Investments (20 per cent) and Breton Investments (3 per cent). The entire plant operates to the Environmental Management System standard ISO 9001:2000 and the cast houses and marketing functions are also operating to the ISO 9002 Quality Management System. Alba’s Line 5 Expansion, due for completion in 2005, will expand Alba’s annual production by a further 307,000 tonnes per annum, making it the largest smelter in the world outside of eastern Europe. The US$1.7 billion expansion includes a new power station, carbon, cast house and other facilities. Abu-Ghazaleh Intellectual Property (AGIP) was established, as TMP Agents, in 1972 in Kuwait. Since then it has devoted its efforts to promoting the importance of IP protection throughout the Arab countries. AGIP can now not only boast being the largest IP firm in the region with 18 offices in the Arab countries and a network of associates that are the equal of any firm in the world, but also the fact that its advice
List of Contributors
and encouragement to the governments of the region have frequently played a significant role in the introduction of new laws. Operating from our central headquarters in the Jordanian capital of Amman, AGIP is dedicated to providing excellence in the quality of services it renders, the quality of people it employs and the ethical and professional approach it adopts. As a member of Talal Abu-Ghazaleh Organization (TAGO), its licensing department has access to a database made up of thousands of clients across the Arab countries and around the world, providing it with the capabilities to find the right partners for each licensing and franchising venture. To ensure services of the highest quality, AGIP’s 21 offices report to its regional office in Amman, Jordan. In addition to monitoring the administrative and technical work of the offices, the Regional Office provides them with a full range of services including quality control, training, technical know-how, consultations, financing and state-ofthe-art communication technology through its own servers. The centralized accounting system at the Regional Office enables clients to attend to financial matters easily and effectively through a single contact. In July 2005, Arab Bank will celebrate its 75th year of operation. The bank has been, and will continue to be, a pillar of the Arab region’s economies, safeguarding the mission for which Arab Bank was established by its founder, the late Abdul Hameed Shoman, who aimed to build a pioneering financial institution to serve all Arab countries and to cover the most important financial centres in the world. In the 21st century, Arab Bank will remain loyal to its mission and will continue to distinguish itself by protecting its clients’ interests, meeting their financial needs and helping them to reach their goals. In 2003, the Arab Bank Group’s net income was US$227.7 million, its total assets stood at US$24.5 billion and shareholders’ equity at US$2.9 billion. The Bahrain Monetary Agency (the central bank of the Kingdom) is the single regulator for the whole financial sector and oversees a clearly defined regulatory and supervisory framework constructed to the highest international standards. BMA currently licenses over 360 banks, insurance companies and other financial institutions incorporating local, regional and international names. These institutions, applying both conventional and Islamic principles, offer a wide range of services. The Bank of Bahrain & Kuwait (BBK) is a Bahrain Stock Exchange-listed shareholding company that was established in 1971. The Bank began operations in 1972 with a capital of US$2.5 million.
List of Contributors
Today, it has grown to become one of the largest commercial banks in Bahrain, with a capital base of more than US$300 million and a strong regional presence. In addition to 18 domestic branches, BBK also has a branch in Kuwait, as well as two branches in the Republic of India and a representative office in Dubai, United Arab Emirates. BBK provides a full range of lending, deposit, and treasury and investment services to various sectors of the domestic and regional markets, using state-ofthe-art technology. The Bank plays a major role in financing infrastructure and industrial projects in Bahrain and the Gulf, while also carrying a wide array of products and services that cater to the needs of individual borrowers, depositors and investors. Elham Al-Koohiji is Project Manager in the Business Development Division and has been with Bank of Bahrain and Kuwait for three years. Cluttons is a private partnership, which can trace its origins to 1765 when it was originally founded in the UK. Since opening its first Middle East office in 1976, Cluttons has established itself as one of the leading firms of property consultants operating in the region and now has an office network with representation in Saudi Arabia, Bahrain, Oman and the UAE. The total staff of nearly 50 includes 15 qualified property consultants. The firm specializes in providing valuation, management and consultancy services on all forms of property ownership and actively manages many of the region’s most prominent landmark projects, representing members of ruling families, government organizations, international and regional banks and leading merchant families. The result of almost 30 years of experience, Cluttons has unrivalled experience and expertise in the region. Cluttons provides specialist expertise and real estate services as follows: • property management, real estate asset advice and facilities management; • property valuation and investment appraisal; • property marketing, leasing and brokerage; • consultancy advice, market research and feasibility studies; and • international property services. For more information contact Donald Bradley or Richard Botham on +973 17 227 667 or email to
[email protected]. The Economic Development Board (EDB) was established in April 2000 as the main agency responsible for the formulation of the
List of Contributors
Kingdom of Bahrain’s economic development strategy and the facilitation of investment. Chaired by HH the Crown Prince Shaikh Salman bin Hamad Al-Khalifa, Board membership comprises top representatives from both the private and public sectors. The composition of the Board was designed to ensure the integral participation of the private sector in Bahrain’s economic development. EDB works alongside the relevant ministries and private sector organizations to ensure sustainable economic development and job creation. EDB makes active efforts to initiate and optimize public– private partnerships in order to identify the main areas in which reforms and investment environment enhancements can be made to facilitate private sector led economic growth. The EDB’s main functions are as follows: 1. Developing six main economic clusters in line with the overall economic vision of transforming Bahrain into a knowledge-based economy: – information and communications technology; – education and training; – healthcare services; – business services; – tourism; – downstream industries. The EDB works to enhance the capabilities, infrastructure and policies that are directly related to these clusters, with the ultimate goal of attracting investment in these areas and thereby contributing to economic growth. 2. Recommending areas for investment environment enhancement EDB examines and provides recommendations on key areas in the business environment that enable direct investment. This constitutes privatization and deregulation, streamlining government procedures and providing investment facilitation incentives. 3. Recommending areas for infrastructure enhancements In order to enable investment, EDB works to ensure that the hard infrastructure required by investors is in place. 4. Promoting and marketing Bahrain As the first point of contact for international investors wishing to explore business opportunities in Bahrain, EDB uses several tools through which it promotes Bahrain, regionally and internationally: – overseas network of offices (currently in Hong Kong, Bangalore, India and Tokyo, Japan); – EDB’s overseas representative offices play a key role in spreading awareness of Bahrain and providing local assistance to interested investors. EDB’s active presence abroad is laying the foundation for business development and expanding Bahrain’s reach to the
List of Contributors
international business community. EDB also works closely with Bahrain’s embassies across the world to promote Bahrain and its available business opportunities; – event participation, in Bahrain and abroad In an effort to increase awareness of Bahrain and the unique features of its open market economy amongst the international investment community, EDB attends and hosts seminars, during which it establishes contacts with interested parties and helps them organize visits to Bahrain to further explore investment opportunities; – marketing collateral, including the EDB website that has updated business news about Bahrain, and other promotional publications. 5. Special projects In addition to being responsible for the development of the clusters, EDB is also involved in large scale macroeconomic projects. Current examples of these include labour market reform, economic reform and industrial policy. EDB acts as both a leader and enabler in such projects, ensuring that the different stakeholders are integrated in the process and that the outcomes are aligned with the overall economic development policies. EDB continues its efforts in these areas, while actively engaging the Kingdom’s public and private sectors in its work. The ongoing efforts have resulted in several key milestones for Bahrain’s economy, including the privatization law, the ability of foreign investors to own land, as well as strategic benefits such as several well-established relationships with key specialized organizations and high-level individuals in each of the countries in which EDB has a local presence. Moreover, EDB plays an important role in strengthening and promoting international trade ties and agreements, including the Free Trade Agreement with the US, and cooperation programmess with several countries in Asia. 6. Investment facilitation – First point of contact for investors: EDB serves as the first point of contact to first-time investors who are interested in learning about and investing in Bahrain. – Network-building: EDB helps introduce the investor to Bahrain, highlighting the services and facilities available. EDB also initiates a network building process, introducing the investor to members of both the private and public sectors. – Information resources: EDB provides the investor with all the necessary information to support the investment decision. This includes, but is not restricted to, information about the investment environment, including investment and commercial laws, economic data, the commercial registration process, and the
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government agencies within the framework of the national objectives and priorities, notably social welfare, employment and growth. The economic objectives have much to do with the diversification of the economy away from oil. In particular, they include enhancing the competitive advantage of Bahrain as a leading regional centre for financial, banking and business services. The vision of MOFNE for the coming decade involves building and expanding a knowledge-based economy, with six clusters of activities being selected to lead the drive. These clusters are Information Technology-based Services, Financial Services, Business Services, Healthcare, Education & Training and Tourism, while developing downstream industries to accelerate economic growth. In the context of fiscal policy, the Ministry’s vision seeks to balance the budget over the medium term, while maintaining low levels of external debt. In order to achieve this objective, the Ministry is in the process of diversifying the revenue base through enhancing non-oil revenues and increasing the role of the private sector in the economy. Norwich Union Insurance opened its first office in the Gulf in 1950. Today the company has a well-developed regional network of offices covering Bahrain, Saudi Arabia, the UAE and Oman. A full range of products and services for both corporate and individual clients are available at each location, as well as the provision of risk management services. The Telecommunications Regulatory Authority (TRA) was established by Legislative Decree No. 48 promulgating the Telecommunications Law. The TRA is an independent body and its duties and powers include, among other things, protecting the interests of subscribers and users and promoting effective and fair competition among existing and newly licensed operators. More information regarding the TRA can be viewed at www.tra.org.bh. Trowers & Hamlins is a City of London-based legal practice, which provides broadly-based legal services to a wide range of clients including banks and financial institutions, oil and petrochemical companies, property companies and investors, governments and government bodies, professional advisers and consultants, and accountancy firms.
List of Contributors
InCite Marketing Research is a full service market research agency with operations throughout the Arabian Peninsula. Established in 1994, the company has offices in Bahrain, Qatar and the United Arab Emirates. With quantitative and qualitative research expertise, InCite conducts studies among consumers, as well as business-to-business and industrial levels. Farah Khalid is a Supervising Consultant and a core team member of the Islamic Financial Services Group, Ernst & Young, Bahrain. She has over two years’ experience in Islamic finance. Her main work with IFSG involves strategic advisory and structured finance. Prior to joining Ernst & Young, she was working with an Islamic investment bank in Pakistan and involved in advisory, structured finance and capital markets. Prior thereto, Farah was an Investment Banking Analyst with JP Morgan in New York, providing advisory services to the Asset Management industry group. KPMG is one of the world’s largest professional services firms, operating in over 825 cities in 157 countries, and is the global leader in providing services to businesses around the world. KPMG’s strength is its international network, made up of strong national practices, combined with its emphasis on proving market-specific added service to meet its clients’ needs in a rapidly changing business environment. The Ministry of Electricity and Water (MEW) is a totally government-owned utility, whose function it is to provide electricity and water services to the Kingdom of Bahrain. The Ministry in its present status was formed in 1995 from the former Ministry of Works, Power and Water. The Ministry is divided into four Assistant Undersecretariats, each headed by an Assistant Undersecretary, who report directly to the Undersecretary for Electricity and Water. The highest authority within the organization is the Minister of Electricity and Water. The Ministry currently has about 3,600 employees and services more than 200,000 customers. It has seen rapid growth on the demand for these two services over the past decade and currently has a number of vital ongoing projects to ensure that the required infrastructure is in place and that the demand for these two services is met in a timely fashion. The Ministry of Finance and National Economy (MOFNE) of the Kingdom of Bahrain is charged with the dual responsibility of overseeing the development of the economy and managing the finances of the Kingdom. To this effect, it formulates and implements the economic policy of the country in close coordination with other ministries and
government agencies within the framework of the national objectives and priorities, notably social welfare, employment and growth. The economic objectives have much to do with the diversification of the economy away from oil. In particular, they include enhancing the competitive advantage of Bahrain as a leading regional centre for financial, banking and business services. The vision of MOFNE for the coming decade involves building and expanding a knowledge-based economy, with six clusters of activities being selected to lead the drive. These clusters are Information Technology-based Services, Financial Services, Business Services, Healthcare, Education & Training and Tourism, while developing downstream industries to accelerate economic growth. In the context of fiscal policy, the Ministry’s vision seeks to balance the budget over the medium term, while maintaining low levels of external debt. In order to achieve this objective, the Ministry is in the process of diversifying the revenue base through enhancing non-oil revenues and increasing the role of the private sector in the economy. Norwich Union Insurance opened its first office in the Gulf in 1950. Today the company has a well-developed regional network of offices covering Bahrain, Saudi Arabia, the UAE and Oman. A full range of products and services for both corporate and individual clients are available at each location, as well as the provision of risk management services. The Telecommunications Regulatory Authority (TRA) was established by Legislative Decree No. 48 promulgating the Telecommunications Law. The TRA is an independent body and its duties and powers include, among other things, protecting the interests of subscribers and users and promoting effective and fair competition among existing and newly licensed operators. More information regarding the TRA can be viewed at www.tra.org.bh. Trowers & Hamlins is a City of London-based legal practice, which provides broadly-based legal services to a wide range of clients including banks and financial institutions, oil and petrochemical companies, property companies and investors, governments and government bodies, professional advisers and consultants, and accountancy firms.
Part One Country Background
1.1
Geography and History Economic Development Board
Geography The Kingdom of Bahrain is an archipelago of low-lying islands in the Arabian Gulf, situated midway in the large bay that separates Qatar from the east coast of Saudi Arabia. The islands’ total landmass is just over 700 square kilometres. The largest island in the group is Bahrain Island, measuring 50 kilometres in length and between 13 and 25 kilometres across. The island is low and flat, rising gradually to form a plateau with an oval depression in its centre, out of which rises the 400 foot Jebel al-Dukhan (mountain of smoke), the island’s highest point. Other significant islands include Muharraq, Bahrain’s historic capital and economic centre, Sitra and Hawar.
Population Bahrain is the Arab world’s smallest country and its only island state, with a population of a little under 0.7 million people, 60 per cent of whom are Bahraini. The growth rate is high, averaging about 2.7 per cent annually. The population is a young one, with almost 44 per cent below the age of 25 years (2001 census).
History Archeological evidence suggests that Bahrain has been inhabited for at least the last 7,000 years. The first civilization appears to be a Stone Age one, spanning the period from 5000–3200 BCE. This civilization fashioned tools and weapons from flint. The climate was much cooler and wetter than it is now, allowing the pre-Dilmun civilization to depend on farming and animal husbandry. Pottery shards indicate that trade with Mesopotamia (modern day Iraq) may have been carried out.
4
Country Background
Located on the Mesopotamia–Indus Valley trade route, the island soon became a watering stop for ships carrying goods between these two shores. The trading vessels that frequented Dilmun’s shore brought with them tin and copper, heralding in a new age known as Formative Dilmun (3200–2200 BCE). Although initially no more than a number of stone houses scattered along the shore, this civilization grew to become a strategic trading post between Mesopotamia and the Indus Valley, with well developed political, economic and social structures. In order to serve its trade network, which included Mahan (modern day Oman), Mesopotamia, Ebla (northern Syria) and Meluhha (Indus Valley), Dilmun developed shipbuilding and secured a hold on the metal and sea trades. By 2200 BCE, Dilmun had developed into a major city playing a central role in trade along the Mesopotamia–Indus Valley route. Early Dilmun, as the era is known to historians, lasted to around 600 BCE, during which most of Bahrain’s ancient temples were built. It was during the Middle Dilmun period (1600–1000 BCE) that the Kassite Kings of Babylon took power. Before the coming of the Kassites, Dilmun appears to have suffered an economic and social decline. The mining of copper had stopped in Oman, and Cyprus had replaced Dilmun as the main exporter of copper to Mesopotamia. The Kassites repaired the city, rebuilt the temples and revitalized Dilmun economically through a resumption of trade with Mesopotamia. The Kassite domination of Dilmun ended in 1150 BCE when the rulers of Syria and Elam waged war against the Kassite leadership in Babylon. This coincided with the beginning of the Late Dilmun period (1000–330 BCE), also known as the Iron Age. During this period, Dilmun was an independent business community and economic centre. Arabian tribes from the mainland appeared on the island. Dilmun, still a prosperous merchant economy, was also well known for its artisans. Iron was introduced, as was bronze. Evidence of domesticated camels has also been found, which led to the development of desert trading routes, particularly the incense routes from the south of Arabia to Mesopotamia and the Mediterranean. In 330 BCE, Alexander the Great defeated the Persians and brought to an end the Persian Empire’s dominance of the region. Although there is no evidence that the Greeks conquered Bahrain, Greek influence was extremely strong on the island, to the extent that texts of that period referred to Bahrain by its Greek name, Tylos. The Greeks also built a large fortress on the northern shore of Bahrain between 100 and 200 BCE. Greek influence also pervaded Tylos’ architecture, jewellery, burial traditions and its administrative practices. In 629 AD, the king of Bahrain received a letter from the Prophet Mohammed calling upon him and his people to embrace Islam, a call that many of the people answered. Thus began a new era in Bahrain’s
Geography and History
5
development. Islam’s impact on the country’s social and cultural life was evident in artifacts and texts of the period, as well as the architecture. The country was still dependent on agriculture, fishing and the pearl trade. By 1000 AD, Bahrain had developed extensive trade relations with China, as well as its traditional regional trade partners. In addition to pearls, Bahrain was exporting date honey and breeding horses for export to India. Bahrain had also developed a variety of industries such as weaving, boat building and sail making, making it a highly prosperous economy. This attracted the attention of the Portuguese, who, in 1523, took control over the islands and held them until 1602 when they were ousted by the Persians, until they in turn ceded power to the Al-Khalifa family in 1783. The Al-Khalifa family has ruled Bahrain ever since, overseeing the development of Bahrain’s educational and healthcare systems, the discovery of oil and the resultant economic growth, as well as the diversification of the economy. Under the rule of HM the King Shaikh Hamad bin Isa Al-Khalifa, Bahrain has also instituted an ambitious political and economic reform programme to see the Kingdom into the twenty-first century. (Please see also Chapter 1.2 ‘The Political System’.)
1.2
The Political System Economic Development Board
Introduction The Kingdom of Bahrain is a sovereign, independent Arab State and the first true democracy in the Gulf region. Islam is the official religion and Islamic (Sharia) Law is one of the principle sources of legislation. Its Constitution fully embraces the diversity of its population, securing equal rights and freedoms for all the different groups that constitute its rich social and cultural mix. Over the years, Bahrain has been able to retain flexible structures and innovative platforms for growth and expansion due to its political maturity vis-à-vis the region, the development of which has been reinforced by various political, economic and social changes on global and regional levels. Established political structures, such as Bahrain’s National Action Charter and Constitution, have provided an environment conducive to the development of the democratic process and have been instrumental in further grounding stability.
A brief history Bahrain has been ruled by the Al-Khalifa family since 1783, when members of the Al-Khalifa family succeeded in deposing the Persians. In 1861, Bahrain signed a treaty of perpetual peace and friendship with Britain. In 1971, Bahrain declared its independence and signed a new treaty of friendship with Britain. His Highness Shaikh Isa bin Salman Al-Khalifa became the first Emir of the newly independent State and the Council of State became the first Cabinet, led by the Emir’s brother, the Prime Minister, His Highness Shaikh Khalifa bin Salman Al-Khalifa.
The Political System
7
The development of the democratic process Bahrain’s second move towards democracy took place in 1992 when the late Emir, His Highness Shaikh Isa bin Salman Al-Khalifa established the Shura (Consultative) Council. The members of the Shura Council were appointed by the Emir and included senior figures chosen from among business, civic and political arenas competent to give advice on matters of state and policy. This tentative move signalled the beginning of the democratization process, but it would be another 10 years before a full-scale democratic shift was to take place.
Bahrain’s new system of government Political liberalization started with the accession of His Highness Shaikh Hamad bin Isa Al-Khalifa in 1999. In 2001, an overwhelming majority of Bahrainis approved a new and explicit social contract, the National Action Charter, which set out the basic principles of society, economy, government, national security and foreign relations. Bahrain’s next step towards democracy followed shortly afterwards with municipal elections in May 2002, when all Bahrainis above the age of 21 exercised their right to vote. Bahrain, predominantly urbanized and densely populated, had until then functioned under a nominal municipal system that divided the country into 12 administrative areas with little autonomy. A new municipal law was promulgated that created a new decentralized municipal system, under which the 12 administrative areas were consolidated into five autonomous municipal areas. The law gave the municipalities administrative and financial autonomy and clearly demarcated their responsibilities over public spaces, roads, beaches and the environment. Municipal elections were held that saw the election of 50 members to represent civil society at a local level. While the election of municipal councils is not unique to Bahrain within the Gulf region, it indicated a move towards the branching out of the political systems and the decentralization of authority. In October 2002, Bahrain completed its metamorphosis into a constitutional monarchy. As a constitutional monarchy, Bahrain’s reigning monarch is His Majesty the King, Shaikh Hamad bin Isa AlKhalifa. The new bicameral government consists of a parliamentary council of elected representatives, the Chamber of Deputies, as well as an advisory Shura Council of appointed members. The two bodies work in tandem, sharing legislative responsibilities. Under the new political system, government is based on a distinct separation of executive, legislative and judicial authorities.
8
Country Background
Executive authority Executive authority rests with the Council of Ministers headed by the Prime Minister. The Council of Ministers is entrusted with overseeing the interests of the country, the laying down and implementation of general government policy, and the supervision of the course of business in the government system.
Legislative authority Legislative authority is vested in the National Assembly, Bahrain’s bicameral parliament, made up of the Consultative Council and the Chamber of Deputies. Each of the two houses is made up of 40 members. The King or the Prime Minister presents bills to the Chamber of Deputies. The Chamber of Deputies then refers the bills to the Consultative Council. Each house has the right to amend or reject the proposed legislation. In addition, any member of either the Consultative Council or the Chamber of Deputies has the right to propose a law. Fifteen members of either chamber may propose a constitutional amendment. If the chamber accepts the proposal, however, it is then referred to the government, which formulates it as a draft amendment or law for future deliberation. The Chamber of Deputies may submit its requests to the government regarding public matters. If the government is unable to meet these requests, it must give its reasons in writing to the Chamber. The Chamber may also at any time form commissions of inquiry. Both houses have equal legislative powers. The two chambers meet together if they disagree twice over any bill or if they disagree over economic or financial legislation that is considered urgent by government. The bill may then be passed by simple majority of the members present and transmitted to the King for ratification and promulgation.
Judiciary authority The Constitution states that the judiciary in Bahrain is an independent body whose function and organization are to be regulated by law. The Supreme Judicial Council is responsible for all issues related to the judiciary, including the nomination, training, promotion and dismissal of judges. The judiciary is made up of two branches: the Sharia Law Courts, which have jurisdiction over family matters affecting Muslims only, and the Civil Law Courts, with jurisdiction over civil, commercial and
The Political System
9
criminal matters, as well as family matters relating to non-Muslims. An independent body, the Constitutional Court, is empowered to review the constitutionality of all laws. The Sharia Law Courts are made up of two tiers: the Senior Sharia Court and the High Sharia Court of Appeal, which rule on all matters related to the personal status of Bahraini and non-Bahraini Muslims. This includes all matters relating to inheritance, gifts, wills and charitable donations (waqf). Civil Law Courts in Bahrain are made up of three tiers: the Lower Court and the Senior Court preside over civil, commercial and criminal cases, as well as family matters related to non-Muslims. In addition, the Lower Court is also responsible for the execution of judgements. While Senior Court cases are appealed before the High Court of Appeal, Lower Court cases are appealed before the Senior Court. In 1989, the Supreme Court of Appeal (Court of Cassation) was established to serve as a final court of appeal for all civil, commercial and criminal matters of all courts. The official language of the courts is Arabic. The Ministry of Justice does make English and other translators available.
Bahrain in the international arena Bahrain’s political reform was watched with great interest both regionally and internationally. Bahrain has fared well under international scrutiny and has set the standard for political reform in the region. In 1981, Bahrain became a founding member of the Gulf Cooperation Council, or the GCC, as it is known within the region. Other members include the Kingdom of Saudi Arabia, Kuwait, the United Arab Emirates (UAE), Oman and Qatar. The GCC has provided the Kingdom of Bahrain and the rest of the member states with a new platform for a unique regional mentality of cooperation regarding the exchange of information, research, political and economic strategic thinking and the flow of trade. All efforts in the GCC have assisted in the development of common regional laws and practices. The political implication of the GCC and its evolution into a partnership held together by formal agreements resulted in Bahrain receiving crucial assistance and backing during its dispute with Qatar over the Hawar Islands in the 1980s and 1990s. Furthermore, Bahrain plays a lead role politically as the first democracy in the Gulf and as such, is looked upon as a model for the democratization of its neighbours. Bahrain is also a member of the Arab League.
10
Country Background
On an international front, the Kingdom of Bahrain has maintained strong relationships with the countries of the EU and the US. It is the host of the US fifth fleet and has been a major US non-NATO ally since 2001. Bahrain is also the signatory of 30 bilateral agreements on trade and investment, including a free trade agreement with the US, and is a founding member of the WTO. The Kingdom of Bahrain has evolved in the last few years into an open political system formalizing its respect for civil liberties. With its recent political reforms, Bahrain has ensured a system whereby civil society and government are partners in its future development.
1.3
Bahrain’s Economy Denzil Pereira, Senior Economist, Arab Bank plc (OBU), Bahrain
Introduction Bahrain’s open and well-diversified economy is the result of an acknowledgement, at an early stage in its development, that economic progress could not be supported by its limited oil and gas resources. Consequently, the government has an ongoing commitment to implement macroeconomic, investment and monetary policies that will diversify the economy, provide employment opportunities for its indigenous population and improve the quality of life in the country. As far back as the late 1960s and 1970s, the results of its efforts were evident in such world-class industries as that of the Aluminium Bahrain Company (Alba), a broad range of other heavy and light manufacturing industry, the development of the country as a regional hub for several service-oriented companies and the regional and international importance of the country’s offshore banking centre. Following a period of relative consolidation in the 1980s and 1990s, the beginning of the new millennium has seen another wave of economic initiatives in Bahrain that has coincided with the political reforms introduced by King Hamad. The number of obstacles that were overcome, including a very tight construction deadline to stage the first Formula One race in the region in April 2004, is a testimony of the confidence that will underpin the success of this new major effort to meet the country’s long-term challenges. Such challenges include the growing regional competition to Bahrain’s well-established services and industries. These are being addressed directly with, for example, the Bahrain Financial Harbour complex, the first phase of which will be completed in 2006. It will be home to the Bahrain International Insurance Centre, which is the project of the Bahrain Monetary Agency (the Kingdom’s monetary and regulatory authority) to create a world-class insurance market. Bahrain is pressing ahead with plans to privatize its power generation and desalination sector, which as a first step, will include a
12
Country Background
new privately-owned and constructed 400 MW capacity power plant that will sell power to the Ministry of Electricity and Water. The government is also actively supporting the development of new tourist resorts by taking minority stakes in one or two of them as a gesture of its confidence and support. Alba itself may become the world’s first million tonnes per year aluminium smelter if it takes its expansion plans another step further. These and other initiatives will serve the country well in achieving its long-term plans and aspirations.
Economic structure The transformation of Bahrain’s economic structure to its present state occurred mainly during the period from the mid-1970s through to the end of the 1980s. The broadening of the economic base that the government sought to engineer by the introduction of new manufacturing and service industries has provided the underlying stability of this structure in the past 15 years. The halving of the share of the oil and gas sector in real gross domestic product (GDP) from over 35 per cent in the 1970s has reflected not only the ascendancy of these new industries but also, since 1970, the 50 per cent drop in oil production from the country’s one onshore oilfield (which was discovered in 1932) to 38,000 barrels per day (b/d) currently. Crude oil output has, however, been stable at this level in the past few years. In contrast to crude oil, natural gas production has been rising steadily and has been fully utilized for oil field injection, electricity generation, by Alba and in the domestic petrochemical industry. The Kingdom has a more balanced structure of GDP (see Figure 1.3.1) than its fellow GCC members. The oil and gas sector accounted for 15.7 per cent of GDP in 2003. The proportion of agriculture and industry (the latter including electricity and water and construction) was stable at 19.1 per cent. Transport and communications and the category of government, education, health and personal services had stronger rises in their share of GDP; the former grew from 7.8 per cent of GDP in 1998 to 8.4 per cent in 2003, while the latter expanded to 13.6 per cent from 11.9 per cent. The shares of hotels and trade contracted to 14.9 per cent in 2003 from 17.2 per cent of GDP in 1998, but that of financial, real estate and business services rose to 28.3 per cent from 27.8 per cent. The manufacturing sector, which contributed 11.9 per cent of GDP in 2003, is dominated by the heavy industries such as aluminium, refined oil products, petrochemicals and iron and steel. But light manufacturing, including food, textile articles, paper goods etc, are also important, not least because they are labour intensive. At current prices, aluminium industries accounted for 33.7 per cent of the manufacturing sector’s output in 2003, followed by oil-related
Bahrain’s Economy
13
100% 80% 60% 40% 20% 0% 1998 Oil & Gas Hotels & Trade Financial & Related Services
2003
Agriculture & Industry Transport & Comms. Gov. & Other Services
Figure 1.3.1 Structure of GDP activities with 31 per cent, metals made up 11 per cent and the share of food industries was 6.3 per cent. The ascendancy of transport and communications mainly reflects recent strong growth in communications, which, in nominal terms, accounts for close to 50 per cent of the sector. While land transportation has seen steady expansion over the years because of the Saudi–Bahrain causeway, which has facilitated considerable cross-border trade and tourism, air transportation has tended to fluctuate over time. The contribution of marine transportation (the smallest category in this sector) has been stable recently, but government transportation has declined. The proportion of the financial sector (local commercial banks, insurance and the offshore banks (OBUs)) in GDP recovered in 2003 to over 19 per cent, following a couple of years where its share fell below that of oil and gas. The OBUs and the insurance companies were responsible for the decline of the sector, as their recovery following the Asian and regional crisis in 1997–98 was soon followed by more difficult operating conditions in the wake of the slowdown in the US and Europe in 2001–02. Finally, it is noteworthy that the proportion of government services (other than in education and health) in the GDP structure has been falling since the 1980s. While this development has partly been due to revenue considerations, it is also evidence of an economic philosophy that shifts the provision of such services to the private sector where feasible.
Economic policies A market-oriented economic philosophy and revenue constraints have made the country very receptive to domestic and foreign private investment. The government has concerned itself primarily with the
14
Country Background
task of providing the necessary infrastructure and a liberal business environment to attract firms interested in regional transactions. It has, moreover, shown itself willing to cut back on non-essential government projects rather than risk stifling new business through increasing tariffs and imposing other restrictions. In fact, in the last couple of years, import duties have been slashed to provide for new competition and investment initiatives. To provide for a smoother and more orderly development process Bahrain has, since 1978, worked a system of biennial budgets. With the government actively cooperating, the new parliament is also providing oversight of public sector finances and lack of transparency of such finances should become less of an issue over time. The Bahrain government has also been forthright in its support of GCC-wide economic initiatives, including taking steps to achieve the goal of monetary union by 2010. Monetary and regulatory policy has been conducted by the Bahrain Monetary Agency (BMA) with the view of maintaining the stability and confidence in the economy, the Bahraini dinar and the country as a regional financial centre. The Bahraini dinar is pegged to the US dollar at the rate of BD0.377 = US$1. Bahrain as a centre for the Islamic banking industry is being actively promoted through the BMA and by participants who see the strong regulatory environment as giving credibility to their activities in other jurisdictions. An earlier announcement of a new law to regulate the financial industry and change the BMA to the Central Bank of Bahrain was confirmed by the government at the beginning of 2004 and will be debated by parliament.
External trade and payments Bahrain’s trade balance has been in surplus during most of the 1990s. This has reflected an increase in the volume and export of refined oil products and aluminium. In 1996, Saudi Arabia handed over its share of the offshore Abu Safah oilfield, which was then directly marketed by Bahrain. The sharp fall in oil and aluminium prices in 1998 was mitigated by a drop in the value of imports, including Saudi Arabia’s oil subvention. The gap in net services and income has traditionally been moderate, but large outgoing private transfers from its expatriate population have often contributed to deficits on the current account.
Bahrain’s Economy
15
Table 1.3.1 Bahrain economic indicators Population (2003): 0.69 million GDP per capita (2003): US$13,987 Nominal GDP (US$ mn) Real GDP (% change) Broad money (M2) (% change) Domestic credit (% change) Consumer prices (% change) Exports (US$ mn) Imports (US$ mn) Trade balance (US$ mn) Current account balance (US$ mn) Foreign exchange reserves (US$ mn)
1998
1999
2000
2001
2002
2003
6,168 4.8 16.8 23.3 –0.2 3,270 –3,299 –29 –778
6,603 4.3 4.1 27.5 –1.5 4,363 –3,468 895 –36
7,949 5.3 10.2 5.8 –0.7 6,243 –4,394 1,849 830
7,908 4.6 9.2 5.3 0.2 5,657 –4,047 1,610 226
8,395 5.2 10.3 22.7 1.3 5,887 –4,697 1,190 –513
9,581 6.8 6.3 12.0 1.5 6,690 –5,079 1,611 –68
1,079
1,369
1,564
1,684
1,726
1,778
Trade by Commodity in 2003 (% of total) Exports Animal and animal products – Vegetable products – Prepared foodstuffs, – beverages etc Mineral products 74.7 Chemical and related 2.8 products Plastic and rubber articles – Wood pulp and paper – Textiles and textile articles Articles of stone, cement etc Base metals and related articles Machinery and electrical equipment Transport equipment Optical, photographic, medical equipment Others Total
Imports 2.6 2.4 4.1
Non-oil Trade by Country in 2003 (% of total) Exports Imports Arab Countries 40.2 17.7 Saudi Arabia 23.5 9.1 Asian Countries 34.3 33.2
42.3 7.9
Japan Taiwan
3.3 10.4
12.6 –
2.0 1.2
5.9 6.4
4.0 30.3
– –
7.1 5.6
15.0
9.2
14.8
5.7
–
9.0
–
8.7
4.2 100.0
0.6 100.0
4.3 –
4.0 1.8
India European Countries Germany UK
13.7
4.9
The Americas
–
11.8
–
10.6
–
0.9
4.5 100.0
3.4 100.0
USA Oceanic Countries Australia Others Total
Sources: Bahrain Monetary Agency (BMA); Ministry of Finance and National Economy; IMF.
16
Country Background
Recent economic developments Real GDP and sector growth By expenditure activity, real GDP growth (at market prices) picked up to 5.2 per cent in 2002, following an expansion of 4.6 per cent in 2001. This was more or less in line with the trend since the second half of the 1990s. The main impetus to growth in 2002 came from government investment, which surged by a remarkable 70 per cent, and government consumption, which grew by 3.2 per cent. Growth of private consumption, which accounts for the largest share of expenditure activity, was weak while the sector’s capital spending rose by 3.3 per cent. The contribution of the external balance was markedly negative, as strong domestic demand fuelled a 16.2 per cent increase in import volumes as against 5.8 per cent in exports. Real GDP growth accelerated by 6.8 per cent in 2003 as private sector capital spending surged by 65 per cent, although much of this probably reflects construction of the Formula One racetrack and Alba’s expansion. Private consumption also recovered somewhat, but the net external balance was again a restraint on GDP growth. On the supply side, the main industries boosting real GDP growth (at producers prices) were manufacturing (which expanded by 5.5 per cent, although aluminium output declined), construction (up 11.7 per cent), trade (11.5 per cent), transport and communications (8.8 per cent), real estate and business activities (7.1 per cent) and education services (22.4 per cent). The largest sectors of the economy performed marginally: crude petroleum and natural gas rose by 1.3 per cent, while financial institutions increased by 1.7 per cent. In the case of the former
14 12 10 8 6 4 2 0 1998
1999 GDP
2000 Non-oil GDP
2001
2002
2003
Oil & gas GDP
Figure 1.3.2 Volume changes in GDP (non-oil GDP and oil and gas GDP)
Bahrain’s Economy
17
sector, natural gas output grew by 1.1 per cent and that of crude oil by 0.7 per cent. With regard to financial institutions, there were, however, some contrasting performances: commercial banks recorded a surge of 22.5 per cent, but offshore banks and the insurance sector contracted by 8.5 per cent. In 2003, the main development was an impressive performance by all categories of financial institutions, including the OBUs, which topped 35 per cent. Manufacturing growth slowed somewhat but aluminium production recovered. Construction decelerated, although this was surprising given developments in investment spending. Activity in other sectors also moderated but overall the levels were firm.
Price trends Consumer prices actually contracted slightly in the late 1990s and earlier this decade, partly because prices of some essential consumer goods as well as services provided by the government are subsidized. Moreover, during this period the strength of the dollar (to which the Bahraini dinar is tied) restrained the cost of imports. In the latter instance, however, the strength of non-dollar currencies since 2002 has been having an impact on the prices of some imported goods and services, which was reflected in a pick-up in inflation of 1.3 per cent in that year and by an estimated 1.5 per cent in 2003.
External payments In 2002 the trade surplus narrowed again to US$1.2 billion (see Figure 1.3.3) but in contrast to the year earlier period (when the surplus amounted to US$1.6 billion) this was the result of a decline in the value of non-oil exports and higher imports. Aluminium prices, in particular, fell by 7 per cent and, while oil prices were relatively stable compared with the previous year’s level, increased shipments of crude and refined products contributed to an overall increase in receipts. Import values rose in 2002 because of the jump in local demand for machinery and transport goods. A widening invisibles deficit, due to bigger gaps in income, and transfers contributed to the current account sinking into a deficit of US$513 million (6.1 per cent of GDP) as against a surplus of US$227 million (2.9 per cent of GDP) in 2001. In 2003, the trade surplus rebounded to US$1.6 billion because of an 18 per cent surge in crude oil and product exports (due to higher prices rather than volumes) and a recovery in non-oil export receipts because of better aluminium prices and shipments. Imports also picked up reflecting continued solid domestic demand, as well as higher costs related to the decline in the dollar. The invisibles gap was similar to the previous year at US$1.7 billion, with the result that the current account deficit contracted sharply to US$68 million (0.7 per cent of
18
Country Background
GDP). Trade data in the first quarter of 2004 indicate a twofold increase in the trade surplus, compared with the same period in 2003, but this surprisingly reflects a drop in imports in 2004 rather than an increase in exports. The latter, in fact, were the same as in 2003, despite stronger oil and aluminium prices this year.
Foreign exchange reserves and assets Bahrain’s published foreign exchange reserves increased to US$1.8 billion in 2003 from US$1.7 billion in 2002; in February 2004 they amounted to US$1.9 billion. Unlike some other GCC states, Bahrain is not thought to have large undisclosed public sector foreign assets, although the non-bank sector’s deposits with BIS banks totalled US$4 billion in March 2004.
Public finance The government has recently embarked on a more expansionary fiscal policy (reflected in both budgetary and non-budgetary spending) that will give new impetus to its task of providing the infrastructure to attract foreign investment while also financing non-budgetary initiatives such as the construction of the Formula One racetrack in 2003–04. Many transactions covering public sector finances, however, are not known including support for Alba and Bapco. Of total revenues, 60–70 per cent are earned from oil (including the 70,000 b/d subvention from Saudi Arabia from the joint Abu Safa offshore field, which has been producing at a greater rate than its normal 140,000 b/d) and the balance from equity interests and investment income, customs duties and indirect taxes. The Abu Safa capacity expansion to 300,000 b/d will presumably give Bahrain its half share of 150,000 b/d but it is not known whether the Saudi subvention will also be included.
2
50 40
1.5 20
1
10 0.5
0
% change
US$ bn
30
-10
0 1998
1999
2000
2001
2002
2003
-0.5 Trade balance (US$)
Foreign exchange reserves (US$)
Export growth (%)
Import growth (%)
-20 -30
Figure 1.3.3 Trade balance, foreign exchange reserves and export and import growth
Bahrain’s Economy
19
A prudent move by the government was the setting aside as reserves most of the budgetary surplus of US$1.1 billion in 2000 and 2001 as a ‘sovereign and strategic projects’ item to be utilized for projects in 2002–05. It is not known, however, whether the funds will be used in budgetary or non-budgetary financing. Excluding this reserve item from spending (it is included in official presentations) produces surpluses in 2000 and 2001 of 8.7 per cent and 5 per cent of GDP respectively. Although total revenues increased by 4.7 per cent in 2002, with most of the increase coming from non-oil revenues, spending on manpower and projects resulted in total expenditure climbing by 24 per cent. Despite the surge in expenditures the deficit was barely 0.1 per cent of GDP. Unlike in the previous two years, however, nothing was set aside for sovereign and strategic projects (see Figure 1.3.4). In the budgets for 2003 and 2004 announced in November 2002, the total of expenditures of BD2.3 billion is close to 40 per cent over that budgeted in 2001–02, but 25 per cent above the actual levels (excluding, again, sovereign and strategic project spending) in those years. The projected deficits are significantly higher than those in earlier budgets, but revenues are based on an assumed oil price of US$18 per barrel. This price was well exceeded in 2003 and will be again in 2004. There is, therefore, less cause for concern than would otherwise have been the case. Moreover the surpluses set aside in 2001–02 will also provide some comfort. Financing the deficits, where these occur, and non-budgetary spending should not pose a problem. The government has an established debt programme, which includes medium- and long-term dinardenominated development bonds and short-term treasury bills of up to one year. Since 2001, the BMA has also been issuing medium- and short-term Islamic instruments in dollars. In addition, there is the foreign currency borrowing of both sovereign (for example, in 2003 4
US$ bn
3 2 1 0 2000
2001
2002
2003b
-1 -2 Total Revenues Total Expenditures
Oil & Gas Receipts Fiscal Balance
b = estimate
Figure 1.3.4 Revenues expenditures and fiscal balance
2004b
20
Country Background
there were the US$600 million Abu Safa loan facility and the US$500 million eurobond) and quasi-sovereign entities (for instance, Alba).
Monetary policy Reflecting the peg to the dollar, the BMA’s monetary policy stance has closely mirrored that of the US Federal Reserve Bank. Thus, interest rate developments have been in line with those of the American currency. By the end of 2003, the money market rate and treasury bill rate had fallen from an average of 6.9 per cent and 6.6 per cent respectively in 2000, to 1.4 per cent and 1.1 per cent. Domestic banks’ lending rates also declined from 11.3 per cent and 9 per cent for personal and business loans respectively in 2000, to 7.9 per cent and 5.3 per cent at the end of 2003. In real terms interest costs to borrowers were even lower, with inflation rising in this period. Interest rates are now likely to increase, however, reflecting the changing economic situation in the US.
Conclusion Sound economic policies and a strategy that has shown itself willing to adapt to changing regional and international circumstances have enabled Bahrain to firmly establish itself as a major centre for services and manufacturing that are not only regionally-oriented but also global in scope. These attributes will continue to provide the basis for Bahrain’s economic prosperity and the aspirations of its people for the foreseeable future. The views expressed in this article are those of the author and do not in any way reflect those of Arab Bank plc. While every care has been taken in preparing this article, Arab Bank plc and its officers have no liability whatsoever for the accuracy of its contents or for the consequences of any reliance that may be placed on it.
1.4
Foreign Trade Ministry of Commerce and Industry, Kingdom of Bahrain
Introduction The Kingdom of Bahrain’s strategic geographic position makes it an attractive hub for investment and trade in the Gulf and the Middle East. Coupled with the Government of Bahrain’s encouraging and positive vision for the future, it establishes the Kingdom as a stable and attractive regional centre for foreign trade activities in diversified areas such as sales, marketing, manufacturing and distribution of goods and services. The Kingdom, through its three branches (Executive, Legislative and Judiciary), is committed towards improving the country’s infrastructure in order to support new investments and continued economic growth, and is actively taking steps to further liberalize the trade and investment climate in the Kingdom. In this context, the government’s efforts with its diversification programme have obviously borne fruit. Additionally, the strong growth in the performance of various sectors across the board and the deepening of economic relations between the Kingdom and other countries, serve to highlight the positive performance of the Bahraini economy. Due to its historical status as a regional trading centre, the Kingdom of Bahrain is considered to be one of the major ‘Gateways to the Middle East’, a business and financial nucleus. A number of multinational corporations have recognized its importance as a foreign trade centre by establishing their regional offices in the Kingdom – Citicorp, American Express, Nomura Investment Banking, Arab Banking corporation, Investcorp, Arig, DHL, and Gulf International Bank, are just a few examples. Over the last few years, the Kingdom of Bahrain’s foreign trade policy witnessed major developments that have led to a positive impact on its economy. The affirmative steps taken by the Kingdom towards the creation of healthier political and economic reforms, its role and
22
Country Background
membership in the World Trade Organization (WTO), various Free Trade Agreements (FTAs) whether on bilateral basis or with integrated economic blocs through the Gulf Council Cooperation (GCC), its new and updated trade and investment regulations, bilateral agreements, and its progress towards the integration of its economic policies in accordance with the GCC initiatives are a testimony to such a positive impact. The Ministry of Commerce’s new commercial laws, which have been implemented by the Kingdom, have paved the way for a more open, transparent and flexible commercial environment. Government agencies have been working hard to push the government’s initiative further to achieve excellence in all vital sectors on the domestic and international fronts. Furthermore, the Ministry of Commerce issued its new Electronic Transaction Law and Certification Authority Regulations, recognizing the importance of E-commerce as a business delivery channel, thus, affirming the government’s dedication and ensuring Bahrain’s preeminence in this field. Additionally, the government continuously upgrades its commercial laws such as the Trade Law, E-Transaction Law, Commercial Agency Law, Trade Mark Law, Patents and Utility models laws, to ensure that its commercial and legal infrastructure remains conducive to growth, and serves to maintain the legitimacy of the island as an important business centre. As a result of such dedicated endeavour, the Kingdom of Bahrain has emerged as one of the most dynamic economies, and has created a welcoming business climate that has served to encourage inward and foreign direct investment. The Kingdom of Bahrain’s foreign trade policy is based on economic openness and integration into the global economy. The political and economic reforms, which the country witnessed during the last few years, have enhanced its role as a regional financial centre, and in such a short time has managed both to strengthen its economic ties with neighbouring countries and become a founding member of the WTO in 1995. The Kingdom of Bahrain has also recently concluded negotiations of an FTA with the US. In this context, the Kingdom of Bahrain has become the first country in the Arab world to submit draft proposals to the WTO on the opening of its trade in the services and other related sectors. Therefore, its seriousness and its commitment towards the global economy were appreciated by the WTO when the Kingdom submitted its trade in services sectors proposals on 31 March 2003. The initial offers submitted by the Kingdom of Bahrain were in line with the recommendations of the fourth WTO ministerial meeting held in Doha in 2002. The Kingdom remains committed to its obligations, and has fulfilled all requirements under the WTO agreement in trade
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in the services sector and other trade sectors and will continue to participate in successive negotiating rounds. In its 2003 Index of Economic Freedom, the US-based Heritage Foundation and the Wall Street Journal, rated Bahrain as the freest economy in the Gulf Region. The survey concluded that Bahrain’s government is actively promoting foreign investment, and ranked Bahrain 16th in the Index of Economic Freedom. The ranking puts the Kingdom in line with countries such as Malaysia, Singapore and Thailand, with structural capabilities to attract foreign direct investments (FDIs). In addition, Bahrain has been regularly mentioned as one of the top ten freest economies in the world by various institutions. One of the more far-reaching positive trade developments will be the impact of the GCC Customs Union. As of January 2003, all goods and services traded within the six members (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates) will face no customs or trade related restrictions. Given Bahrain’s sophisticated service companies and its close ties with Saudi Arabia, this offers huge trade and investment potential. To date, Bahrain has signed an FTA, alongside the GCC members, with Lebanon as well as Syria, and is presently negotiating an FTA with the European Union (EU). It will commence negotiating similar FTAs with other countries such as China, India, Morocco, and other potential countries. GCC member states are in the process of coordinating their trade policies and relations with other economic blocs in order to create and guarantee transparent and equal conditions for trade and investment relations. Due to the fact that the GCC’s economic cooperation strategy is considered as one of the major objectives of the GCC, the Council’s goal is to move from cooperation and coordination to an advanced stage of economic integration. In this regard, the GCC member states have already made impressive progress to unify their economic policies, such as signing various FTAs collectively, which will reinforce their positions at the WTO negotiations and will provide for the economic development of all members of the GCC. All these positive developments will contribute toward escalating the country’s export potential and toward attracting foreign investments. In this perspective, new projects in the Kingdom such as the expansion of Aluminum Bahrain (Alba), (in February 2004, Alba started the first phase of adding a fifth expansion line to increase production by more than 300,000 tonnes per year, and when completed, smelter capacity will increase to 830,000 tonnes per year), which would make it the largest aluminum smelter in the world outside of Eastern Europe, and will increase its contribution to the national economy to over BD113 million, and in addition the creation of much needed permanent jobs for locals.
24
Country Background
Furthermore, the Bahrain Financial Harbour (BFH), (a US$1.3 billion development, and a home to the financial services sector), will reinforce Bahrain’s position as the international financial centre of the Middle East by evolving a highly focused, committed and advanced financial environment. Moreover, in 2003 the BFH project authority completed the work on phase one development, which included US$250 million Financial Centre and Bahrain International Insurance Centre (BIIC). Finally, the Bahrain International Circuit (Formula One), is the second most important sport after the World Cup in terms of spectators, and Bahrain’s hosting of such an event, which commenced on 4 April 2004 had, and will have, a significant future impact on the Kingdom’s economy – for instance, a definite increase in financial revenues from tourism, an increase in FDIs, an increase in joint ventures firms, the creation of jobs, an increase in advertising and promotion, an increase in sponsorship deals, and an increase in technologies and manufacturing enterprises associated with car manufacturing. All the abovementioned projects will provide a strong stimulus to the economic growth of the Kingdom, serve as a key indicator of the country’s vision, and will pave the way for new foreign investments, transparency, continued economic growth and further liberalization of the trade and investment climate in the Kingdom of Bahrain.
The economy, imports and exports The improvement in non-oil sectors (see Figure 1.4.1), such as financial corporations, manufacturing, transportation, communication, government services, education and health services, had a major impact on the economic growth rate in 2003, which increased by 6.8 per cent compared with 2002 where the economic growth rate was 5.2 per cent. The gross domestic product (GDP) at constant prices rose to BD3,058.2 million in 2003, from BD2,864.3 million in 2002 (see Table 1.4.1). On the basis of prices at the time of writing, 2003 GDP rose by 13.7 per cent over 2002, from BD3,176.5 million to BD3,612 million (see Figure 1.4.2). The growth was mainly due to the rise in world oil prices and the performance improvement of the financial, commercial and trade sectors.
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Table 1.4.1 Main national accounts aggregates at current prices (BD million) 1999
2000
2001
2002
GDP at Purchases’ Prices 2,489.27 2,996.93 2,981.24 3,176.45 Population 620,989.00 637,582.00 654,621.00 672,123.00 GDP per Head (BD) 4,008.56 4,700.46 4,554.15 4,725.99 Net Primary Income from –101.60 –84.10 –120.80 –197.30 Abroad Gross National Income 2,387.67 2,912.83 2,860.44 2,979.15 GNI per Head (BD) 3,844.95 4,568.55 4,369.61 4,432.45 –308.10 –372.30 –475.30 –496.10 Net Current Transfer from Abroad Gross National Disposable 2,079.57 2,540.53 2,385.14 2,483.05 Income (GNDI) GNDI per Head (BD) 3,348.81 3,984.63 3,643.54 3,694.34
2003* 3,611.98 689,418.00 5,239.18 –196.00 3,415.98 4,954.88 –503.80 2,912.18 4,224.12
* provisional data Source: Ministry of Finance and National Economy.
The value of exports of goods and services rose by BD303 million or 11.7 per cent to BD2,883.3 million in 2003, from a 2002 level of BD2,580.3 million, and this was due to the increase in the value of oil exports, which improved from BD1,562.6 million in 2002 to BD1,851.5 million in 2003. The value of imports of goods and services registered an increase of 5.8 per cent to BD2,237.2 million in 2003, compared with BD2,114.2 million in 2002. This rise is attributed to oil imports, which increased from BD699.1 million in 2002 to BD848.7 million in 2003. Bahrain’s trade with
Imports
Exports
Re-export
Trade balance
Trade volume
2,500 2,000
BD, Millions
1,500 1,000 500 0
1992
1993
1994
1995
1996
1997
1998
1999
2000
–500 –1,000
Years
Figure 1.4.1 Kingdom of Bahrain’s non-oil trade
2001
2002
2003
26
Country Background 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00 1999
2000
2001
2002
2003*
* provisional data Source: Ministry of Finance & National Economy.
Figure 1.4.2 GDP at purchase prices (BD million) the world in 2003 was BD2.1 billion, a 4 per cent increase over the 2002 level of BD1.95 billion. The Kingdom of Bahrain’s imports from the world in year 2003 registered BD1.3 billion, a 3 per cent increase over 2002 (see Table 1.4.2). Bahrain’s exports to the world in 2003 increased by 2 per cent over 2002 to reach BD666.5 million (see Table 1.4.3). Re-export in 2003 was BD66.5 million, a massive 96 per cent increase over 2002 where it was BD34 million.
Table 1.4.2 Kingdom of Bahrain imports (excluding oil imports) (millions) 2003* Rank
Country Name
1 2 3 4 5 6 7 8 9 10
Japan Saudi Arabia Australia Germany USA UK China UAE India France Remaining 112 countries TOTAL (in all 122 countries)
*provisional data Source: Central Information Organization
BD 159.05 119.97 106.83 92.34 72.99 71.32 69.40 61.50 52.17 44.92 435.23 1285.72
% of Total 12.37 9.33 8.31 7.18 5.68 5.55 5.40 4.78 4.06 3.49 33.85 100.00
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Table 1.4.3 Kingdom of Bahrain exports (excluding oil imports) (millions) 2003* Rank
Country Name
1 2 3 4 5 6 7 8 9 10
Saudi Arabia USA Taiwan India UAE Qatar Japan Malaysia Iran Kuwait Remaining 80 Countries TOTAL (In all 90 countries)
BD
% of Total
136.63 105.39 74.91 41.64 35.01 26.58 23.83 21.75 19.67 18.99 162.19 666.59
20.50 15.81 11.24 6.25 5.25 3.99 3.58 3.26 2.95 2.85 24.33 100.00
* provisional data Source: Central Information Organization
Trade relations The Kingdom of Bahrain has trade relations with around 149 countries, and this varied trade portfolio is facilitated by the existence of an efficient seaport and airport, as well as advanced telecommunications, a strategic geographic position, and the King Fahad causeway. These trade relations helped to develop economic relations with other countries and to attract foreign investments. In this context, the government of Bahrain has signed different types of bilateral agreements with some 25 countries in the following areas: 1. Agreements on the promotion and protection of investment: promoting and protecting investments of nationals and enterprises of one contracting party in the territory of the other contracting party by providing an appropriate legislative environment to stimulate and increase investments, trade and industrial activity. 2. Agreements on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income: eliminating the double payment of taxes by nationals and enterprises of a contracting state in the territory of others, and creating an appropriate economic environment to attract capital between the two contracting parties. 3. Agreements on reciprocal exemption with respect to taxes on income arising from the business of international air transport: establishing a reciprocal exemption from taxes on income, profits and gains derived from the operation of aircraft in international traffic and
28
Country Background
from customs duties on equipments and materials imported by the air transport enterprises of the two contracting parties. 4. Agreements on economic, trade and technical cooperation: developing economic, trade and technical cooperation in accordance with the laws of each contracting party and creating appropriate conditions to develop cooperation on the basis of reciprocal interests. This allows the free inflow of goods, capital and services and the free movement of individuals and investments between the two contracting parties. The Kingdom of Bahrain’s geographic location makes it an important and attractive site for US firms intending to do business within the neighboring Gulf countries. The US is Bahrain’s sixth largest trading partner – the second in terms of exports, and the sixth in terms of imports, while Bahrain is the 78th largest trading partner of the US. The Kingdom of Bahrain’s major exports to the US include aluminium, fertilizers, mineral fuels, organic chemicals, plastic, fish, articles of apparel and clothing accessories; whereas, Bahrain’s major imports from the US are aircraft, machinery, vehicles, fuels, oils, waxes, medical equipment, pharmaceutical products, toys, sports equipment, frozen poultry, garments and apparel items, electronic products, construction equipment, tobacco, beverages, cosmetics and miscellaneous food items (see Table 1.4.4).
Table 1.4.4 Kingdom of Bahrain imports (excluding oil imports) from the US in (January–December 2003) No. Product Section 1 2 3 4 5 6 7 8 9 10
BD
US$
Private cars, current, spark ignition, over 3000 cc 9,138,920 24,177,037 Cigarettes containing tobacco 5,368,392 14,202,095 Parts of the machines of heading 84.71 3,045,016 8,055,598 Cotton, not carded or combed 1,759,049 4,653,569 Private cars, current, spark ignition, 1500–3000 cc 1,627,491 4,305,532 Parts of boring or sinking machinery 1,553,144 4,108,847 Other medical equipment 986,591 2,610,029 Private cars, 4+ years, spark ignition, 1501–3000 cc 887,870 2,348,862 Parts for aircraft engines 879,742 2,327,360 Other medicaments put in forms or pickings for retail sale 853,744 2,258,582 TOTAL 26,099,959 69,047,511
* provisional data Source: Central Information Organization
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The FTA between the Kingdom of Bahrain and the US aims to achieve extensive liberalization across a wide spectrum of trade issues, both in terms of goods and services. It will attract capital to the region, which will help to boost Bahrain’s economy, and Bahrain would become the point of entry for US companies looking to do business in the region. Furthermore, US exporters would use Bahrain as a gateway to other markets. Bahrain will also benefit from access to the world’s largest economy, and economic opportunities will be created for businesses in both countries.
Conclusion In conclusion, the Kingdom of Bahrain’s foreign trade policy is based on providing choices for investors in the most efficient and solid business environment, and to be recognized worldwide for setting standards of excellence in creating these environments and to provide value added business support for foreign investors in the Kingdom. The investment climate in Bahrain is already very healthy but is anticipated to become even stronger with the existence of FTAs and the continuous development process of liberalization and stronger economic and trade ties with other countries that will promote economic growth and sustainable development and prosperity for Bahrain.
1.5
The Bahrain–US Free Trade Agreement Ministry of Finance and National Economy, Kingdom of Bahrain
Introduction The Kingdom of Bahrain and the United States have a long-standing economic partnership and a history of cooperation in support of economic developments in the Kingdom. A regional pioneer in political, economic, and social reform, the Kingdom of Bahrain has launched a wide range of economic initiatives aimed at diversifying the economy and stimulating growth and economic stability. Liberalization of trade is complementary to the economic reform agenda espoused by the Kingdom of Bahrain and applauded by the United States. Bahrain’s economic prosperity can be best served by embracing open market strategies, encouraging inward investment, and engaging in international competition. Aspiring to deepen the US–Bahrain economic partnership, improve bilateral economic ties, and reduce barriers to the flow of investment, the Kingdom of Bahrain and the United States signed a Bilateral Investment Treaty (BIT) in 1999, which came into force in 2001. It is the first such treaty signed between the United States and a member of the GCC and is aimed at stimulating the flow of private capital between the two countries. The Bahrain–US BIT guarantees investors from both countries the right to invest on terms no less favourable than those accorded to domestic or third-country investors, in most sectors. It also guarantees the free transfer of capital, profits and royalties, freedom from performance requirements that distort trade and investment flows, access to international arbitration, and internationally recognized standards for expropriation and compensation. In addition, the Treaty obligations ensure maximum transparency in investment.
The Bahrain–US Free Trade Agreement
31
In 2002, the two countries signed the bilateral Trade and Investment Framework Agreement (TIFA). The TIFA was designed as a forum for ongoing dialogue with the US Government on economic reform and trade liberalization. It promotes the establishment of legal protection for investors, improvements in intellectual property protection, more transparent and efficient customs procedures, and greater transparency in government and commercial regulations. The Bahrain–US TIFA established the Bahrain–US Council on Trade and Investment, comprising representatives from both countries and co-chaired by the Ministry of Finance and National Economy and the Office of the United States Trade Representative. The Council was formed to establish a permanent bilateral dialogue with the goal of expanding trade and investment relations. In the same year, the Kingdom of Bahrain was named a Major Non-NATO US Ally. Negotiating a Free Trade Agreement (FTA) with the United States constitutes the next step towards the further strengthening of this economic partnership and the creation of new areas of cooperation that are of mutual benefit. The FTA serves the essential objectives of stimulating economic growth, creating job opportunities, and promoting transparency and reform. The FTA provisions were carefully designed to liberalize trade in goods and services, facilitate free market competition, stimulate investment and expansion in key manufacturing and services sectors, encourage the exchange of technology and expertise, and promote the creation of employment opportunities in the local market. The FTA will liberalize trade between the two countries and reduce barriers to trade through the elimination of tariff and non-tariff barriers and the attainment of National/Most Favoured Nation Treatment. It will thus enable Bahraini consumers to acquire US goods and services at reduced costs, and expand the market for Bahraini goods and services by providing greater access to the US market – the largest in the world. Coupled with the Bilateral Investment Treaty, the FTA is structured to further stimulate the flow of investment into Bahrain. It reaffirms the commitments of the BIT and includes extensive services-related provisions that provide American investors with incentives and sector-specific benefits available to entrepreneurs wishing to establish in Bahrain and provide their services to the local and regional markets. The Agreement facilitates the establishment of Bahrain as a regional hub and service centre to the surrounding region. US service providers will acquire the chance to service the greater Gulf and Arab region by establishing a gateway in Bahrain, and in doing so, stimulate economic activity in Bahrain and provide local job opportunities. Viceversa, producers and suppliers of neighbouring countries will have the
32
Country Background
option of establishing ventures in Bahrain in order to gain access to US markets. Moreover, the Agreement provides substantial market access benefits for those wishing to supply services across the border, for example by electronic means. In addition to commitments directly related to trade in goods and services, the Agreement covers a wide spectrum of issues that indirectly affect the trade and investment regime and are of interest to those conducting business in both countries. The FTA ensures that all matters of trade and investment are regulated in a transparent, objective, and predictable manner. Commitments related to the protection of intellectual property rights, labour rights, and the environment are integrated into the Agreement. Taken as a whole, the Bahrain–US Free Trade Agreement provides for a state-of-the-art business environment, and advances the highest standards for conducting trade and investment.
The negotiation process Bahrain and the United States first announced their intention to negotiate a Free Trade Agreement on 21 May 2003. HH the Crown Prince Shaikh Salman Bin Hamad Al-Khalifa and Ambassador Robert Zoellick, United States Trade Representative, then discussed the preparatory steps for the launch of the Free Trade Negotiations. On 4 August 2003, Ambassador Zoellick formally notified the United States Congress of the Administration’s intent to initiate FTA negotiations with Bahrain in January 2004. The Government of Bahrain FTA Negotiating Team was led by HE Abdulla Hassan Saif, Minister of Finance and National Economy, and the US team was led by Ms Catherine Novelli, Assistant United States Trade Representative for Europe and the Mediterranean. Individual chapters of the Proposed Free Trade Agreement were negotiated by specialists from the ministries and government agencies concerned. On 26 January 2004, the first round of Bahrain–US negotiations was launched in Manama. The second round of negotiations took place in Washington, DC on 1–5 March, with an interim round of technical discussions taking place in London starting 19 April 2004. The negotiation process was concluded on 28 May 2004. The Bahrain–US Free Trade Agreement was signed on 14 September 2004 in Washington DC. HE Abdulla Hassan Saif, Minister of Finance and National Economy, signed the Agreement on behalf of the Bahrain Government, and United States Trade Representative Ambassaor Robert Zoellick signed on behalf of the Government of the United States. Upon signing, the Agreement passed through the constitutional
The Bahrain–US Free Trade Agreement
33
ratification mechanisms in both countries before entering into force by decree of law.
Overview of the Agreement The following is an overview of the major commitments of the Agreement:
Market access for goods • 96 per cent of Bahrain industrial and agricultural products will receive immediate duty-free access to the US markets upon entry into force of the Agreement. • Tariffs on the remaining products, which are not currently produced in Bahrain, will be phased out according to the following staging categories: – Category A: immediate duty-free access (96 per cent of industrial and agricultural products); – Category B: duties will be eliminated in 10 equal annual stages (one per cent of industrial and agricultural products); – Category C: goods that are already duty free and will continue to receive duty-free treatment; – Category D: duties will be eliminated in five equal annual stages (three per cent of industrial and agricultural products). • Bahrain will provide immediate duty-free access on all US industrial and agricultural products, except 80 products for which the duties will be phased out over 10 years.
Rules of origin • The Agreement lays out specific rules of origin to ensure that only Bahrain and US goods benefit from the preferential duty treatment of the Agreement. • Two types of goods produced in Bahrain will receive preferential treatment: – goods originating in Bahrain; – goods that have undergone a substantial transformation with at least 35 per cent value added.
Textiles and apparel • Textiles and apparel products of both countries will receive immediate duty-free access upon entry into force of the Agreement, provided they meet the rules of origin requirement.
34
Country Background
• The Agreement provides for a 10-year transition period, during which up to 65 million square metres of Bahraini textiles and apparel products that do not meet the rules of origin requirement may be exported to the US duty free.
Customs procedures • The Agreement includes commitments to ensure transparency and efficiency in customs administration, including publication of laws and regulations on the Internet and procedural certainty and fairness. • Both governments agree to share information to combat the illegal transshipment of goods and implement special customs cooperation measures to prevent fraud.
Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS) • The Agreement ensures that policies and regulations on food labelling, biotechnology, and shelf-life standards are transparent, science-based, and in accordance with international standards. • It reaffirms Bahrain’s WTO commitment on TBT and SPS measures and ensures that technical regulations, standards, and conformity assessment procedures are not an impediment to trade.
Trade in services and cross-border services • Service providers from each country will enjoy substantial market access to the services market of the other country and will be accorded National or Most-Favoured Nation Treatment. • The Agreement uses the ‘negative list’ approach, meaning that all sectors are covered unless specifically excluded. • Key services sectors covered by the Agreement include telecommunications, computer and related services, healthcare, education, advertising, tourism, transportation, engineering, construction, audiovisual, and express delivery services. • The Agreement provides benefits for businesses wishing to supply services cross-border (eg electronically), as well as businesses wishing to establish local presence in the other party’s territory. • All policies and measures affecting services trade are to be applied in a fair, objective, and non-discriminatory manner.
The Bahrain–US Free Trade Agreement
35
Financial services • The chapter covers traditional as well as Islamic financial services. • Financial service providers from each country will enjoy access to the other country’s financial services market and be accorded National or Most Favoured Nation Treatment. • The Agreement offers benefits for US financial institutions wishing to supply services and establish ventures in Bahrain, holding the promise for greater expansion in the financial services sector in Bahrain, especially in emerging key service areas such as insurance and Islamic Banking. • The Agreement underscores both countries’ commitment to the liberalization of the financial services markets and to legislative and procedural transparency in the financial services sector.
Telecommunications • The Agreement ensures that telecommunications service providers of each country have reciprocal access to the telecommunications market of the other country. • Users of the telecommunications network will have reasonable and non-discriminatory access to the network. • Firms of each party seeking to build a physical network in the other party’s territory will have non-discriminatory access to infrastructure and facilities. • There are no restrictions in terms of technology.
Electronic commerce • The Agreement promotes a liberalized, non-discriminatory trade environment for E-commerce. • Each government commits to non-discriminatory treatment of digital products and agrees not to impose customs duties on digital products. • For digital products delivered on hard media (such as a DVD or CD), customs duties will be based on the value of the media rather than the content. • The E-Commerce commitments will help develop Bahrain’s E-commerce infrastructure and promote Bahrain as an E-commerce leader in the region.
36
Country Background
Government procurement • Bahraini suppliers will be granted National Treatment and nondiscriminatory access to bid on contracts from various US central government entities and government-owned enterprises, in excess of agreed monetary thresholds. Similarly, US suppliers will have access to bid on contracts from various Bahrain government entities. • The Agreement reinforces the transparency and predictability of government procedures, such as advance public notice of purchases and timely and transparent bid review procedures and decision-making.
Intellectual property rights • The Agreement covers the most updated international standards for copyrights, patents, and trademark-related commitments to lock-in intellectual property protections and enforcement to deter counterfeiting and piracy. • It builds on the foundations established in the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS Agreement) and other international agreements, such as the World Intellectual Property Organization (WIPO) Copyright Treaty, the WIPO Performances and Phonograms Treaty, and the Patent Cooperation Treaty. • Commitments are included to strengthen Bahrain’s procedures to enforce intellectual property rights’ protection, provide for compensation of rights holders for infringements of intellectual property rights, and provide for criminal penalties for violators of intellectual property rights under Bahrain law.
Labour rights • Each government reaffirms its obligations as a member of the International Labour Organization (ILO), and commits to strive to ensure that its laws provide for the highest labour standards. The Agreement makes clear that it is inappropriate to weaken or reduce domestic labour protections to encourage trade or investment. • Each government is required to enforce its labour laws effectively, and this obligation is enforceable through the Agreement’s dispute settlement procedures. Procedural guarantees guarantee workers and employers access to fair, equitable, and transparent labour tribunals or courts. • A Labour Cooperation Mechanism is established to promote higher labour standards and to further advance common commitments,
The Bahrain–US Free Trade Agreement
37
including the principles embodied in the June 1998 Declaration on Fundamental Principles and Rights at Work, and compliance with ILO Convention 182 on the Worst Form of Child Labour.
Environmental protection • Each government will be required to enforce effectively its environmental laws. This obligation is enforceable through the Agreement’s dispute settlement procedures. • Each government commits to establishing high levels of environmental protection, and not to weaken or reduce environmental laws to attract trade or investment. • The Agreement also promotes a comprehensive approach to environmental protection. Procedural guarantees that ensure fair, equitable and transparent proceedings for the administration and enforcement of environmental laws are married with provisions that promote voluntary, market-based mechanisms to protect the environment. • Parallel to the Agreement, a Memorandum of Understanding was signed to establish a Joint Forum on Environmental Cooperation to strengthen Bahrain’s capacity to protect the environment through the promotion of sustainable development.
Legislative and procedural transparency • The Agreement requires that trade-related laws and regulations are published and that proposed regulations are published in advance and open to public commentary, as far as possible. • Each government is required to apply fair procedures in administrative proceedings covering trade and to ensure that traders from the other country can obtain a prompt and fair review of final administrative decisions affecting their interests. • The Agreement requires each government’s commitment to prohibit corrupt practices, such as bribery, to enforce such prohibitions, to enforce penalties for violators, and to adopt or maintain measures protecting whistle-blowers.
Technical assistance Parallel to the Agreement, the US has committed to providing technical assistance to the Kingdom of Bahrain in order to facilitate the implementation and effective administration of its FTA commitments.
38
Country Background
The two parties agreed that technical assistance is to take various forms and will start on a needs-based timescale. FTA-related technical assistance includes funding an FTA-related impact assessment and business development study; assistance in the implementation of internet-based systems of law publication, advance notice, and public commentary; training of personnel and officials; assistance in the development of policy manuals and electronic systems; and various forms of assistance related to the protection of the environment and labour rights.
Enforcement of the Agreement The Agreement emphasizes compliance through consultation and trade-enhancing remedies. It provides for mechanisms of state-to-state consultations and dispute settlement procedures to address any potential sources of conflict or disputes that may arise in the course of implementing the Agreement. A joint committee shall be established to oversee the implementation of the Agreement. This committee will meet annually or as otherwise agreed by the parties to review the progress in implementation of the FTA commitments and review trade relations between the two parties. The Agreement also emphasizes transparency and openness in implementing its provisions, including considering the views of interested parties and other members of the public. The Agreement requires that efficient and transparent dispute panel procedures be established (or maintained), including open hearings, public release of legal submissions by governments, and mechanisms for interested thirdparties to provide their input. Finally, all investment-related disputes will be handled in accordance with the procedures set out in the Bilateral Investment Treaty.
Part Two The Investment Climate
2.1
Current Strategies in Attracting Investment and Fostering Development Economic Development Board
With his accession to power as Emir in March 1999, Sheikh Hamad bin Isa Al-Khalifa began a new era in Bahrain’s political and economic development. In 2001, the population voted overwhelmingly (98.4 per cent) in favour of a National Charter to create a constitutional monarchy, with an elected parliament and a government based on the separation of powers. The Kingdom of Bahrain was thereby announced, under the reign of His Majesty the King Sheikh Hamad bin Isa Al-Khalifa. Integral to the new era is a combination of economic and political reforms. On the political front, the National Charter provides a legislative system consisting of two chambers, including one with legislative attributes, to be elected directly and freely by citizens. This came into existence in 2003 with the first open elections held. The second chamber (Majlas al-Shura), or the Consultative Council, is appointed and includes senior experts competent to give advice on matters of state and policy. The Charter allows universal suffrage, and the Consultative Council consists of several female members. Moreover, the National Charter also sets the overall parameters within which future economic development would be formed. The economic principles of the National Charter reflect Bahrain’s visionary leadership and direction. With an emphasis on promoting economic freedom, safeguarding private ownership, ensuring economic justice and contractual adherence, facilitating economic diversification and environmental protection, and investing in human capital and training, this framework positions Bahrain as a regional leader in economic development.
42
The Investment Climate
The vision The economic vision of Bahrain is to establish the Kingdom as a knowledge-based services economy.
Developing knowledge-based industries As part of Bahrain’s economic diversification strategy, the Economic Development Board (EDB) was established with the aim of developing key industries that support this vision, namely: • information and communications technology (ICT); • education and training services; • tourism; • healthcare services; • business services; and • downstream industries. The EDB aims to create the right climate to attract more foreign investment to Bahrain in these key sectors in order to ensure sustainable GDP growth and to create increased employment opportunities. This mission has the overall aim of diversifying Bahrain’s economy, thereby ensuring continued economic development. Pivotal to the successful development of these clusters is the creation of a solid supporting investment environment and infrastructure. Recommending areas for investment environment enhancement and development EDB examines and provides recommendations on key areas in the business environment to enable direct investment. This constitutes privatization and deregulation (as demonstrated by the successful opening of the telecommunications market), streamlining government procedures, and providing investment facilitation incentives (such as allowing foreign ownership of land). EDB was the initiator of the deregulation of the telecommunications market, and was instrumental in bringing about the privatization law. Recommending areas for infrastructure enhancements In order to enable investment, EDB works to ensure that the hard infrastructure required by investors is in place. In addition, EDB works to streamline and enable coordination between the different government and private agencies involved in infrastructure development, to ensure that Bahrain’s infrastructure is constantly enhanced in line with global market requirements.
Current Strategies in Attracting Investment and Fostering Development
43
Encouraging private sector growth Privatization In line with its strategy of enabling private sector-led growth, Bahrain embarked on a privatization programme with the introduction of the Privatization Law in 2002. The privatization programme is to include services and production sectors, in particular tourism, communications, transport, electricity and water, ports and airports, the oil and gas services sector and postal services. Some state-owned industries have already been privatized, including transportation and the meat processing industry. One of the biggest success stories of Bahrain’s moves towards building a free market economy to enhance private sector activity is the opening up of the telecommunications industry, which was opened to competition in 2002, with the implementation of the new Telecommunication Law. This Law, which was a result of a National Plan for the industry, emphasizes opening the market to private entrants with no restrictions on foreign ownership and investment. The Telecommunications Regulatory Authority (TRA) was established to regulate the sector and to promote effective and fair competition among existing and new licensed operators (see Chapter 4.7). Currently, the power industry is undergoing privatization, with ports expected to follow shortly. These moves are in line with the overall economic vision of Bahrain, and will result in a marked increase in the role of the private sector in the nation’s economy.
Investment strategy Bahrain has formulated its investment strategy in line with its economic vision and diversification into non-oil industries, capitalizing on the Kingdom’s competitive strengths. This strategy has successfully resulted in a diverse economic base (see Figure 2.1.1) In addition to the six economic clusters listed earlier that are being developed through EDB’s efforts, Bahrain also has vibrant manufacturing and financial services industries.
Manufacturing Alba One of the greatest successes of Bahrain’s industrialization strategy has been Aluminium Bahrain (Alba). Alba, Bahrain’s first major economic diversification initiative and the region’s first aluminium smelter, was incorporated in 1968, primarily to take advantage of the plentiful supply of natural gas. Alba has become not only Bahrain’s major non-oil industry, but also a major contributor to the national economy through
44
The Investment Climate Oil & Gas 15.67%
Services 33.14%
Government Services 18.52%
Others 1.55%
Downstream Industry 11.88%
Financial Sector 19.24%
Figure 2.1.1 Bahrain’s economic base the generation of revenue, the employment of Bahrainis and in providing a base for ever-increasing aluminium downstream industries. In January 1969, a contract was signed for the construction of an aluminium smelter with a designed capacity of 120,000 tonnes per year (tpy). Alba’s first aluminium alloy was smelted under the patronage of the late Shaikh Isa Bin Salman Al-Khalifa, the then Emir of Bahrain in May 1971. Alba’s current annual capacity stands at 520,000 tonnes, half of which is consumed by the country’s aluminium downstream industry. Hot metal is produced at a purity rate of 99.7 per cent. Alba’s products include rolling slabs and extrusion billets, as well as standard ingots for local companies and export. This, today, compromises a wide range of downstream industries, including the production of atomized aluminium powder, aluminium profiles, metal coating, cables and conductors, wheels and automotive parts. By 2005, production will increase to about 280,000 tpy, and proposed further expansions of the production lines will bring the total production output to well over one million tpy, which would make Alba the largest smelter anywhere in the world. The increase in production of prime aluminium presents a unique opportunity for the further development of the aluminium downstream industries, which is one of the top priorities for the Bahrain government in order to increase the added value for the aluminium industry. GPIC The petrochemical industry ranks high on the priority list of industrial development in Bahrain. As a result, the Gulf Petrochemical Industries
Current Strategies in Attracting Investment and Fostering Development
45
Company (GPIC) was established as a joint venture between Bahrain, Saudi Arabia and Kuwait, with the objectives of utilizing Bahraini natural gas to produce ammonia and methanol. GPIC commenced production in 1985 at a daily capacity of 1,000 tonnes of each product. In 1987, the output capacity was expanded to 1,200. A third expansion was implemented in 1998 by constructing a urea plant, with a daily 1,700 tonnes capacity, contributing to the creation of new downstream industries in Bahrain. South Hidd Industrial Area This industrial estate, upon completion, will provide a total of 640 hectares of industrial area. An area of 247 hectares equipped with state-of-the-art infrastructure oriented to modern industrial needs has been completed and was handed over to Ministry of Industry in May 2004. A marine jetty will be available for the direct loading and unloading of inter-Gulf shipping, in addition to an area for warehousing, storage, and distribution. Furthermore, this new industrial area will be subject to a zoning system to distribute small and medium industries according to their specialization. The most important advantage of this area is its proximity to the new Shaikh Khalifa international seaport, which is core to government strategy for ensuring that Bahrain has the world-class infrastructure needed by industry. The area is linked to the Island of Muharraq by a causeway originally constructed to serve the Arab Shipbuilding & Repair Company, and is only a few kilometres from both Bahrain International Airport and Mina Salman port. The project will be implemented in three phases as follows: • Phase One (completed): This is an area of 246 hectares, excluding the existing Gulf Industrial Investment Company (GIIC) housing site on this area. Nearly 92 hectares is allocated for car parks and other facilities, including a 10-hectare water treatment plant, and a 15-hectare services corridor and power plant. The remaining area of 154 hectares is available for industrial investment. • Phase Two: This will comprise further reclamation of the area next to Phase One and other land on the western side. It will provide industrial plots with a water frontage. The total area of this phase is 196 hectares. • Phase Three: This will comprise the development of three remaining areas on the eastern side and along the dredged channel. By then all the work associated with port should have been completed and the areas for cargo handling constructed. The area of this phase, excluding the new port, is 136 hectares. It is planned to construct warehouses related to the port on this site.
46
The Investment Climate
Financial services Bahrain is the financial capital of the Middle East, with a wellestablished and diverse financial and banking industry; boasting over 350 financial institutions (see banking chapter). Perhaps the most striking pillar of the banking industry is Bahrain’s central bank, the Bahrain Monetary Agency (BMA), which has been paramount in establishing a well-regulated sector with a regulatory framework unmatched elsewhere in the Middle East. One of the most evident success stories of the BMA is the establishment of a rapidly growing Islamic banking sector, governed within an innovative and comprehensive regulatory framework that incorporates international best practice. AAIFIOI Accounting and Auditing standards for Islamic Financial Institutions (AAIFOI) was established, in accordance with the agreement of association signed by Islamic Financial Institutions, in 1990 in Algiers. The organization was registered in 1991 in Bahrain as an international autonomous non-profit-making corporate body. The AAIOFI has been extremely successful in achieving its objectives. As of 2001 the organization has released 16 financial accounting standards, four auditing standards, four governance standards and one code of ethics. This is in addition to one standard on the Purpose and Calculation of the Capital Adequacy Ratio for Islamic Banks. AAIOFI has also been working hard in persuading regulatory authorities to adopt its standards. To date the BMA, the Bank of Sudan and the Central Bank of Jordan have mandated the adoption of AAIOFI standards by the Islamic Financial Institutions operating within their jurisdiction. Islamic banking regulations In addition to the application of rigorous regulatory standards the BMA has also pioneered a range of innovations designed to broaden the depth of Islamic financial markets and to provide Islamic institutions with wider opportunities to manage their liquidity. The Kingdom of Bahrain now hosts the newly-created Liquidity Management Centre (LMC) and the International Islamic Financial Market (IIFM): • LMC: The establishment of the LMC in February 2002, based in Bahrain, represents a historical landmark for the Islamic banking industry. The LMC addresses the critical need for liquidity management in line with Sharia principles. The objective of the LMC is to enable Islamic financial institutions to manage asset liability mismatch, to create a pool of quality assets for Islamic financial institutions, to create liquidity for conventional players, to
Current Strategies in Attracting Investment and Fostering Development
47
enhance Sharia creditability and, finally, to achieve higher returns for investors and shareholders. • IIFM: An agreement establishing the IIFM was signed in Paris, on 13 November 2001. The IIFM is designed to facilitate a cooperative framework among the financial institutions involved in Islamic finance. It is designed to boost the creation of Islamic financial products and to address the liquidity requirements of the industry. International Islamic Rating Agency (IIRA) The first rating agency for the Islamic banking sector was established in Bahrain, to serve as an assessment body of compliance and regulation. This move reaffirms Bahrain’s efforts to apply best practice in its business and to boost transparency.
Conclusion Bahrain’s strategic economic direction has clearly translated into active steps that have positioned the Kingdom as a frontrunner in economic progress. Bahrain enjoys a business environment that adheres to international standards, and this is constantly being enhanced to meet the growing requirements of an increasingly sophisticated global investment community.
2.2
Investment Flows in Bahrain Rima M Bhatia, Group Economist, Gulf International Bank, BSC
Since 1990, the influence of globalization has led to growing interdependence between economies around the world, creating increased demand for cross-border finance mechanisms. The potency of this force has catalyzed financial innovation and fostered the emergence of an internationally mobile pool of capital and liquidity. Attracting these capital flows is a key challenge for any country, and Bahrain is no exception. Such investment, particularly foreign direct investment (FDI), has enormous potential to create employment, raise productivity, boost exports and attract knowledge and technology, which together form the core ingredients for sustainable long-term economic growth and development. As an established and highly-regarded financial centre, Bahrain has long pursued a liberal policy towards attracting various forms of inward private investment. In recent years, however, this policy has been fine-tuned and the orientation is now decidedly towards enhancing the attractiveness of the island to international investors and businesses in a broad spectrum of economic sectors.
The pro-investment posture Bahrain has always had one of the most liberal regulatory environments in the Middle East, including a complete absence of corporate, personal and withholding taxes and no restrictions on the repatriation of profit or capital.The only exceptions are oil and gas companies, which are subject to a 46 per cent tax rate on income derived from the sale of finished or semifinished products manufactured from natural hydrocarbons in Bahrain. The year 1999 marked a pivotal year for investment in Bahrain. In March 1999, restrictions on the foreign ownership of shares in the
Investment Flows in Bahrain
49
Bahrain Stock Exchange (BSE) were relaxed, allowing GCC nationals 100 per cent ownership of listed companies’ shares and non-GCC foreign nationals up to 49 per cent ownership of listed companies’ shares. The following year in June 2000, the autonomous, semi-private Economic Development Board (EDB) was created to reorient the thrust of economic policy towards enhancing the attractiveness of Bahrain for a wide range of foreign investment and ensuring the active participation of the private sector in economic development. Six main economic clusters have been identified as the focal point of EDB’s strategy to capitalize on Bahrain’s competitive advantages and attract foreign direct investment: information and communications technology; education and training services; tourism; healthcare services; business services; and downstream industries. International companies are permitted 100 per cent ownership in these economic clusters. Bahrain also embarked on a programme of democratization, which began with the unveiling of a new constitution (the National Charter) that was overwhelmingly backed following a referendum. In February 2002, Bahrain established itself as a constitutional monarchy alongside the implementation of a host of political reforms, including allowing women to vote and hold public office. Municipal and parliamentary elections followed in May 2002 and October 2002 respectively. Other important developments during this time that have been conducive to significantly elevating Bahrain’s pro-investment posture include the following. In 2001: • the creation of the Supreme Privatization Council to promote privatization in sectors such as transport, electricity and water, ports and airport services, postal services and oil and gas; • the introduction of a new Commercial Companies Law in place of the previous law, which dates back to 1975; • the United States signed a Bilateral Investment Treaty (BIT) with Bahrain, which obligates national treatment for US investments across sectors with the following exceptions: 1) US investments will receive Most Favoured Nation (MFN) status (and not national status) for ownership of television, radio and other media; fisheries; and privatization of oil, dredging and exploration. 2) With regards to air transportation, the buying or ownership of land, and the buying or ownership of shares traded on BSE, Bahrain is exempt from providing MFN or national status to US investments until January 2005. In 2002: • an official decree places privatization as a key economic policy goal; • a new labour and unions law was unveiled which promotes more flexibility in the labour market for both locals and expatriates;
50
The Investment Climate
• 100 per cent foreign ownership was permitted in new industrial and service companies that establish representative offices or branches in Bahrain. Local sponsors are no longer required; • 100 per cent foreign-owned companies were also permitted to be established for regional distribution purposes, ie commercial sales should be in Bahrain and one more Gulf Cooperation Council (GCC) country; • 100 per cent foreign ownership of land was permitted for all foreign companies. In 2003: • a Tenders Law went into effect outlining standard procedure in government tenders and promoting transparency in the process, and thereby enhancing the potential for wider private sector participation. The significance of this law lies in the fact that outside of the financial services sector, the economy is still dominated by parastatals (both wholly- and quasi-owned). In 2004: • Bahrain and the United States successfully concluded Free Trade Agreement (FTA) negotiations. This is expected to improve flows of trade and investment between the two countries.
Investment incentives Bahrain also offers a host of other incentives for inward investment: • duty-free access to the GCC market; • duty-free merchandise for re-export; • duty-free import of materials and machinery for manufacturing; • duty-free zones at ports and industrial estates; • US$10,000 subsidy for the first three years for each Bahraini employed in a newly-established firm involved in a pioneering industry; US$7,950 for downstream industries; and US$2,650 for factories in existing industries; • 50 per cent tax rebate on electricity charges for the first five years for all industries; • 10–20 per cent tariff protection applicable on pioneering or downstream industries.
Investment Flows in Bahrain
51
Patterns in investment flows Bahrain has traditionally remained a net external creditor in terms of its net International Investment Position (IIP). The net IIP has increased substantially since 1996 and is estimated at US$6.1 billion for year-end 2003, according to latest available official data (see Table 2.2.1). Table 2.2.1 Bahrain international investment position (IIP) (2000–2003) (US$ million) IIP (net) Foreign assets Direct investment abroad Portfolio investment Other investment** Foreign liabilities Direct investment in Bahrain Portfolio investment Other investment** *
2000 5,305 97,082 1,857 12,732 80,902 91,777 5,836 531 85,411
2001
2002
2003*
5,570 93,367 2,122 14,058 75,332 87,798 6,101 531 81,167
6,101 65,252 2,122 19,363 42,175 59,151 6,101 1,592 51,459
6,100 89,920 2,918 22,281 62,865 83,820 6,631 1,857 75,332
provisional data includes loans, currency and deposits
**
Source: Bahrain Monetary Agency Annual Reports – 2002 and 2003
Trends and composition Despite the dramatic increase in global capital flows since the early 1990s, only a trickle has entered Bahrain, indeed the Middle East region as a whole.
Global Consider these statistics by the International Monetary Fund (IMF). Global net capital flows, as measured by aggregate net resource flows,1 to developing countries expanded three-fold between 1990 and 1996, from under US$100 billion to over US$330 billion. The rise is attributed to capital flows from private sources to developing countries, comprising foreign direct investment (FDI), portfolio investment, bank lending, and international bond issuance by developing countries. Such flows accounted for nearly 80 per cent of the total net resource flows by 1996.
1
Net resource flows are total new capital inflows (gross disbursements) minus amortization or principal repayments.
52
The Investment Climate
Thereafter, global net capital flows into developing countries have since halved (to an estimated US$175 billion in 2001), despite a brief recovery in 1999. Nevertheless, private flows have continued to dominate net resource flows, remaining around 60–70 per cent since 1997.
Bahrain Up until 1996, Bahrain’s capital inflows did not exhibit any sustainable trend. For example, after declining nearly 15 per cent between 1989 and 1990 (largely due to the Gulf War), capital inflows remained volatile between 1990 and 1996, and stood at US$65 million (0.7 per cent of nominal GDP), 0.2 per cent of aggregate international capital flows by year-end 1996. Over 93 per cent of these inward flows comprised ‘other investment’, primarily in the form of transactions in currency and deposits, while FDI accounted for only 7 per cent of total flows (US$4.5 million in 1996). Portfolio flows were also negligible in this period. The large size of the ‘other investment’ component is a typical characteristic of capital flows in financial centres such as Bahrain. It was only after 1996 that capital inflows started exhibiting sustained growth, by expanding over 41 per cent to reach US$92 billion up to year-end 2000. In the following year, capital inflows dropped marginally, primarily reflecting the impact of the 11 September 2001 terrorist attacks on the United States.Although this drop was temporary and inward investment quickly recovered, the 2002 year-end inflows still displayed a dramatic drop as a result of Citibank’s (Bahrain) temporary withdrawal of an estimated US$30 billion of its asset book ahead of the invasion/war of Iraq in March 2003 (see Figure 2.2.1). This was returned following the conclusion of hostilities by May 2003. Despite the generally amorphous nature of Bahrain’s capital flows, there have been some very positive developments in the overall nature of these flows in recent years: • For the first time, the stock of portfolio investment crossed the US$1 billion mark in 2002 by recording a robust 150 per cent jump in inflows to reach US$1.5 billion. These flows are estimated to have jumped at least an additional 80 per cent if not more in 2003, although no official figures are available. • Underscoring the expansion in portfolio investment was the increase in inflows into debt securities, which began with the September 2001 launch of the highly popular Islamic Sukuk Bonds2 programme by 2 Islamically structured leasing bonds (Sukuk Al-Ijarah) provide investors with an avenue to invest along Islamic principles. As the host country for the International Islamic Financial Market (IIFM), Bahrain was the first sovereign to issue Ijarah Sukuk bonds in the world. The bonds are supplemented on a monthly basis by short-term Sukuk Al-Salam bills, ie Islamic government bills. Bahrain was also the first sovereign to issue Salam Sukuk bills.
Investment Flows in Bahrain
53
100,000 90,000 80,000 70,000 US$ Mn
60,000 50,000 40,000 30,000 20,000 10,000 0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year
Sources: International Monetary Fund (IMF), International Financial Statistics (IFS) May 2004; IFS Yearbook 2002
Figure 2.2.1 Bahrain’s total capital inflow trends (1989–2002) the Bahraini government. The total value of listed bonds on the BSE has grown from US$511 million in 2001 to US$1.3 billion by 2003. This is largely attributed to the increase in the number of listed Islamic Sukuk bonds from one at a value of US$100 million in 2001, to four at a value of US$480 million by 2003. In addition, there were two non-Bahraini bonds listed on the BSE for the first time in 2003 at a value of US$601 million, while the value of corporate bonds also increased from US$40 million in 2001 to US$260 million in 2003. Finally, in January 2003, Bahrain also launched its US$500 million sovereign Eurobond. • Portfolio equity investment inflows also recorded an unprecedented increase from US$1.2 million in 2001 to under US$400 million by 2002 (see Figure 2.2.2). Figures for 2003 are unavailable. However, the inflow level is likely to have been equal if not higher than the previous year. Underlying such a dramatic growth trend are a combination of factors, primarily events in United States including the start of a protracted downturn in the NASDAQ and other stock market indices in 2000, the 11 September 2001 terrorist attacks; and the subsequent low interest rate environment. Together, the confluence of these developments led to higher inward investment inflows into both the BSE and the numerous mutual funds listed on the island. For example, the value of shares traded on the BSE grew from US$191.5 million in 2001 to US$265.5 million by 2003. More notably, in the year up to March 2003, investment in mutual funds registered in Bahrain grew from US$2.9 billion to US$4 billion (a large part of which was also attributed to a jump in new fund
The Investment Climate
US$ Mn
54
1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 2000
2001
2002
Year Equity Securities
Debt Securities
Sources: International Monetary Fund (IMF), International Financial Statistics (IFS) May 2004
Figure 2.2.2 Bahrain’s portfolio investments (2000–02)
listings during the period), with the total number of funds at 1,478 (29 of which are listed on the BSE – 20 open-ended and 9 closeended).
Foreign direct investment According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report (2003), total global FDI inflows stood at US$651 billion in 2002, the lowest level since 1998 and less than half the US$1.4 trillion level in 2000. Flows declined in 108 of 195 economies, with the main factor underlying the drop being the slow economic growth in most parts of the world and the poor short-term economic prospects. Other contributing factors were falling stock market valuations, lower corporate profitability, a slowdown in the pace of corporate restructuring in some industries and the winding down of privatization in some countries. A large drop in the value of cross-border mergers and acquisitions featured prominently in the overall decline. During this time, FDI inflows into Bahrain were not only negligible but also very erratic; FDI inflows peaked at US$454 million in
Investment Flows in Bahrain
55
1999 before declining to US$81 million by 2001 and then rising by US$218 million the following year. As a percentage of total global FDI flows, Bahrain’s share has averaged a mere 0.027 per cent for most years, with the exception of 1997, when the share stood at 0.068 per cent. Moreover, Bahrain’s share in total FDI inflows into West Asia3 – the grouping under which Bahrain is classified by UNCTAD – is also low at only 9 per cent in 2002. The bulk of FDI into the West Asia region was into Cyprus, Saudi Arabia (in some years) and Turkey (see Table 2.2.2). Bahrain’s FDI inflows performance stands in stark contrast to UNCTAD’s FDI Performance and Potential Index matrix.4 Bahrain has been identified as a high potential and high performance investment destination in the periods 1993–1995 and 1999–2001, while all other GCC states under-performed. Bahrain’s ranking out of 140 countries was 91 for the period 1999–2001.
Looking ahead A cursory overview of domestic investment in Bahrain, and indeed the Gulf region as whole, reveals that equity tends to be privately and informally raised, while there is a complete absence of any structured venture capital industry. As such, businesses have generally not used the stock market to raise capital, while daily trading has tended to be dominated by the small retail investor (albeit that a change in this pattern is underway as mentioned above). Debt financing tends to feature prominently in investments, largely in the form of commercial loans. Bond markets are developing, although the primary market remains dominated by government Islamic Sukuk bonds while corporate debt issuance is still very limited. Finally, in spite of Bahrain’s tremendous potential to attract FDI, overall inflows remain limited and erratic. However, there is little doubt that Bahrain is in the midst of a transition, with inward portfolio investment and FDI likely to exhibit healthy growth going forward. The pro-investment policy stance of the government coupled with supporting external factors is creating a fertile domestic environment to attract such flows. Moreover, numerous other drivers are likely to provide further impetus to this investment growth including: 3 West Asia comprises Bahrain, Cyprus, Iran, Iraq, Jordan, Kuwait, Lebanon, Oman, Occupied Palestinian Territory, Qatar, Saudi Arabia, Syria, Turkey, United Arab Emirates and Yemen. 4 UNCTAD’s FDI Performance and Potential Index matrix ranks countries according to how they do in attracting inward direct investment and what their potential is in that respect.
56
The Investment Climate
Table 2.2.2 Bahrain’s Foreign Direct Investment (FDI) inflows (1991–2002) 1991–1996 (annual (US$ million) average) Global FDI flows of which West Asia Bahrain Cyprus Iran, Islamic Republic of Iraq Jordan Kuwait Lebanon Oman Occupied Palestinian Territory Qatar Saudi Arabia Syrian Arab Republic Turkey United Arab Emirates Yemen
254,326
2,228 650 81 47 2* 4 55 28 91
1997
1998
481,911 686,028
5,918 329 491
6,893 180 264
1999
2000
2001
2002
1,079,083 1,392,957 823,825 651,188
754 454 685
1,523 364 804
5,211 81 652
2,341 218 297
53 1* 361 20 150 65
24 7* 310 59 200 101
35 7* 158 72 250 21
39 3* 787 16 298 44
50 6* 100 147 249 42
37* 9* 56 7 257* 40*
7 418* 3,044
58 347* 4,289
19 113* 780
62 252* 1,884
11 296* 20
41* 326* 350*
105 751
80 805
82 940
263 783
270 982
205* 3,266
225* 1,037
220* 274
232* 139
258* 226
985* 328
515* 6
257* 136
95* 64
8** 120* 201
* estimates ** 1996 figures Sources: UNCTAD, World Investment Report, 2003
• The government is keen to further enhance the already stable and prudently managed banking sector, alongside gradually deepening capital markets. In this regard, the authorities are spearheading a strategy to boost Bahrain as a world-class financial hub through building a niche in seven asset classes: Islamic banking and insurance; private banking; debt; equity; conventional insurance; corporate finance; and remote services. • As part of the financial sector development strategy, Bahrain is developing a US$1.3 billion financial city, the Bahrain Financial Harbour (BFH), through which it aims to attract inward investment and further bolster the island’s position as a premier financial centre. BFH will comprise financial institutions, investment companies and corporations, and will also house institutions operating in capital and retail banking markets, and asset management as well as insurance.
Investment Flows in Bahrain
57
• Investment promotion efforts are being supported by the government at the highest level, while free zones are being established to foster such investment. Currently, the Hidd Industrial Area is being developed with state-of-the-art infrastructure, power and gas supply, and advanced networks of roads and communications to attract foreign investment. • Bahrain is a member of the World Trade Organization (WTO) and, as such, is lowering barriers to entry as part of the organization’s non-discriminatory and liberal rules-based system. • The government has recently signed numerous bilateral agreements (ie with Thailand, China, Malaysia, Singapore, Philippines, Bangladesh and India), which seek to encourage trade and investment (portfolio and FDI) flows. • Mergers and acquisition (M&A) typically comprise a large part of FDI flows, and this has yet to occur for Bahrain. There are numerous M&A opportunities in the Gulf region, most notably in the financial services sector. Given Bahrain’s prominence as a financial centre, there is increasing potential for cross-border M&A opportunities between Bahrain-based banks and other regional, or even international banks. • There are growing opportunities for private sector participation, particularly in utilities. Bahrain’s first independent power plant (IPP), Al-Ezzal is underway while, partial privatization in numerous other economic sectors is being undertaken or under consideration. In late 2002, the telecommunications sector was liberalized, following which MTC Vodafone was awarded a mobile telecommunications licence. • Opportunities for foreign investment are also emerging in established industries. For example, it has recently been reported that negotiations are underway for Alcoa (US) to undertake a 26 per cent stake in Aluminium Bahrain (Alba).
Acknowledgment Many thanks Ms. Mala Javeri, Research Analyst, (Gulf International Bank, BSC) for her assistance in the data compilation for this paper. The views and interpretation of data in this paper reflect the opinion of the writer and not necessarily those of Gulf International Bank (GIB), BSC. GIB has no liability whatsoever for the accuracy of the paper’s contents or the consequences of any reliance which may be placed on it.
2.3
The Development of Corporate Governance in Bahrain Dominic O’Neil and Roly Denman, Trowers & Hamlins Law Firm, Bahrain
Introduction Corporate governance may be defined as the system by which companies are directed and controlled. Whilst there is no legislation that specifically relates to corporate governance in Bahrain, various provisions in existing legislation have the effect of regulating the way in which companies are directed and controlled. In particular, the way in which companies are permitted to operate is governed by the Commercial Companies Law (Legislative Decree No. 21 of 2001) and its Implementing Regulations (Ministerial Order No. 6 of 2002) (the Law). All companies operating in Bahrain must take one of the legal forms provided for in the Law and comply with its provisions, and there are a number of different corporate vehicles available to investors. In this chapter, references to a company are to a Bahrain public joint stock company unless otherwise indicated. Corporate governance can be placed in the context of duties of directors, the company secretary, financial reporting and the company auditor. Governance now also embraces issues such as the annual general meeting, communications with third parties and relationships with shareholders.
Directors Any discussion of corporate governance must be placed in the context of directors’ duties. One aspect of the function of directors is to ensure the preservation and enhancement of the company’s assets, whilst the
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other concerns the duties and liabilities of directors with respect to the company, its employees and third parties. A Bahraini joint stock company, be it public or closed (ie private), must establish a board of directors to administer its operations. In the case of a public joint stock company, there must be a minimum of five directors, whilst for a closed joint stock company the minimum required number is three. In each case, the term of office of a director must not exceed three years. The Ministry of Commerce retains a qualified right to dissolve a company’s board of directors if the company: • experiences adverse financial or management conditions; • suffers substantial losses affecting the rights of shareholders or rights of its creditors; or • commits serious breaches of the Commercial Companies Law. The Ministry may only exercise this right where, on an inspection of the company’s accounts and records, it has prepared a report that confirms that one of the above events has taken place. In addition, the Ministry may dissolve the board if the board is unable to conduct its business due to an inability to attain the necessary quorum. First and foremost, company directors in Bahrain are responsible to their shareholders. They are required to exercise due care and diligence in the course of their duties and will be held jointly liable to any damages that may be sustained by the company or by third parties as a result of a failure to do so.
Non-executive directors Article 177 permits a company’s general meeting to appoint a number of experienced members to the board of directors who are neither shareholders nor promoters of the company (non-executive directors). As members of the board, non-executive directors must comply with the duties and obligations placed on directors by the Commercial Companies Law and other related laws. Notwithstanding this, the specific role of the non-executive director, over and above his/her role as a member of the board, is to assist in the development of the company’s strategy by: bringing his or her own expertise to the board; voicing an independent opinion (being one step removed from the executive management of the company); reviewing the performance of the board and the executive management; assisting in areas of conflict or potential conflict; and ensuring that directors are accountable to the company’s shareholders.
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In this regard, a non-executive director will attend board meetings and general meetings and will be remunerated in recognition of his independent and expert contribution on various issues, including risk, strategy and performance and of his/her supervision of the executive directors.
Directors’ remuneration A company’s articles of association must specify the remuneration of directors and non-executive directors. The Law limits the amount of such remuneration to 10 per cent of the company’s net profit after the deduction of legal reserves. Article 189 of the Commercial Companies Law prohibits a director of a company, or any of its managers, from having an interest, whether directly or indirectly, in any transactions or contracts made on behalf of the company, unless the director has obtained the consent of the general meeting. Any such contract entered into will be declared null and void. In addition, a director must declare to the board any personal interest, whether direct or indirect, that he has or may have in any matter placed before the board for discussion. The declaration must be noted in the minutes of the board meeting and the interested director is not permitted to participate in the discussions or voting in respect of the matter. The chairman of the board must specifically inform the general meeting of the outcome of discussions in connection with the matter and must table a special auditor’s report. Any such contracts or transactions entered into by the company must be disclosed in the company’s financial statements.
Board meetings Board meetings may be convened upon the summons of the Chairman or alternatively, by at least two members of the board. To constitute a quorum, the presence of more than one half of the Board’s members including the Chairman must be present. The majority voting system is to be adopted. However, in the case of equality of votes, the Chairman shall have the casting vote. Article 194 states that minutes of board meetings must be entered on a regular basis after every meeting in a special register. The said minutes ought to be signed by the Chairman, any members who attended the meeting and the Board Secretary; thus, they shall ultimately be liable for the accuracy of the minutes. In addition, the minutes must contain information concerning the names of the members and non-members of the board present at the meeting, including those who failed to attend providing a reason for their
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absence. A detailed summary of all the board’s discussions, including developments and requirements of members must be also be recorded. In the event of a dissenting member who wishes to object to a resolution by the board, his objections must be recorded in the minutes.
The Annual Report The annual report is a primary instrument in communicating to shareholders all corporate governance issues. An open approach in discussing such matters must be adopted in order to produce an efficient working environment for the market economy, enabling the board to take prompt action whilst simultaneously allowing the shareholders to scrutinize the company’s actions more thoroughly. The Board of Directors must publish a copy and a detailed summary of the annual report in a local daily newspaper in Arabic at least 15 days before convening the general meeting. The publication of a balance sheet, profit and loss account and a full text of the auditor’s report must also be provided. The annual report must state that the company is committed to high standards of corporate governance. The characteristics of the annual report ought to cover: remuneration; nomination; audit and internal control and communications. Articles 362(g) provides a fine of BD5,000 for breaches of the Companies Law, which includes the preparation of any reports that come under the responsibilities of any director.
The Annual General Meeting The Board uses the AGM essentially to communicate with private investors and encourage their participation. However, it has also become the forum to discuss a wide range of governance issues. The power to convene an AGM may be exercised by the Chairman, the Board of Directors and auditor. The Ministry of Commerce and Industry may also summon an AGM in the event that one month has elapsed from the date fixed for its convention without it being summoned, or in the event that the number of the members of the Board of Directors is less than the minimum required for the validity of its convention, or provided there are legitimate grounds for requisition by shareholders holding at least 10 per cent of the capital. The Minister of Commerce and Industry also has the power to convene an AGM if it is felt that there are serious grounds for such a meeting. In such an event, the Agenda shall be prepared by the individual who convened it. The summons must include the date and the venue prescribed in the company’s Articles of Association and must convene at least once every year within the six months following the date on which the financial
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year of the company ends. The summons must be published in at least two Arabic newspapers, one of which must be local. Copies of the summons must also be forwarded to the Ministry of Commerce and Industry at least 10 days prior to the date of the meeting. Only topics mentioned in the Agenda may be discussed at the meeting; however, if an urgent matter has arisen subsequent to the preparation, it may be discussed. Any resolutions resulting from such matters must be referred to the Ministry of Commerce and Industry, otherwise they will be deemed null and void.
Governance and insider dealing Poor performance and abuse of authority by the directors of the company paves the way for corporate failure. It is essential for a company to implement internal mechanisms that ensure the compliance of the company’s objectives and underpin the overall management and running of the company. Article 185 states that all directors owe a duty to the company, its shareholders and any third parties to fulfil all their duties and to act in good faith. Any act involving betrayal of trust, misuse of power, breach of the Law or of the company’s Articles of Association or mismanagement of the company can result in action against the board. The company has the right to institute an action against any of the directors involved if the wrongful acts committed by them resulted in damage to all shareholders. A resolution needs to be passed at a general meeting to institute the action.
Shareholders Shareholders play an additional role in good corporate governance.
The right to vote The owner of ordinary shares in a company has the right to vote at the ordinary and extraordinary general meetings of the company. Notice of general meetings, including the Agenda, must be published in at least two Arabic newspapers at least 15 days prior to the scheduled date of the meeting. Resolutions of the ordinary general meeting are passed by a simple majority of the shares represented at the meeting and the following matters, together with any matters included on the Agenda that do not fall within the jurisdiction of the extraordinary meeting, are to be decided upon at the ordinary general meeting:
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1. 2. 3. 4. 5. 6. 7.
the election or dismissal of board members; decisions with respect to the remuneration of the board; consideration of the company’s annual report and financial statements; the absolution of the directors from liability; the appointment of an auditor; review of the auditor’s report; the approval of financial statements, together with the allocation of net profit and the payment of any dividends; and 8. the discussion of any recommendations for issuing bonds, borrowing, mortgaging, or issuing guarantees. Any proposals to amend a company’s Memorandum and Articles of Association, to increase or reduce its share capital, to dispose of the entirety of a company’s business and to dissolve, convert or merge the company must be dealt with at an extraordinary general meeting (EGM). An EGM is not valid unless attended by shareholders representing two-thirds of the company’s capital. Resolutions of the EGM are passed by a majority of two-thirds of the shares represented at the meeting, with the exception of resolutions in connection with a change to the company’s share capital, an extension of its duration or its winding-up, or conversion or merger with another company – all of which require a majority of three-quarters of those shares present.
Institutional shareholders Changes in regulations have resulted in a drive towards the local Bahraini market, due to the ill-performance of overseas markets. This paved the way for institutional investment in Bahrain to flourish, as there has been an increase in foreign ownership and a growing number of investment funds actively investing on local stocks. Accordingly, institutional shareholders are increasingly demanding a voice in corporate governance. This requires a greater level of accountability, transparency and provision of back-office resources to ensure that they can play an effective role as concerned and active shareholders. The involvement of institutional investors will ultimately lead to the enhancement of corporate governance, as they may be classed as controlling shareholders in class actions against the company. Therefore, institutional investors are most likely to undertake their duties with the utmost scrutiny.
2.4
Living and Working in Bahrain Leon Fabrikanov, Ecka Granules GmbH & Co
Introduction Bahrain is an archipelago of 33 islands and has a very long and distinguished history that is considered unique in the Arabian Gulf region. It has been a cradle for civilization for the past 5,000 years and it is even mentioned in the first recorded travel records by Gilgamesh, the ancient king of Samaria. It has also been historically referred to as the Garden of Eden, as the island has a natural abundance of fresh water from subterranean sources and hence is green with farming plantations and palm trees in its northern third. Being the major source of fresh water between the trade routes of the civilisations of the subcontinent and those on the rivers Tigress and Euphrates, has meant that Bahrain has been a major trading hub for thousands of years. This exposure to other cultures has created a people that are friendly and tolerant of those from other cultures, and Bahrainis are renowned within the region for their friendliness.
Working environment Since the mid-1990s, Bahrain has undergone a shift in the workforce demographic. Under this shift, called Bahrainization, there is a very high proportion of Bahrainis in the workforce and this workforce is augmented by western and Asian expatriates with specific skills in key areas. Hence, in most companies, expatriates will be mixed and interact with a high percentage of Bahrainis, which leads to a very friendly and relaxed work environment. However, potential expatriate employees should understand that their employment in most companies is for the use of their specialist knowledge to add value wherever there is a lack of local expertise; hence, in some cases, there is
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a great reliance on the skills and commitment of expatriate employees in order to allow the company to function as intended. It may also be a requirement to act as a mentor for junior Bahraini employees in the company as part of a transfer of skills and knowledge that is informal but serves to enhance the local skills base. This is looked upon as an honourable undertaking because it is seen as a way in which Bahrain can evolve the local skills base for its long-term competitive advantage and development. It is also important for any potential expatriate to understand that he or she will be looked at not only as an individual but as a representative of his/her country. This fact is important because Bahrain, as well as the rest of the Gulf, is a very wellnetworked community. Therefore a good reputation, whilst taking a while to establish, can be a very important professional and personal asset.
Recreation While expatriates freely mix with Bahrainis in the workplace, friendships are usually along the lines of gender. Although Bahrain is a developing constitutional monarchy and undergoing great democratic and economical changes, society is still conservative in some aspects. Men and women do mix freely in the workplace. However, this is on a professional level and is quite limited on a social level. Social interactions are based on traditional values, so one should not automatically expect to bring one’s spouse when asked to dinner at a Bahraini colleague’s home; such interactions are usually undertaken in single gender gatherings. As a precaution it is always a good idea to check these details first with your Bahraini work colleagues. Having said this, Bahraini people are generally very warm and friendly and are open to questions about their culture and country. They also respond well to expatriates who have a similar mind-set. Other important facts relate to the different approach to children as Arabic culture is very open and tolerant of them, especially in public where one should not be surprised if expatriate young children are given special attention by Bahraini women or girls. Their forwardness in touching or talking to children is natural and innocent and is a sign of the friendliness and the family orientation of the local community. Given the boom in development that Bahrain has undergone in the last decade, there are a number of large shopping malls that are well airconditioned and contain everything from western groceries to designer labels to amusement parks. This proliferation has had an effect on the local lifestyle as, being a very socially and family-orientated people, a large part of their time is taken up in these shopping malls, especially
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during the hot summer months, where families can interact in large social groups with friends in air-conditioned comfort. For expatriates, Bahrain represents a very safe, family-orientated lifestyle that is beyond the reach of many middle class people in the western world. It is particularly easy for English speakers to work and live in the Kingdom, as English is understood and spoken by the vast majority of local people. Furthermore, as Bahrain is only one to two hours ahead of Europe, it is very easy to do business in real time with EU countries. The sun sets quite early in comparison with European summer time, but the warm weather and high standard of recreational facilities allows most sporting and recreational activities to continue after dark. Whilst being able to enjoy the lifestyle and economic benefits offered in Bahrain, expatriates can also drive around the country as there is no restriction on driving, provided an individual has a valid local or international driving licence. The road infrastructure is also very good and makes up for the lack of a proficient public transport system. Bahrain is almost unique in the Gulf, in that is has a great number of high-quality restaurants that are located in stand-alone premises (ie not part of hotels) and where alcohol can be served to patrons without the need for special permits. There are also many affordable recreational options for expatriate families via a number of clubs that are open to all residents. Such clubs usually offer a mixture of inexpensive high-quality food, pubs, swimming pools, gyms and other sporting facilities that are designed to cater for the needs of the entire family. These are highly popular with expatriate residents as they are inexpensive and the sunny weather is conducive to water sports and many other types of outdoor activity. This is also enhanced by the fact that most families find they have a new degree of freedom in their social lives because they can afford to hire a housemaid and/or nanny. Having a live-in nanny, who is usually an expatriate from Asia, to act as a baby-sitter and housemaid, significantly changes the lifestyle of most expatriate families.
Education Other facilities for families include a very highly regarded school system catering for British, American, Indian and other curricula. These are long-established schools operating with selected expatriate teachers. The schooling system for expatriates is operated for all levels up to university matriculation.
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Dress code There is also no official dress code as Bahrain has such a diverse number of people from all around the world, and one can see several national dress styles within a single trip to the supermarket. However, there are some guidelines for dress that should be followed based on respect for the local community, which can still be conservative by nature. Such guidelines are only voluntary, but to show sensitivity to local culture is seen as good manners. For example, women can wear almost anything, although long sleeves and knee-length skirts would be more appropriate and would not stand out from the crowd. For men, again nothing is prohibited, although long trousers are culturally respectful, especially when out in village markets and shops.
Permits When dealing with legal and financial matters, as well as for all aspects of immigration and residency permits, the sponsoring company usually has a ‘fixer’ who is a specialized office assistant or manager and who takes care of all such details. Therefore, the process is fairly easy for most individuals and families. However, it is important to understand that the bureaucratic process takes time and there are usually several processes required before most official paperwork is completed. This point is meant to highlight the fact that delays are common but do not cause problems in the vast majority of cases, and it is helpful, on many occasions, to have patience. In addition, once an expatriate is established, the company’s office assistant, in most cases, will also take on the task of paying the bills and do all the running around that is normally associated with that.
Tax From a business perspective it should be noted that Bahrain is totally tax-free for personal income and allows unrestricted movement of money, whilst adhering strictly to WTO rules.
Accomodation In comparison with most other countries in the region, it has comparatively low commercial and private residential rental costs, whilst having an exceptionally high standard of accommodation for professional expatriates and their companies.
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Security Much has been made in the western media about how the Middle East has many security issues pertaining to local and expatriate workers. Bahrain has often been the victim of collectivization, where all the countries in the broader Middle Eastern region are seen as one entity. In reality, the Kingdom of Bahrain is a safe and well-secured island – as attested by the almost total lack of historic or recent terrorist activity. This situation is maintained through a combination of many factors, including the manageable size of the country, effective controlled access to and from the island, and the proficiency of the security forces, who have been integrated into the broader international community. Other factors that reduce the risk include the demographic make-up of Bahrain’s population and the process of democratization that has allowed society to move away from radical views.
2.5
Market Research in Bahrain Aldrin Stephen Luiz, Research Director, InCite Marketing Research WLL
Existing published data When considering doing business in any country, companies need statistics that provide a basic understanding of the potential the market can offer. The population size with a demographic analysis is the most obvious requirement. Reliable import and export data, economic indicators such as GDP and information regarding domestic household expenditure are other useful guidelines a marketer keenly uses when considering market entry or development. Even specialist market research agencies operating in the Gulf find it difficult to source reliable secondary data for most GCC states, let alone companies based overseas that are less familiar with the region. Bahrain is one of the few Gulf countries where a wealth of vital statistics is readily available. The Statistics Directorate, part of the Central Statistics Organization (CSO), publishes various statistics tracking Bahrain’s socioeconomic developments including the following: • Population census. Last conducted in 2001, the census records comprehensive statistics on the population, residential buildings and business establishments. • Statistical abstracts. Researchers consider this book, updated annually since 1968, an important statistical publication, revealing vital information about the social, economic, education and health conditions in Bahrain. • Foreign trade statistics. This annual publication provides researchers and businesses with accurate and up-to-date statistics relating to Bahrain’s import, export, re-export and transit trade.
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• Bahrain in figures. A concise yet information-packed leaflet published annually that summarizes the statistical abstracts and foreign trade statistics. • Household income and expenditure survey. This survey provides useful insights into the consumer habits of families in Bahrain. The last one was conducted in 1993–94 and the exercise is normally repeated every 10 years. All publications with the exception of the household income and expenditure survey are available online (free of charge) at the Directorate’s website (www.bahrain.gov.bh). For information not already available, researchers can approach the CSO office, where helpful staff normally furnish the required information (subject to availability) within a day or two. Research agencies in Bahrain eagerly use the services of the Directorate as a reliable secondary data source to help calibrate recommendations from research findings based on interviews. The more data is available about the population of a country – be they consumers, businesses or retail outlets – the more accurately research agencies can project their findings to ensure that they are representative of the population as a whole.
Off-the-shelf data available from research agencies Market research agencies have been operating in Bahrain for decades and therefore the industry is well established. Continuous multiclient surveys such as retail audits and media tracking services have been available for many years. Their findings are mostly relevant to multinational manufacturing companies marketing fast-moving consumer goods. The retail-based audits provide brand share, distribution and allied data on consumer goods, and they are a useful tool in monitoring the development of brands in terms of demand and retail visibility. Some manufacturing companies and advertising agencies also subscribe to tracking studies for consumer media habits in helping to optimize their advertising spend. There are other syndicated and continuous surveys operated by various research agencies with the aim of offering regular market research data cost effectively.
Research agencies and their services There are half a dozen specialist research companies in Bahrain. An encouraging sign of the growing market research industry on the
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island is the emergence – in addition to well-known international research groups – of smaller and medium-sized research agencies. Their research consultants work and live in Bahrain and they have, therefore, an unrivalled insight into the domestic market, with a sound grasp of the local culture. The notion that all Gulf states are more or less similar is incorrect and therefore a local perspective adds value. This does not mean that research agencies in Bahrain only have national capabilities; on the contrary, Bahrain’s somewhat modest domestic market in terms of population size encourages the business community to explore export opportunities in neighbouring countries and beyond. Practically all research agencies respond either by extending their capabilities – their own or through networking – into other Gulf states and even into the Levant. To research users the convenience of working with one agency for multinational studies with the reassurance of uniform execution in all relevant countries is often preferable and more economical than dealing with separate agencies in each country. All research companies in Bahrain are full service agencies offering both qualitative and quantitative expertise. Essentially qualitative research (eg focus groups) is exploratory in nature and often used to generate ideas and to probe (mostly) consumer attitudes. Quantitative research adds a numeric perspective by interviewing large numbers of respondents with a structured questionnaire. Understanding is gained through measurement. Reputable agencies are staffed by research professionals who are well-versed in mainstream market research techniques in both quantitative and qualitative disciplines. Larger international research groups in Bahrain offer a wider range of research models for in-depth analysis. These are primarily designed for the needs of multinational clients to monitor their brand or advertising performance. Historically, most research practitioners in Bahrain were expatriates from Europe or South Asia. In the last decade, thanks to the higher educational standards on the island, professional Bahraini researchers have come to the fore, offering unmatched understanding of their own market. Although few agencies are wholly staffed by Bahrainis, their contribution to the market research community is accelerating. As is common in this part of the world, most research agencies employ part-time staff for conducting the interviews. Some of the more common surveys that research agencies handle are on the following topics: • advertising concept/positioning development; • advertising tracking; • brand equity evaluation;
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• brand switching opportunities; • census surveys; • consumer lifestyle; • customer satisfaction; • retail distribution/merchandising; • corporate image; • employee surveys; • feasibility/market entry studies; • market experiments (shop tests, test markets); • mystery shopper surveys; • new product development; • packaging research; • price sensitivity; • product placement tests; • usage and attitude surveys. Unlike in the West, the concept of online (internet) surveys is still very much a novelty and traditional survey instruments such as telephone, face-to-face and postal interviews dominate. Research agencies employ a number of quality control procedures to enhance the quality of the data collection. The scope and type of procedures vary substantially from agency to agency. Typical procedures for field operations include logic checking of completed questionnaires and back checking a random sample of interviews. These also extend to data processing where match verification ensures accuracy of the data entry.
Practicalities of market research As is the case with many other Gulf states, Bahrain has a sizeable expatriate population of nearly 40 per cent. At an annual rate of almost 4 per cent, the population is growing steadily and this rejuvenates the dynamics of change: 37 per cent of the Bahraini population is younger than 15. Bahrain is an Islamic country, with both Shi’a and Sunni Muslims, but other religions are also tolerated. Expatriate workers (58 per cent), mainly from the subcontinent and Southeast Asia, dominate the country’s labour market. In short, the population of Bahrain is richly diverse in lifestyle – traditional as well as progressive.
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Research consultants must understand, respect and accommodate in their research practice the sensitivities of different lifestyles, especially when driven by Islamic or ethnic values. Any survey that aims to represent the Bahraini population at large deals with different nationalities and, even among the Bahrainis, a multiplicity of lifestyle values. Bahrainis are hospitable and this helps the researcher to find willing respondents. However, cordiality may extend into providing overly accommodating answers. The gap between what is said and what is actually done is influenced by the culture of the respondent. It is generally wider with Asians compared with Westerners. This is especially of concern when dealing with concept or feasibility studies whose aim is to predict future behaviour. An understanding of this phenomenon is critical in the interpretation of findings when the researcher is preparing recommendations. Answers from respondents cannot always be taken at face value. In all of the GCC states, random sampling in quantitative research is at best difficult because the method relies on intercepting respondents freely. In Bahrain, this is generally not possible with females for cultural and religious reasons. Research agencies usually resort to a method based on referrals to achieve a required sample, but this inevitably leads to an inherent bias. Various techniques are used to minimize this effect, but it cannot be completely eradicated. Similarly, in arranging focus groups great care needs to be taken with the composition of respondents and the choice of the moderator. Mixing gender for Bahraini groups is not only counter-productive, but is considered embarrassing and offensive. Of course, research agencies advise their clients in this respect, but companies considering research need to be aware of the parameters within which surveys in Bahrain are conducted.
The importance of market research Generally, just under 65 per cent of new businesses fail within their first three years and, according to The Wall Street Journal, as many as 86 per cent of new brands suffer the same fate. Listening to customers – be they prospective or existing – and adapting to their constantly changing wants and needs is critical in creating as well as maintaining excitement and demand for products or services. Market research can definitely help maximize the potential of initiatives – in whichever area of the marketing mix – or prevent costly misjudgements by bridging the perilous cleft between the marketer’s perceptions and the reality of market dynamics. This applies to any idea – a new business, changing or developing new services/products, advertising, packaging etc – that demands precious investment of a company’s time and capital.
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Fundamental to this is obtaining accurate and relevant information. However, more important, making sense of it all with wellreasoned recommendations is the kind of calibrated understanding companies need to steer clear from sombre statistics. Bahrain’s market research agencies are well equipped to provide solid guidance, but as with choosing any supplier, companies interested in conducting a survey need to ensure that the range of capabilities and credentials suit the particular need at hand. Selecting an agency registered with the European Society for Opinion and Market Research (ESOMAR) offers the best reassurance on standards. ESOMAR is a global organization of research practitioners and it sets out as concisely as possible the basic ethical and business principles that govern the practice of marketing and social research. It also specifies the rules that are to be followed in dealing with the general public and with the business community, including clients and other members of the profession.
Part Three Bahrain: The Regional Financial Hub
3.1
Bahrain: The Financial Capital of the Middle East Bahrain Monetary Agency
Bahrain has been at the heart of international trade for many millennia, first as an entry-point between Mesopotamia and the Indus Valley and then as a focal point for the trade in pearls with merchants across the Indian Ocean. Today, however, Bahrain is best known as the leading international financial centre in the Middle East. Banking first came to Bahrain in 1921 and remained modest in scale for the succeeding 50 years. Then, in the early 1970s, increased wealth across the Middle East, the result of the oil boom, created a demand for a high level of banking and financial services, which Bahrain was well placed to provide. Concurrent with this was the formation of the Bahrain Monetary Agency (BMA), which was to play an important role in developing Bahrain into the international financial market it is today, with more than 360 banks, financial institutions, insurance firms and capital market companies. The growth of Bahrain into a financial centre of international stature has taken little more than a quarter of a century and could not have been achieved without government policies that have achieved political and economic stability. Recognizing the need to diversify the national economy away from a dependence on oil, the government adopted a policy to develop other industries. The emergence of a vibrant financial services industry of international repute is ample testimony of the undoubted success of that policy. The formation of the BMA in 1973 gave an added impetus to Bahrain’s aspirations to establish a banking centre of excellence. Today, the country is well established as the financial capital of the Middle East and the BMA has earned an international reputation as
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the most highly regarded and innovative regulator in the Middle East region. The financial services industry has grown to become a major sector of the national economy. In 2003, the industry’s contribution to GDP was almost 20 per cent, compared with 1.1 per cent in 1970. Foreign direct investment (FDI) in the industry is also substantial, currently standing at about US$6 billion. The growth and development of the industry has been underpinned by a buoyant, free market economy, which posted real growth of 6.8 per cent in 2003. The government has, over the years, pursued a prudent fiscal policy to ensure ongoing diversification and to maintain monetary stability. This approach has clearly paid dividends as Bahrain enjoys a sovereign rating of A- from international rating agencies Standard & Poor’s (S&P) and Fitch. In December 2003, S&P upgraded Bahrain’s foreign debt outlook to positive, from stable, while Moody’s upgraded the country’s ceiling for foreign currency bonds. The ratings are ample testimony of the inherent strengths of the country’s economy. Management of Bahrain’s economy has also earned accolades from such organizations as the US-based Heritage Foundation, which has, in recent years, consistently ranked Bahrain as the freest economy in the Middle East/North Africa (MENA) region. The Kingdom also tops all other Arab countries in terms of FDI inflows, according to the United Nations Annual World Investment Report for 2002, as well as in terms of industrial performance, according to the 2002–2003 Industrial Development Report of the United Nations Industrial Development Organization (UNIDO). These ongoing positive developments have been a result of Bahrain’s position today as the financial capital of the Middle East. For its part, the BMA has pursued a regulatory and policy framework in line with international standards, as an essential basis for financial services to flourish. In addition, an absence of foreign exchange controls and a policy of pegging the Bahraini dinar to the US dollar have provided a mixture of flexibility and stability that facilitates international financial flows. As a result, an international financial services industry of depth and breadth has developed in Bahrain. As the industry continues to develop, Bahrain remains focused on its evolving needs. A more recent phenomenon has been the growing inter-dependencies and synergies across different sectors within the industry. Such an expansion of the financial sector, indicative of Bahrain’s coming of age as a financial centre, has been the reason behind the move to create a single regulator for the industry. In August 2002, BMA assumed responsibility for regulating the entire financial sector, including banking, insurance and capital
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markets. The move is yet another demonstration of the government’s strong commitment to the continuous development of Bahrain as an international financial centre and to maintain its leadership position in this arena. The country’s well-established, mature and vibrant banking and financial services industry represents the largest concentration of financial institutions in the Middle East. The institutions, a unique blend of international, regional and domestic players, offer a diverse range of services, including money market and portfolio management, investment advice and insurance products involving risk transfer and capital accumulation.
Commercial banking Modern day commercial banking in Bahrain traces its beginnings to the 1920s, with the establishment of the Standard Chartered Bank. The sector witnessed rapid growth in the late 1960s and early 1970s when the country began enjoying enhanced revenues. The more recent licensing of GCC-based banks has arisen, at least in part, from intraGCC agreements to allow institutions based in one member country to operate in another as a local bank. As at May-end 2004, there were 25 full commercial banks (FCBs) operating in Bahrain; of these, eight are locally incorporated and 17 are branches of foreign banks. The consolidated balance sheet of FCBs stood at US$12.8 billion at March-end 2004. Following the early growth in local commercial banks, BMA recognized in 1973 that the local banking community at that time had limited capacity for dealing with the large amounts of money then circulating. With this and the country’s desire for economic diversification in mind, BMA recognized the country’s potential for becoming an international financial centre. Thus, it was that BMA took what was to be a landmark decision to allow offshore banking units (OBUs) to operate out of Bahrain as a channel for investing the region’s surplus liquidity. Crucially, Bahrain was able to offer potential participants political stability and a relatively free economic system; a tax efficient environment; adequate infrastructure, including world-class telecommunications; readily available office and commercial accommodation and a comfortable environment in which to live and work. However, whilst encouraging international banks to come to Bahrain, BMA continued to remain selective, only licensing those banks of high international standing and from as wide a geographical spread as possible. The first OBUs to start operations, Citibank and Algemene Bank, did so in 1975 and, by the end of 1977, 30 OBUs had been formed and their
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assets had increased from US$1.7 billion in 1975 to US$6.2 billion in 1977. Today, there are 51 OBUs based in Bahrain. The assets of the OBUs stood at US$83.6 billion at March-end 2004, representing the 82.1 per cent of the consolidated balance sheet of the banking system in Bahrain.
Islamic banking Bahrain has also firmly emerged as the global centre of Islamic banking and finance. The country hosts the region’s largest concentration of Islamic financial institutions, with 28 Islamic financial institutions and nine Islamic insurance (takaful) companies. BMA was quick to recognize the growth potential of the Islamic banking and finance industry, following the establishment of the first Islamic bank in Bahrain, Bahrain Islamic Bank, in 1979. The country also plays host to five key industry-support organizations: the General Council for Islamic Banks and Financial Institutions (GCIBFI); the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI); the International Islamic Financial Market (IIFM); the International Islamic Rating Agency (IIRA); and the Liquidity Management Centre (LMC). Bahrain’s Islamic financial institutions offer a diverse range of products, which include traditional Islamic structures such as Murabaha, Ijara, Mudaraba, Musharaka, Al-Salam and Istisna’a, as well as restricted and unrestricted investment accounts, syndications and other structures used in conventional finance, which have been modified to comply with Sharia principles. Recognizing the unique characteristics of Islamic finance, BMA was the first central bank to develop and issue comprehensive prudential regulations for Islamic financial institutions. The Prudential Information and Regulatory Framework for Islamic financial institutions (PIRI), introduced in 2002, covers issues related to capital adequacy, asset quality, the management of investment accounts, corporate governance, earnings quality and liquidity management. To support the growth and advancement of the industry, BMA has also been at the forefront of developing and issuing Islamic bonds (sukuk). A rolling programme of monthly issuance of short-term securities, Sukuk Al-Salam, has been in place since June 2001. The BMA has played a pioneering role in developing the medium- and long-term Ijara Sukuk asset class, which has universal appeal as an Islamic variant of a conventional fixed income tradable instrument. Recently, BMA acquired the unique status of being the issuer of a longest tenor Sukuk Al Ijara, when it made a 10-year issue in the market. The BMA also made its debut entry in the eurobond market in June 2004, by
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issuing under Regulation S format. As of October 2004, BMA has made 10 Sukuk Al-Ijara issues, with a cumulative outstanding value of US$1.136 billion and 41 issues of Sukuk Al-Salam, worth a total of US$1.025 billion, of which US$75 million is outstanding. The success of Bahrain as a centre of excellence for conventional and Islamic banking and finance is also due to BMA’s commitment to implementing rigorous regulation that conforms to the highest international standards. The regulations are continuously reviewed, upgraded and modified whenever appropriate. BMA implemented the 1988 Basel Capital Accord in 1992 with market risk capital requirements in 1998. It has been adopting IAS for over 10 years. BMA works closely with other multilateral agencies, such as the International Monetary Fund (IMF), World Bank, Basle Committee on Banking Supervision, International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO), to stay abreast of international developments related to the world of finance. BMA also works closely with other monetary authorities and maintains especially close relations with authorities in London, New York, Hong Kong, Singapore and, with particular regard to Islamic banking matters, Malaysia, as well as with those within the neighbouring GCC and Arab countries via committees. Such cooperation has been of vital importance in recent years as governments around the globe have sought to prevent money laundering and the financing of terrorist activities. BMA implements the Financial Action Task Force’s recommendations on money laundering and terrorist financing. In the past two years, BMA has significantly upgraded its legal and regulatory framework aimed at combating money laundering and terrorist financing issues in the banking sector. This year, BMA has issued anti-money laundering (AML) regulations for the country’s capital market, while similar regulations are being finalized for the insurance industry.
Insurance Bahrain’s insurance industry first emerged in 1950 and has grown to become a prominent element within the country’s financial services sector. In the 1950s and 1960s, Bahrain was the Arabian Gulf ’s major trading centre, with its merchants having established commercial links with producers worldwide, a situation that continues to this day. As trade grew, there became an increasing need for insurance to protect merchants’ interests which, in turn, led to the establishment not only of an increased number of local agents of international insurance companies but, over time, to the establishment of locallyowned insurance companies.
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Today, Bahrain’s insurance industry totals 163 firms, of which 21 operate in the domestic market, which generated gross premiums worth US$180 million in 2002. The country also hosts the leading Arab reinsurer, Arab Insurance Group (Arig), as well as two insurance syndicates, the Arab War Risks Insurance Syndicate (AWRIS) and the Federation of Afro Asian Oil and Energy Insurance Syndicate. Having taken charge of regulating the insurance industry from the Ministry of Commerce in 2002, BMA is currently implementing a number of initiatives to further advance the insurance sector. Among these are the introduction of a framework specifically tailored to takaful companies and to captive insurers. The initiatives include a major project to upgrade regulation. A complete insurance rulebook, covering all aspects of regulating insurance, is now being finalized. It will be issued in January 2005. For new licensees, the rules will be effective as soon as they are issued; for existing licensees, the rulebook takes effect on 1 April 2005.
Capital markets BMA is also focusing its attention on the country’s capital market, with the aim to position Bahrain as the Middle East region’s premier market for debt and equity instruments. To achieve this, the BMA seeks to make Bahrain’s capital market regulations friendly to nonBahraini issuers and investors. Since the Bahrain Stock Exchange (BSE) began operations in 1989, it has grown to become one of the leading stock markets in the region. At the outset, 29 companies were listed. This had increased to 44 companies by the end of May 2004, with a market capitalization of US$11.4 billion; as well as 28 mutual funds and 16 bond issues. BMA is currently implementing a comprehensive strategy to promote credibility, transparency and efficiency in the capital market. A number of new rules have been recently issued, setting strict new standards on disclosure requirements by listed companies; issuance, offering and listing of debt securities; and prevention and prohibition of money laundering activities and guidelines on insiders. In addition, BMA is in the process of drafting a securities and exchange regulation (SER), which will serve as an enabling law for the securities industry in Bahrain. BMA also has ambitions to make Bahrain an increasingly recognized international centre for collective investment schemes. Under this banner, BMA permits the marketing and establishment of unit trusts and mutual funds and began regulating such schemes in 1992. By March-end 2004, a total of 1,401 collective investment schemes, with invested funds worth about US$4.8 billion, were registered with the BMA.
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Human resources A major element in the growth of Bahrain’s financial services industry has been the government’s recognition that its primary asset is its people, and it has made a commitment to ensure the availability of an educated and bilingual workforce. BMA has been the driving force behind education and training initiatives in the banking and financial sector since the 1970s. The employment of Bahrainis in the banking and finance sector, which is the largest single private sector employer in Bahrain, has been one of the foremost aims of the BMA. Equally important has been the level of education and training made available for employees in the sector, to enhance their knowledge and expertise. BMA initially provided training courses at banks having such facilities. Subsequently, the Bankers’ Training Centre was established in 1981 and, following the construction of purpose-built premises in 1989, it was renamed The Bahrain Institute of Banking & Finance (BIBF). The institute has, over the years, acquired a first-rate reputation for financial education and training. It offers full-fledged degree programmes, diploma programmes and short-term courses in conventional and Islamic banking, insurance and capital market-related subjects. More recently, BMA, with the support of the government, has initiated the Human Resource Development Fund, which is aimed at addressing the evolving needs of the financial services industry by bridging specific skills gaps and financing specific training programmes of a professional and technical nature. BMA is also spearheading a project to establish an Islamic finance research, education and training institute.
The future Going forward, BMA is encouraging the expansion of certain identified growth areas, such as private and corporate banking, debt and equity capital markets, insurance, Islamic finance and remote services. BMA also intends to remain focused on reinforcing its own reputation as a rigorous, yet innovative, regulator.
3.2
The Regulatory Framework for the Financial System Dominic O’Neil and Roly Denman, Trowers & Hamlins Law Firm, Bahrain
Introduction At present the role of regulator and supervisor of banking and financial services in the Kingdom of Bahrain is performed by the Bahrain Monetary Agency (BMA). The BMA is a creature of statute, having been established under the Bahrain Monetary Agency Law (Decree No. 23 of 1973) (the BMA Law). In addition to acting as regulator, the BMA is also responsible both for the issuance and circulation of Bahrain’s currency, in its capacity as the central bank, and also acts as banker to the government. In this final capacity, the BMA is responsible for coordinating Bahrain’s public sector borrowing requirements through monthly issues of government bills and through issues of medium and longer-term Islamic-compliant Sukuks (or bonds).
The composition and administration of the BMA Article 3 of the BMA Law states that the BMA is to: • organize the issue and circulation of currency in the State of Bahrain,1 as well as foreign exchange operations;
1
Bahrain became a constitutional monarchy on the accession to power of the country’s present ruler, Shaikh Hamed bin Isa Al-Khalifa. Its position as a constitutional monarchy was enshrined in the new Constitution of Bahrain, which came into effect on 14 February 2002.
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• maintain the value of the currency of Bahrain and endeavour to ensure monetary stability; • organize the banking business and control the banking system; • control and direct bank credit so as to realize the objectives of the economic policy of the state; and • participate in the creation of a developed monitory and financial market. The BMA was established with a separate legal personality, although it acts as the government’s banker. There is no express provision in the BMA Law purporting to give the BMA sovereign immunity. So far as this writer is aware however, no person(s) have ever commenced proceedings against the BMA for any actual or alleged acts or omissions in fulfilling its statutory duties. The BMA is administered by a board, which is comprised of the chairman, who presides over the board’s meetings, a representative of the Ministry of Finance and National Economy and three other members. All board members are appointed for a renewable period of three years. All members of the board must be Bahraini nationals, and experts in financial affairs. No member of the board may be an agent, representative, employee or official of any financial organization, nor may a member hold more than 10 per cent of the capital of a financial organization. A board member must not have been previously convicted of a crime affecting his honour or integrity, nor may he have been adjudicated bankrupt or have suspended payment of his debts. The board is the ultimate authority within the BMA, but may seek the assistance of experts and invite consultants to attend its meetings. Within the limits prescribed by the BMA Law, the board may exercise all powers necessary for the performance of its role. In particular, the board will: • set the monetary and credit policy to be followed by the BMA; • decide on matters related to the issue, circulation and recall of currency; • fix interests and commissions to be charged by the BMA for loans, advances and the discount of commercial papers; • lay down the special regulations required for the application of the provisions of the BMA Law with respect to organization of the banking business and the exercise of strict control over banks and other financial organizations; • approve the annual financial statements of the BMA; • issue regulations, to be approved by the Minister of Finance and National Economy, pertaining to the staff and employees of the BMA;
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• issue such financial, accounting and other regulations necessary for the enforcement of the BMA Law; and • deal with such other matters as may fall within the competence of the board.
The licensing process Under the BMA Law, banks and other financial institutions are only permitted to operate within the Kingdom of Bahrain if they have been granted a licence by the BMA. In addition, as with the carrying on of any other commercial activity in Bahrain, banks and financial institutions will be required to establish a formal corporate presence in Bahrain, which must be registered with the Ministry of Commerce. There are various types of corporate entity that may be established but the most common form for a bank or financial institution to establish is a joint stock company. There are two types of joint stock company: 1. the closed joint stock company (BSC (c)), which is not permitted to offer its shares to the public; and 2. the public joint stock company (BSC), which is permitted to offers its shares to the public, and the shares of which will be listed on the Bahrain Stock Exchange. The licences currently offered by the BMA are somewhat prescriptive. The licences permit the licensee to conduct business and operations within the narrowly defined areas to which the licence relates. Banks and financial institutions may currently apply to the BMA to be licensed under one or more of the following licence categories. 1. Full Commercial Bank (conventional) This licence permits the bank or other financial institution to carry out all banking activities in local and foreign currencies and with both residents and non-residents of Bahrain, subject to such conditions that are agreed with the BMA. 2. Full Commercial Bank (Islamic) This licence permits the bank or other financial institution to carry out the same activities as the Full Commercial Bank (conventional) licence, except that the bank must ensure that its activities are in accordance with the terms of the Islamic Sharia. In addition, the bank must appoint a Religious Supervisory Board, which is subject to duties and obligations imposed on it by the bank’s shareholders and is accountable to them. 3. Investment Bank (conventional)
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5.
6.
7.
8.
9.
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This licence permits banks to carry out traditional investment and merchant banking activities (especially in the field of securities) with non-residents, other banks in Bahrain and the government of Bahrain. In particular, loans and advances may be made to non-residents but overdrafts to non-residents are specifically prohibited. Investment Bank (Islamic) This licence permits the bank to carry on the same activities as are permitted under the Investment Bank (conventional) licence, provided that those activities comply, at all times, with the Islamic Sharia. The bank must appoint a Sharia Advisory Board, which operates in an identical manner to the Religious Advisory Board prescribed by the Full Commercial Bank (Islamic) licence. Offshore Banking Unit (conventional) This licence permits the bank to conduct all banking activities with non-residents. Unless otherwise agreed with the BMA, and other than required in the course of its normal business, all the bank’s activities must be conducted in a foreign currency. The terms of the licence specifically prohibit the bank from dealing with residents of Bahrain, with the exception of the government of Bahrain and licensed banks. Notwithstanding this prohibition, a bank may participate in domestic development projects with the specific approval of the BMA. Offshore Banking Unit (Islamic) This licence permits the bank to carry on the same activities as are permitted under the Offshore Banking Unit (conventional) licence, provided that those activities are in accordance with the principles of the Islamic Sharia. Again, a Sharia Supervisory Board accountable to the bank’s shareholders must be appointed. Representative Office The terms of this licence limit a bank to carrying out the following activities: – gathering financial, economic and commerical information; – carrying out general promotional activities; and – providing assistance of a non-specific nature to resident and nonresident customers of overseas office. Money Changer This licence permits the licensed institution to enter into any transaction involving the sale, purchase and exchange of foreign currencies, currency transfer from Bahrain and the purchase and sale of travellers’ cheques. In addition, the licensed institution is permitted to deal in precious metals within certain authorized limits. Money and Foreign Exchange Brokers Subject to such conditions as are agreed in writing with the BMA, this licence permits the licensed institution to undertake all forms of money broking and foreign exchange business with institutional,
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corporate and governmental customers. The licence prohibits the licensee from undertaking margin trading or margin finance activities on behalf of its customers. 10. Investment Advisers/Consultants This licence limits the licensee to giving advice in relation to: buying, selling, subscribing for or underwriting investments; the exercise of any right conferred by an investment; or an arrangement or scheme involving an investment. 11. Investment Advisers/Brokers This licence permits the licensee to conduct all the activities permitted under the Investment Advisers/Consultants licence, as well as authorizing the licensee to make arrangements acting as an intermediary on behalf of another person who wishes to conduct those activities. This licence does not extend to permitting the licensee to act as principal in investment transactions, margin trading or holding/managing clients’ funds. Furthermore, unless such organizations are operating as branches or representative offices of foreign banks (see below), such organizations will also need to be registered with the Ministry of Commerce (MOC) in one of the acceptable forms. Generally, banks will be established as Bahrain joint stock companies (BSCs). A BSC may either be closed (in which case its share capital will be privately held) or open (in which case its share capital will be listed on the Bahrain Stock Exchange). The rules for listing of Bahraini and foreign companies on the Bahrain Stock Exchange are discussed below. The licensing system currently operated is somewhat prescriptive, as it involves the granting of a licence only to conduct business and operations within the particular areas to which such licence applies. In May 2002, the government announced that regulatory responsibility for the insurance sector and stock exchange would move to the BMA. This was completed late in 2002.
Supervision of BMA licensees The BMA issues regulations in respect of the organization of the banking sector and controls over banks and other financial entities registered in Bahrain. It also issues financial and accounting regulations, covering required levels of cash reserves and liquidity percentages.
Investigation The BMA has wide powers of investigation. It may investigate a bank if it deems an investigation to be necessary to determine whether the
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bank is financially sound and has complied with the BMA Law. Inspectors must be either the BMA’s own officials or technically qualified consultants appointed by the BMA. Banks are required to comply fully with the requirements of the inspectors and must submit all books, minutes of meetings, accounts in relation their operations in Bahrain and any other such information as is requested by the inspectors. If the BMA decides that the bank under investigation is, or has been, carrying out its operations in contravention of the provisions of the BMA Law, it may require the bank to take such action as is required to remedy the breach of the Law. Alternatively, with the approval of the Ministry of Finance and National Economy, either appoint a suitably qualified advisor (for whose fees the bank will be liable) to advise the bank on a remedial course of action or suspend the bank’s licence for a period not exceeding six months.
Administration of banks by the BMA In addition to the above powers of investigation, the BMA has the power to assume the administration of a bank if it becomes insolvent, if its liquidity is in jeopardy, if there is a risk of it becoming insolvent, if continuing its operations would be detrimental to the rights of depositors, or if it commits serious contraventions of the BMA Law. Where the BMA assumes administration, it assumes all powers with respect to the management and control of the bank, including, without limitation, the power to continue the bank’s operations, to suspend the bank’s operations and to suspend or limit the discharge of the financial obligations of the bank. Once it has assumed the administration of a bank, the BMA has a period of six months within which it must apply to the Minister of Finance and National Economy to liquidate the bank or to return the administration to the bank. Liquidation is effected by the BMA submitting an application to the Court. The liquidator enjoys a wide range of powers, which are set out in the BMA Law. Nonetheless, he/she must obtain the Court’s approval in order to be able to take one of the following measures: 1. sell any asset or property of the bank, the value of which is greater than BD100,000; 2. charge any of the bank’s assets of funds by way of security to one of the bank’s creditors; 3. enter into any settlement or waiver of rights when the amount involved exceeds BD50,000.
Capital requirements The following capital requirements apply in respect of the different types of banking licence available:
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• Full Commercial Bank (conventional): minimum capital paid in (usually at least BD20 million) is agreed with the BMA on a caseby-case basis. In addition, an adequate level of capital funds should be maintained (measured on a risk-weighted basis in accordance with the Basle arrangements). Minimum risk–asset ratio is set at 12 per cent. Deposit liabilities should not exceed 20 times the capital and reserves. • Full Commercial Bank (Islamic): the same provisions in respect of minimum share capital apply as for conventional full commercial banks. • Investment Bank (conventional): minimum paid-up capital is US$30 million, but appropriate levels are agreed with the BMA on a case-by-case basis. Adequate levels of capital funds must be maintained (measured on a risk-weighted basis in accordance with the Basle arrangements). Minimum risk–asset ratio is 12 per cent. Deposit liabilities may not exceed 10 times the capital reserves. • Investment Bank (Islamic): minimum paid-up capital is US$30 million, but appropriate levels are agreed with the BMA on a case-by-case basis. Funds placed with the bank (on-balance sheet items), whether by way of call or unrestricted investment accounts or otherwise, may not exceed 10 times the capital and reserves (paid-up capital, share premium, statutory and general reserves). • Offshore Banking Unit (conventional): minimum paid-in capital is US$50 million, but appropriate levels are agreed with the BMA on a case-by-case basis. An adequate level of capital funds must be maintained (measured on a risk-weighted basis in accordance with the Basle arrangements). The BMA has currently set a minimum risk– asset ratio at 12 per cent. Deposit liabilities may not exceed 20 times the capital and reserves. • Offshore Banking Unit (Islamic): minimum required paid-in capital is US$50 million, but appropriate levels are agreed with the BMA on a case-by-case basis. Funds placed with the bank (on-balance sheet items), whether by way of current or unrestricted investment accounts or otherwise, should not exceed 20 times the capital and reserves (paid-up share capital, share premium, statutory and general reserves). • Money Changer: minimum required paid-in capital of not less than BD150,000 to be determined by the BMA. In addition, a bank guarantee of not less than BD50,000 is required. • Money and Foreign Exchange Brokers: minimum required paid-in capital is US$400,000. In the case of a branch entity, the BMA may require endowment capital. The BMA may also require a letter of
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guarantee from one or more shareholder and/or a bank guarantee for US$1 million. • Investment Advisers/Consultants: minimum paid-up capital is BD10,000. In addition, the BMA may require a letter of comfort or a guarantee in respect of the applicant’s obligations. • Investment Advisers/Brokers: minimum paid-in capital is US$400,000. In the case of a branch entity, the BMA may require endowment capital. In addition, the BMA may require a letter of comfort or a guarantee in a form acceptable to the BMA and/or a bank guarantee for US$400,000.
Deposit insurance A Deposit Protection Scheme and a Deposit Protection Board were established in 1993. Each eligible depositor under the scheme is entitled to a maximum of the lesser of (a) three-quarters of the combined total amount of all eligible deposits with the relevant bank, and (b) BD15,000, irrespective of the number, type, value and currency of eligible deposits. An overall limit payable under the scheme in any one calendar year is set at BD25 million, although the Governor of the BMA can change this figure. Procedures for making a claim are set out in the regulations. Full commercial banks must notify potential depositors of the scheme using prescribed wording, and are encouraged to notify account holders as to the existence of the scheme.
Rules on loss provisioning, asset quality standards and liquidity standards The BMA has issued guidelines as to the categories of loans to borrowers experiencing difficulties, against loans to countries with current or potential debt servicing difficulties, and the level of provision that a bank should make. Specific provisions for bad and doubtful debts (and non-performing assets) should be maintained in the books of the branches of foreign banks in Bahrain. If not possible, the branch’s head office must advise the BMA annually in writing of the amount of provision for bad debts (and non-performing assets) made in respect of the branch. The BMA has also issued guidelines on the need for realistic assessments of asset quality to be made, as an essential feature of effective risk management. For all types of bank, the maintenance of adequate liquidity is the responsibility of management. Liquidity policy must be agreed with the BMA with regard to a stock of high-quality liquid assets and ability to meet obligations as they fall due. For conventional banks, primary
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liquid assets should be held of not less than 25 per cent of total deposit liabilities. Arrangements for local liquidity of branches of foreign banks should be considered on a case-by-case basis. For Islamic banks, primary liquid assets (which include cash and balances with the BMA, balances with other banks and financial institutions maturing within one month, investments in commodities, trading and marketable securities) should be held of not less than 25 per cent of total on-balance sheet funds placed with the bank (whether by way of current or unrestricted investment accounts). In addition, conventional full commercial banks should maintain a daily cash reserve balance of five per cent of Bahraini dinar deposits from non-bank customers and Bahraini dinar-denominated certificates of deposit with the BMA. Full commercial Islamic banks are also subject to similar requirements as specified by the BMA.
3.3
Bahrain as an International Centre for Islamic Banking Farah Khalid, Supervising Consultant, Islamic Financial Services Group, Ernst & Young, Bahrain
Introduction The Islamic financial industry was formally established in the 1970s in Bahrain with the formation of Bahrain Islamic Bank. At that time the level of sophistication and reach of the industry was limited. Over the last two decades, the Islamic financial industry has emerged as a powerful force, with Bahrain at its centre, and has become one of the fastest growing sectors of the financial industry. The rise and reinforcement of the industry can, in part, be attributed to the Kingdom of Bahrain, the hub for Islamic financial services in the Middle East. This chapter aims to highlight the Islamic financial services industry in Bahrain. It will first examine the overall industry and how Bahrain has become the centre for Islamic financial services. The current initiatives underway to further cement Islamic finance as a major sector of the financial industry and the current activities in the industry will also be brought to light.
The industry The Islamic financial industry as a whole has experienced growth rates of 10–15 per cent1 (in assets) over the last few years, with total assets estimated by various industry sources to be in the range of 1
Industry Perspective 2004, Islamic Banking Hub, January 2004; a BMA publication.
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US$200–300 billion in the banking sector alone. Total assets for the industry, including asset management and insurance are estimated to be double that size. Islamic banking and finance exists in over 75 countries and includes commercial and investment banking, asset management, and Islamic insurance and reinsurance (takaful and retakaful) operations (see Figure 3.3.1). In addition to the countries of the Middle East, North Africa and Asia, western countries such as the US and Europe are also home to Islamic financial operations through Islamic windows.2 Multinational institutions, spotting the opportunity in the industry, have also started Islamic operations, including: • Citibank (Citi Islamic Investment Bank); • HSBC (Amanah Finance); • UBS (Noriba); • Standard Chartered Bank (SCB Islamic); • Hannover Re (retakaful pool). The fastest growing sector in the Islamic financial services industry is often quoted to be takaful. Takaful premiums amounted to US$2 billion (at the end of 2002) and are expected to reach US$12 billion by 2015.3 Takaful companies or operators are mushrooming in the region and conventional insurers are also launching takaful divisions to capture some of this demand.
Islamic Banking Assets Asia 6% Africa 4%
Rest of M. East 38%
Europe & US 2%
GCC 50%
Assets as of 2003
Takaful Premiums Arab countries 21%
Other Asia Pacific 3%
Europe 0.2%
Iran 38%
Malaysia 38% Premiums as of 2002
Figure 3.3.1 Islamic banking assets and takaful premiums
2
Sub-operations of full-service banks, offering Islamic banking products thorough a separate ‘window’ – department, for example, without its own legal or brand identity. 3 Takaful – Global Overview and Opportunities Ahead, Ajmal Bhatty.
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Islamic vs conventional banking: in the interest of profit What are the cornerstones of Islamic banking and finance that distinguish it from conventional finance and make it a unique system unto itself? The main principles guiding the activities of Islamic financial institutions are: • the prohibition of ‘Riba’ or interest-based activities; • avoidance of ‘Maisir’ or speculation and/or gambling; • removal of ‘Gharar’ or uncertainty from transactions; • participation in only ‘Halal’ activities (prohibition in the financing of activities involving alcohol, pork-based products, gambling institutions, tobacco, cinema, pornography, arms and ammunition, interest-based financial institutions, etc); • the principle of profit and loss sharing. There is a burgeoning retail banking market with consumer finance, deposit and saving schemes based on profit sharing principles. Islamic banks accept deposits in the form of Investors’ Accounts whereby the Investors (depositors) share in the profits (and losses) of the bank, with the bank acting as a fund manager rather than a financial intermediary paying interest for the use of depositors’ funds; • asset-backed financing. The Islamic bank acts as a financier or equity partner/provider to a tangible asset, and receives profits generated from such a tangible asset (commodity-backed transactions); • returns based on risk-taking (there exists no risk-free rate in Islamic financing). For example, in takaful structures, the insured parties take on the insurance liability of the entire pool of insured, thus receiving dividends for the risk they have underwritten. As the takaful operator does not assume the risk per se, it does not derive profit from the technical surpluses arising out of an insurance pool, but rather receives a commission or fee for the management of the funds and investment profits. The implications of Islamic principles in the realm of finance make for a varied form of banking, asset management and insurance, but in no way undermine the sector’s strength. The Islamic financial system is based on profit rather than interest, and thus all transactions are structured in a manner different from conventional financing transactions. Table 3.3.1 outlines a brief description of some Sharia-compliant financing structures used in Islamic finance.
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Table 3.3.1 Sharia-compliant financing structures Structure
Unique Characteristics
Application
Murabaha
Cost plus asset backed financing Islamic bank (‘bank’) purchases an asset for the client Bank sells the asset to the client, with a built-in profit element Client purchases asset on a deferred payment basis
Mudarabha Partnership involving a financier and entrepreneur and/or fund manager Bank manages funds for a client into a project for a fee Client receives profit from the projects revenues
Consumer financing Corporate financing Working capital Capital expenditure funding Term lending
Asset management Liability products (deposits)
Musharika
Financing through equity participation Joint venture capital participation into an enterprise (clients partner with the bank) Profit and loss sharing model
Venture capital Equity financing Treasury (equity portfolio)
Ijara
A lease transaction – can be structured as a financing or operating lease Bank purchases the asset to lease it to the client Client usually leases on a buy-back basis Islamic bank receives either rental payment or profit
Consumer and corporate leases Securitizations
Salam
Deferred delivery sale contract Bank makes spot payment for future delivery of asset (finances purchase) Client purchases asset from bank and pays bank on delivery
Commodity finance
Istisna
Similar to Salam Deferred delivery sale contract where payments made on progressive basis
Trade finance Work in progress financing (construction)
Takaful
Structured as pools of insured risk, Property and casualty with the risk underwritten by (general takaful) participants in the pool Life insurance (family takaful (the insured parties) – savings schemes, life, health and medical takaful Takaful operator acts as manager and investor of insurance/takaful and retakaful) premiums and earns a fee Participants receive returns on their invested funds and possible dividends from technical surpluses Retakaful or Islamic reinsurance is structured similarly
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While Table 3.3.1 is not exhaustive, it is representative of Islamic financial transactions. However, Islamic financial institutions are able to tailor transactions for their clients according to the broad stipulations of the Islamic structures. Continuous work is being conducted by the industry to arrive at innovative Islamic structures to increase the depth of the industry and satisfy increasing client sophistication and demand. The trend mostly revolves around the development of new and more sophisticated products to serve the Islamic banking and asset management industry. Initiatives are underway for Shariacompliant money market instruments. Also, Islamic banks have moved away from ‘plain-vanilla’ financing structures to more complex and structured transactions, and this movement is seen as continuing to grow in the face of increased competition and demands from investors. The real estate sector has become an important asset class for investment banking transactions and other alternative investment classes are also being explored. With the increased sophistication of the Islamic banking model, competitive service offerings, and the proven success of the industry, more investors and clients are turning towards Islamic institutions to meet their needs. In the pursuit of the above, the industry faces certain limitations. The most pressing challenge is that of a lack of an active Islamic interbank fund market. The industry, growing at such a rapid pace, is flush with liquidity, and has limited short-term investment options for liquidity management. Other issues facing the industry include the lack of harmony between Sharia boards (especially between the Middle East and Asia). The industry as a whole and its main supporters are addressing these issues to promote further growth of the industry. Much of the future of the Islamic financial industry rests on the resolution of these issues, as they are proving to be roadblocks in the way of progress.
Bahrain: The centre for Islamic finance Bahrain is one of the few global financial markets operating a dual banking regulatory environment. The conventional and Islamic financial sectors operate in parallel, in the same market, and are governed by one regulator – the Bahrain Monetary Agency (BMA). The BMA has been innovative in its approach to the financial sector, devising separate prudential regulations for both financial systems, thus providing the framework that has enabled Bahrain to become the financial capital of the Middle East and arguably the hub of Islamic finance. The financial sector in Bahrain established itself out of the need for diversification of the economy. Despite being a country located in the oil-rich Arabian Gulf, Bahrain was not characterized by vast reserves of oil as its neighbours were (although a large portion of the economy
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did, and continues to, rely on the oil sector). The government, to reduce reliance on the oil sector, turned to a policy of diversification, focusing its efforts on the financial sector. This was a natural choice as Bahrain, traditionally a trading hub with much commercial and financial activity, lent itself to a formal and institutionalized financial industry. With its open yet sophisticated regulations, tax-friendly environment, and enabling institutions, Bahrain emerged as the financial centre in the region promoting all areas of financial activity – including Islamic banking and finance (see Figure 3.3.2).
5 commercial Islamic banks 16 investment banks 45 Islamic mutual funds 3 offshore banks 1 representative office 2 investment advisors/brokers 16 takaful operators Total assets of the Islamic banks – US$4.5 billion
Figure 3.3.2 Bahrain’s Islamic finance industry
Key initiatives for the promotion of Islamic banking Bahrain has taken on the immense responsibility of being the main promulgator of the Islamic financial industry. To fulfil this role, Bahrain has become home to many institutions that form the infrastructure for the industry (see Figure 3.3.3). The different institutions were established to meet certain objectives, all with the common goal of aiding the growth and strengthening the Islamic financial sector. The institutions range from large, multilateral sponsored organizations to smaller, focused bodies. The supporting institutions are making an effort to smoothen out the challenges currently facing the industry. Bahrain has instituted the Liquidity Management Centre in an effort to address the issue of lack of short-term investments for liquidity management. The BMA has taken a personal interest in the liquidity management of Islamic banks, and launched a regular, monthly programme of the issuance of short-term Islamic bonds or Sukuk, showcasing its strong support for the betterment of the industry. The Sukuk programme has encouraged development and growth in the industry by providing an avenue for investment of Islamic funds. The BMA, through the use of the Ijara financing model, structured Sukuk-al-Salam, which are asset-backed, short-term, Shariacompliant bonds that can be traded on secondary markets. The BMA
Bahrain as an International Centre for Islamic Banking
AAOIFI The Accounting and Auditing Organization for Islamic Financial Institutions. It was established in 1990 in Bahrain as the international standard setter for the industry, focused on accounting, auditing, governance and transparency. IIRA The International Islamic Rating Agency was instituted to provide rating services to the industry and Islamic financial instruments. (It has yet to commence operations.)
Bahrain’s Enabling Institutions
IIFM The International Islamic Financial Market started operations in 2002 in Bahrain with the objective to provide a cooperative framework for the growth and promotion of the Islamic financial market. Its roles are to encourage cohesion of Sharia interpretations, and to encourage the creation of the secondary market.
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LMC The Liquidity Management Centre was established in 2002 in Bahrain to develop an active secondary market of Sharia compliant treasury products. The main mandate of the LMC is to facilitate the creation of an interbank money market, provide investment opportunities, provide short-term liquidity, tradeable instruments, and act as market maker. GCIBFI The General Council for Islamic Banks and Financial Institutions was set up to promote market understanding of the industry. The GCIBFI organizes seminars and provides employee training programmes. BIBF The Bahrain Institute of Banking and Finance provides training in the form of courses to the financial industry with special courses focused on Islamic finance.
Figure 3.3.3 Bahrain’s enabling institutions has been committed to bringing to market a new issue, amounting to US$25 million on a monthly basis due to its acknowledgment of the dearth of tradable money market instruments for the liquidity management of Islamic institutions (see Table 3.3.2). Table 3.3.2 BMA’s Sukuk programme No. of issues
Total amount issued
Listing
Sukuk al Ijara
10
US$1,130,000,000
Sukuk al Salam
37
US$950,000,000
BSE & Luxembourg, Labuan4 Bahrain Stock Exchange
Total
47
US$2,080,000,000
Source: BMA 4
Other stock exchange listings in relation to the international Sukuk issue.
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Bahrain: The Regional Financial Hub
The BMA has recently launched its first international Sukuk worth US$250 million, listed on the Luxembourg exchange (also listed in Bahrain with a secondary listing in Labuan).5 Witnessing the potential of the BMA Sukuk, other Sukuk issues have been launched, including sovereign issues (Qatar: US$700 million; Malaysia: US$600 million), multilateral institutions issues (IDB: US$400 million) and corporate issues (UAE’s National Central Cooling Co: US$100million).6 The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has been instrumental in increasing investor confidence in Islamic institutions. AAOIFI has released reporting standards for the Islamic industry, inspired by conventional standards (IFRS), which have been widely acknowledged by the industry, and are being adopted by Islamic banks in the country and the region, as well as in Malaysia. Private institutions have also been established to serve the Islamic financial industry, including consulting firms and investment advisory companies. One such specialized organization is the Islamic Financial Services Group (IFSG) of Ernst & Young (E&Y) in Bahrain. The Middle East practice of E&Y is an independent professional firm, which has operated in the region since 1923 and is a full member firm of Ernst & Young International. The Bahrain practice of E&Y is home to IFSG. IFSG is a specialist group providing advisory and consulting services to the Islamic financial industry. IFSG has built strong relationships with key Islamic financial institutions in Bahrain and the Middle East region, and is now branching out to provide similar services to other global Islamic financial institutions. IFSG’s roster of services includes strategic business plans, market feasibility studies, structured finance and business restructuring advice, regulatory advice and risk management solutions. IFSG is run by a team of dedicated professionals with a strong track record in the industry.
Recent activity on the Islamic financial front While the institutions were set up to support the Islamic banks on a macro level, Bahrain has also taken on initiatives with more focused objectives and results (see Table 3.3.3). Other major initiatives in Bahrain for the Islamic financial sector include:7 • The launching of the first US-dollar denominated Sukuk, which is the industry’s longest tenor Sukuk to date – with a maturity of 10 years. 5
$250m Ijara Sukuk Launched’, Islamic Finance Review, July 2004; a BMA publication. Islamic Banker, March 2004. 7 Source: BMA. 6
Bahrain as an International Centre for Islamic Banking
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• The launch of a new Islamic Investment Bank in the country in May 2004. The bank has been sponsored by investors from Saudi Arabia and Kuwait with an initial paid up capital of US$120 million and with activities ranging from structured finance and asset management to investment services for global clients. • The Bahrain Stock Exchange and the International Islamic Financial Market have signed a memorandum of understanding to work together in promoting listings and secondary market trading of Islamic financial products. • The Bahrain Financial Harbour, a mega real estate project aimed at cementing Bahrain as the financial capital of the Middle East and bringing further investment to the sector, has been initiated by Gulf Finance House. The US$1.3 billion project will help promote the Islamic financial industry as a whole, with strategic investment zones and liberal regulations to attract private sector investment. • The Islamic Financial Services Board has planned to introduce new standards of corporate governance and Sharia compliance for the industry. • BMA is set to launch a retakaful operator in Bahrain to serve the needs of the takaful industry both regionally and globally. The retakaful operator is being promoted by the BMA to help capitalize the retakaful industry, and encourage growth of the takaful sector. • The BMA is in the process of releasing separate rules to regulate the takaful and retakaful industry. The regulations will cover issues of controls, segregation of funds, solvency, valuation, etc. • The IIFM has six new members due to its marketing efforts. The new members are Bank Muamalat Indonesia, Citi Islamic Investment Bank, Jordan Islamic Bank, Malaysian Rating Corporation, Bank Rakyat Malaysia and the Securities and Commodities Authority of the UAE. Strong growth has been witnessed in the Islamic financial industry. The industry has received a boost from a proven business model that has growing appeal among the Muslim populations around the globe. Proof of that is the significant amount of GCC investors’ funds returning to the region from abroad with a high propensity to choose Islamic investments. With the return of capital to the region, the Islamic financial marketplace has benefited from larger balance sheets, and thus more freedom to pursue alternative investment options. The innovation taking place is capturing more clients, and further promoting growth. Bahrain has been at the forefront of the industry, and is committed to enhancing its position as the Islamic financial hub of the Middle East and possibly of the world.
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Table 3.3.3 Notable Islamic financial transactions Transaction
Details
Hidd Power Project8
US$55million Islamic funding tranche in total US$300 million facility. US$250 million Islamic facility as part of US$1.55 billion expansion funding facility. Completed first UK direct equity deal with the acquisition of a 33 per cent stake in Beaufort Wind, owner of a portfolio of energy farms in the UK. In cooperation with BSEC Investment Bank of Lebanon, launched the first auto-backed Sukuk.
Aluminium Bahrain9 First Islamic Investment Bank10
Shamil Bank of Bahrain11
Acknowledgements Sources of information used to compile this chapter include: • Bahrain Monetary Agency publications; • Middle East Economic Digest website; • Gulf Daily News; • Islamic Finance, Justice Taqi Usmani; • Islamic Banker; • Ajmal Bhatty’s research; • Ernst & Young internal resources.
8
‘Hidd Deal Ready for Signing’, 5 April 2002; MEED.com. ‘Steady Progress on Alba Debt’, 17 January 2003; MEED.com. 10 Islamic Banker, March 2004. 11 Islamic Banker, March 2004. 9
3.4
Retail Banking in Bahrain: An Overview Elham Al-Koohiji, Project Manager, Research & Development, Business Development Division, Bank of Bahrain & Kuwait
Bahrain today is home to a large number of financial institutions, whether retail banks, investment houses, brokerage firms, or insurers. Bahrain’s financial sector is considered to be one of the most advanced in the region, offering a wide range of sophisticated products and services and employing a significant portion of the local workforce. Bahrain’s commercial banking, in particular, is a mature and wellregulated sector that has, over many years, contributed to the economic growth and well-being of society. Commercial banks are defined here as financial institutions that operate onshore to provide institutional and individual clients with an array of financial solutions. In the following paragraphs, we present an overview of Bahrain’s vibrant commercial banking sector.
Market size, growth, and composition The commercial banking sector in Bahrain was estimated at a size of US$12 billion in total assets at the end of the 2003. This represents around 12 per cent of the total banking industry in Bahrain, comprising commercial banks, offshore banking units, and investment banks. Bahrain’s commercial banking sector has witnessed steady growth over the past decade or so, in line with the expansion in the local economy. The annual growth rate in the sector’s asset base over the past five years (1999 to 2003) has been to the tune of 5 per cent. In terms of the composition of the commercial banking asset base, the bulk of the funds are naturally invested in privately-held debt instruments (loans to individual and institutional clients and investments in
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non-governmental securities). As for sector-wise concentration of commercial banks’ loans and advances, lending to persons (individual customers) represents a significant 45 per cent of the total portfolio. Lending to the government (mainly through holding government issued bills and bonds) stands at around 8 per cent. The remainder is invested in the business sector, with the trading and manufacturing sectors at the forefront (at 16 per cent and 14 per cent respectively). On the liabilities side, private non-bank deposits represent the main source of funds for commercial banks, accounting for more than half of the sector’s liabilities. Time deposits make up close to half of the total deposit base.
Market constituents Bahrain, today, poses as a competitive arena for a large number of Islamic and conventional commercial banking institutions in what seems to be a densely populated banking sector. The following table presents a snapshot of Bahrain’s commercial banking sector. As shown in Table 3.4.1, Bahrain is home to 24 full commercial banks (FCBs), four of which operate in accordance with Islamic Sharia principles. The majority of the commercial banks operating in Bahrain are branches of regional or multinational financial institutions, such as Citibank, HSBC, and BNP Paribas. These banks have opted to set up operations in Bahrain mostly to take advantage of regional business opportunities, on the backdrop of an open, well-regulated, and advanced banking environment. In terms of market dominance, however, the sector is mostly captured by a handful of large (by local standards) locally incorporated banks – namely, Bank of Bahrain and Kuwait, National Bank of Bahrain, and Ahli United Bank. Today, these financial institutions offer a wide range of corporate and retail banking products, and provide a high level of customer service through wide networks of conveniently located branches and automated teller machines (ATMs). Locally, these banks enjoy well-respected brand names. Locally-incorporated commercial banks, however, are considered to be small in size and scope by international, and even regional, standards. Mergers and acquisitions in Bahrain have been rare occurrences in the past, while organic growth has been close to natural growth. As a result no significant changes to the regional ranking of locallyincorporated banks have come about in recent years. Small size – and the consequent capital restrictions – limits the ability of these banks to partake in major regional project finance transactions.
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Table 3.4.1 Constituents of Bahrain’s commercial banking sector Bank name
Date of establishment
Head office + branches
Comments
21 Oct 01
1+0
Islamic principles
1 Al Baraka Islamic Commercial Bank EC 2 Ahli United Bank (Bahrain) BSC (c) 3 Arab Bank PLC 4 BNP Paribas 5 Bahrain Islamic Bank BSC
1 Oct 01
1 + 14
5 Dec 60 19 Feb 75 29 Oct 78
1+3 1+0 1+7
6 7 8 9
Bahraini Saudi Bank BSC Bank Melli Iran Bank Saderat Iran Bank of Bahrain and Kuwait BSC 10 BankMuscat (SAOG) 11 Citibank NA 12 Gulf Finance House (BSC) EC
19 May 83 8 Jul 70 8 Jul 74 16 Mar 71
1 1 1 1
13 Feb 02 2 Dec 69 20 Oct 03
1+0 1+1 1+0
13 HSBC Bank Middle East Limited 14 Habib Bank Limited 15 Kuwait Finance House (Bahrain) BSC (c) 16 National Bank of Abu Dhabi 17 National Bank of Bahrain BSC 18 National Bank of Kuwait SAK 19 Rafidain Bank 20 Saudi National Commercial Bank 21 Shamil Bank of Bahrain EC
16 Dec 44
1+3
17 Nov 68
1+2
9 Dec 01 19 May 01 1 Jan 57 11 Jun 02 1 Jul 69 20 Jul 02
1+0 1+0 1 + 24 1+0 1+0 1+0
23 Feb 93
1+5
11 Aug 18 11 Jun 02
1+4 1+0
22 Mar 69
1+2
22 Standard Chartered Bank 23 The Housing Bank for Trade and Finance 24 United Bank Limited Source: Bahrain Monetary Agency
+ + + +
Islamic principles
5 1 0 18
Islamic principles
Islamic principles
Islamic principles
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Bahrain: The Regional Financial Hub
Islamic banking as a growing sub-sector Today, Bahrain boasts a dual banking system, accommodating both Islamic and conventional financial institutions, and stands as an international hub for Islamic finance, rivalled by only Malaysia. With twothirds of GCC-based Sharia-compliant players calling it home, Bahrain’s Islamic financial services industry comprises around 30 different Islamic full commercial banks (FCBs), offshore banking units (OBUs), investment banks (IBs), representative offices, brokerage and advisory firms, and takaful companies. On the retail front, four full commercial banks operate on the shores of Bahrain in accordance with Islamic Sharia principles (see Table 3.4.1). Islamic FCBs in Bahrain have realized the value of quality service and product innovation and have made substantial strides on those fronts. These Sharia-compliant players stand today as formidable contenders to their conventional counterparts, having, in a few years, attracted considerable banking business. Islamic financial institutions in Bahrain have come a long way to successfully meet and, at times, even exceed mainstream banking standards, thus appealing not only to the Sharia-conscious but to a wider audience.
Products, services, and delivery channels Today, the range of products and services offered by commercial banks in Bahrain is on par with the best in the world. All commercial banks – whether conventional or Islamic – offer retail and corporate banking products and services in one form or another. At the retail level, the offerings include personal finance, mortgages, credit and debit cards, money transfers, and savings and current accounts. Some commercial banks even offer ‘plain-vanilla’ investment accounts and basic forms of bancassurance. On the other hand, corporate clients enjoy access to funding through tailored lines of credit and bank loans. Commercial banks also offer their institutional clientele trade finance facilities and demand and time deposit accounts. Delivery channels are numerous, ranging from traditional bricks and mortar outlets to state-of-the-art online banking services. Most banks maintain a wide physical distribution network, comprising traditional branches and ATMs. Electronic banking, however, is gaining momentum as a number of banks strive to migrate routine non-value adding transactions to e-channels by appealing to the customers’ search for convenience. The Bank of Bahrain and Kuwait (BBK) is considered to be a leader in this arena, with an arsenal of modern and customer-friendly electronic banking solutions. BBK
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provides its customers with online banking, telebanking, SMSbanking, and a state-of-the-art electronic contact centre.
Competitive strategy Bahrain’s commercial banking industry is a battleground of intense competition fueled by a continuous quest for market share in a small marketplace. The lack of economic diversity has resulted in somewhat concentrated loan books and an over-exposure to the retail sector, which itself is capped by a population count of 700,000 – a third of which is non-local. As a result, the retail sector is characterized by cutthroat pricing, big marketing budgets, and an unwinding race for the customer’s attention. In Bahrain’s retail banking market, customers are spoilt for choice. Generally, locally-incorporated banks appeal to the mass market, with much emphasis placed on extensive marketing campaigns and competitive pricing. Given the mix of products and services carried, and the wide distribution networks maintained, these financial institutions cater to most of the demand for basic banking products and services in the local market. Segmentation is not very visible amongst these banks. Branches of multinational banks, on the other hand, provide more advanced banking solutions and cater mostly to more affluent customer segments. These banks are highly active at the institutional level, participating in major public and private sector projects.
The regulator Recognizing and acknowledging the importance of nurturing Bahrain’s financial sector, the Bahrain Monetary Agency (BMA) has long served not only as a regulator, but also as a catalyst for the growth of the industry. The BMA has been actively involved in developing and encouraging the implementation of industry best practices, attracting new players, and sponsoring the development of innovative new products, processes, and concepts. The BMA has been pioneering in its efforts to create an operating environment that is conducive to the growth and success of both conventional and Islamic financial institutions. Going forward, the BMA appears adamant in its drive to create a sustainable, transparent, and trustworthy financial services marketplace.
Going forward Bahrain’s commercial banking sector is a competitive one, with wellestablished players and a mature product-service offering. With
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economic liberalization well under way, the situation in the financial services industry is poised to head in only one direction. As competition in the local market intensifies and organic growth decelerates, we expect to see a move towards cross-border expansion as regional economies converge and open up. The pace of mergers and acquisitions is also expected to accelerate as local – and regional – banks come to the realization that in light of an increasingly challenging marketplace, consolidation is the only way forward.
3.5
Bahrain Financial Harbour: Reinforcing Bahrain’s Position as the Financial Capital of the Middle East Bahrain Financial Harbour
Introduction Although a relatively tiny island country from the perspective of the territory over which it is sovereign, the Kingdom of Bahrain is widely regarded as the giant of the Middle Eastern financial services sector. With over 360 financial institutions either based or represented in the Kingdom, a world class regulatory environment provided by the Bahrain Monetary Agency (BMA), which is the Kingdom’s central bank, access to some US$100 billion held in Islamic Funds and an amazing US$1.3 trillion in regional private wealth maintained in various forms in the region, it is not surprising that Bahrain has become widely regarded as the financial capital of the Middle East. Many impressive modern buildings have appeared in Bahrain as a reflection of the strength of the country’s financial sector, with the capital city, Manama, having benefited from the emergence of a number of striking new real estate complexes and architectural developments in recent years. The expansions of the diplomatic area, the establishment of the Seef District on the edge of central Manama, and the various new developments around the island are just some of the new, spectacular additions to Bahrain’s residential and financial skyline that have appeared in recent years. However, by all accounts it seems that the best is yet to come. The Bahrain Financial Harbour (BFH) is a US$1.3 billion masterplanned development on prime seafront property in Manama, integrating
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finance, commerce, leisure, lifestyle and the arts, and is scheduled for completion in early 2009. This landmark project has been designed to address every single need of the financial services sector and upon completion will, without doubt, become Bahrain’s most impressive development feat to date. Construction on BFH is currently under way, and the key features of this unique waterfront development project include the following: • 30 individual development units, collectively offering over 500,000 m2 of office, residential, retail, dining and leisure space; • the Financial Centre, the hub of all monetary activities, includes the Dual Towers, the Financial Mall, and the Harbour House; • ample lifestyle options with up-market residences, retail and leisure outlets, including a luxury hotel and the Bahrain Performance Hall; • exciting alternatives for relaxation with an array of seafront walkways, shopping boulevards, promenades, a marina, water pathways, water taxis, coffee shops and dining facilities.
A landmark financial sector development BFH development covers an area of some 380,000 m2, formed from a series of connecting islands formed from reclaimed land. The development is located on the Manama Corniche, on the northern seashore of the main island of the Kingdom of Bahrain, and reflects the unique heritage design and the modernized financial sector of Bahrain. Once the Financial Centre is completed, the first phase of the development, it will become home to the leading institutions in Bahrain’s financial sector and will consolidate the country’s position as the financial capital of the Middle East. The Bahrain Financial Harbour development will also contain an insurance centre, upmarket residences, retail and leisure outlets, a luxury hotel, and the Bahrain Performance Hall, which will house the Royal Opera House.
The Financial Centre At the heart of the Bahrain Financial Harbour will be the Financial Centre, which will be developed exclusively to provide a high-tech, sophisticated environment for international and regional banking. Work space will be designed in harmony with living and leisure arrangements within the Bahrain Financial Harbour. Designed as a distinctive new architectural landmark for the region, the Financial Centre comprises the Dual Towers, the Financial Mall and the Harbour House:
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1. The Dual Towers: At an imposing 53 storeys, the uniquely designed Dual Towers will become the most visible and striking buildings on Manama’s skyline. Offering beautiful panoramic views, the towers will provide office and commercial space for the financial sector. 2. The Financial Mall: Spread over 78,000 m2, the Financial Mall is an eight-storey building set to recreate the ambience of a convenience mall for financial products. It will host everything related to financial services, catering specifically to the capital and retail financial markets. Put simply, the Financial Mall takes the concept of a modern shopping mall and applies it to finance and ancillary activities and will offer an array of finance-related activities and services under one roof. Designed specifically for capital markets, it will house the Bahrain Stock Exchange and will harbour a retail environment for finance and investment services firms such as stockbrokers, market makers, proprietary investment firms, futures commission merchants and options brokers, as well as other exclusive retail outlets. 3. The Harbour House: Directly linked to the Financial Mall via a suspended bridge, the Harbour House is poised to create the ultimate working space. The Harbour House is a 10-storey building that is roughly circular in plan, with an approximate diameter of 28m. The building has primarily been set up for media-based enterprises such as television and satellite broadcasting stations, publishing houses or strategic marketing and media consultancies that will benefit from the financial-based businesses of Bahrain Financial Harbour. With the judicious combination of work and leisure space, the Harbour House is the ideal place for the business parties to converge. The Financial Centre will aim to provide optimum infrastructure, office and leisure facilities, including ample parking, an atrium and a helipad for the business community. Highlights of some of the other facilities provided to the tenants of the Financial Centre include the following: • unique district cooling systems, reducing electricity and maintenance costs and eliminating roof chillers; • central building management services: – per tenant billing based on area as opposed to a blanket cost; – value-added services including parking allocation, lift call functions, lights and AC automation; – sophisticated security systems including CCTV and access control via smart cards; • electricity will ultimately be provided to the Financial Centre from two substations to make the power supply 100 per cent redundant;
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Bahrain: The Regional Financial Hub
• water will be supplied by the Water Distribution Directorate to the Bahrain Financial Harbour bulk connection and reservoir and then redistributed to the Financial Centre from a water pressure tower; • chilled water for the Financial Centre’s air conditioning requirements will be produced at a remote chilled water plant for internal circulation. The Financial Centre will aim to support world-class business growth and serve the needs of individuals, groups and communities that want to build business value and enhanced commercial success for their organization. These will include: • investment banks; • commercial banks; • offshore banking units; • representative offices; • insurance and reinsurance companies; • takaful and retakaful companies; • legal and advisory services; • fund managers; • IT firms; • professional institutes; • Sukuks and equity; • leasing banks; • international regulatory agencies; • financial consultants; • real estate investment trusts. This new financial community will also require a comprehensive range of logistics support and ancillary services that will benefit from the companies establishing themselves at BFH, including providers of health and educational services, recreational and leisure facilities companies, media services, and logistical business support services.
The Bahrain International Insurance Centre The 18-storey stand-alone Bahrain International Insurance Centre (BIIC) will also be constructed alongside the Financial Centre within
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the eastern commercial complex and is due for completion mid-2006. The BIIC will house Bahrain’s growing regional and international insurance sector, including insurance companies (both conventional and Islamic), reinsurance majors and providers of specialist insurance services, making it the single largest composite development in the regional insurance industry. The BIIC environment is being specifically designed to cater to new companies, both from the region and internationally, that are seeking a regional base for their operations. By offering shared facilities and state-of-the-art services, the BMA envisions the BIIC as a catalyst for the formation of an ‘insurance cluster’ within the Kingdom.
Ongoing construction on the BFH development Construction of the Financial Centre – Phase One of the development, which includes the Dual Towers – the Financial Mall and the Harbour House began in March 2004 and is due for completion by the end of 2006. The engineering and construction contract for the Financial Centre was awarded to Al Hamad Development & Construction Co in March 2004. The Financial Centre, with an estimated value of over US$250 million, will generate about 2,000 new jobs for Bahrain over the next three years within the construction and engineering fields. The second reclamation phase was awarded to Bahrain-based Ahmed Mansour Al Aali Company in June 2004 and will be carried out in two parts, both of which are scheduled for completion by April 2006. The total reclaimed land in this phase covers an area of approximately 179,000 m2. Once completed, BFH will have a highly visible presence on the Bahrain skyline, located only 20 minutes from the King Fahad Causeway (which links Bahrain to Saudi Arabia), and 10–15 minutes from Bahrain International Airport. The design concept for the BFH was developed by Ahmed Janahi Architects, a leading architectural firm in the region. The design drew heavily on Bahrain’s trade and pearling heritage and, as will be seen in the design, the sail is ubiquitous, with each building designed to reflect the various sails used by dhows that once sailed the seas of the Bahrain coast.
Professional studies A number of professional studies were carried out prior to commencing construction work on the project, to ensure harmony with Bahrain’s ecological composition, environmental standards and urban planning. The main studies carried out included the following:
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Bahrain: The Regional Financial Hub
• A Hydrodynamic Study was used to assess the impact of the reclamation project on the seawater environment and showed that the proposed new shoreline posed no flushing problems. Furthermore, it was shown that the sediments from the dredging operations also proved non-problematic. • A Traffic Impact Study was also commissioned to calculate additional traffic and its impact on the existing traffic situation. Based on the findings of this study, appropriate infrastructure developments have been proposed to meet the high flow of traffic. • Urban Structured Planning studies and an Urban Development Design Framework ensured prime location for the BFH site.
Doing business with Bahrain’s financial sector: the BFH development Bahrain Financial Harbour is set to have a significant impact across the widest spectrum of the regional and global financial communities. It will be a unique financial community built on solid foundations and offering untold commercial opportunities for the future. Although still over two years from completion at the time of writing, it seems that the development has already secured the business of some major clients.
Bahrain Financial Harbour: the hub for Bahrain’s financial sector BFH will allow Bahrain’s financial sector to be assembled together into one focal point. At the moment the numerous different buildings and institutions of Bahrain’s financial sector are scattered around the island and are not in any way centralized to form a financial community. In order to maintain its position as the financial capital of the Middle East, it is clear that Bahrain needs to have one centralized, ultra-modern financial district – which is exactly what BFH will accomplish.
Increasing the contribution of the financial sector to Bahrain’s GDP The financial sector currently contributes around 20 per cent of Bahrain’s GDP. One of the fundamental objectives of the BFH development is to hike the percentage of the contribution of the financial and business sector to Bahrain’s GDP to exceed 20 per cent, since its provision of a modern, state-of-the-art infrastructure for the functioning of the financial sector will assist in making that sector operate even more efficiently.
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Job creation in the financial, services and construction sectors Creation of new job opportunities represents a major objective of the project. It is expected that the construction and building operations will create approximately 2,000 to 2,500 jobs in the architectural and engineering sectors alone. The banking, financial and insurance sectors will provide about 6,400 jobs. In addition to that, the project’s tendency is to focus on creating jobs in major sectors, including professional consultation, trading and brokerage companies. It is also expected that around 2,000 jobs will be provided by the project through the support sectors such as retail, services and the hotel and hospitality industry.
Attraction of foreign direct investment The Kingdom of Bahrain has been ranked number one in the Arab world by the United Nations in attracting foreign direct investment and by the UN Report on Economic Freedom. A project such as BFH will lure more of these foreign investments especially from neighbouring countries. It is also expected that the project will attract several establishments from the Middle East and North Africa besides attempting to attract the international establishments, headquartered in Europe and Southeast Asia, to Bahrain. Another advantage is the Free Trade Agreement between the Kingdom of Bahrain and the United States of America. This will further nourish the competitive positioning of Bahrain as a destination for investments due to further cooperation and developments in the field of financial services, including Islamic Banking and insurance companies. Such initiatives will capitalize on Bahrain’s position as a regional financial centre and encourage further liberalization and development for the telecommunications industry and other services.
3.6
Company Profile: Gulf Finance House Introduction Gulf Finance House (GFH) is the fastest growing Islamic investment bank in the Middle East and has taken the lead in unlocking the incredible potential of the Islamic finance industry in the region. GFH has carved a niche for itself in the regional banking and investment industry by offering a unique investment strategy. The reason behind GFH’s success is that it has not confined itself to the Middle East. To diversify risk it offers clients the opportunity to invest outside the region, having structured Islamic investments in property and real estate in the UK and French and Spanish markets.
Organizational background GFH was established on 16 October 1999, in the Kingdom of Bahrain, as an Islamic investment bank with an authorized capital of US$150 million. In 2003, the bank raised its paid-up capital from US$65 million to US$135 million through private placement to existing and new investors. In order to expand its investor base and allow more investors from the GCC to take part in its growth, GFH listed on the Kuwait and Bahrain stock exchanges in January 2004, thus changing into a joint stock company. The listings came at the time when GFH was growing rapidly. GFH is based in Bahrain and is managed by a seven-member board. Dr Fuad Abdullah Al-Omar is the Chairman of the bank and Mr Esam Y Janahi is the Chief Executive Officer. Mr A Rahman Al Jasmi is the Chief Placement Officer, Mr Ahmed Al-Qattan is Chief Investment Officer and Mr Peter Panayiotou is Chief Operating Officer. GFH employees comprise a mix of nationalities and cultures, which brings out the best results for its shareholders and investors. GFH has joint venture partners in several areas of its business and it does not rule out further joint ventures in the future wherever it is necessary and when it makes strategic sense.
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Business development: real estate and property development The bank’s present and future projects are spread across the Middle East, with its investments extending into Europe. GFH is one of the leading and fastest growing Islamic investment banks in the region and thus enjoys a dominant place in the financial services industry. GFH’s European real estate investment offerings include Gulf Atlantic Real Estate (GARE) I and II, providing clients with a healthy avenue to invest in a strategic mix of income-producing blue chip properties in the UK market, and Gulf Atlantic FZ-LLC (GFF), which is focused on the property market in France, particularly Paris and nearby markets. While the total capital of GARE I is £150 million, GARE II is £200 million. Additionally, GFH offers the Al Andalus fund, which invests in Spanish residential property. In the Bahrain market, GFH launched AQAR Management I, a US$20 million investment fund focused on high cash-yield investments within the serviced apartments sector in Bahrain. Other offerings include the Injazat Technology Fund jointly with the Islamic Corporation for the Development of the Private Sector (ICD), a subsidiary of the Islamic Development Bank. At present, GFH’s most ambitious investment plan is the prestigious US$1.3 billion Bahrain Financial Harbour (BFH) project, designed to be the financial hub of the region. The first phase of BFH, is planned to be a global financial and business park that will reaffirm Bahrain’s status as the Middle East’s banking and financial capital. The Financial Centre will house a Financial Mall, a 50-storey dual towers building, and the Harbour House. Around 10 per cent of the first phase has been completed and about 35 per cent of the leasable area in the Financial Centre has been already booked. The Centre will be completed by 2006, ahead of schedule. Aside from the BFH project, GFH promoted the Gulf Development Real Estate Gulf Company to offer niche real estate services in Kuwait.
Business development: other sectors Among its diversified investments in other sectors, GFH has a controlling 26 per cent stake in the Halcore Group, the leading manufacturer of ambulances and rescue vehicles in the US, through TransOcean Capital. It also holds a controlling stake in the Bahrain Aluminium Extrusion Company. This was the first aluminium extrusion plant in the Gulf and is the leader in the region’s production of high-quality extrusions and systems. Separately, GFH established the International Franchise Capital to acquire a controlling stake in a company engaged in franchise
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restaurants and car rental businesses, including Chillis, Johnny Carinos, Nando’s, Mrs Fields and AVIS Rent a Car in Bahrain. Its other investments include the Khaleej Finance and Investment Company, Arab Finance House in Lebanon, Sharjah-based low-cost airline Menajet, Costa Coffee House, the Royal University for Women and Al Khaleej Development Company. It is also the promoter of Solidarity, a life assurance and annuity company, which is the first regional takaful company to offer products complying with the Islamic Sharia. GFH has recently launched First Leasing Bank, a specialized leasing bank to manage and create Sharia-compliant equipment leasing funds that will lease equipment to GCC private and public companies and institutions. GFH has proposed major leisure projects for the future. These include the US$1.5 billion theme park resort in Dubailand and US$600 million Al Areen Desert Spa and Resort in Bahrain. The investment bank is in the process of identifying unique, income-producing high-yield real estate investments in the GCC and the Middle East market.
Financial overview In the last five years, GFH’s portfolio of assets under management have grown by over 11 times, indicating the steady growth of the bank and its positive outlook. Although set up only five years ago, GFH’s assets under management soared to US$1billion in 2003, including the leveraged component, as against US$101 million in 2002. Its assets under management in 2001 were US$39 million, up from US$21 million in 2000. GFH ended 2003 with a net profit of US$17 million, up more than 22 per cent from US$13.3 million in 2002. Its operating profits rose to US$38.3 million from US$24.7 million in the previous year. Dividend payout for 2003 was US$11.25 million, which worked out as 15 per cent of the paid-up capital. It posted a return on average equity of 17.7 per cent, while its return on average paid-up capital was 24.2 per cent. In the first half of 2004, GFH recorded an impressive 240 per cent increase in net profit at US$28.5 million, as compared with US$8.4 million for the corresponding period in the previous year. During this six-month period, investors placed more than US$122 million.
Outlook for the future GFH aims to be the premier Islamic bank by offering clients innovative investment opportunities, while mobilizing the great pool of private and institutional capital of the Islamic community. Today, GFH is at
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the forefront of the rapidly expanding regional and international Islamic banking industry. It is committed to the Islamic philosophy of wealth management, which shapes the structure of its investment products and gives direction to innovation. GFH aims to lead the Islamic investment banking industry in the GCC, Middle East and North African countries, by providing clients with carefully selected investment opportunities that balance risk and reward. It will continue to capitalize on the increasing willingness among Islamic investors to back local and regional projects. It will take advantage of the wave of reforms initiated by GCC governments to diversify and liberalize their economies.
Doing business with Bahrain Bahrain has a visionary government, diversified economy, superb regulatory environment, a transparent legal system and a high literacy rate – thus making it well suited for the operation of financial institutions. It has long been known as the international and regional wholesale interbank money centre for the Middle East. Bahrain is also the largest centre for Islamic banking in the Middle East. The country currently expects additional liquidity and offers an ideal environment that is conducive to Islamic banking.
3.7
Company Profile: Stratum Who is Stratum? Stratum is a new investment advisory firm operating within Bahrain’s financial services sector. Licensed and regulated by the Bahrain Monetary Agency, Stratum is focused on building new businesses within the Middle East primarily, in sectors such as financial services and information and communications technology. The firm’s mission statement articulates clearly its overall objective ‘to proactively work with private equity investors and entrepreneurs to develop and structure innovative business ventures in the Middle East’. As described by its managing partners, Stratum is in the ‘business of building new businesses’, which is a deceivingly simple way to convey a rather complex task. Founded by two western-educated, new-generation Bahrainis, Stratum has built a talented team with professional and academic credentials from some of the world’s most respected institutions. Reflecting the wide range of skills required to achieve its objectives, Stratum’s team represents a broad base of experience in strategy consulting, corporate finance, entrepreneurship, and public policy. The firm’s activities include the identification, analysis, structuring, financing, and management of private equity investments into early stage venture opportunities. As a general rule, Stratum only focuses upon opportunities where there is a clear level of innovation and a strong foundation for regional expansion.
What makes Stratum different? There are a number of characteristics that distinguish Stratum from many of the other firms operating within the regional investment industry. For instance, unlike most mainstream investment advisors operating within the region, Stratum is primarily committed to channelling regional capital into regional opportunities, rather than promoting
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investments in North America, Europe, or other regions into which Arab capital has previously been directed. Another notable difference is the fact that Stratum primarily focuses upon opportunities where the main underlying assets are human resources rather than natural or financial resources. Having avoided developing real estate investments, which have attracted the majority of regional capital in recent years, Stratum has remained focused on its long-term goal of investing in innovative, sustainable investment opportunities within the service economy. It is interesting to note how the company’s founders selected an appropriate name for their firm. Stratum itself is the singular of the Latin word strata, which means a layer, and in this case means taking on a layer of the risk, which is essentially what Stratum does in its business. Stratum typically engages in an opportunity when it is only at its nascent stages – as an idea, concept, or emerging trend within the marketplace. Stratum assumes the first layer of risk in the development and financing of an innovative opportunity. As a result, the firm has had to build rigorous analytical processes and investment criteria in order to ensure that those risks that it accepts will lead to attractive financial returns.
Why Stratum is important? Prior to its formation, Stratum’s founders had recognized that a number of significant trends were reshaping the investment climate within the Gulf region: • repatriation of capital back into Bahrain and the rest of the region; • similar repatriation of talented human capital back into the region; • deregulation of several key industries; • liberalization of markets for trade and investment with a greater emphasis on promoting the private sector to the forefront of the economy. Through conducting several months of in-depth due diligence, Stratum had discovered the existence of an increasing number of regional professionals and entrepreneurs with good business concepts looking for trusted partners to help them develop and finance new venture opportunities. Recognizing this, Stratum was founded in early 2003 in order to identify, develop, structure and finance regional ventures within the service sector, with the broader vision of serving as a catalyst for regional business creation and economic growth.
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The Private Equity Practice It could be said that Stratum is one of the first professional intermediaries operating within the region’s still formative private equity and venture capital industries. These industries are an integral part of a robust financial services sector, having led to significant economic and social gains in regions of the world where they are more developed. In fact, a healthy venture capital industry has been shown to be a significant contributor towards economic development, job creation, and innovation. Within the region, private equity and venture capital have not yet been organized into a fully functional and regulated industry. There are only a handful of companies within the region that are currently operating within these industries; few have a pure focus upon private equity and virtually none are focused on early stage ventures. Although a number of regional funds have been created over the last several years, few have lived up to expectations, with most industry professionals commonly citing difficulty in locating a sufficient number of high-quality investment opportunities to warrant the amount of capital that had been raised. Recognizing that venture capital within the region will require a more proactive, deal-driven approach, Stratum’s founders developed a business model that specifically reinforces the creation of its propriety deal flow. As one of Stratum’s partners had put it: ‘Stratum has had to build an internal “venture laboratory” in order to conduct the research and development required to secure a steady stream of innovative deals’. In theory, Stratum’s core business model seems quite simple – identify good opportunities, put them together with the right investors and management (and sometimes the right international partners), and then follow through with a clear business strategy and professional implementation. In practice, however, the venture development process is long, demanding and full of surprises. It is a creative and analytical process, which takes patience, team-work, and a lot of energy. Nevertheless, through focusing on the creation of high-quality deal flow, rather than the pure raising of capital, Stratum has built an impressive portfolio of ventures, which it is methodically bringing to the market one at a time. In June of 2004, Stratum officially launched its first venture within the insurance sector: Ensurion, the first insurance management firm within the Middle East. Specializing in the formation and administration of captive insurance companies, Ensurion delivers some of the region’s most innovative insurance and risk management solutions to corporate insurance buyers. At the time of writing, Stratum was also in the process of preparing a venture in the telecoms industry, aimed for launch towards the end of
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2004. Other ventures in Stratum’s portfolio include several opportunities in areas such as consumer finance, media and information services, the most notable of which is an independent credit agency, which Stratum is continuing to promote within Bahrain and the wider region.
The Advisory Practice In addition to its Private Equity Practice, Stratum maintains an Advisory Practice that provides a number of professional services in the areas of business strategy, investment analysis, and project management. On a case-by-case basis, Stratum leverages the skills, knowledge, and experience it uses to ‘build new businesses’ in order to serve high-profile clients within the private and public sectors. The set of tools and techniques used by Stratum’s team are primarily derived from the world of strategy consulting, which is an area of professional services that remains underserved within the region but is growing steadily at the most senior levels of corporate management and government. One of the main accomplishments of Stratum’s Advisory Practice has been the firm’s engagement by the Bahrain Monetary Agency to serve as strategic project manager for the Bahrain International Insurance Centre (BIIC). Located within the US$1.5 billion Bahrain Financial Harbour project along the Manama seafront, the BIIC is an innovative, world-class facility designed and built specifically for Bahrain’s insurance industry. Stratum’s role has been to work closely with a global network of professionals to develop the strategies and incentives to attract local, regional, and international participants from across the insurance industry.
The future: bank vs. business as usual It is still unclear whether Stratum will continue to pursue its current business model for the foreseeable future, or whether it will ultimately evolve into a venture capital fund or fully-fledged investment bank. However, regardless of what form it decides to take, it appears that the underlying business strategies, skill sets, and entrepreneurial culture that make up Stratum will continue to represent one of the most promising and innovative firms within Bahrain and the region’s financial sector.
Part Four Prospective Sectors for Investment
4.1
The Oil and Gas Sector Mohammed Al Sayyad, Director Economic Research, Ministry of Oil, Kingdom of Bahrain
Introduction Energy resources, notably oil and gas, have played (and are still playing) a vital and decisive role in the whole economic and social life of the Kingdom of Bahrain. This is partly due to the scarcity of other natural resources, limited arable areas, and relatively new economic structures, and partly because of their potential in offering great opportunities for various aspects of economic development and for creating new and increasing sources of national income. The contemporary economic and social history of the Kingdom has been linked to and interrelated with oil since its discovery in 1932. The Kingdom of Bahrain became the first oil-based economy in the Gulf region when the Bahrain Petroleum Company discovered oil at Jebel Dhukan in Bahrain in June 1932. In 1936, the first refinery in this area was built, making the Bahrain Refinery one of the major refining centres in the Gulf. Today the refinery produces products such as naphtha, gasoline, kerosene, aviation turbine fuel, diesel oil, heavy lube distillate, fuel oil and asphalt.
Electrical energy as a source of development By virtue of oil discovery and the ensuing development of production and refining, an electricity supply was then made possible. During 1951–52, the government decided to harness electricity as the principal source of domestic energy for the country. The first power plant was erected in Juffair, and gas supplies from the ‘Arab Zones’ to the new power station began in 1955. This was followed by new power plants being built in Sitra (1975), Muharraq (1976) and Rifa (1978).
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Gas from the Arab Zones was eventually replaced by the more extensive reserves of the ‘Khuff Zones’. In addition to providing gas for oil fields injection and the power stations, new applications for gas were identified. The first and most prominent was the supply to the island’s aluminium smelter, which started production in 1971 with an annual capacity of 120,000 tonnes. In addition to the four power stations mentioned above, a fifth new power and water station was built in Al Hidd (the northern side of Bahrain) in 1997 and started operating in 2000, with an installed capacity of 280 MW, which makes the country’s total installed capacity 1,268 MW.
The status of Bahrain’s petroleum sector today The institutional structure of the sector comprises the following bodies.
Supreme Council of Oil This is the top authority, which determines and undertakes the setting up of the oil policy on the island, and enacts oil and gas legislation, which enhances the development of investment in a better way to achieve greater proceeds in oil wealth.
Ministry of Oil This is another government authority, concerned with the execution of policy as determined by the Supreme Council of Oil. The Ministry represents the Kingdom of Bahrain in matters relating to petroleum affairs in the international media, regional Arab and international organizations, particularly with Oil Arab Petroleum Exporting Countries (OAPEC) and their emerging institutions and companies, which have been utilized the Kingdom.
Bahrain Petroleum Company (BAPCO) The Bahrain Petroleum Company BSC (c) – BAPCO – was incorporated on 29 December 1999, merging the Bahrain National Oil Company and the former the Bahrain Petroleum Company. BAPCO, wholly owned by the government of Bahrain, is engaged in the oil industry, including exploration and prospecting for oil, drilling, production, refining, distribution of petroleum products and natural gas, sales and exports of crude oil and refined products. The company owns a 250,000 barrel-a-day refinery, storage facilities for more than 14 million barrels, a marketing terminal, and a marine terminal for its petroleum products.
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BAPCO’s prime customers for crude oil and refined products are based in the Middle East, India, the Far East, Southeast Asia and Africa, and 95 per cent of its refined products are exported.
Bahrain National Gas Company (BANAGAS) The Bahrain National Gas Company (BSC) (BANAGAS) is 75 per cent owned by the government of the Kingdom of Bahrain, 12.5 per cent by Caltex Bahrain and 12.5 per cent by the Arab Petroleum Investment Corporation. The company was established with the primary objectives of processing associated gas into marketable products, supplying residue gas for local industrial use and providing employment and training opportunities to Bahraini nationals. Today, the company employs 350 people, of whom 93 per cent are Bahraini nationals. The plant facilities were officially inaugurated on 17 December 1979, and the first shipment lifted in early 1980. Propane, butane and naphtha products are exported worldwide. The residue gas, mainly methane and ethane, is routed to Aluminium Bahrain, the BAPCO refinery and Rifa power station. During the early years, plant capacity was increased from the original design of 110 million cubic feet per day (MMSCFD) to accommodate 170 MMSCFD, and in 1988, a US$75 million expansion project was undertaken to upgrade capacity to 280 MMSCFD.
Gulf Petrochemical Industries Company The Gulf Petrochemical Industries Company (GPIC) was established on 5 December 1979 as an equal partnership between the government of the Kingdom of Bahrain, Petrochemical Industries Company of Kuwait and Saudi Basic Industries Corporation (SABIC). The company is considered to be a successful example of fruitful Gulf cooperation in industry in general, and in the petrochemical industry in particular. The company owns a petrochemical complex in the Kingdom of Bahrain, comprising an ammonia plant with a daily capacity of 1,200 tonnes, a methanol plant with a daily capacity of 1,200 tonnes and a urea plant with a daily capacity of 1,700 tonnes.
Bahrain Aviation Fuelling Company The aviation refuelling service at Bahrain International Airport is provided by the Bahrain Aviation Fuelling Company (BAFCO), a joint partnership formed in 1985. The Bahrain Petroleum Company (BAPCO) is its main shareholder with a 60 per cent stake, while Caltex
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has a 27 per cent share and BP 13 per cent. BAFCO is responsible for all refuelling operations at Bahrain International Airport. However, BAPCO, Caltex and BP each market and sell fuel to the individual airlines on their own behalf in separate sales operations. The grade of aviation fuel supplied by BAFCO is more commonly known as JET A-1. This is produced to international specifications by the Bahrain refinery, 17 km from the airport. The fuel is then pumped from the Sitra tanks through a dedicated pipeline to reception tanks at BAFCO’s tank farm at Arad.
Government participation in pan-Arab petroleum institutions Organization of Arab Petroleum Exporting Countries (OAPEC) Since 1970, Bahrain has been a member of this organization, which was established in 1968 for the purpose of coordinating and developing the Arabian oil industry. Table 4.1.1 lists the OAPEC-instituted companies and organizations in which Bahrain participates. Table 4.1.1 Bahrain’s participation in OAPEC-instituted organizations Company name Arab Arab Arab Arab
Marine Petroleum Company (AMPTC) Shipbuilding and Repair Yard Company (ASRY) Petroleum Investment Corporation (APICORP) Petroleum Services Company (APSC)
% 3.8 18.5 3 3
Natural Gas Committee On 25 June 2003, HM King Hamad bin Isa Al-Khalifa, the King of Bahrain, established the Natural Gas Committee under the Chairmanship of HH the Crown Prince and Commander-in-Chief of the Bahrain Defence Force, Shaikh Salman bin Hamad Al-Khalifa. The overall function of the committee is to look into all natural gas issues and consider various options available to meet the Kingdom’s requirement for natural gas. In particular, the committee may: • conduct studies and research on the Kingdom’s resources of natural gas and the development of such resources;
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• consider strategic options to meet the Kingdom’s requirements for natural gas; • propose the Kingdom’s natural gas general policy; • take any necessary action to implement the general policy on Bahrain’s natural gas. The committee may exclusively carry out contacts and negotiations within and outside the Kingdom regarding natural gas.
Sector potential The potential of the petroleum sector, as such, is the aggregate of its units, utilities and capacity. It includes the following:
1. Bahrain Field The Bahrain Field, the first and biggest of Bahrain’s onshore oil fields, has a production capacity of approximately 37,600 barrels a day of crude oil (2003).
2. Abu Sa’fah Field A production capacity of approximately 151,000 barrels a day (2003) of crude oil is provided by the joint Saudi–Bahraini Abu Sa’fah oil field, which was opened officially in February 1966.
3. The refining industry The Bahrain Refinery – one of the largest in the Middle East and the oldest in the GCC – refines over 250,000 barrels of crude oil every day. About one-sixth of this crude originates from the Bahrain Field; the remainder is pumped from Saudi Arabia through a pipeline extending 27 km over land and a further 27 km under the sea, before reaching the northwest of Bahrain.
4. The gas industry The economic potential of this industry is made up of: • natural gas reserves, which are estimated at 114 billion cubic metres a year (2000); and • a production capacity of 1,190 million cubic feet per day, from both natural and associated gas (2003).
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Future horizons and challenges for the energy sector During the past five years, the Bahrain petroleum industry has witnessed two major developments, which will certainly increase its contribution to GDP and to the national economy.
1. The comprehensive modernization programme of the refinery Under the chairmanship of HH the Prime Minister, Shaikh Khalifa bin Salman Al-Khalifa, the Supreme Council of Oil decided on 9 July 1998 to proceed with the Bahrain Refinery Modernization Project, as proposed by the Ministry of Oil in conjunction with BAPCO. This is the largest ever upgrade project for the refinery. The total cost of the upgrade amounts to about US$952 million. It is being implemented over several years with a target completion date of mid-2005. The net result of the combined upgrade projects is an expected additional annual revenue of more than US$118 million. The aim of these interlinked projects, the implementation of which began in 2000, is to upgrade the technical capabilities of the refining modules to enable BAPCO to focus on finished and environmentallyfriendly petroleum products, capable of competing in international markets.
2. The new oil and gas exploration activities in the offshore southeastern area In November 2001, the Government of Bahrain signed two separate exploration and production sharing agreements with Chevron Texaco of the United States and with Petronas Karigali of Malaysia. Both agreements cover exploration of the southeastern area, geographically and technically assessed as Exploration Zones 4, 5 and 6. This became possible thanks to the issuance of the Award of the International Court of Justice regarding the Qatari–Bahraini border dispute, the outcome of which resulted in Bahrain getting the right of ownership over the Hawar Islands. Hence, Chevron Texaco is continuing exploration activities in Block 5, where the company drilled an exploratory well in Tughaileb. Another similar well is scheduled for the second half of 2004. At the same time, Petronas Karigali of Malaysia is active in Blocks 4 and 6, where the company drilled two exploratory wells in Fasht Al-Adhm reef and in North Sowad.
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Still challenges ahead Analysing the post-oil discovery economic history of the Kingdom of Bahrain, one could say that the main and very important success among the very tangible achievements registered and accomplished by the government of Bahrain, is the maintenance of production capacity levels in the petroleum sector, as well as in the other related sectors, therefore maintaining a good standard of living for the population and gradually securing a reasonable annual economic growth rate of GDP and per capita income. This has resulted in Bahrain coming first in the Arab world for the fourth time in the UN’s annual Human Development Report. The reason why this is considered a major success in Bahrain’s development efforts is that it happened in spite of the limitations of oil and gas reserves and production, as well as the scarcity of other natural resources, and, in addition, the increment in financial allocation to support the targeted economic and social goals of sustainable development. Nevertheless, with a growing of population at an annual rate of 2.7 per cent and increasing economic requirements, particularly financial and energy resources and, of course, social burdens, the country will have to find ways and means of developing new sources of income.
Gas is a focal point In order to maintain a more diversified economy, energy sources, specifically gas, must be secured. With the available economic indicators showing that the economy is on the verge of economic growth, it is expected that there will be an increase in demand on electrical energy and consequently on its main source, natural gas (since the electric power sector accounts for 29.2 per cent of total consumption of natural and associated gas, which amounted to 434,537 million cubic feet in 2003). Considering the current gas consumption rates as well as the remaining gas reserves, it is obvious that within a few years, should the ongoing oil and gas exploration and drilling activities in the offshore southeastern areas of the island prove less fruitful than expected, Bahrain will become a net importer of gas. Naturally, this has already been considered by the government and some alternatives have already been subjected to debate, study and consideration. Among them are the partial privatization of electrical energy and some other utilities, and the import of gas by pipeline from neighbouring countries, notably Qatar and Iran, with whom preliminary negotiations have been held.
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This would, of course, put more pressure on Bahrain’s trade balance and consequently the balance of payments. Furthermore, it would also affect the production costs of different economic sectors and utilities, especially those that are still enjoying preferential treatment by buying gas at subsidized prices. Naturally, this will reflect negatively on their competitiveness. Therefore, there must be forward planning on both the macro and micro levels, seeking the best ways to confront these challenges.
4.2
Bahrain’s Electricity Sector Ministry of Electricity and Water, Planning and Studies Directorate, Kingdom of Bahrain
The Kingdom of Bahrain has seen a tremendous growth in the electricity sector over the past decade with a maximum demand of 1,632 MW in 2004, compared with a maximum demand in 1994 of 899 MW. The demand for power has risen dramatically over the last five years with an average growth rate of 7 per cent. It has been the main function of the Ministry of Electricity and Water in the Kingdom of Bahrain to ensure that the required power production and electrical transmission and distribution facilities are in place to cope with this great rise in demand. This chapter provides a short overview of Bahrain’s electricity sector, as well as giving a brief overview of anticipated future developments. The total installed capacity of Bahrain’s electricity sector currently stands at 1,850 MW. This is generated at four major power stations in the country. By far, the largest power and water station on the network is at Hidd, which contributes 962 MW to the installed capacity. The next largest contributor is Rifa Power Station with 700 MW and the final 188 MW is generated at Sitra, Manama and Muharraq power stations. Manama Power Station, which is the oldest power station in the country, is currently being decommissioned and should be fully retired by end of 2005. This generation is a mix of gasfired turbo-generators and steam turbo-generators. The transmission of the bulk of power from the power stations to the load centres is achieved by means of the electrical transmission network, which consists mostly of underground cables, with very small numbers of overhead lines. The transmission voltage is at 220kV, 66kV and 33kV. There are 11 220kV substations interconnected by 133 km of 220kV cable feeders and 53 66kV substations interconnected by 502 km of 66kV cable feeders. This includes substations and cables
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being added on two ongoing 220kV and 66kV developments. The 33kV network is not being developed further and has 11 33kV substations connected by 78 km of 33kV cable feeders. It is a testimony to the rapid growth of the sector when one considers that the number of transmission substations on the network today is three times the number of substations that were available in 1980. The distribution voltage level is at 11kV, and this is then transformed to 440 volts at the distribution substations. Much of the power demand in Bahrain is associated with airconditioning load and, consequently, the peak demands are usually recorded in the summer months. The largest peak ever recorded was in August 2004 and stood at 1,632 MW. It is expected that the peak MW demand will exceed 3000 MW by summer 2015, if current growth trend continues. This is an increase of nearly 6.5 per cent annually over the next 10 years. In order to cope with this increasing demand for electricity, the Ministry of Electricity and Water is currently carrying out a 15-year Master Plan to identify the plans and projects that the Ministry has to put in place if the demand is to be met in a timely fashion. It is to be noted that, until recently, it has been the responsibility of the Ministry of Electricity and Water, as a totally government-owned utility, to provide both electricity and water services in the country. This included being responsible for the total electrical and water infrastructure, from production facilities to the transmission and distribution networks. However, a policy decision has been taken that all future power generation projects can be privately financed, thus embarking Bahrain on the first step towards the privatization of this part of the electricity sector. The first independent power producer (IPP) in Bahrain has been awarded to a consortium of investors, Tractebel/Gulf Investment Corporation, with Siemens as the engineering, procurement, construction (EPC) contractor. The project, when completed, will add a total of 1,000 MW to the installed generation capacity and it is expected that the first units will have to be commissioned before summer 2006. The Al Ezzel IPP design has been based on combined cycle gas turbine technology, with heat recovery steam generators and steam turbines. This is to ensure the optimum use of natural gas fuel. The Master Plan has identified the following major projects, which are either in the planning process or currently being executed, that the Ministry has to complete in order to cope with the increasing power demand. 1. Al Ezzel IPP, which will add a total of 1000 MW to the current installed generation capacity. The Ministry has a Power Purchase Agreement to buy power from Al Ezzel for the next 20 years.
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2. A new 220kV Transmission Development Programme and a new 66kV Transmission Development Programme that coincide with the Al Ezzel Development, in order to be able to connect the electricity generated from Al Ezzel to the Ministry’s network. Development on the 220kV is for network reinforcement, adding six new 220kV substations, extending two existing substations and installing approximately 85 km of new 220kV cables whilst further development on the 66kV is to ensure that the extra power is delivered to the load centres all over the country. This 66kV development will add 15 new 66kV transmission substations to the existing network and will extend capacities at 14 existing substations, and install approximately 200 km of new 66kV feeder circuits. 3. Rehabilitation and NOx reduction at Rifa Power Station to ensure its continuing availability for the next 15 years. As of today, the moves towards the privatization of the electricity sector have been confined to Al Ezzel and future power generation projects in the country. Transmission and distribution will remain within the control of the Ministry of Electricity and Water for the foreseeable future. However, this does not preclude privatization in terms of outsourcing different works that the private sector can carry out for the Ministry. As part of its moves towards the outsourcing of different jobs in the electricity sector to the private sector, the Ministry has also gone out to tender for a Long Term Services Agreement (LTSA) for the full maintenance of the largest power station in the country – Hidd Power & Water Station. This Long Term Services Agreement is to last for 12 years, during which the private sector will be fully responsible for all the maintenance works at the power station. The Ministry of Electricity and Water, being responsible for providing the required electrical and water infrastructure for all new developments within the Kingdom, currently has plans, in the implementation phase, to provide the required electrical infrastructure for a number of major projects in the Kingdom, and to link them to the national grid. Some of these projects are the Bahrain Financial Harbour, Amwaj touristic development, Durrat al Bahrain touristic development, as well as for the development of the LSDP at Bahrain Petroleum Company, BAPCO. If current growth trends materialize and develop as expected, the Ministry of Electricity and Water will face major challenges over the next decade in order to ensure that these demands are met in a timely fashion.
4.3
Bahrain’s Aluminium Industry Taimour Raouf, Senior Public Relations Officer, Aluminium Bahrain
The birth of industry The commissioning of Aluminium Bahrain (Alba) in 1971 marked the birth of industrial diversification in the oil rich region of the Arabian Gulf. Today, Alba produces more than 526,000 metric tonnes (mt) of primary aluminium and pumps more than US$200 million into the national economy every year. It ranks as one of the largest aluminium smelters in the world and accounts for around eight per cent of Bahrain’s GDP. As a result of the consistently high quality of Alba’s products, Bahrain’s aluminium has made its way across the globe (with exports to more than 25 countries) and even into outer space (when Alba’s aluminium was used to build the Mars explorer, Sojourner). The company’s ongoing success has also spawned a thriving downstream industry in Bahrain and provided training and job opportunities for the national workforce. It is a success story that has earned Bahrain pride of place on the world industrial stage, and has served as a blueprint for the region’s industrial diversification programme. The story, however, is far from concluded and Alba is forging ahead with ambitious plans that could make Bahrain home to the largest single-site producer of primary aluminium in the world.
A historical prospective Bahrain’s aluminium success story started in the mid-1960s when the government, seeking to diversify its economy away from its heavy dependence on oil revenues, began to look into alternatives.
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Although, in 1932, Bahrain became the first state in the Arabian Gulf to strike oil in commercial quantities, the government recognized the dangers of heavy dependence on oil revenues, and forged a pioneering venture with an aluminium consortium that wished to secure its own source of metal. The aim was to establish an industry that would provide valuable export earnings, develop the country’s resources and create training and employment opportunities for its people. Bahrain was strategically positioned between the sources of the raw materials from which aluminium is made and the growing markets for primary aluminium in Asia, Europe and the Americas. A plentiful supply of gas to fuel the power-hungry process of aluminium production was readily available from the Khuff field and, in 1968, Alba was incorporated by Emiri Charter. At the time, the smelter was to have an annual production capacity of 56,000 mt, but even before the first aluminium had been poured in 1971 by His Highness the late Emir, Shaikh Isa bin Salman Al-Khalifa, agreement had already been reached to raise this figure to 120,000 mt a year. Thus, Alba became the first aluminium smelter in the Middle East and, as the first non-oil industry in Bahrain to provide training and career development for a growing population, the aluminium industry earned a special place both in the country’s history books and in its people’s hearts.
Dramatic development No one, at the time, could have foreseen that, only three decades later, Alba would have more than quadrupled in size. Growing local, regional and international demand for high-quality aluminium, however, set a brisk expansion pace and, today, after several ambitious expansions, Alba now ranks among the six largest single-site producers of aluminium in the world. Almost exactly 10 years after aluminium was first poured in Bahrain, Alba inaugurated Line 3 to boost its production to 170,000 tonnes per annum (tpa). A few years later, Alba further expanded the new line with the installation of 76 new-technology pots and a fume extraction system to increase production and protect the environment. By 1992, Bahrain had became home to the largest singlesite aluminium smelter in the free world, after Alba completed a US$1.4 billion expansion to boost its annual production capacity to 460,000 mt. The expansion included construction of what was, at the time, the largest pot line in the world and the installation of a highlysophisticated dry scrubbing system, which ensured that 99 per cent of
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all fumes were recycled and which made Alba one of the cleanest, most efficient smelters in the world. The expansion also created 450 job opportunities for the national workforce. 1997, again, saw Alba looking to the future with the announcement of a US$400 million project to build the first petroleum coke calcining plant in the Middle East. The project also included the construction of a seawater desalination plant and the upgrading of the jetty facility at the Alba Marine Terminal. Today, Alba is currently undergoing another major expansion project, with the construction of an additional reduction line that will make the smelter the largest in the world outside Eastern Europe.
World-class smelter Today, Alba is owned by the government of Bahrain (77 per cent), Saudi-based SABIC Industrial Investments Group (20 per cent) and German-based Breton Investments (3 per cent). The smelter now comprises four reduction lines, with a total of 1,048 cells and produces more than 526,000 mt a year. The company also owns and operates its own power complex, with a total generating capacity of 1,504 MW per hour, and its own carbon anode department that manufactures some 457,000 anodes a year. The raw materials used in the production of those anodes are made at the company’s own calcining plant, which can produce as much as 450,000 tonnes of calcined petroleum coke per year. The plant is currently undergoing expansion that will boost its annual capacity to 600,000 tonnes per year. Alumina, the main raw material used in the production of aluminium, and green coke, the raw material used in the production of calcined coke, are received at the company’s own dedicated marine terminal, which can accommodate cargo ships with cargoes of up to 60,000 tonnes. The company also operates comprehensive cast house facilities and a sophisticated metallurgy department. Alba operates to exacting international standards and, in 1994, was among the first major industries in the Middle East to qualify for the Quality Management System ISO 9002 Accreditation. In 2003, Alba was, again, among the first major industries to qualify for the new ISO 9001:2000 standard.
Continuous expansion Alba is determined to maintain its brisk expansion pace, and plans to add more than 300,000 tonnes to its annual production are already well underway. The plans, which began to take shape in 2003, promise
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to further increase the aluminium industry’s already significant contributions to Bahrain’s social and economical development. The US$1.7 billion expansion includes the addition of a fifth pot line, an environmentally friendly power plant, a carbon plant and cast house developments. When the project is completed, the smelter’s production capacity will increase to 827,000 tpa. This, in turn, will increase Alba’s annual contribution to the national economy to more than US$300 million and create hundreds of permanent jobs for the national workforce. The US$1 billion engineering, procurement, construction and management contract for the reduction line expansion was awarded to Bechtel. Alstom Powers were appointed as the engineering, procurement and construction contractors for the power station portion of the project, and the first cell of the new fifth line is expected to produce its first metal in the first quarter of 2005. Originally set to be a 260,000 tpa pot line, the Alba executive management team have been able to increase the new pot line’s capacity to 307,000 tpa, whilst remaining within the original approved budget. As a result, Line 5 will have a total of 336 pots spanning more than 1 km in length and making it the longest pot line in the world. The technology will be an improved version of the AP30 technology utilized in pot line 4. Other key aspects of the expansion include the construction of a 650 MW power station; a carbon plant with a capacity to produce 190,000 anodes per year; cast house facilities to produce ingots and billets; a new road network; facilities to handle raw materials; and fume treatment plants to control fluoride emissions. The social and economical rewards of this major construction, however, are already being harvested, with more than 40 per cent of the project’s cost being spent locally to help boost the local economy, and up to 4,000 project-related jobs being created during the two-year construction phase. In addition to the Line 5 expansion, the Alba board of directors approved plans to increase the smelter’s current annual capacity by 23,000 mt by adding 24 pots to Line 4 and generating additional power to meet the extra requirement. The new pots are expected to produce their first metal by December 2005 and will bring Alba’s total production capacity to more than 850,000 tpa. Alba’s expansion efforts, however, have not focused exclusively on its aluminium production figures. Instead, the executive management team have sought to protect future expansion plans by making the smelter as cost-effective and as self-reliant as possible. As part of those efforts, Alba built its own coke calcining plant to eliminate the need to import the primary raw material used for the production of carbon anodes. In addition to allowing for significant cost savings, the plant also supplements Alba’s aluminium revenues.
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The US$400 million plant, the first of its kind in the Middle East, was built on 140,000 square metres of reclaimed land at Alba’s private marine terminal, and since its commissioning, in May 2001, has met all of Alba’s calcined coke needs. At full capacity, the coke calcining plant can produce as much as 450,000 tpa, which leaves up to 250,000 tonnes of calcined coke available for export every year. Prior to the commissioning of the coke calcining plant,Alba imported up to 250,000 tpa of calcined coke from as far afield as the US and Argentina. Now, Alba only imports green coke, the raw material used to produce calcined coke, and then completes the calcining and anode production cycles at its own facilities and under its own quality supervision. The coke calcining project included the construction of a seawater desalination plant, which utilizes waste heat from the calcining process to make 41,000 cubic metres per day of desalinated sea water available to the Ministry of Electricity and Water.
Strategic plan The expansions are in line with Alba’s strategic plan, which provides a blueprint to sustain the company’s contribution to Bahrain’s economy. The plan identifies five key performance indicators – safety, people, environment, cost and productivity – to measure Alba’s performance. The plan commits Alba to making safety a state of mind by which everyone thinks and acts, and targets a 20 per cent reduction in the number of lost-time accidents every year. To do so, Alba initiated a complete reassessment of its safety programmes and introduced an internationally-recognized safety standard that measures over 70 different safety, health and environmental aspects and compares them to the best in the world. The driving force behind Alba’s heart-warming success story is almost certainly its dedicated, well-trained and highly professional workforce. A workforce that stands testimony to the success of Alba’s long-term investment in the people of Bahrain. When Alba was commissioned, it aimed to provide training and employment opportunities for the national workforce, and today, as one of Bahrain’s biggest employers, Alba is as committed as ever to setting an example for others to follow. Employee training is a cornerstone of that commitment and, over the years, Alba has led the way in introducing pioneering training programmes. Last year Alba introduced, for the first time in Bahrain, a joint training initiative with the Ministry of Labour and Social Affairs and contractors working on the Line 5 expansion project. Dubbed ‘Training for Bahrain’, the initiative facilitates the employment of unskilled and unemployed Bahrainis by creating a pool of qualified workers.
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Alba also invests time, effort and money on improving employee morale, and by 2002 had completed construction of its 350th new employee home. Every year, the company also provides scholarship opportunities and valuable hands-on training for the children of its employees. Alba has also invested over US$8 million in building a world-class medical facility for employees and their families. These efforts have paid off in handsome dividends and, today, Alba boasts an award-wining Bahrainization rate of 89 per cent.
Protecting the environment Long before Bahrain established environmental standards, Alba was already implementing pioneering environmental protection programmes and, having achieved the Environmental Management System standard ISO 14001 in 2000, Alba continues to maintain its uncompromising stance on environmental issues. Alba’s ongoing commitment to protecting the environment has involved investments of hundreds of millions of dollars and has earned the company international praise and recognition. In 2000, for example, Alba became one of only 12 companies in the world to earn the Millennium Business Award for Environmental Achievement, which was presented by the United Nations Environment Programme in conjunction with the International Chamber of Commerce. In 2003, Alba installed a state-of-the-art flue gas desulphurization plant at the calcining plant, which virtually eliminated sulphur emissions. The US$18.5 million unit makes the calcining plant one of the cleanest in the world and allows Alba to operate it at full capacity with minimal impact on the environment. Last year, Alba also embarked on a US$65 million project to retrofit its gas turbines with low NOx burners and replace existing control systems to reduce waste emissions and help control environmental pollution. To ensure that its expansion plans are aligned with this commitment, Alba carried out a comprehensive Environmental Impact Assessment (EIA) to guarantee that the construction and subsequent operation of Line 5 is undertaken with the utmost care for the environment. The new power station will utilize combined cycle technology, with steam turbines using the waste heat from the gas turbines to improve efficiency and reduce pollution. The gas turbines will also be equipped with state-of-the-art technology combustion units to reduce NOx emissions. The pot room itself will also be equipped with hi-tech fume treatment plants and a double duct system to enhance fume collection efficiency and minimize emissions.
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Aluminium for the world Plans to forge ahead with ambitious expansion plans have not distracted from time-honoured commitments to quality and, with metal purity levels consistently at 99.88 per cent, Alba is able to offer its customers a winning formula both in terms of the quantity and the quality of its products. Alba places great emphasis on continuous improvement and takes great pride in its expanding range of products. It is a corporate vision that has paid off in handsome dividends and, today, Alba is highly regarded by the global aluminium industry and greatly respected for its technical expertise. As a result, Alba’s aluminium is exported to some 25 counties with the Far East receiving 20 per cent, Gulf countries and the Middle East consuming 18 per cent, Southeast Asia accounting for 7 per cent and the remaining 7 per cent going to other countries. The success of Bahrain’s aluminium industry can also be seen in the emergence and growth of downstream industries. In 1972, Bahrain Atomizers became the first company to be formed on the strength of Alba’s development. This was followed by Balexco (Bahrain Aluminium Extrusion Company) and Midal Cables. The following decade saw the establishment of Garmco (the Gulf Aluminium Rolling Mill Company) and, in the late 1990s, Aluwheel and Bamco (Bahrain Alloys Manufacturing Company) were formed. Today, these downstream industries consume around half of Alba’s aluminium, a figure than has been growing constantly with Alba’s expansion and the addition of further downstream operations. These diverse industries demonstrate not only the thriving nature of the downstream industries in Bahrain but also the almost limitless uses of aluminium.
Forging ahead Even with the addition of Line 5, Alba’s brisk expansion pace is not likely to slow down, and plans for a sixth pot line are already being studied. The sixth line would bump plant capacity to well over 1,000,000 tpa, potentially making Bahrain home to the largest aluminium smelter anywhere in the world. The construction of Line 5 and, potentially, Line 6, mark an important milestone, not only in the smelter’s history of expansion but also in Bahrain’s industrial development, and confirm Alba’s pioneering role in diversifying the region’s economy. Bahrain’s aluminium industry has certainly come a long way, and Alba’s achievements have earned Bahrain kudos for its industrial development.
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Midal was was conceived conceived in in 1977 1977 as as aa joint joint venture Intersteel, aa Midal venture between between Intersteel, member of of al al Zayani Zayani Investments Investments Group Group of of Bahrain, Bahrain, and and Olex Olex Cables Cables of of member Australia to to become become the the region’s region’s leading leading manufacturer manufacturer of of aluminium aluminium rod rod Australia andelectrical electricalconductors. conductors. 1984, soon the withdrawal of Saudi Olex, and In In 1984, soon afterafter the withdrawal of Olex, Saudi Cables of Jeddah equal partner. Cables of Jeddah becamebecame an equalan partner. Establishing production Establishing the the Middle Middle East’s East’s first first aluminium aluminium alloy alloy rod rod line, production evolved evolved into into aa vast vast range range of of wires wires and and conductors. conductors. With With aa current current operational operational capacity capacity exceeding exceeding 100,000 100,000 tones tonnesper perannum, annum, Midal’s Midal’s isis aa recognized aluminium recognizedglobal global leader leader in in the the development development and and production production of of aluminium alloy alloyproducts. products. Midal’s Midal’s mission mission statement statement isis “Setting “Setting Standards Standards for for Others Others to to Follow”. Follow”. ItIt was the region to to attain ISOISO reorganization for wasone oneofofthe thefirst firstcompanies companiesin in the region attain reorganization its dedication to toquality environmental for continuous its continuous dedication qualityperformance performance and and environmental protection. protection. We look forward to serving your demands! We look forward to serving your demands!
Khalid R. Al Zayani
Khalidd All Zayani.. Chairman Midal Cables Ltd
4.4
Company Profile: Midal Cables Introduction Bahrain’s aluminium industry has been rapidly developing for over a generation, since the country’s government founded Alba, or Aluminium Bahrain, in 1968, as part of the state-led economic diversification programme. The industry comprises of the upstream sector, predominantly represented by Alba, which produces up to 750,000 metric tonnes (mt) of raw aluminium per annum and is one of the largest single-site producers of aluminium in the world; and the downstream sector, which is made up of a number of companies producing finished and semi-finished aluminium products. Midal Cables is one of the major companies in Bahrain’s internationally renowned downstream aluminium industry. The company produces aluminium rod, wire and overhead conductors for power transmission lines. Other major companies in Bahrain’s downstream aluminium sector include, GRAMCO Rolling Mill, a producer of flat aluminium products; Balexco extrusion company, which makes aluminium profiles; Bahrain Atomisers, which makes a wide range of aluminium powders and pellets; and Aluwheel, which produces aluminium passenger car and truck wheels. All of these companies have emerged as a result of Alba’s aluminium producing capacity during the last three decades, and procure their aluminium directly from Alba’s smelter. Given the steady supply of aluminium from Alba, these enterprises go on to produce their various aluminium products for the downstream sector. They are all medium-size enterprises, each employing several hundred employees.
Organizational history Midal Cables was established in 1978, as a joint venture between OLEX Cables of Australia, and the Inter-steel (Al-Zayani Investments) corporation of Bahrain. The company was founded as a private sector joint venture and incorporated as a limited liability company (WLL).
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Equity in the new company was split 49:51 and the project was very much intended to support the government of Bahrain’s policy of further economic diversification, as well developing further industrial projects to support Alba in the downstream sector. In 1985, however, Saudi Cables of Jeddah bought out OLEX’s shares in Midal (+1 share from Al Zayani), making the company a 50:50 shareholding between Al Zayani Investments and Saudi Cables. Midal Cables remains a closed limited liability company with two shareholders only, and there is no sign that the company will go public in the foreseeable future. The company currently employs some 270 individuals. It should be noted that Midal Cables itself is one of three companies in the Midal Group. The other two companies in the Midal Group are Aluwheel, a pioneering plant manufacturing aluminium alloy wheels for the automobile industry, and Metalform, which produces solid sectors for power cables as well as aluminium tubes for numerous industrial applications including automobile radiators, air conditioners, heat exchanges and freezers. Metalform also produces AS wire, which clads high carbon steel with aluminium and is used for earth wire or fibre optic cables. Metalform employs some 50 people, with Aluwheel employing 110 and exporting its entire production to European countries.
Product lines Midal’s core business is the manufacture of aluminium and aluminium alloy rod and wires for electrical and mechanical applications; a comprehensive range of aluminium, aluminium alloy and steel-reinforced bare conductors for overhead power transmission and distribution. The company grew from being a small workshop at the back of Alba’s facility, with just 50 employees and only 12,000 mt production capacity, to some 270 employees and 90,000 mt production capacity today. During the past 20 years of the company’s operations, its output capacity increased threefold and Midal attained the ISO for international standards. It was the first company in the Gulf for rods, wires and conductors to achieve this standard of excellence, reaffirming its position as a market leader in the development and production of aluminium alloys and a leading player in the industry for new technologies. All of the company’s products are currently manufactured to industrial specifications and according to international standards. Midal’s main raw material input is aluminium (molten metal), which it sources from Alba at the market price (Midal’s production line is set up to receive Alba’s aluminium). The molten metal is obtained in liquid form and is transferred to Midal from Alba in 10 mt crucibles, poured into holding furnaces at Midal’s plant and casted continuously for industrial
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usage. Molten metal from the adjacent Alba smelter enables Midal to make rod with particularly little re-melt cast to the end products of rod, wire and conductor. Of further significance is the quality of the electrical conductivity in Midal’s cables, which easily reaches international specifications due to the high purity molten form metal.
Business development Midal Cables exports its entire production, with 40 per cent of exports going to the Gulf (GCC) market and 60 per cent internationally (including Europe, Africa, Australia, New Zealand and some to North America). The company is a market leader for a number of its products, particularly in the GCC. At present, more than one-third of the company’s sales are in the form of higher added value conductors. Its conductors have been used on transmission line projects performing efficiently in over 25 countries in the Middle East and internationally. Furthermore, Midal supplies all the GCC cable manufacturers with 80 per cent of the GCC market for aluminium rod. Midal’s alloy and EC rod is used by cable manufacturers in many parts of the world and is sold at reasonable premium due to its quality, ease of drawing and its high conductivity. The company also exports aluminium wire to North Africa and Southeast Asia. Midal’s products are shipped in containers by road to Saudi Arabia and the rest of the GCC, and by sea internationally. Midal also invests noticeably in marketing its products internationally, and maintains representative offices in London, Hong Kong and South Africa.
R&D Midal Cables is committed to research and development (R&D) and invests some US$2–3 million each year into upgrading and maintaining its production line and into new technologies. Midal’s recent R&D contributions have also been used in order to develop the market for new products, including the development of ‘enhanced conductivity aluminium alloy rod’ for the cables industry in Britain, and the ‘extra high conductivity aluminium alloy conductors of 59 per cent IACS’ for the Swedish National Electricity Utility, which recently opened new growth markets in the 400kV transmission network.
Human resource management Midal Cables is a medium-size company and, with some 270 employees, a significant employer in the Bahraini economy (taken together the
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whole Midal Group employs around 420 people). Out of 270 people employed at Midal Cables, around 50 are engaged in management and administration, while 220 individuals constitute the company’s semiskilled and unskilled line workers and labourers. The company employs both Bahrainis and expatriate workers, and operates within the regulations set down by the Ministry of Labour’s Bahrainization programme (which requires that private sector companies start their operations by employing a minimum of 20 per cent Bahrainis, with an annual increase of five per cent until the figure of 50 per cent Bahraini employees is achieved). Indian and Filipino nationals tend to be the dominant foreigners comprising Midal’s expatriate workforce. Out of Midal’s 50 individuals engaged in managerial tasks, some 50 per cent are Bahrainis. Out of the 220 workers, around 63 per cent are reported as Bahrainis. The Ministry of Labour channels a steady supply of local semi-skilled and unskilled labour into the company. Labour turnover at Midal Cables is relatively low and many of the people engaged in management positions have remained in their place for quite some time. Since 2002, a labour union has been in place at Midal Cables to give workers greater workplace representation, and some 90 per cent of the workforce now belongs to the union. Changes in Bahrain’s constitution, designed to further Bahrain’s development of democratic political institutions, allowed for trade unions to be legally formed, whereas in the past the interests of Midal’s workers were represented by more ad hoc workplace committees. The minimum wage of BD150 a month is payable to unskilled Bahraini workers at the company, with expatriate workers qualifying for higher wages than those traditionally received in the country’s services and small enterprises sectors.
Doing business with Bahrain Midal lists the following factors as some of the major advantages of doing business in Bahrain: • no corporate or income taxes; • inexpensive and dependable supply and source of energy (ie cheap and abundant oil, gas and electricity, upon which Alba is reliant to produce its aluminium, which is, in turn, used by Midal and the other companies in Bahrain’s downstream aluminium sector; • a good supply of molten aluminium as the company’s main raw material is readily available from Alba, which is physically located next to Midal’s plant; • competitive rates for transport and shipping; • Bahrain is a safe and secure place in which to do business.
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Midal’s CEO does not envisage that taxes will come into effect in Bahrain in the foreseeable future, as the state still derives the majority of its revenues from oil and therefore does not need to rely on traditional, fiscal methods of procurement (ie the government relies on revenues from natural resources, over which it commands ownership). However, it should also be noted that Bahrain’s political institutions are still in the process of developing, and are still viewed with a degree of uncertainty. Reformers within the Bahraini government are seeking to overcome traditional methods of doing business and ensure that the country’s institutions are upgraded and integrated into internationally compliant political and economic systems. Bahrain is already a member of the WTO, though it does not always adhere to all of the protocols set out under its charter, and has recently signed a Free Trade Agreement with the USA, which will further assist the country’s government in meeting its strategic objectives.
4.5
Company Profile: Bahrain Atomisers International BSC Introduction As the reader of this book should by this stage have established, the Kingdom of Bahrain has a very well developed aluminium industry, comprising both upstream (production of raw aluminium) and downstream (production of a range of finished and semi-finished aluminium products) sectors. While Aluminium Bahrain (Alba) is the dominant player in the upstream sector, there are several important enterprises belonging to downstream industries. We have already discussed in some detail Midal Cables Company in the previous chapter, whilst Balexco and GARMCO are also significant medium-size enterprises comprising the downstream sector. In this chapter we focus on Bahrain Atomisers International BSC (BAI), which is yet another significant enterprise in Bahrain’s downstream aluminium industry. BAI is a manufacturer of a wide range of high-purity and alloyatomized aluminium powders and pellets. Aluminium powder is used constantly in the steel industry, as well as in alloys, high temperature refractories, ceramic bricks, in the automobile industry, and various other chemical processes. Aluminium powder is a highly used commodity in numerous industrial applications internationally. It gives plastic a metallic look (ie commonly appearing as the top coating of a mobile phone for example), and is frequently sprayed on in the final coating whilst painting the surfaces of automobiles and aircraft. Given the global demand for this commodity, it will not surprise the reader that BAI is an export-oriented enterprise, strategically located in the Kingdom of Bahrain, with good access to the Asian, European and American markets.
Organizational history The origins of BAI go back to the late 1960s, when the government of Bahrain embarked upon a policy of employing its abundant gas
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resources to develop a fully-fledged value-added aluminium industry. With Alba founded in 1968, there was soon scope to develop a comprehensive downstream aluminium industry. Established in 1973, BAI was the first company in Bahrain’s downstream industry and was initially supported by the government under an infant industries programme. The company was incorporated as a private sector joint-venture enterprise, with just two shareholders establishing the company – a similar arrangement to Midal Cables’ as discussed in the previous chapter. BAI’s two shareholders were, and have remained, the Bahrain Development Bank (51 per cent) and Ecka Granulate GmbH & Co KG of Germany (Ecka Granules) (49 per cent), a leading global manufacturer of non-ferrous metal powders and their alloys. The German company itself is a privately-owned Bavarian firm, with a corporate history spanning well over a century. Ecka Granules also holds a three per cent ownership stake in Alba. BAI has a Board of Directors, comprising seven individuals all coming from the two shareholders. BAI’s Chairman of the Board is from the Bahraini shareholder, while the General Manager is an employee of Ecka, seconded to BAI. Relations between the shareholders have generally been good and the company has been run to international standards since its foundation. Its auditor is KPMG.
Product lines BAI products range from ultra-fine aluminium powders to aluminium pellets. The company makes these products in three grades: • alloys; • high purity; and • standard purity. It does not engage in the secondary aluminium market (ie scrap metals). BAI has an exceptional product capability ranging from 3 micron to 20 mm in particle diameter for all purity and alloy grade aluminium particulates. Process flexibility is combined with high quality to ensure that BAI can act as the supplier of products that fulfil the customers’ needs from both commercial and technical perspectives. BAI produces around 8,000 tonnes annual capacity, hovering around this figure year-on-year, and representing around 3–5 per cent of the world’s total supply for aluminium powders (we should note that there are only between 10 and 20 plants in the world that produce aluminium powder). BAI’s plants consists of two atomizing facilities (ie the plant that takes liquid aluminium and processes it into powder), one pellet casting facility and two re-processing facilities. BAI’s main
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raw material input is liquid aluminium, which is available in abundant supply, given that BAI’s plants are located less than 1 km from Alba. Liquid aluminium is transported to BAI from Alba in five-tonne crucibles and is then atomized for the production of aluminium powder. It takes roughly five hours for BAI to atomize the liquid aluminium and turn it into one tonne of aluminium particles. While BAI sources all of its raw materials from Alba, the company’s technologies and production units have been traditionally supplied by Ecka Granules, which also handles the majority of BAI’s sales and marketing internationally.
Business development BAI exports the entire 100 per cent of its production capacity to international markets. The company exports very little to the GCC market since BAI’s products are in high demand in high-tech and large-scale industries, very few of which are found in the Gulf. Although BAI’s products are sold as finished aluminium products, BAI’s clients will often treat these products as a raw material, add value to them, and sell them on in the industry as a new product. Being located in a major regional commercial hub, BAI has been able to provide effective delivery times to all of its key target markets internationally. BAI’s market for aluminium powders and pellets is very competitive, with the main competition coming from the US, Europe, and to a lesser degree Russia and China. The challenge that has consistently confronted BAI is to maintain its position as a profitable, internationally significant company supplying international markets. BAI’s General Manager seeks to keep his company competitive by ensuring that the price and quality of BAI’s products, as well as the level of service accorded to its clientele (ie delivery time as well as technical support) keep pace with the expectations of the market. He sees that the challenge ahead of his company is one where it is necessary to win market share from the competition and to grow naturally with the market, and to expand as the requirements of the company’s main clients expand (ie annual demand for aluminium powder is growing at around 1–5 per cent each year). From a marketing perspective, BAI is fully integrated into the Ecka Granules international network, given that the latter is very well known in the industry at the global level. Therefore Ecka’s sales and marketing offices worldwide tend to market BAI’s products. This works well for Ecka, given that BAI is manufacturing high quality products at competitive prices. BAI is a profitable company with an annual turnover of around US$15–20 million.
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R&D BAI operates a total quality production system and has achieved ISO 9001:2000 registration under the British Standards Institute, and was one of the first production companies in Bahrain to achieve this standard. Along with this achievement, BAI has the added advantage of 30 years of production experience as well as access to the technical expertise and facilities of the extensive R&D and quality resources of the Ecka Granules group.
Human resource development BAI is one of the smallest companies in the downstream sector, employing only 59 individuals. Of these there are only three expatriates, with the other 56 people being Bahrainis. The fact that the company employs so many Bahraini nationals makes BAI one of the best private sector performers in the government’s Bahrainization programme. BAI has received recognition in the form of industrial awards from the Ministry of Labour as a profitable, well-managed, international export-oriented company, which employs 95 per cent Bahrainis. BAI’s General Manager, Mr Leon Fabrikanov, an Australian working in Bahrain for over six years, holds a very high opinion of his Bahraini workforce, claiming that they ‘work like lions and will do work that Europeans will find very difficult to do’. It should be mentioned that running an international, export-oriented private company according to international standards, with 95 per cent Bahrainization is quite a significant achievement. Unlike the case of neighbouring Midal Cables, there is no labour union or worker committee present at BAI. However, labour turnover tends to be fairly low at BAI, and many workers have kept their place at the company consistently over time. The regulations for employing workers in Bahrain are fairly rigid, however, and although it is not impossible to fire inefficient workers, removing individuals from the company is not easy. The industrial relations at the company appear harmonious according to BAI’s General Manager, who adds that employing Bahrainis has advantages. Well-trained Bahraini employees have proved to be a major asset to BAI’s business, something that would clearly be pleasing to the Ministry of Labour and the Bahraini government in general.
Doing business with Bahrain BAI’s General Manager suggests that any foreign company planning to operate in the Kingdom of Bahrain needs to come to terms with the
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country’s domestic value system and local business culture, which may be quite different to their own. Foreign companies should also come to terms with the government’s Bahrainization programme. Indeed, the business experience of BAI clearly demonstrates that a modern company can operate profitably and efficiently in Bahrain, work to international standards and be export-oriented whilst employing an overwhelmingly Bahraini workforce. While some foreigners have recently been concerned by the question of security for foreign workers, particularly in the wake of attacks on foreign (European) workers in neighbouring Saudi Arabia, BAI’s General Manager suggests that security is one of the issues that he is least concerned about, as a foreigner working and living in Bahrain. Despite the fact that Khobar (where attacks on employees of foreign companies took place in the spring of 2004) is just across the causeway linking Bahrain to Saudi Arabia, in reality these attacks were very distant from Bahrain both politically and logistically. Given that the main populated part of the Kingdom of Bahrain is located on an island, the country remains both isolated and insulated from such attacks, and there is only one road, the King Fahad Causeway, linking Bahrain to the mainland. With air and sea being the only other avenues to enter the country, there is less scope for terrorists to enter the Kingdom than some of the neighbouring states of the Middle East. Bahrain’s population is composed mostly of Shi’ite Muslim communities, which in recent years have been less prone to be mobilized for terrorist purposes. Furthermore, Bahrain is seen as the leading state in the GCC in terms of political reforms and democratization, which, in theory at least, should give greater scope for expression of social and political grievances through non-violent channels compared with countries where more authoritarian regimes tends to predominate. BAI’s General Manager lists the following factors as noticeable advantages for his type of enterprise whilst doing business in Bahrain: • no corporate tax; • relatively low labour costs; • import duty exemptions to aluminium producers based in Bahrain and exporting to OECD countries; • competitive transport costs (ie the Middle East is a net importer with lots of empty container space leaving the region and available to exporters at competitive rates). One disadvantage for BAI in being based in Bahrain is that the country is quite distant from many of its customers. Ideally, the company would be located much closer to its main customers as
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delivery of production would be much easier and more efficiently achieved. BAI therefore relies significantly on Ecka Granules to do much of its marketing internationally and liaise with the client base on a constant basis, as well as its own capacity to deliver a competitive product in terms of price, quality and service.
4.6
Bahrain’s Telecommunications Sector Bahrain’s Telecommunications Regulatory Authority (TRA)
Telecommunications and economic expansion An effective and competitive telecommunications sector serves as a catalyst for economic growth and drives increased levels of commercial activity and investment. This is not only true of investment and growth in the telecommunications sector itself but, importantly, across multiple industry sectors from consumer industries, manufacturing and transportation through to financial services. Cost-effective and efficient telecommunications raise the competitive advantage of all economic sectors, and ultimately any jurisdiction itself, by providing primary benefits by way of cost reductions, improvements in the scope and availability of services and greater ease and access to information, all of which contribute greatly to enhanced levels of productivity and a country’s attractiveness as an investment or business centre. With these factors in mind, Bahrain has viewed the further development of its telecommunications sector as a national priority and an important part of its broader efforts to stimulate economic growth and investment. In October 2002, the Kingdom passed the Telecommunications Law, which articulated the strategy and means by which Bahrain’s telecommunications sector would be liberalized. With the availability on 1 July 2004 of national fixed and international services licences, all market segments in Bahrain were opened to competition and investment. In what has come to be hailed, both
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locally and internationally, as a fair, efficient and transparent process, the liberalization of the market in Bahrain, which has been administered by Bahrain’s Telecommunications Regulatory Authority (TRA) established in October 2002, has already begun to deliver the intended benefits to consumers, market operators and the economy at large.
The right foundation for investment Characterized by a commitment to political and economic diversity and liberalization, Bahrain is one of the region’s most open economies and a leading investment centre, in particular in relation to banking, and gateway to the broader GCC and Middle East region. Marked by a stable political environment, a sound regulatory environment and a demonstrated dedication to implementing free market principles, Bahrain is experiencing considerable growth and thus provides an attractive environment in which to invest and operate. Bahrain’s GDP growth for 2002 was registered at US$8,416.86 million, and telecoms revenue as percentage of GDP was recorded as 3.6 in 2003, according to figures registered in the Central Informatics Organization of the Kingdom of Bahrain. Further, although a small island with a population of under one million demand for national as well as international telecommunications services in the Kingdom is strong and continues to grow among both individual users as well as Bahrain’s business community. There are more than 400 financial institutions operating on the island at present, and current development projects such as the planned US$1,000 million Bahrain Financial Harbour as well as numerous large-scale real estate projects, are all expected to drive significant demand for high quality, advanced telecommunications services well into the future.
Overview of the telecoms market In establishing its policy for the telecommunications sector, considerable attention was paid by the Bahrain government to identifying the objectives and expectations of the liberalization process and the desired results. These included the: • stimulation of economic activity; • rapid creation of a free market environment that would prove attractive to private investment in the telecommunications sector; • enhancing the attractiveness of Bahrain as a business centre by becoming a regional communications hub; and
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• retention of opportunities for the incumbent operator to grow value by balancing the mechanisms that compel it to adapt to competition, with the need to maintain, or even enhance, its value. With a successful fast-track liberalization completed in July 2004, Bahrain has already achieved many of these objectives and has emerged as one of the region’s most competitive and dynamic marketplaces, prime for the attraction of new operators and greater levels of private sector investment. In April 2003, Bahrain’s mobile telecommunications segment became the first to open to competition, followed over the course of the following 15 months by all additional segments as follows: • 1 August 2003: Availability of Internet Service Providers (ISP) licence; • 1 August 2003: Availability of Value Added Services (VAS) licence; • 1 January 2004: Availability of Paging licence; • 1 January 2004: Availability of Public Access Mobile Radio (PAMR) licence; • 1 January 2004: Availability of VSAT licence; • 1 January 2004: Availability of International Telecommunications Facilities licence; • 1 July 2004: Availability of International Telecommunications Services licence; • 1 July 2004: Availability of National Fixed Services licence. The impact of the liberalization process currently can be seen most vividly in the mobile segment, which consists of two operators, namely Batelco and MTC-Vodafone Bahrain. Competition has already begun to deliver the intended benefits driving economic investment and job creation, business opportunities and growth for both operators – the incumbent and the new entrant alike – as well as subscribers who have witnessed enhanced customer service, the introduction of new services and service options as well as price reductions. It is expected that, with the full liberalization of the market after July 2004, the model has been set for additional operators to enter the market across the full spectrum of telecommunications services, and for the completion of opening the telecoms market in Bahrain to have a similar positive impact as competition increases. It should be noted that, other than in relation to mobile telephony, all sectors of the telecoms industry in Bahrain are open to an unlimited number of licensees, and that there are no local ownership requirements.
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Market players Presently, major market players in Bahrain’s telecommunications sector, as well as other licensed entities, include the following. Bahrain Telecommunications Company (Batelco) Batelco is Bahrain’s incumbent telecommunications operator. Established in 1981, the Company has been an integral part of the Kingdom’s telecommunications sector since its inception. Batelco holds 14 licences spanning the spectrum of telecommunications services in Bahrain; however, its activities are not limited to the local market. Batelco is also an active participant in additional regional markets. MTC-Vodafone Bahrain MTC-Vodafone Bahrain is the result of an agreement between the Mobile Telecommunications Company (MTC), a GCC regional company in Kuwait, and Vodafone, a global company based in the UK. MTC-Vodafone Bahrain is the Kingdom’s second GSM service provider, having launched its service in the Kingdom in December 2003. MTC-Vodafone Bahrain further holds Internet Service Provider (ISP), Value Added Services (VAS) , VSAT and International Facilities licences.
Fixed telephony Fixed telephony service in Bahrain is currently provided by Batelco. However, with the recent availability of National Fixed Licences since 1 July 2004, the Kingdom’s telecommunications sector hopes to attract additional fixed line providers as investors and operators alike come to take advantage of the opportunities presented by the full liberalization of the sector. With regard to tariffs, all in-country calls in Bahrain are classed as local calls and billed at standard local rates. International calling rates in Bahrain have been historically high when compared with the European or US norms. However, prices have started coming down with the introduction of the new regime and certainly with International Service Licences, available since 1 July 2004, it is expected that international call tariffs will become increasingly competitive as competition enters the market and operators vie to provide customers with greater value and service options. Teledensity for fixed telephony stands at 27.6 per cent among Bahrain’s population of 672,100 people. It is expected that continued economic growth and increasing prosperity in the Kingdom will continue to drive demand for fixed lines in the country in the years ahead.
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Mobile telephony The award of the country’s second mobile licence in April 2003 was a significant milestone for Bahrain, both marking the first critical step in the introduction of competition into the telecommunications market, as well as representing a decisive step forward in the Kingdom’s overall goal of promoting free market principles. The process, a ‘beauty contest’ through which the second operator was selected, was a transparent and rigorous one aimed at ensuring the chosen applicant could deliver high-quality service, meet growing consumer demands and provide optimal investment and job opportunities for the citizens of Bahrain. MTC-Vodafone Bahrain, now the country’s second mobile operator, was selected from among some 10 high-quality regional and international operators seeking to enter the Kingdom’s fast-growing mobile telecommunications market. As of 2003, the mobile telephony sector registered a 65.9 per cent penetration rate – a figure that is expected to increase even further with the advent of a second mobile operator. Further, the introduction of competition has also had a positive impact on this segment with regard to the availability of greater choice both in terms of operators and the scope of products and services on offer, enhanced customer service and, importantly, considerable reductions in price. Both operators provide world class services in the GSM range covering voice, international calls, GPRS, MMS and gaming to name a few. The TRA has a policy of technology neutrality in order to encourage innovation in products and services provided in the Kingdom of Bahrain. In terms of the number of mobile licences available, Bahrain’s Telecommunications Law stipulated that for a period of two years, until April 2005, there would only be two mobile operators in the Kingdom. However, if the two mobile operators were to engage in anti-competitive behaviour, the TRA would have the power to license a third mobile operator before April 2005. Similar rules apply to a Mobile Virtual Network Operator (MVNO).
The Internet The advent of the Internet and its proliferation has revolutionized the way in which individual users and businesses communicate and access information. Bahrain’s island geography further enhances the importance, need and demand for internet services and usage. According to statistics published by the International Telecommunications Union (ITU), the total number of internet users in Bahrain for the year 2003 is estimated at 195,700, which constitutes a penetration rate of 29.1 per cent.
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While the Kingdom began the offer of Internet Service Provider (ISP) licences in August 2003, Batelco, Bahrain’s incumbent operator remains the sole source of internet services to the public and business community at large. Demand for internet services is strong and the lack of competition in the market thus far has kept prices, in particular those using ADSL technology, significantly higher than European or US norms. Nevertheless, Bahrain, through the TRA, is taking the necessary steps to drive investment in this segment of the telecommunications sector – which it views as a critical one – and has set the foundation for doing so through the establishment of the Bahrain Internet Exchange (BIX). As envisaged in the Telecommunications Law, the establishment of BIX was announced in November 2003 and licensed in March 2004. BIX will be the connecting point for all internet traffic within Bahrain, and will also act as the gateway for international internet connectivity with Bahrain (see Figure 4.6.1).
Wider Internet
Tier 1 IX London? Tier 2 IX
BIX ensures the development of a competitive ISP sector
All ISPs required to connect to BIX only for exchange of Bahrain traffic
BIX
Licensed Operator Int’l facility
ISP 2 ISP 1 User ISP 3
User
User
Figure 4.6.1 Bahrain Internet Exchange (BIX)
4.7
Bahrain’s Telecommunications Sector: The Regulatory Framework Bahrain’s Telecommunications Regulatory Authority (TRA)
Introduction The establishment of a fair and transparent regulatory framework is a prerequisite for the attraction of private sector investment – both domestic and foreign. This is particularly true for developing markets, as they vie to enhance their competitive advantage and position themselves as investor-friendly destinations. Bahrain has long been recognized as a regional leader in terms of its legal and regulatory infrastructure, and its telecommunications sector is no exception. The Kingdom’s telecommunications sector – much like its renowned financial services industry – is characterized by a worldclass regulatory environment conducive to the attraction of investment and capable of supporting multiple operators. In embarking upon the process of liberalizing the telecommunications sector in the Kingdom, the government devised a telecommunications plan aimed at establishing and maintaining sustainable competition through the development of a regulatory infrastructure based on transparency and accountability, whilst being capable of providing both current and future market operators and subscribers with clear rights, obligations and long-term visibility.
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The regulatory authority Bahrain’s Telecommunications Regulatory Authority (TRA), established in October 2002 by the Telecommunications Law as an independent body, is tasked with the effective implementation of the government’s strategy and plan for the development of the Kingdom’s telecommunications sector. This encompasses all necessary measures to attract investment and competition, as well as ensuring that the regulations set out in the Telecommunications Law are fairly and effectively enforced for the benefit of both subscribers, consumers and operators alike. The TRA is responsible for developing regulations that protect and promote consumer interests – allowing both new and existing market operators to thrive is a key goal. In liberalizing the sector and in its ongoing efforts to regulate the market, the TRA has focused on the promotion of fair and effective competition and the creation of an open environment that encourages investment and at the same time allows private sector companies the necessary flexibility to best meet user needs. The TRA is overseen by a Board of Directors appointed by His Majesty the King on recommendation of the Council of Ministers, as is the General Director of the TRA who is responsible for the day-to-day operations of the authority and in whom all powers of the TRA are vested, according to the Telecommunications Law.
The regulatory environment Working under the Telecommunications Law, the TRA has gone to great lengths to ensure that the regulations it adopts and the manner in which it enforces these regulations are fair and transparent. The TRA, (the Authority) on an ongoing basis, devises and implements consultations on critical issues, allowing both the general public as well as market operators to participate in the development of the sector and the rules and regulations that govern it. All consultations, determinations and regulations are published on the TRA website at www.tra.org.bh. Comments on consultation documents may be submitted by anyone, including those outside of Bahrain. Further, the TRA continues to put in place other key processes and systems to encourage an open dialogue between the Authority, the industry and members of the public, so that the benefits of liberalization are delivered efficiently and as intended and that the interests of all subscribers and market operators are effectively protected and promoted. The most recent of these mechanisms was the launch of the Kingdom’s first Telecoms Consumer Advisory Group, the first of other
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similar groups, which will be tasked with working with the Authority and industry operators on critical industry issues.
The legal framework The Telecommunications Law sets out the powers, duties and responsibilities of the TRA as well as operators. The Law also provides mechanisms for dispute resolution between subscribers and operators, and provides for the use of arbitration in the event of disputes between a licensee and the Authority. The Telecommunications Law also sets out clear and strong enforcement powers of the TRA, in particular in the area of competition. Furthermore, the TRA has the power to investigate complaints within the telecommunications sector, both from and regarding licensees and non-licensees. Depending on the nature of the complaint and the results of the TRA’s investigation, the TRA can either take any necessary action itself (including imposing fines, and requiring behavioural and/or structural remedies) or inform the Public Prosecutor of the matter, for him/her to take any suitable action.
Licensing Among the TRA’s major roles is granting licences and monitoring licensed operators, in particular to ensure compliance with their licence obligations and the Telecommunications Law. As such, the Authority has put in place a clearly defined, technology-neutral and easy-to-navigate licensing process, aimed at encouraging participation whilst ensuring that applicants meet the necessary legal requisites. There are currently nine licences provided by the TRA, shown in Table 4.7.1. In order to apply for these licences, which are issued for a period of 15 years, potential candidates can simply apply online by filling out the required application forms and sending them to the TRA. Upon receipt of applications the TRA will send an acknowledgement within 14 days of receipt of the application. The TRA will assess the application and correspond with the applicant on any issues requiring further clarification. Assuming all requirements are met, the TRA will issue the appropriate licence(s) to the applicant. There are no restrictions on levels of foreign ownership; however, all licence applicants must be legally registered Bahraini commercial entities. Licensing fees for each licensed service are one per cent of a company’s gross annual revenue attributable to the licensed activity.
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Table 4.7.1 TRA licences Licence
Initial fee
Renewal fee
Mobile Telecommunications LicenceThis licence allows provision of mobile telecommunication service by its own network.
Two operating licences have been granted (to Batelco and to MTC-Vodafone). No further licences of this type are currently available until 2005.
Paging Service Licence This licence allows the commercial use of paging services to subscribers.
BD5,000
1% of gross annual turnover attributable to licensed activity.
VSAT Licence This licence grants the use of Very Small Aperture Terminal, a digital satellite data network with small antenna diameter, for private use only.
BD5,000
1% of gross annual turnover attributable to licensed activity.
Public Access Mobile Radio Service BD5,000 Licence This licence allows the use of Public Access Mobile Radio in dispatch applications (eg by truck and taxi fleets).
1% of gross annual turnover attributable to licensed activity.
International Telecommunications BD20,000 Facilities Licence This licence authorizes the termination/landing/establishment of international connections and the obligation and right to connect to other Bahrain licensed networks.
1% of gross annual turnover attributable to licensed activity.
International Telecommunications BD10,000 Service Licence This licence allows the provision of international voice and data services with requirement to deploy a physical traffic aggregation structure.
1% of gross annual turnover attributable to licensed activity.
National Fixed Services Licence This licence allows the provision of national fixed voice and data services by its own network.
BD35,000
1% of gross annual turnover attributable to licensed activity.
Internet Service Provider Licence This licence allows the provision of internet services but not including voice.
BD1,000
1% of gross annual turnover attributable to licensed activity.
Value Added Services Licence This licence allows the provision of services over an existing network (eg card services).
BD1,000
1% of gross annual turnover attributable to licensed activity.
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The initial fee, paid once with the application for the licence, also covers the first calendar year from the date of grant of the licence.
Numbering Numbering is a vital issue in any telecommunications market as it moves from monopoly to competitive supply. Before 2003, the national operator, Batelco, controlled all telephone numbers in Bahrain. As soon as competition was introduced, control over all national numbers was placed with the TRA, to administer fairly in the best interests of consumers. In order to achieve this, the TRA consulted the industry and the public on the allocation and structure of telephone numbers in Bahrain and proposed an extension of all numbers to an eight-digit format. The key feature of the eight-digit format was its stability. It would create sufficient numbers so that further changes would not be needed for many years, if ever. After completing the consultation process, the TRA issued the National Numbering Plan for the Kingdom of Bahrain on September 2003, bringing into force the above-mentioned proposal. By ensuring that there are adequate numbers, the National Number Plan both cleared the way for fair competition and provided a consistent way for consumers in Bahrain to access their telecommunication services.
The importation of telecommunications equipment The Authority is the body responsible for approving the telecommunications equipment used in the Kingdom of Bahrain. The small size of the Bahrain telecommunications market makes it impractical to implement a bespoke equipment approval process or to test every piece of equipment against a standard equipment approval. The TRA has therefore adopted an approval-by-exception approach, whereby international standards, mutual recognition agreements and self-regulation by manufacturers will be used as much as possible. Certificates from the main equipment approval authorities will be recognized by the TRA and these include: • ANSI – American National Standards Institute; • BABT – British Approvals Board for Telecommunications; • CEPT – European Conference of Post and Telecommunications; • ETS – European Telecommunications Standards;
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• ETSI – European Telecommunication Standards Institute; and • FCC – Federal Communication Commission. When seeking to import telecommunications equipment into the Kingdom of Bahrain, it is the responsibility of operators/users to present the relevant certificates. Whilst the Authority reserves the right to spot-check equipment if this is felt necessary, it also has the right to use a preferred third party to test equipment as it deems necessary. In such instances, the operator wishing to use the equipment that requires testing will be liable for the cost of the tests. The TRA may also seize or prohibit the use of equipment that does not comply with type approval regulations. It also has the power to levy fines for breaches of type approval regulations.
4.8
Tourism Development Department of Tourism, Ministry of Information, Kingdom of Bahrain
Introduction The Kingdom of Bahrain is an archipelago of 33 islands, with a total land area of just over 700 square kilometres and with the sea as its prominent element. The Kingdom takes its name from the largest island, Bahrain (587 square kilometres), which is linked to the other main inhabited islands of Muharraq, Sitra and Nabih Saleh by causeways. To the southeast of Bahrain lies a group of 16 small islands, the largest of which is Hawar and resembles the shape of the mother island. In 1999, Bahrain witnessed a new era of economic and political reforms, manifested in the introduction of a Referendum on the National Action Charter, which won almost 99 per cent of Bahraini votes to transform the State of Bahrain to the Kingdom of Bahrain and to proclaim HM Shaikh Hamad bin Isa Al-Khalifa, as the King of the country. ‘Bahrain’ or ‘Two Seas’ refers to the abundance of sweet water found in a number of natural springs both on land and beneath the sea. The phenomenon of sweet water springs under the sea, which blend with the salty water of the sea, has been responsible for the renowned lustre of Bahrain’s natural pearls. The second most important aspect is that this country has a history and civilization that dates back more than 6,000 years. Much of that history is still seen in abundance all over the island and in its museums and archaeological sites. Historically, Bahrain is the motherland of the Delmon civilization, dating from the third millennium BC. Delmon was an important seaport between Mesopotamia and the Indus Valley as repeatedly mentioned in Sumerian, Babylonian and Assyrian inscriptions. It has also been described as the ‘land of eternity’ due to the abundance of sweet water, with over 170,000 burial mounds at one time covering the central area and part of the western area of Bahrain Island.
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Delmon was later renamed by the Greeks as Tylos, when two of Alexander the Great’s ships arrived opening new trade routes some time around 323 BC, which resulted in a strong Greek influence being exerted over the islands. Archaeological finds reveal evidence of two distinct civilizations, Delmon and Tylos, dating from the third and first millennia respectively. Such evidence can be found at different archaeological sites, and most clearly at the Bahrain National Museum, which consists of several exhibition halls covering the history of Bahrain through ancient civilizations and up to the pre-oil period, when the pearling industry was Bahrain’s major source of wealth. At the start of the 20th century, Bahrain owned nearly half of the pearl fishing fleet in the Gulf, and employed over 2,000 people. The arrival of cheaper Japanese cultured pearls in 1930 coincided with the discovery of oil, which resulted in the crash of the pearling industry as people moved to work for the newly-founded Bahrain Petroleum Company (BAPCO). The first oil well was drilled in 1931 at the foot of Jebel Dukhan, and oil production started in 1932, with oil exports starting two years later. The discovery of oil brought subsequent economic and social change to Bahrain, turning it into a major oil, financial and trading centre, a status that can be attributed to the wise leadership directives that are based on establishing a complete and sound economy by adopting an economic diversification plan that effectively facilitates the development of various non-oil and tertiary industries such as aluminium smelting, offshore banking, insurance, ship repairing and tourism. It is true that the government has made its tourism industry, amongst many other sectors, an essential key policy area, currently contributing 8–10 per cent to the national economy. At present, very keen and sincere measures are set up by both public and private sectors to help increase this contributing factor of tourism to 15 per cent in the coming five years. Obviously, the need for joint efforts and joint plans is paramount and demanded from the various governmental authorities, the community, the private sectors and big corporations, in order to bring about this objective. Still in tune with the development phase, the Kingdom of Bahrain is going to stage a number of mega ‘top-notch’ projects that will accelerate and boost tourism in the region. Of course, one worthy of mentioning is the Formula One Grand Prix, a project that became an annual event for Bahrain as of April 2004 and which promises to be distinct from all other venues in the sense that it has an exceptionally rich Arabian flavour, characterized by its Middle Eastern desert and oasis theme. Other projects include the Durrat Al Bahrain Resort, a 20 km2 area of reclaimed desert and sea, considered to be one-third larger than the capital city, Manama. This resort will comprise 13 different islands, with about 2,000 villas, 2,000 apartments, luxury hotels, restaurants,
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promenades, shopping centres, a marina, spa, sport facilities and an 18-hole golf course. Also, there is the Amwaj Islands project that will include a four-star hotel that will cost BD12 million; a 2,500 km2 unique structure design of a skylounge of restaurants that will look as if it is suspended in midair and a 4,000 km2 mosque that will have its own bridge and will cost up to BD2 million. All in all, the US$1 billion Amwaj Islands project is going to be an attractive beachfront property that will be linked to Muharraq Island by a single causeway and characterized by a leisure community seafront and marina villas, hotel, marina club and commercial building plots. It is expected that these two mega-projects will generate a lot of tourism and business activities and also encourage and entice foreign investments to the country. Besides the affluent and bustling infrastructure that the Kingdom of Bahrain enjoys, there is yet another element that has given it an additional bonus to help it become a thriving and very sought-after destination, whether for business or leisure. That very remarkable secret element is its people. On the spot, anyone coming to Bahrain will discover that the people are the best socially – a gift of God to the Kingdom of Bahrain. When it comes to encouraging people to visit the Kingdom, there is not really a specific type in mind. The government’s main aim is to provide the best options and facilities, at the highest quality, to all types of visitor, be they business travellers, families, cultural travellers or nature lovers. Everyone is welcome in this paradise destination. Having said that, it should be mentioned that one group does demand some special regard, and that is families. Within its new strategy, the government has set up a number of requisites that need to be pursued in order to facilitate comfortable and convenient entertainment and accommodation options for all visiting families. On the other hand, the government has also taken into consideration that a very good infrastructure should be facilitated to support and meet the satisfaction of the business traveller as well. Visitors often have different expectations. For instance, some wish to visit and enjoy the shopping malls, others come to visit the heritage, while others just come to do business. People often judge the countries they visit on their first experiences, and, in most cases, that is what makes them decide to come back again. In light of that, the people in the tourism industry, from public and private sectors, work very hard to ensure that the hotel industry in Bahrain is synonymous with international standards and offers the very best of hospitality to its guests. Through some promising collaboration between the tourism authorities and the hoteliers, efforts are made to encourage the business travellers to bring their family along with them whenever they plan to visit, by providing them with special incentives or complementary
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options so that they come with their families and choose to extend their stay on the island. To sum up, the Kingdom of Bahrain is a country that has had a very long history of hosting events and welcoming visitors to its shores, and so it does not come as a surprise that this precise diversity has added yet another distinctive asset, which is its ability to provide and to cater for all different types of visitor.
Sights and attractions Bahrain provides an array of attractions and sights that suit the various visitors’ interests and tastes – from history, heritage and handicrafts, to sports, relaxing on the beach, dining out and nightlife. The following are regarded as some of the more interesting sights. Bahrain National Museum: Located on the intersection of Muharraq Causeway and King Fahad Causeway, this museum offers a comprehensive view of Bahrain through the ages, with Halls of Delmon, Tylos and Islam, Customs and Traditions and Trades and Crafts, as well as one exhibiting prehistoric animals, and an art gallery. Oil Museum: Located to the south of Jebel Dukhan, next to Oil Well no. 1, this museum exhibits drilling equipment, a working model of an oil rig and photographs. Currency Museum: Located in the Bahrain Monetary Agency (BMA) building in the diplomatic quarter, this museum houses many ancient coins and rare Islamic currency, in addition to all currencies circulated in Bahrain since the early Islamic dynasties. Beit Al Quran (House of Al Quran): Located close to the National Museum, the Beit al Quran houses rare and ancient manuscripts of the Quran from around the world. Also on display are rare Islamic artifacts and jewellery. Bahrain Fort (also known as the Portuguese Fort): Situated at Karbabad Village, seven kilometres from Manama City, this fort is of great historical importance because it is located on a site that became the seat of successive civilizations – the last being the Islamic era. Saar Settlement: The most recent discovery of the Delmon era, this settlement consists of 4,000-year-old residential dwellings with adjoining burial grounds. The site also includes the Saar Temple and is accessible from Saar main road. Ain Umm Al Sejoor: A natural water spring forming part of a Delmonage temple, discovered in the early 1950s at a site to the north of Duraz village.
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Barbar Temple: Located in Barbar village, this temple consists of three superimposed levels built over several periods of time – the first of which was constructed around 2800 BC. The temple resembles those found in Mesopotamia. Al-Khamis Mosque: This mosque was originally built around the 9th century CE and has been renovated and extended through different Islamic periods. Its final structure resembles that of 12th-century Islamic architecture. Arad Fort: Situated on the island of Muharraq, this fort was built around the 17th century during the Portuguese occupation of Bahrain. It is a fortified structure, square in shape, with circular towers at the four corners overlooking the waterways that gave access to Bahrain at that time. Shaikh Salman Bin Ahmed Al-Fatih Fort (formerly known as Rifa Fort): Situated in Rifa and built by Shaikh Salman Bin Ahmed Al-Fatih in 1812 for use as his seat of government, this fort is believed to have been built over the ruins of an earlier 17th-century castle. Shaikh Isa Bin Ali House: Situated in Muharraq, this house resembles the traditional architecture of the Arabian Gulf region with a wind tower as its main feature. It was constructed by Shaikh Hasan Bin Abdulla Bin Ahmed Al-Fatih and later used by Shaikh Isa Bin Ali as his residence and centre of government from 1869 until 1932. Siyadi House: Situated close to Shaikh Isa Bin Ali House, in the Siyadi district of Muharraq, this house was constructed in the 19th century by a Bahraini pearl merchant, Ahmed bin Jasim Siyadi. It resembles a typical residence of merchants at that time. Bait Al-Jasra (or Al-Jasra House): Situated in the Al-Jasra village on the west coast of Bahrain, this house was built in 1907 by Shaikh Hamad Bin Abdulla Al-Khalifa and was later taken as a summer residence by Shaikh Salman Bin Hamad Al-Khalifa, ruler of Bahrain from 1942 until 1961. Also in Al-Jasra village is the Al-Jasra Handicraft Centre, which comprises a number of rooms displaying different traditional handicrafts such as cloth weaving, pottery, chests, ‘sadow’ or Bedouin weaving, and the making of traditional dhow models. With regard to natural attractions, Al-Areen Wildlife Park and Sanctuary provides a natural habitat for many different types of plant and for more than 500 species of animals and birds. Another environmental reserve is located in the Hawar group of islands, which provide a natural habitat for many migrating birds. As for recreation, Bahrain offers a wide range of conventional water sports at Al-Bander Resort, Le Royal Meridien Hotel and Resort, and Hawar Hotel and Resort. In addition, the Al-Dana Resort, consists of
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180 chalets and offers all the facilities and services expected of a true family resort. For those who would like to try a unique and rewarding water sport, pearl diving at one of the world’s largest oyster beds can be arranged with the diving associations in the country. Golf enthusiasts can enjoy the game on the 18-hole PGA championship course at the Rifa Golf Club, in addition to sampling the firstclass facilities at its clubhouse. Go-karting, ice-skating, tennis, squash, cricket, football and rugby are among the many other activities that are also available.
The future The government has always been flexible and welcoming to new ideas and suggestions in areas for development and advancement. It never fails to make sure that when adopting any particular project, it does not usually open if some of the activities are not yet ready. Transparency at all levels is essential for all plans. The authorities need to be fully open before committing to any project. Great effort and a tremendous amount of time has been invested on both government and private levels to bring about a healthy environment for nurturing tourism. The Kingdom of Bahrain is proud of all its achievements and welcomes and treats the visitor with utmost hospitality, no matter who they are or where they come from. The gates of the Kingdom of Bahrain are always open to visitors with love and smiles, making them very much at home on its golden sands and azure beaches.
Key-points Below are some key points regarding Bahrain: • geographic location – halfway down the Arabian Gulf and to the east of Saudi Arabia; • moderate climate most of the year, average temperatures range from 17–30°C between September and April; • richness in history and heritage, as evident from the widespread archaeological sites, traditional homes and museums; • well-established infrastructure; • well-established transport network and world-class telecommunication services; • good tourist amenities, including a wide range of accommodation, catering and recreational facilities, seven five-star hotels, nine fourstar hotels and over 100 restaurants serving an array of cuisines
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ranging from Continental, Thai, Chinese and Japanese, to Indian and Middle Eastern; • state-of-the-art exhibition and conference facilities, including purpose-built centres such as the International Exhibition Centre, the Gulf International Conference Centre and the Bahrain International Conference Centre, as well as the fully-equipped conference halls within all five-star hotels; • the unique friendliness and hospitality of the Bahraini people. It is a known fact that the Kingdom of Bahrain is one of the oldest and friendliest in the world. For centuries Bahrain has received many visitors, with the warm hospitality of its people continuing to make it a special place to visit; • last but not least, the safety and security that prevails in all aspects of life in the Kingdom of Bahrain, making it a peaceful haven. Petty thefts and crime rates are extremely low. People of all races and both genders can freely walk or drive around at any time of the day without fear of being harmed. However, the key element of the country’s successful tourism industry has been its ability to recognize and deal with changes across a wide range of interrelated economic, social and technical factors that shape the world’s tourism industry, emphasizing the net benefit and market share of tourism receipts rather than the market share of the number of visitors. This means promoting Bahrain as a diverse destination that provides alternative tourism rather than a generic leisure destination, thus reaching out to speciality markets that interact well with social and environmental resources and provide substantial economic benefit. To ensure sustainable tourism development on and around the islands, a number of measures have been adopted to create a better climate for this speciality sector and other emerging niche travel segments such as archaeology, culture, golf, diving and eco-tourism. Some of the measures worth mentioning are: • improving and expanding the standard of service infrastructure at historical and heritage sites; • re-evaluation and reclassification of hotels, hotel apartments and tourist resorts; • restricting the number of permits issued for the operation of one- to three-star hotels and issuing permits for four- and five-star hotels only if differentiation in the range of products and services is guaranteed; • the introduction of a liberal visa policy that offers easy access to special interest and business visitors from most countries of the world – for example, Western Europe, Australia, New Zealand, Japan,
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Canada and the United States among others, by making single entry visas or multiple entry visas available on arrival in Bahrain; • the issuing of entry visas on arrival to all residents of the Gulf Cooperative Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates); • the allocation of wide areas of land and sea around the island for reclamation in order to set up new tourist projects such as deluxe family-oriented resorts and theme parks, taking into consideration a minimum negative impact on the environment; • supporting the private sector and foreign investments in such projects.
Tourism statistics The tourism industry in the Kingdom is experiencing remarkable and significant growth. According to our figures, for 2003, total visitor arrivals to the Kingdom came around 4.84 million compared with 4.83 million in 2002, indicating a steady growth rate of 0.3 per cent. Furthermore in 2003, the tourist arrival figure, which was 3.76 million, indicates a growth increase in the ‘tourism and leisure’ market of 3.5 per cent compared with the 3.64 million tourists in 2002, and an increase of 13.3 per cent in the number of those tourists visiting friends and relatives, and, finally, a 12.2 per cent increase in the number of transit arrivals (see Tables 4.8.1 and 4.8.2). Table 4.8.1 Total visitor arrivals to the Kingdom of Bahrain (by air, land and sea)
Air Land Sea Total
2002
2003
920,309 3,897,170 13,461 4,830,940
974,159 3,861,969 8,369 4,844,497
Table 4.8.2 Total visitor arrivals to the Kingdom of Bahrain (by purpose of visit)
Leisure Business Visiting friends and relatives Transit Journalism Total
2002
2003
3,641,727 418,819 79,846 270,126 101,934 4,512,452
3,769,003 542,243 90,428 303,163 130,220 4,835,057
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It is also worth mentioning that the Kingdom of Bahrain presently has 29 hotel apartments and around 90 classified hotels in total, which include: • seven five-star hotels; • 15 four-star hotels; • 23 three-star hotels; • 37 two-star hotels; and • eight one-star hotels.
4.9
The Residential Property Market Susan Neal, Cluttons, Bahrain
Introduction For people thinking of relocating or even retiring to the Kingdom of Bahrain, this is undoubtedly an interesting and multicultural place in which to live. Since 2003, the Bahrain property market is now partially open for both rental and buying. However, this applies only in certain areas, ie Amwaj Islands by the airport, Juffair, certain parts of Saar, and other resort projects currently ongoing, where it is possible for expatriates and other GCC nationals to purchase.
Practicalities of renting When relocating, a valid central population registration (CPR) card is essential, as landlords will not accept any clients unless this is produced. You obtain this card once your employer has had your residence and work permits processed. As this doubtless takes a little time, and landlords prefer not to hold flats and villas, they are usually very happy to issue a lease in the company’s name, which can be transferred later to your name (sometimes for a small fee), but do check with the landlord first. Housing allowances vary according to the grade of the employee, and can be either a basic allowance or sufficient for a fully furnished all-inclusive package. Once this has been established with your company, approaches can be made to reputable property agents, such as Cluttons, who will help you to locate a suitable property. It should be noted that there are many agents in Bahrain, so it is best to make contact with a few and then decide which one to use. In so doing, it should also be noted that the property market is, in essence, a ‘free-for-
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all’ and thus different agents may well make visits to the same properties. This can prove to be extremely frustrating, and a complete waste of time visiting properties over and over again, so it is important to be careful, and to note down the name of every building you go to so as not to duplicate. Once a budget has been set, and a suitable property found, a quick decision is needed as availability changes daily. Delays in the decisionmaking process and a lack of available funds can mean that a ‘dream home’ is lost and you find yourself back at square one. To assist an agent in selecting a property it is essential to provide clear information as to what is required. For example: • Would you prefer a villa or an apartment? • Do you need a garden? • Would you prefer it to be stand-alone or on a compound? • Would you prefer the property to be near school/university/shops? • How many bedrooms and bathrooms would you prefer? • Would you prefer the property to be unfurnished, semi-furnished or furnished? (Unfurnished means nothing included; semi-furnished means carpets/tiles, curtains and air conditioning (A/C) – check whether window, split or wall A/C as they are quite different. Furnished means all of the above and basic furniture. Fully furnished includes all of the above and bedding, cutlery etc.) • Would you prefer the property to be in or out of town? • Do you need housemaid’s quarters? • Do you need a swimming pool? Bahrain has a large expatriate population, and there tend to be ‘pockets’ of culture all over the island. Newcomers to the region may feel more comfortable being near people from their own country or culture, rather than being among people of a different culture. This must also be relayed to the agent, who should know the different areas well.
Financial and lease information Residential leases are normally for a term of one to two years, renewable. The first year of the lease is usually fixed but during the second year, dependent on the landlord, it is usually possible to give one or two months’ notice of termination. To get a feeling of the island go for a one year lease to start with, as you may find once you settle,
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that another area is more attractive, or has more facilities to compliment your lifestyle. Leases themselves can be anything between one and 15 pages long, but it is essential that they are read carefully; do not be put off, because these leases should cover every eventuality, thus protecting not only the landlord but also the tenant.
Payment terms Most landlords require at least three months’ payment in advance at the signing of the lease and will then either accept monthly or quarterly payments. Some will require a deposit of one month’s rent, refundable at the end of the lease, subject to inspection, while others will insist on one year’s post-dated cheques, but again, each of these guidelines are negotiable. Please note that agents charge one month’s rent as a commission fee, which is borne by the landlord. Reputable agents do not charge their clients.
Extras In addition to the rental payments, if a lease is on an ‘exclusive’ basis, municipality tax of 10 per cent of the monthly rental will be payable, which will be included on the electricity and water bill (which are also payable by the tenant). By way of example, for a medium-size flat with air conditioning, the monthly electricity cost will be in the region of BD15–25 in the summer months and BD10–20 during the winter. Water charges are likely to be between 500 fils and BD5 per month. The following is an example of costs for an average flat per month. Exclusive Flat Rental Municipality 10% Water charges (approx) Electricity (approx) Total monthly outgoings
BD250+ BD25+ BD5+ BD20+ BD300
Before obtaining an electricity line, an expatriate is required to pay a deposit of BD100, which is refundable upon vacating the property and once all the final bills have been paid. Such a deposit is also required for both landlines and mobile phones. If the home is to be rented on an ‘inclusive’ basis, the only sum payable is the monthly rental because all utilities and municipality taxes are included.
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Property information Structural repairs and general maintenance are usually the responsibility of the landlord, which should be clearly stated in the lease. If the home is part of a compound with a communal swimming pool, the landlord usually undertakes all maintenance, but confirmation of this should be obtained in advance of signing the lease. If, on the other hand, the home has its own private pool, there is a need to ensure in advance who will be responsible for its maintenance, because, as an approximate guide, a small pool will cost an average of BD50–75 per month to be maintained in pristine condition. Landlords sometimes provide satellite television; otherwise installation will be at the tenant’s cost. On average it costs in the region of BD100 for the initial installation, in addition to which there is a monthly subscription of some BD15, but check with the different satellite providers, as there are always special offers available.
Prices Table 4.9.1 provides a guide to rental prices in different areas. Table 4.9.1 Indicative property prices (monthly rental in Bahraini dinars) Flats/villas in
2 bed from
3 bed from
4 bed from
5 bed from
Central Manama Unfurnished Semi-furnished Fully furnished
150 225 500
250 300 650
350 450 800
450 600 1,000
Surrounding areas Unfurnished Semi-furnished Fully furnished
200 250 400
250 350 600
350 500 800
450 650 1,200
Remaining areas Unfurnished Semi-furnished Fully furnished
200 250 400
300 400 750
400 550 900
500 700 1,200
Areas of Bahrain: Central Manama:Manama, Adliya, Gudaibiya, Hoora and Juffair Surrounding areas: Um Al Hassam, Zinj, Salmaniya, Gufool and Muharraq Out of town areas: Budaiya, Saar, Hidd, Arad, Isa Town, Rifa and Zallaq
The Residential Property Market
All rentals prices are affected by: • the age and condition of the property; • whether the property is on a compound with a shared pool; • whether it has its own pool; • whether it is near schools and shopping areas; • market availability; • whether the landlord is amenable to change and compromise.
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4.10
The Commercial Property Market Andy Hinson, Cluttons, Bahrain
Office developments in Bahrain have traditionally been found in central Manama and the diplomatic area, which act as one adjoining location for a wide range of international and local organizations that require office space for a variety of purposes. More recently, substantial retail developments in the Al Seef area have encouraged a number of office developments nearby for rent and private use. Bahrain has acted as a regional office location for a number of international businesses that, until recently, were generally not able to own their premises. The market has therefore been characterized by widespread leasing activity, with many of the tenant organizations being connected to the finance, insurance and investment sectors. Indications are that the leasehold sector comprises 70 per cent of occupational demand, with government and local institutions making up the balance. Local organizations and individuals have therefore developed a wide range of commercial properties for leasing out, including a significant number of good quality office properties. Since the late 1980s, the office rental market in Bahrain has remained relatively stable with relatively minor increases in rental rates. In the last few years, a number of large, new commercial developments have been initiated and it is possible that on completion these could lead to an over-supply of prime commercial office space in the short term. Although rental rates have increased over the last year by approximately 10–20 per cent, tenants have found themselves in a position to negotiate for longer fitting-out and rent-free periods in some cases. Consultation with a reputable real estate company can help the tenant achieve the best rental terms and property for their requirements.
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Commercial lease structures There are no standard lease formats in use within the commercial sector and the leases will vary considerably depending upon the landlord or his managing agents. The majority of leases are short-term, being between one and five years. It is not unusual to negotiate lease clauses for secondary and tertiary office space until a common ground is reached between the tenant and landlord, although this becomes more difficult with the prime office buildings. Any disputes are followed up by lawyers and may be dealt with by the courts, although this can prove to be an arduous process. Although rare in practice, longer leases can be negotiated (maybe 10 years) with some landlords, and this would usually result in a lower rental rate for the tenant. Leases longer than 10 years are generally unheard of.
Payment terms Rent is usually paid quarterly in advance upon the signing of the lease. It is common practice to leave post-dated cheques with the landlord in order to cover the first year’s payments. During the negotiation stage, the number of rental payments and time frame for post-dated cheques can be discussed as part of the overall terms and conditions.
Service charges Service charges are common for all commercial office space and will usually vary between 15 and 20 per cent of the rent, or a full-cost recovery basis in some cases with prime space. The charge will usually cover the maintenance of the building, the security and cleaning of common areas, in addition to the maintenance and running costs of the air conditioning systems and water charges. It will need to be clarified with the landlord whether the consumption of electricity in your office is included in the service charge.
Municipality charge A local government charge is levied for services such as rubbish removal and the upkeep of roads and parks. The landlord notifies the municipality upon signing a lease agreement and they will then apply the charge of 10 per cent of the monthly rent that will be payable by the
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tenant, along with any electricity and water costs attributable to the tenant. This is the same with residential property.
Agency fees It is common practice for the landlord to meet any agency fees for introduction to his property; these should not be passed on directly to the tenant.
Insurance As part of the lease agreement the landlord is usually responsible for insuring the buildings, while the tenant is responsible for insuring office contents under a separate policy.
Fitting-out works/tenant improvements The landlord will traditionally allow a rent-free period for the fittingout works undertaken by the incoming tenant. This rent-free period will have to be negotiated at the start of the contract and is usually reflected by the standard of the proposed works and the time period of the lease. It is not unusual to secure a couple of months’ rent-free period in today’s market conditions, provided that the landlord is satisfied with the fitting-out proposals. Tenant improvements are taken into account as a landlord’s benefit, with anything physically fixed to the building, ie ceilings, carpets and partitions often remaining as landlord’s property at the end of the lease term. There are a number of specialist office refurbishment companies in Bahrain, in addition to numerous building companies. The landlord or his agent will be able to recommend contractors to assist you in this process.
Termination or renewal procedures Dependent upon the lease expiration clause, the tenant should inform the landlord in writing prior to the expiration of the lease term. Early termination by the tenant is usually attained at the discretion of the landlord and tends to be achieved with the securing of a replacement tenant. Termination can also sometimes be possible with the use of the diplomatic clause (ie if the company no longer operates in Bahrain and is ceasing all operations in the Kingdom).
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Renewal clauses are subject to the initial lease negotiations. Renewal clauses for similar terms and conditions can usually be negotiated subject to an increase in rental rates to the current market rate. Rent reviews are generally by negotiation and are a reflection of market conditions at the time. The law is currently unclear as to whether landlords are obligated to renew leases for further terms upon expiry. However, in practice both parties are usually keen to renew agreements for obvious reasons.
Dilapidation procedures The tenant and landlord will inspect the premises and, subject to the lease agreement and wear and tear, the tenant may be responsible for returning the premises to the same condition as at the date of occupation. This work must usually be completed before termination of the lease can be accepted, although in practice this is rarely enforced.
Transport/parking Taxis are abundant in Bahrain and theoretically operate on a meter system, thus keeping travel costs uniform, while buses run on limited routes and tend to be used by labour workers only. It is, however, the car that is the primary mode of transport in Bahrain, with owners benefiting from low purchase prices and running costs. Car ownership is high – a fact that is reflected by the volume of traffic and the overly congested parking facilities. Parking spaces are limited to all but a handful of buildings in Bahrain and negotiations must be entered into at initial contract stages to secure adequate parking for staff. The lease will usually state a number of free parking spaces depending upon the size of the rented office, with further spaces leased under a separate contract. Buildings rarely have sufficient parking, even at a price, so incoming tenants and local car parks or open spaces will have to be used.
Rental trends Rates are usually quoted per metre square per month and the lease agreements should state the floor area and annual rent. Table 4.10.1 provides some current examples.
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Table 4.10.1 Indicative commercial rental rates as at mid-2004 (in Bahraini dinars) Office type Prime commercial Secondary Tertiary
BD/m2/year
BD/m2/month
72–108 48–72 30–48
6–9 4–6 2.5–4
4.11
The Insurance Environment Richard Morrison MA ACII, Country Manager, Bahrain, Norwich Union Middle East
Through the government’s prudent and prognostic approach, Bahrain has transformed itself into a major regional financial centre, with the insurance industry forming a key and growing element of this development. In 2002, the Bahrain Monetary Agency was assigned the responsibility for regulating the entire financial sector, insurance activities thus coming under the Agency’s control.
The market The Bahrain insurance market, when compared with that of many other Arab countries, is relatively sophisticated with a good range of insurance providers and ancillary companies, providing varied and competitively priced products and services. The latest figures as at end 2002, showed that the industry comprises eight national and nine nonnational insurers transacting direct insurance business, and 23 intermediaries and 20 other companies providing a variety of ancillary needs from loss adjusting to actuarial analysis. In 2004, two more companies established themselves in Bahrain, both non-national, and also one captive management broker company and two further international brokers. Gross premiums in 2003 totalled BD79 million (split as to Life BD17,013,000 and General BD61,987,000), a 16.1 per cent increase over 2002. While the premium income generated from the insurance market in Bahrain is one of the smallest of the Arab countries, the proportion of insurance premium income per capita, compared with its GDP, is the
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Prospective Sectors for Investment
highest throughout the countries of the Gulf Cooperation Council (GCC; comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates). However, this proportion still remains approximately five times smaller than that of the United Kingdom, thus demonstrating relatively low penetration and corresponding high growth potential within the local market. Bahrain has also encouraged the growth of an offshore insurance sector with around 70 companies registered as ‘exempt’. Many of these are trading in Saudi Arabia and utilize Bahrain as an offshore centre due to its developed infrastructure, minimal regulation, zero corporation tax and proximity to the Kingdom. Offshore companies (registered as ‘exempt’) are not permitted to trade in Bahrain. It is anticipated that following implementation of Saudi Insurance legislation, the number of these offshore companies will decrease substantially. However, there may be a corresponding growth in regional, reinsurance and captive companies registered in Bahrain and servicing the Saudi and Middle East marketplace. According to Bahrain Monetary Agency statistics at end 2003, the Bahrain insurance industry employs 818 people with 61 per cent of the workforce being nationals. Government legislation for regulation of the insurance industry is currently being overhauled to provide greater security to policyholders. The BMA is committed to enhancing the Kingdom’s status as the region’s insurance centre. In this regard, the BMA initiated a number of key measures in 2002. Firstly, it conducted a detailed assessment of the financial sector as a whole, with the broad objective of identifying areas of high growth potential. Insurance was one of seven asset classes identified by the study. Special emphasis is now being given to accelerate the growth of this important industry. A key element of the new insurance strategy being implemented by the BMA, is to upgrade the regulatory framework in line with international supervisory standards. The strategy also focuses on expansion of the domestic insurance sector by improving the quality of services, enhancing the calibre and capacity of insurance professionals, attracting takaful and retakaful companies, as well as developing Bahrain as the regional centre for captive insurance activities. In terms of regulation, the BMA has also initiated a major review of the existing regulatory framework. The BMA intends to use this review to enhance the regulation of insurance firms licensed in the Kingdom. In broad terms, the objective is to ensure that Bahrain’s insurance regulatory framework is consistent with international standards and that it is also consistent with the frameworks applicable to other financial sectors, wherever appropriate. A series of consultation papers (some have already been issued) are planned, covering such areas as
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captives, capital requirements, solvency, conduct of business and fit & proper. The implementation of these proposals will be phased in during 2004, depending on their potential impact on firms and the need for adequate transition periods to allow adjustment. The industry’s professional body, the Bahrain Insurance Association (BIA) provides a common platform for all insurance companies and supplementary service companies operating in Bahrain. The BIA’s objectives include, inter alia, increasing the public’s awareness of insurance needs and closer liaison with government bodies. In close association with the Bahrain Institute of Banking and Finance (BIBF), the BIA provides high-quality training and self-development for the industry’s workforce.
Personal insurance In comparison to many other Arab countries, personal insurance in Bahrain is relatively well developed, providing a variety of good quality and competitively priced base products. Motor insurance is the only class of insurance that is compulsory and it is a legal requirement for all vehicles (including those visiting from neighbouring countries) to be insured for third-party liability risks. Unusually, the legal system in Bahrain permits individuals to pursue compensation claims directly with the insurance company of an ‘at fault’ driver, rather than holding the driver personally responsible or the driver seeking indemnity from his insurance company. The majority of death and injury claims are negotiated directly with insurance companies whereby quantum is mutually agreed, thus avoiding costly legal action. However, due to increased expectations of compensation awards, insurers are reluctantly becoming increasingly involved in civil court actions. Death awards range from US$34,000 to US$160,000 with the size of the award dependent on status and the number and age of family dependants. Awards for moderate/serious personal injuries can range from US$100,000 to US$500,000+, with a medical committee deciding upon a percentage of disability and reporting to the court for a decision on the award. Court awards continue to rise and levels of awards can be unpredictable, making product pricing and consistency a difficult objective. The minimum legal requirement covers third parties for an unlimited amount in respect of bodily injury and a limit of US$1.33 million in respect of property damage. Some insurers will provide additional cover by increasing the property limit and extending the definition of third parties to cover family and spouse. The government has imposed a vehicle registration system similar to that of the UK, whereby all vehicles must have valid insurance cover
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Prospective Sectors for Investment
prior to first registration during the purchase of the vehicle. In addition, all vehicles over four years old are required to have an annual safety inspection, similar to the MOT principle in the UK, and valid insurance must be provided at this time in order for re-registration to be completed. Despite a good road infrastructure, as in many Arab countries the frequency of accidents is relatively high. In addition, the high cost of vehicle repairs and spare parts, combined with intense price competition between insurance companies means that comprehensive motor insurance is not viewed as a particularly attractive class of business for insurers. Third-party motor insurance is viewed as even less attractive to insurers, as they are restricted from increasing premiums above a set level. The Bahrain Monetary Agency imposes minimum premiums on a scale in accordance with the cubic capacity of the vehicle and this is designed to protect the consumer and encourage all vehicle owners to insure for the minimum legal requirement. It is anticipated that tariff rates for young drivers and substandard risks may be increased, whilst more prudent drivers will be rewarded, bringing Bahrain into line with more sophisticated insurance markets. While over 40 per cent of all vehicles on the road are only insured for third-party liability risks, there remains a good choice of quality products aimed at those wishing to insure their vehicles for comprehensive cover. Indeed, in recent years the industry has introduced added value benefits, based on the UK philosophy, by providing such benefits as help lines, breakdown services and free courtesy vehicles when the insured vehicle has been involved in an accident. Other traditional personal lines of insurance such as home, travel and medical are also available from the local marketplace. Such insurances are more commonly purchased by expatriates; however, there has been a noticeable increase in demand from the local population in recent years and this is expected to continue as the economy develops, thereby enhancing living standards. While many expatriates insure their contents and personal belongings, the industry anticipates a greater increase in demand from the local population, especially as many householders suffered damage and loss following two significant storms in recent years. There has also been an increased awareness of a steady rise in the incidence of crime (which is still relatively low when compared with most western countries). Individual medical, life and investment business forms a very small proportion of the insurance industry and is viewed as a developing market. Choice and products are limited but insurers are currently developing their products and distribution channels for future expansion in this area.
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The distribution network for personal insurance remains relatively simple with the vast majority of business being conducted directly between insurance company and policyholder. Indeed, it is still common for the individual to undertake the transaction in the insurance company offices. However, credit card payments are more common and insurance companies have developed other payment distribution networks. Fully integrated E-commerce facilities to allow a ‘one-stop’ transaction are not yet available, although some companies provide online quotation systems. Insurance schemes with banks and other lending institutions are not common. The combined lending appetite of retail banks and the demographics of Bahrain have led to a credit boom and credit life and purchase protection are now major bank related insurance purchases. There is a gradual crossing over of borders between insurance companies and banks on financial products and the beginnings of bancassurance. Banks are likely to be a key distribution source in future years, so a single regulator certainly makes sense. Insurance brokers generally deal with corporate insurances.
Corporate insurance Corporate business forms the majority of insurance transacted in Bahrain. The bulk of this business is government- or quasigovernment related, where the State owns the assets or has a major financial interest. This would apply specifically to a majority of the petrochemical and hydrocarbon industry. Government business can only be placed with insurers registered as national companies. However, due to the complexity and significant exposure of many of these risks, a significant proportion are reinsured in other markets such as those in the United Kingdom. Many international companies executing contracts with joint venture partners in Bahrain often use one of the international firms of insurance brokers to advise and negotiate insurance coverage. Competition for corporate business is very keen due to the relatively modest size of the market compared with the number of insurers. However, service levels can differ widely so it is worthwhile carrying out some referrals before committing oneself. Risk management advice is limited and, in the absence of a local fire protection association, insurance companies often rely upon the fire brigade to enforce standards. The fire brigades are well equipped and regarded as being among the most effective in the Middle East. However, significant fires are not uncommon due to a variety of reasons, including overcrowded and non-sprinklered buildings and warehouses, age and lack of maintenance of buildings, and general poor risk management and loss management techniques.
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Bahrain-based reinsurance syndicate, Arab War Risks Insurance Syndicate (AWRIS), provides reinsurance cover for political and war risks within the Middle East and Africa. This facility has been utilized by the Bahrain insurance industry by reinsuring the vast majority of sabotage and terrorism risks with AWRIS. This action was taken in 1996 during the times when Bahrain suffered from intermittent agitation and some property was damaged by incendiary devices and the like. The intention of placing this cover with AWRIS was to bring some consistency into the marketplace and provide continuity and protection to both insurance companies and policyholders alike. While such trouble has subsided for some time now, the facility remains in place, albeit at reduced premiums due to reduced exposure. As Bahrain expands its industrial base, spawned from both the downstream oil activities and the aluminium-related activities utilizing aluminium generated by one of the world’s leading smelters, the need for marine cargo insurance has expanded significantly and forms an integral part of the insurance requirements of many industrial companies. Recent development and expansion of the textile industry, exploiting Bahrain’s quota share export agreements, has also led to greater demand for marine cargo insurance. The recently signed free trade agreement with the USA is seen as providing a boost to Bahrain’s economy over the next five years. Port facilities in the main port, Mina Salman, are excellent, with modern handling techniques, and underwriting marine cargo risks causes few problems compared with some other Middle East countries. The new port at Hidd is nearing completion, although it will not be fully operational until 2005–6. A free zone is planned, which may encourage economic activity. Construction related insurances are increasing as several ‘mega projects’ come on line in Bahrain. The major engineering/contracting companies have full order books for 3–10 years and the related insurances are assisting the strong growth in this insurance class. Employee benefits are an important element of any HR manager’s responsibilities and there is an adequate choice of insurance-related benefits to be found within the Bahrain insurance industry. However, the General Organization for Social Insurance (GOSI) does provide private sector employees with compensation due to accident and injury in the workplace and an income for Bahraini nationals when they retire. The retirement pension benefits for Bahraini employees are quite generous, providing a maximum of 80 per cent of final salary. The contributions for Bahraini employees are 10 per cent from the employer and 5 per cent from the employee. Expatriate staff are covered under the GOSI arrangement for accidents and injury in the workplace but are not eligible for the
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retirement scheme; however, they do receive an end-of-service benefit from their employer, based on length of completed service. While a significant number of employers rely purely on the above system of benefits for employees, an increasing number are purchasing other benefits such as group life, personal accident and medical expenses cover. Group life tends to be placed by insurance companies on a reinsurance basis due to the specialist underwriting expertise required for this class. Personal accident schemes are commonly placed in conjunction with group life cover and usually underwritten locally. Medical facilities in Bahrain are relatively good. The two major public hospitals (Salmania and Bahrain Defence Force) are, between them, quite capable of performing operations such as open-heart surgery and even treating some cancers. There are five major private hospitals also providing a good quality of service for the majority of medical needs. However, many expatriates would probably wish to seek treatment in their home countries for major medical conditions and therefore a good medical insurance policy including ‘emergency evacuation benefit’ should be considered essential. Although there is yet no statutory obligation for employers to provide medical insurance in Bahrain, this is being introduced in other Gulf countries and is being considered by the Bahrain government. In the meantime, it is standard practice, especially among multinational companies, to include private medical insurance as part of the employee benefits package for expatriates at management and senior technical levels. However, the quality of cover provided varies enormously and prospective employees need to check that the cover meets their needs.
Conclusion Under the supervision of the Bahrain Monetary Agency, the insurance industry continues to develop. However, penetration levels remain low and service is variable. Bahrain is seeking and gaining credibility as a regional centre of excellence and it is anticipated that the industry will focus on a stable number of domestic insurers with increased appetite for risk but will see significantly increasing numbers of quality international reinsurers, brokers, captives and takaful/retakaful insurers.
The Big On Group
Shaping the Future of Global Branding Founded in 2003, the “Big On Group” is a holding company shaping the future of global branding. The “Big On Group” owns subsidiaries in publishing, financial services, property, and a range of consumer focused businesses. The “Big On Group” has grown quickly, particularly Big On Publishing, whose venture with Global Market Briefings will soon see the eagerly awaited publication of a series of books aimed at helping international and local businesses work together in countries across the world. The first book involving the Big On Group is this one: Doing Business with Bahrain. Saudi Arabia will be covered in April 2005 and will be followed by editions on the United Arab Emirates (May 2005) and Libya (July 2005). Others are planned. “Big On Publishing”, through its investment in Al Anqaa Communications, is also developing other business publishing ventures from a new operation based in the Middle East. The “Big On Group” has several other specialist divisions focusing on businesses. The “Big On Group” has provided structuring and has arranged financing for UK real estate projects whilst “Big On Security” is a security facilitator in Europe and the Middle East. “Big On Capital” provides assistance with fund raising, business plan reviews and consultancy on complex deals ensuring that tax efficient and investor friendly corporate structures are put in place.
Bahrain International Circuit For almost half a century, the Kingdom of Bahrain has been the home of an enthusiastic motor racing community. Today it is home to the first world-class racing circuit in the Middle East. The impressive Bahrain International Circuit is not only the newest Formula One track in the world; it is also the most advanced. In addition to a challenging Grand Prix circuit, which meets the requirements for hosting Formula One cars, the Circuit also provides the Middle East with an international standard venue for all forms of car and motorcycle racing, testing and a range of on and off-road motoring activities. Operational 365 days a year, the Bahrain International Circuit has been designed by German consultancy Tilke, who are internationally acknowledged leaders in the field of race track design. Other venues include Sepang in Malaysia and Shanghai in China. The Bahrain International Circuit has been designed to host a variety of motorsport activities. Apart from the main Formula One race track, the Circuit includes no fewer than 6 other tracks specially designed to meet other motosport requirements. With a total capacity of 40,000 spectators, and two main grandstands for 14,500 spectators, the Bahrain International Circuit includes state-of-the-art facilities to cater to any motorsport activity. Pit and team buildings meet the demanding needs of today’s competitive racing, while on-site media, broadcast and medical facilities enable the Circuit to easily host international events. Further endorsement of the circuit’s credentials came with the recent presentation at the FIA Prize Giving Gala of the prestigious “Race Promoters’ Trophy” for the best organised Grand Prix of 2004 to the Bahrain International Circuit
4.12
Company Profile: The Bahrain International Circuit Introduction The Bahrain International Circuit was the vision of His Highness the Crown Prince Shaikh Salman bin Hamad Al Khalifa. His objective was to build a state-of-the-art circuit that would serve the requirements of motor-sport fans throughout the Middle East, become a focal point for the development of new business and awareness in the region and create a platform on which to develop the profile of the Kingdom of Bahrain and demonstrate to the world that the country is ‘open for business’.
Formula One comes to Bahrain The Fédération Internationale de l’Automobile (FIA) Formula One World Championship represents the pinnacle of motor-sport and is one of the most watched global sports. The championship is third behind the Olympic Games and the FIFA World Cup in television viewership figures but has a huge advantage over these two events due to the fact that it takes place 18 times a year as opposed to once every four years. The Kingdom of Bahrain entered into a feasibility study to ascertain the value of constructing a Grand Prix circuit and once the results of this were known the decision was taken to push ahead and a long-term agreement with Formula One’s Bernie Ecclestone was reached. Work on the circuit began after the ground-breaking ceremony in October 2002. Fifteen months later, and six months ahead of schedule, the Bahrain International Circuit was opened by His Majesty King Shaikh Hamad bin Isa Al Khalifa, and the sounds of a Formula One car echoed around the impressive new facilities for the first time. The first FIA Formula One World Championship Grand Prix took place on 4 April 2004 and was seen as an overwhelming success by all the Formula One teams, drivers and the hundreds of international and
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regional media representatives present at the race. The event also hosted royalty from across the region and from Europe. The race weekend saw the Kingdom of Bahrain become the focal point of the sporting calendar. The first Grand Prix ever to take place in the Middle East was a qualified success and demonstrated the friendliness and hospitality of the region as well as emphasizing the potential for business, sport and leisure within the Kingdom and throughout the Gulf.
Corporate and organizational structure The Bahrain International Circuit is a government-funded operation. The working capital required to build the US$150 million project came from the government, as does additional revenue required to secure the race on the FIA Formula One World Championship calendar and the funding required to maintain the Gulf ’s only Grand Prix circuit in the taxing and harsh environment in which it exists. The circuit is managed by a team of some 40 administration staff under the guidance of a general manager. This team reports to a 10-strong board of directors, which sits under the Chairmanship of His Excellency Shaikh Fawaz bin Mohammed Al Khalifa, Chairman of the General Office of Youth and Sport. Further to the administration staff there is a full-time maintenance staff of nearly 60 people managed by a team of engineers and technicians, each of whom was involved in the initial design and construction of the circuit.
Benefits to economy and country The FIA Formula One World Championship is a potentially huge revenue earner for each of the 18 countries that host Grand Prix races during the course of a season. An Economic Impact Study produced following the race by London-based independent researchers, Comperio Research, placed the value to the Kingdom from the first race in the region of US$100 million. Visitor expenditure during the three days of the Grand Prix amounted to a sum in excess of US$52 million with a further US$48 million spent outside the three days of the event. This additional impact was predominantly spent within the tourism and travel sectors and underlines the value of the race to the Kingdom and the region as a whole. The revenues generated from Bahrain’s inaugural Grand Prix compares well for a first race, with other recorded figures from countries such as Malaysia, where Kuala Lumpur’s Sepang Grand Prix generated in the region of US$150 million in the first year and some US$250 million in the second year.
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The figure for Bahrain will rise in future years as the race becomes more established on the calendar and spectators from across the world and the region as a whole become more confident in the venue and its infrastructure. It is worth noting that the first race was pulled forward six months by the sport’s governing body, the FIA. This change of date resulted in media coverage producing stories that the track and its facilities would not be ready in time for the inaugural race. Such statements, while untrue, reflected the reluctance of international spectators to travel. While the Grand Prix represents a massive potential revenue stream to the Kingdom, the potential is multiplied by the addition of business, sporting and corporate entertainment initiatives in the future.
Additional business A new business park on the circuit’s land at Sakhir is more than just an artist’s impression. Private investment is currently being sought for the venture that should be completed by 2006–7. The venture will house a multitude of companies and organizations that either benefit directly from the motor-sport business or from the association that their business has with the leading circuit of its type in the Middle East region. Race teams, component suppliers, suppliers to the motoring industry, manufacturers and merchandising manufacturers and suppliers are expected to see the BIC Business Park, with its ‘free zone’ status, as beneficial to the establishments of first or established businesses in the region. Already a number of leading names in the automobile industry are considering a base at the gates to the circuit, while others are already planning the design of their facilities. The site has the potential for two hotels to service the park as well as the racing circuit, while a leading European catering company has signed an agreement to use the Sakhir site as its base for a new thrust into the Middle East market. Furthermore, the establishment of new racing and off-road schools will add depth to the circuit’s portfolio of international and regional racing activities and events. The schools are fundamental to the development of new initiatives designed to encourage the youth of the region to learn to drive and emulate their sporting heroes. Even of perhaps greater commercial significance are the corporate entertainment opportunities and revenue streams that the facilities will generate. Corporate entertainment and hospitality are big business and the list of multinationals and regional companies, together with leading travel companies, that are already knocking the door down to operate motivational and incentive programmes at the circuit is impressive.
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Motor manufacturers from around the world also see the benefit of the Sakhir track as a venue for product launches, client promotions and media launches. The circuit’s hot weather testing facility also attracts attention, as do the opportunities for filming promotional and documentary films and TV commercials. The circuit, and in particular the Sakhir Tower, has now become an icon for the Kingdom of Bahrain, and there is also much potential to develop numerous social and cultural initiatives from these commercial activities. Each of these elements of the BIC drives trade, business, tourism and general awareness for the Kingdom, whilst also endorsing the importance of the Crown Prince’s and government’s confidence in underwriting this bold vision.
The challenge of hosting a Formula One event Hosting a Formula One event in the region was by no means a simple task. Perhaps the most challenging aspect of staging the event related to the task of marketing the Grand Prix to an audience that is predominantly interested in football. Furthermore, prior to the opening of the circuit the only real exposure to motor-sport in the region was provided by occasional rally-car events, and the awareness of the sport in the Middle East was generally low compared with Europe. The other difficulty that Bahrain faced was promoting the event on a Sunday, a working day in the GCC. Taking all of the difficulties into consideration, BIC recognized that potential customers will come predominantly from Bahrain, Saudi Arabia (just 40 km away from Bahrain’s border) and the UAE, where awareness of Formula One amongst the western expatriate community is generally high. The circuit’s marketing campaign was very focused and concentrated its exposure in these markets. However, BIC also used regional satellite TV station advertising and pan-Arab print publications to reach the masses and communicate its marketing message. This was coupled with an outdoor and online campaign, as well as a heavy public relations campaign. The main task was to always remind people when and where the event was taking place and how to buy tickets. The overall response was very encouraging and on the day of the race the grandstands were full with Formula One enthusiasts, all of whom identified a passionate desire to return in 2005.
Employment of Bahraini nationals One of the main initiatives of the Bahrain International Circuit from its inception in April 2003 has been to provide employment for
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Bahraini nationals. Although motor-sport and circuit experience, in general, is a relatively scarce commodity in the Kingdom, the Bahrain International Circuit has made strides in providing relevant training and exposure for its employees in other circuits and events around the world. Not only has the circuit sent staff on familiarization and training visits, but training has also been given on site by various experienced personnel. The circuit, in conjunction with the Bahrain Motor Federation, has also been instrumental in the development and training of Bahraini marshals for not only the first Gulf Air Bahrain Grand Prix but also for other events held at the facility. The Bahrain International Circuit has a Bahrainization plan in place, which envisages that, within three to five years, the overall percentage of Bahraini nationals employed at the circuit will exceed 85 per cent. The temporary staff are trained in various aspects of the circuit, from event management to ticket sales, with a view to permanent employment thereafter. The main focus of the Administration and Human Resources Department is to ensure that Bahraini nationals will have gained enough experience and training to ensure that the Bahrain International Circuit goes from strength to strength in the coming years without losing its unique culture and position in the Middle East, as well as globally.
Part Five Bahrain Business Guide
5.1
The Legal Regime and Regulatory Environment for International Business Dominic O’Neil and Roly Denman, Trowers & Hamlins Law Firm, Bahrain
Introduction Bahrain has evolved into a dynamic and ambitious economy due to the government’s aggressive economic diversification programme. As Bahrain has been endowed with smaller oil resources than its neighbours, it actively pursued the development of a policy that promotes openness and diversification. Bahrain’s economy flourished as it became one of the region’s most advanced economies, with liberal exchange rate, trade and investment regimes. At present, Bahrain maintains a unique blend of local, regional and international business, thus providing a vast pool of diverse financial services, products and activities. The National Charter of Bahrain (2001) has recently affirmed Bahrain’s policy for free international trade, movement of investment, capital and labour, while taking into account national interests of individual countries. By adopting an International Constitution in 2002, Bahrain had effectively abolished all of its previous authoritarian methods and had undertaken constitulization. In this respect, Bahrain has undertaken great strides towards the fulfilment of its liberalization policy. Bahrain has a long-established and clearly-defined framework of commercial law. Well known international legal firms work in association with local partners, providing expert legal services both for domestic and international clients. Services and fees are structured according to internationally accepted practices.
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For such intense diversity to exist and continue to grow, an open and transparent legal regime is indispensable in procuring a precise yet welcoming regulatory environment for international business. Numerous organizations and agencies, such as the GCC and the BMA, have been set up to implement fundamental legislation. Additionally, various international agencies have become involved in order to help Bahrain assure the international business world that a familiar environment in which they can thrive has been established.
Procedures for doing business Different legal vehicles are available for the international investor, which include: • limited liability company (WLL); • single person company; • closed joint stock company; • public joint stock company; • branch office; • representative office; • holding company. The choice is governed by the nature and size of the business and the requirements of the investors.
Setting up Bahrain has been continually liberalizing its laws and expertise with regard to international business and foreigners doing business. One of the most popular actions taken by the government concerns an order issued in 1995 by the Minister of Commerce permitting the establishment of an ‘onshore’ company, which can be 100 per cent nonBahraini owned. Furthermore, the recent Law (2/2001) has made it possible for non-Bahrainis, in addition to certain types of company that are wholly non-Bahraini owned, to own buildings and land. This applies to investors other than GCC citizens who already had the right, and is subject to conditions to be resolved by the Council of Ministers. Once the necessary authorizations, licences and permits are granted, a company needs to be registered in the Commercial Register in the Ministry of Commerce. This action ultimately results in the legal
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incorporation of the company, which is required before it is able to begin operating in Bahrain.
Companies qualifying for 100 per cent foreign ownership International companies are permitted to have 100 per cent foreign ownership in the following sectors: technology; tourism; healthcare; education and training. Additionally, international companies may also acquire 100 per cent foreign ownership in the following sectors: manufacturing-related and business-consultancy related industries.
The Economic Development Board The EDB was created by Emiri Decree in 2000, with the main objective of spearheading the economic diversification initiative by channelling both domestic and foreign direct investment into the country. The EDB provides foreign investors with all the necessary information concerning the investment environment, commercial laws, commercial registration process and availability of land. The EDB can also review any investment opportunity, presenting suitable ones to the Board of Directors, hence streamlining decision making and reducing bureaucracy. The EDB also provides the investor with solutions if any difficulties should present themselves.
The Gulf Cooperation Council The GCC is a regional organization, created in May 1981, with Bahrain as one of its six members. It is a practical answer to the challenges of security and economic development of the area. It has also been intrinsically linked to the development of international business in Bahrain, while simultaneously entrenching a friendly regulatory environment for international investment.
Foreign investment The GCC reiterates its goals by stating that each of the member states is to establish an investment committee to fulfil various functions in order to facilitate investment by international businesses. The functions of the investment committees involve:
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• facilitating project licensing and registering procedures; • identifying and promoting investment fields and opportunities available; • proposing the necessary incentives that are likely to encourage foreign investment; • developing a mechanism for monitoring the performance of foreign investment; • concentrating efforts on selecting qualified international investors; • coordinating with foreign investment committees in the GCC state(s) to fulfil the objectives envisaged; and, finally • handling disputes arising from investors. Bahrain offers the highest standards of financial regulation, efficient procedures and political stability to foreign investors. In 2001, Bahrain entered into a Bilateral Investment Treaty with the US. This treaty further liberalized land and other laws that allow 100 per cent foreign ownership of various types of companies, in addition to imposing no personal or corporate taxation, or restrictions on capital repatriation; hence, essentially providing international businesses with incentives that were previously available to Bahraini companies only. The government has also permitted the establishment of representative offices or branches of foreign companies, without local sponsors. Joint ventures allow for up to 49 per cent foreign ownership, and individual expatriates living in Bahrain for more than one year can buy up to one per cent of any publicly-listed Bahraini corporation.
Manufacturing investment Manufacturing investments receive the following incentives: electricity rebates; 100 per cent rebate of customs duties for the first five years for all industries; export credit facilities; and tariff protection (subject to the approval of the National Committee and Tariff Protection).
Construction For construction projects, firms must be registered with the Ministry of Works, Power and Water, and in the case of smaller contracts, individual ministries and departments direct the pre-qualification process.
Infrastructure Large-scale infrastructure projects and major purchasing decisions are directed by the Ministry of Works, Power and Water, which extends invitations to select pre-qualified firms.
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In June 2001, a new commercial code was passed to further improve conditions for foreign investment.
Arbitration The GCC Commercial Arbitration Centre was established in 1993, with its headquarters based in Bahrain. Bahrain has become an international and GCC arbitration centre within the guidelines of the New York Convention of 1958, and has hosted the Euro–Arab Arbitration Conference. The arbitration services apply both to individuals and organizations from the GCC in dealings with their international counterparts. A separate GCC arbitration centre deals with inter-regional cases. Bahrain has been able to develop these arbitration facilities as a consequence of its well-established legal framework, its extensive international communications, and its close links with GCC, Arab and western countries. Furthermore, Bahrain’s development as the region’s financial centre and the presence of the professional disciplines of accounting, legal, consulting, banking, medical, insurance and other supporting services, have all helped in the development of the arbitration facilities in Bahrain.
European Union In 1989, the GCC had concluded a Cooperation Agreement, under which the EU and GCC foreign ministers meet once a year at a Joint Council or a Ministerial Council. The objective of the agreement is to facilitate trade relations and to provide stability in this strategic part of the world. The agreement also provides a commitment from both sides to enter negotiations on a free trade agreement.
Bahrain Monetary Agency The BMA plays a decisive role in the maintenance, supervision and ensured development of Bahrain’s business sector. It is a legal entity that was established in 1973, and was bestowed with the powers of a central bank. The BMA’s regulatory responsibilities involve the supervision and regulation of banks and financial institutions operating in Bahrain, and regulating the issue and circulation of Bahrain’s currency. Its regulatory framework is wholly consistent with international standards. The BMA has recently introduced International Accounting Standards for locally incorporated banks and has also increased the
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transparency of the financial position of locally incorporated and publicly-quoted banks by requiring them to publish their financial statements on a quarterly basis.
The financial sector Bahrain is well established as the principal banking and finance sector in the Gulf. The regulations of banking and financial services by the BMA are extremely comprehensive and very well-respected, thus providing international banks with the security required. Bahrain’s financial sector remains one of the main engines of growth for Bahrain’s economy and one of the most vibrant in the region. To ensure effective supervision and mitigate risks common across the components of the financial sector, the BMA has consolidated the supervision and regulation of the financial sector (including banks, insurance, and capital markets) under one umbrella. The BMA also ensures that there is an adequate number of suitably trained financial supervisory staff to handle the broadening range and increasing sophistication of financial products and services that will prove to be a constant challenge and priority.
Offshore banking units (OBUs) Bahrain is perceived to be the premier centre of offshore banking in the Middle East. This is due to the extensive BMA regulations, the legal framework provided by Bahraini legal practices that play host to many UK common law principles and some US legal practices, and inducements of limited or no tax charged on financial activities. OBUs were created by the BMA in 1975. OBUs are branches of international commercial banks exempted from foreign exchange controls, cash reserve requirements, taxes on interest paid to depositors and banking income taxes that are required of other banks in Bahrain. In return for such privileges, the OBUs are required to pay the government annual licence fees. In addition, OBUs are prohibited from accepting deposits from citizens and residents of Bahrain and must refrain from transacting in Bahraini dinars.
Islamic finance centre Bahrain is poised to become the international Islamic banking centre, due to its extensive experience in running an offshore banking centre and a well-established Islamic banking presence. In 2001, the BMA
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had ventured into the issuance of Sukuk, which attracted both regional and international investors.
Money laundering All banks in Bahrain are required by the BMA to adhere to international principles designed to prevent the transmission of money arising from criminal activity. Numerous procedures have been established by the BMA to ensure that money-laundering activities are prevented, in addition to its continuing cooperation with the FATF. In 2001, stringent anti-money laundering legislation was introduced, which was followed by the establishment of the Financial Monitoring Bureau and several specialist sub-committees whose function is to continuously review, refine and improve money laundering prevention schemes. In 2003, Anti-Money Laundering Procedures were drawn up by the CMS Directorate. The procedures state that companies accredited with receiving money relating to public subscription in securities must take all necessary measures to ensure the legality of the sources of the money used in the payment of such securities, in compliance with the provisions laid down in the Prevention and Prohibition of Money Laundering and its Implementing Regulations. The strict guidelines require full details of a client, as well as the approval of the concerned shares registrar, prior to opening a security account in the Clearing Settlement and Central Depository System. Any amendments or changes that may occur in such particulars are to be provided by the client. Moreover, brokerage companies and offices, shares custodians and shares registrars are to be responsible for the verification of all information provided by the client about himself and the instructions issued by him with respect to transactions carried out on the Exchange, and shall enter such information into the records and books approved by the Exchange. Additionally, every employee in the Exchange who is aware or believes, or has reason to believe, that a client is involved in a moneylaundering offence or related crimes, shall immediately report the incidence to his/her superior, provided that the reporting of such incidence shall be in writing and kept in a register held by the Exchange.
International organizations Bahrain has attempted to establish itself as an international player and develop the ability to provide an international forum by becoming
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a member of numerous international organizations. By doing so, Bahrain is generating international recognition that will ultimately aid it in fulfilling its objective to expand its present well-founded economic and business sectors. This is to be achieved comprehensively through the coordination of Bahrain’s relations with neighbouring states and both regional and international organizations.
World Trade Organization (WTO) Bahrain became a member of the WTO in 1997. Consequently, legislation will eventually be introduced in order to comply with its rules. Bahrain has adopted an open-market concept as part of its economic development strategy. This will ultimately foster an environment that will allow international business to flourish. The government recently announced that it is planning to overhaul further commercial laws in order to guarantee foreigners full freedom to set up companies in Bahrain. With the goal to find a competitive advantage, both regionally and internationally, Bahrain had cut import duties within the context of the GCC Customs Union and the Greater Arab Free Trade Area (GAFTA). Bahrain’s membership of the WTO provides foreigners with comfort and security, as Bahrain’s legitimacy and the predictability of its administrative and legal systems become established.
The International Monetary Fund (IMF) The IMF is an organization with the prime purpose of ensuring the stability of the international monetary and financial system and the system of international payments and exchange rates among national currencies that enables trade to take place to take place between countries. It also has a decisive role in combating international money laundering through the FATF by providing technical assistance in the financial sector, as it is the natural forum for sharing information, and by exercising surveillance over member’s exchange systems.
Free trade zones There exist two free trade zones in Bahrain, providing a free transit zone in order to facilitate the duty-free import of equipment and
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machinery. This also allows for raw materials intended for processing in Bahrain and machinery imported and stored by Bahraini-owned firms to be exempt from duty. The government of Bahrain continues to offer incentives to international firms to establish light and heavy manufacturing operations on the island, making use of its strong transport and communications infrastructure. This is in accordance with Bahrain’s overarching plan to encourage foreign businesses to use Bahrain as a regional operational base.
5.2
Business Structures and Company Incorporation Hugh Stokes, AlMahmood & Zu’bi, Attorneys and Legal Consultants, Bahrain
On 1 January 2002 a new Commercial Companies Law (Decree Law No.21/2001) came into effect and made some substantial changes to the previous law. Two of the most important changes were to abolish the former classifications of ‘Exempt Companies’ and to introduce a ‘Single Person Company’, whereby a sole shareholder can obtain corporate personality and limited liability. The current situation is set out below.
Companies A company is defined as a contract with which two or more persons (but see below) undertake to participate in the economic venture intended to make a profit with each contributing a share in the form of money or service in order to divide the profits realized or losses incurred as a result of such venture. Any commercial company in Bahrain must take one of the following forms: • partnership under a collective name (ie a simple partnership); • simple commandite partnership (a limited partnership); • asssociation in participation (an unincorporated joint venture); • joint stock company; • commandite company by shares; • company with limited liability; • sole proprietorship; • holding company.
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Of these categories, only a few will be of interest to overseas investors.
Partnerships and joint ventures Partnerships under a collective name are in practice restricted to Bahraini citizens; associations in participation (joint ventures) are normally formed for special purposes, mainly carrying out major contracts. Commandite companies by shares are virtually unknown in practice, and the limited liability company is more popular.
Joint stock companies These may take two forms: public and closed. 1. Public joint stock companies are formed mainly for local participation in banking, utilities, insurance and the like, and the overseas investor is unlikely to wish to commence business on this footing. All shareholders in a public joint stock company must be Bahraini nationals (subject to permission for GCC nationals to hold a percentage, and for all other nationalities to hold a percentage if the shares are listed on the Bahrain Stock Exchange). As stated, this is a development that an overseas investor will be unlikely to seek at the beginning of an enterprise. 2. Closed joint stock companies (abbreviated as ‘BSC (c)’) are one of the two most suitable vehicles for overseas investors. They may have two shareholders (but three directors), a minimum capital of BD250,000 (but this may be reduced to BD1,000 for companies whose sole object is to issue a fund or funds, or BD20,000 for companies whose objects will be conducted offshore). The Ministry of Commerce has the discretion to decide whether in its opinion the capital is adequate for the company’s stated purposes. With the consent of the Ministry, the capital may be in another currency – the most popular is US dollars. This type of company is the most appropriate for investors wishing to conduct business in banking, insurance or investing for others, as a limited liability company may not have these objects.
Limited liability company (WLL) Companies with limited liability (WLL) are the most common form of company in Bahrain. As with closed joint stock companies, WLL companies may be 100 per cent foreign-owned if they are either industrial companies or service companies using Bahrain as the centre for regional distribution of their manufactured goods or services, or by the permission of the Ministry of Commerce, they are formed for other purposes. Otherwise, the extent of foreign ownership is limited to 49 per cent.
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The minimum share capital for a WLL company is BD20,000. There must be a minimum of two shareholders; there need not be (but may be) a board of directors, and the company may be managed by managers, who may be shareholders or others.
Simple commandite company A commandite company consists of two categories of partners: those with unlimited liability and those whose liability is limited to the extent of their capital contributions. The Memorandum of Association need not include the names of the sleeping partners but must contain an adequate description of their shares in the capital and the value thereof. The Articles of Association should state the joint partners and the sleeping partners, the former of whom should be Bahraini. The share of Bahraini partners should not be less than 51 per cent of the capital. This type of company (known elsewhere as a limited partnership) is suitable for special structures, such as companies that may wish to offer limited partnership interests to new investors in the partnership.
Single person company (SPC) This type of company has most of the characteristics of a WLL company except for having only one shareholder. On the death of the sole proprietor (if an individual) or its dissolution (if a company) the survivors must either convert it into a WLL or liquidate it. The minimum capital for an SPC is BD50,000.
Holding company A holding company is a new type of company introduced by the new law, and its chief object is usually to own shares in related companies and to participate in their management. It can take the form of a joint stock company, a WLL or an SPC. Its capital and its regulations must comply with those applicable to the form of company it takes.
Branch or representative office If an investor does not wish to commit capital and the establishment of a company in Bahrain is not required (say for tax reasons), the foreign company may establish a branch or representative office. Either may be established, but a branch must have a sponsor unless it is to be the regional centre for Gulf activities. This is evidenced by a resolution of the company to the effect that the Bahrain branch or representative office will be the company’s regional centre. The Commercial Companies Law (21/2001) states that any branch or representative office of a foreign company must have a local sponsor (whose role is described below), but by Ministerial Order No 4/1995 a
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considerable number of exceptions has been established. The list is too detailed to include in this chapter, but there are 22 categories. Of these, those most applied for have been in the fields of telecommunications, high technology, educational and training services, and miscellaneous consultancy services. A local sponsor’s role is to assist the foreign company in obtaining registration, negotiating with government departments, obtaining work permits and visas, and advising on business opportunities. A sponsor may be paid a fixed annual fee or a percentage of turnover or of profits if the branch is actually conducting business.
Branch office A branch office may conduct business without a sponsor if it falls within any of the exempted categories, or with a sponsor if it does not. Prominent among the types of business that require a sponsor are contracting, shipping and customs clearing and some types of computer activities.
Representative office A representative office may be established without a sponsor if it is in one of the exempted categories and established for the purpose of acting as a ‘regional’ office. It may not conduct business as such but is principally involved in information gathering, publicity for the parent company and liaison with its parent company’s local agent.
Specialized companies There are special regulations for companies intending to carry on banking, investment, insurance, money or stock broking or any other financial activity. These companies (or branches or representative offices) need a licence from the Bahrain Monetary Agency.
Variable capital companies Pursuant to Ministerial Order No 17 of 1986 as amended by Ministerial Order No 13 of 1994, variable capital companies may be formed as joint stock companies, of which there are two classes of capital: • Management shares: there must be at least two shareholders, and only the holders of these shares have voting and management powers. • Participation shares: these shares participate in the increase of value of the assets of the company and its annual profits, but carry no management or voting rights.
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The issued share capital must be no less than BD500,000 (approximately US$1,329,750) and the authorized share capital must not be more than 10 times the issued share capital. Originally introduced so that participating shareholders could participate in Islamic investments whereby their shares could be redeemed on completion of the underlying investment, the scope has been widened to include non-Islamic projects. The formation procedures are the same as for other exempt joint stock companies; the annual registration fee is BD6,000 (approximately US$15,950).
Establishment Branches and representative offices The Ministry of Commerce requires the following documents to be submitted, preferably notarized and legalized, in Arabic or English: • corporate documents (Memorandum and Articles of Association, or equivalent); • latest audited annual accounts; • Board resolution (or equivalent) to open the branch; • power of attorney in favour of the manager of the branch; • guarantee from the head office to be responsible for any proven debts of the branch. In addition to the above, the branch must have its own premises (leased) in a commercial building, which is subject to inspection by the municipality as a condition of registration. Moreover, the sponsorship agreement must also be filed, unless the activities are exempt. Commercial registration fees are payable on registration as a condition of registration, and annually thereafter. The fees depend on the type of activity. Typically, the annual registration fee for a regional representative office is BD1,200 (approximately US$3,190. No accounts have to be filed. No business may be conducted, bank accounts established or telephone, fax or telex connected until the branch is registered. The time taken to register a branch is between one and four weeks.
Companies Foreign shareholders must submit the following to the Ministry of Commerce, preferably notarized and legalized (exceptions can be made), in Arabic or in English:
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• Memorandum and Articles; • latest audited accounts; • Board resolution (or equivalent) to establish company; • power of attorney to a named person to sign the notarized Memorandum of Association. A foreign shareholder who is an individual must submit: • copy of passport; • bank reference; • CV. Application is made online and an application number is allocated. Incorporation documents are then submitted in draft to the Ministry of Commerce for approval together with the foreign company’s documents listed above, and details of the second shareholder (if an individual, then his/her passport copy, CV and bank reference only are required). The incorporation documents of the Bahrain company are: • joint stock company: Memorandum and Articles of Association and Founders’ Declaration; • limited liability company: Memorandum of Association only. Capital must be paid up in cash into a local bank as a condition of registration, but shares may be subscribed for in kind, subject to the valuation procedures stated in the Commercial Companies Law. Together with the registration fee, a certificate from a local bank that the capital has been paid up in full must be submitted (unless shares are being contributed in kind). Upon receipt of approval from the Ministry of Commerce, the incorporation documents must be signed in front of the Notary Public of Bahrain (in the Ministry of Justice) and then filed with the Ministry of Commerce in order for the commercial registration to be effected. When this is completed, the Ministry of Commerce issues a commercial registration number, which needs to be quoted on all company documents and signs. Companies must make a statutory reserve of 10 per cent of net profits in every year until the reserve reaches 50 per cent of the capital (or a higher percentage if the company’s Memorandum and Articles so provide). Formation of a company takes between one and eight weeks.
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Management of companies Joint stock company A joint stock company (closed) must have a board of not less than three directors who may be elected for not more than three years. Directors do not need qualification shares.
Limited liability company This may, but need not, have a board of directors appointed by the shareholders; a management contract may be given to a manager or managers, their powers may be entrenched, and only withdrawn by a vote of a majority of shareholders.
Single person company The sole shareholder may appoint a manager (or even a board) or retain management powers for him/herself (or itself if a corporation) alone.
Professional practices Accountants and auditors are regulated by the Ministry of Commerce and Industry pursuant to Decree Law No. 26/1996. Internationally recognized firms may be registered in the Auditors’ Register. Engineers and engineering consultants are regulated by the Ministry of Works and Agriculture pursuant to Decree Law No. 17/1982 (as amended). There are strict professional standards and experience levels that are required to establish and maintain a licence. Lawyers and advocates are regulated by the Ministry of Justice pursuant to the Bahrain Advocates Law of 1980. Only Bahraini or Gulf Cooperation Council (GCC comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates) citizens may practise advocacy, and only Bahraini-owned firms may advise on Bahraini law. Foreign law firms may obtain ‘offshore’ licences and are restricted to advising on their own laws.
Unincorporated joint ventures These are not companies as such and the foreign partner will need to be sponsored by the Bahraini partner; normally a branch of the foreign partner is established in accordance with the procedures listed above. Such arrangements are almost invariably linked to particular projects usually in the civil engineering and construction fields, but this is not a
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condition of the formation of a joint venture. As a joint venture is not a separate legal entity, there are no capital requirements.
Taxation There are at present no personal or corporate taxes in Bahrain and no withholding, stamp or capital gains taxes, nor is there any exchange control. There are no current plans to introduce tax or exchange controls. Customs duties (the rates varying according to class) and municipal rates (being 10 per cent of rent) are payable. Exemption from customs duties may be available for imports from other GCC countries.
Language The official language is Arabic, but English is widely spoken and is accepted for applications to government departments in many instances (eg applications to the Ministry of Commerce and the Bahrain Monetary Agency (BMA) are almost always made in English).
Ownership of land Until recently, ownership of land in Bahrain was not permitted for foreigners except by special permission from HH the Prime Minister. However, a recent Law (2/2001) has made it possible for non-Bahrainis (other than GCC citizens who already had the right) to own buildings and land, and also for certain types of company that are wholly nonBahraini-owned, subject to conditions to be resolved upon by the Council of Ministers.
World Trade Organization Bahrain has been a member of the World Trade Organization since 1997 and, progressively, legislation will be introduced – in, for example, the fields of commercial agencies – to comply with its rules.
5.3
Accounting, Auditing and Taxation in Bahrain Doug Tait, KPMG
Accounting principles, record keeping and reporting requirements The Kingdom of Bahrain does not have its own national accounting standards. However, the Bahrain Commercial Companies Law 2001 (earlier Law of 1975 substantially amended) requires all companies to prepare their financial statements in accordance with the International Financial Reporting Standards (IFRSs). Also, companies listed on the Bahrain Stock Exchange and all banks and financial institutions licensed by the Bahrain Monetary Agency (BMA), the central bank for Bahrain, are required to prepare their financial statements in accordance with IFRSs. Generally, the standard of financial reporting in Bahrain is high and largely consistent, as users of financial statements largely require compliance with international standards. This trend is being encouraged by more rigorous requirements amongst users such as bankers and shareholders as discussed in the previous paragraph.
Accounting principles and guidelines The Bahrain Commercial Companies Law (BCCL) 2001 requires each registered entity to produce its balance sheet, profit and loss account and managers’ (directors’) report for every financial year, within three months from the end of the financial year, in compliance with the IFRSs. It also requires the entities to appoint auditors to audit the financial statements, which are required to be performed according to the Bahrain Audit Law, Decree 26/1996. This law prescribes various guidelines to the auditors in performing their duties. All auditors comply with the International Standards on Auditing (IASs) while performing their audits.
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The Law of Commerce (Decree 7/1987) provides the basis for maintenance of commercial books and retention of records. International accounting standards The most relevant and widely acceptable standards as regards the financial information in Bahrain are the IFRSs. There is a clear understanding in the business community that IAS compliance provides consistent presentation and wider acceptability of the financial information. IFRSs is the new nomenclature for the earlier known IASs. However, individually, the existing IASs will be continued to be referred to as IASs and new individual standards issued by the International Accounting Standards Board will be referred to as IFRSs. Setting of and issuance of IFRSs is the sole responsibility of the International Accounting Standards Board (IASB), which conducts the business of the International Accounting Standards Committee (IASC) that was established in 1973. Effective 1 January 2004, there are a total of 34 applicable standards (after excluding seven standards, namely, IAS 3,4,5,6,9,13 and 25, that have now been superseded by other standards) on various subjects of accounting, as follows: IAS 1 IAS 2 IAS 7 IAS 8 IAS 10 IAS 11 IAS 12 IAS 14 IAS 15 IAS 16 IAS 17 IAS 18 IAS 19 IAS 20 IAS 21 IAS 22 IAS 23 IAS 24 IAS 26 IAS 27
Presentation of Financial Statements Inventories Cash Flow Statements Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies Events After the Balance Sheet Date Construction Contracts Income Taxes Segment Reporting Information Reflecting the Effects of Changing Prices (withdrawn with effect from 1 January 2005) Property, Plant and Equipment Leases Revenue Employee Benefits Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Business Combinations Borrowing Costs Related Party Disclosures Accounting and Reporting by Retirement Benefit Plans Consolidated Financial Statements and Accounting for Investments in Subsidiaries
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IAS 28 Accounting for Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions IAS 31 Financial Reporting of Interests in Joint Ventures IAS 32 Financial Instruments: Disclosure and Presentation IAS 33 Earnings Per Share IAS 34 Interim Financial Reporting IAS 35 Discontinuing Operations IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture Apart from the above IASs, there are 31 Interpretations of International Accounting Standards issued by the International Financial Reporting Interpretations Committee (IFRIC, a new name to the earlier known Standing Interpretation Committee, or SIC), as follows: SIC 1 SIC 2 SIC 3 SIC 5 SIC 6 SIC 7 SIC 8 SIC 9 SIC 10 SIC 11 SIC 12 SIC 13 SIC 14 SIC 15 SIC 16
Consistency – Different Cost Formulas for Inventories (IAS 2) Consistence – Capitalization of Borrowing Costs (IAS 23) Elimination of Unrealized Profits and Losses on Transactions with Associates (IAS 28) Classification of Financial Instruments – Contingent Settlement Provisions (IAS 32) Costs of Modifying Existing Software Introduction of the Euro (IAS 21) First-Time Application of IASs as the Primary Basis of Accounting (IAS 1) Business Combinations – Classification either as Acquisitions or Unitings of Interests (IAS 22) Government Assistance – No Specific Relation to Operating Activities (IAS 20) Foreign Exchange – Capitalization of Losses Resulting from Severe Currency Devaluations (IAS 21) Consolidation – Special Purpose Entities (IAS 27) Jointly Controlled Entities – Non-Monetary Contributions by Venturers (IAS 31) Property, Plant and Equipment – Compensation for the Impairment or Loss of Items (IAS 16) Operating Leases – Incentives (IAS 17) Share Capital – Reacquired Own Equity Instruments (Treasury Shares) (IAS 32)
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SIC 17 Equity – Costs of an Equity Transaction (IAS 32) SIC 18 Consistency – Alternative Methods (IAS 1) SIC 19 Reporting Currency – Measurement and Presentation of Financial Statements Under IAS 21 and IAS 29 SIC 20 Equity Accounting Method – Recognition of Losses (IAS 27) SIC 21 Income Taxes – Recovery of Revalued Non-Depreciable Assets (IAS 12) SIC 22 Business Combinations – Subsequent Adjustment of Fair Values and Goodwill Initially Reported (IAS 22) SIC 23 Property, Plant and Equipment – Major Inspection or Overhaul Costs (IAS 16) SIC 24 Earnings Per Share – Financial Instruments and Other Contracts that May Be Settled in Shares (IAS 33) SIC 25 Income Taxes – Changes in Tax Status of an Enterprise or its Shareholders (IAS 12) SIC 27 Evaluating the substance of transactions in the legal form of a lease (IAS 17) SIC 28 Business Combinations – ‘Date of Exchange’ and Fair Value of Equity Instruments SIC 29 Disclosure – Service Concession Arrangements SIC 30 Reporting Currency – Translation from Measurement Currency to Presentation Currency SIC 31 Revenue – Barter Transactions involving Advertising Services SIC 32 Intangible Assets – Website Costs SIC 33 Consolidation and Equity Method – Potential Voting Rights and Allocation of Ownership Interests
Record keeping Article 25 of the Law of Commerce requires businesses to keep their commercial books and the documents supporting the entries made therein for a period of 10 years commencing from the date of the closing of books. It also requires that all correspondence should be kept for a period of five years commencing from the date of despatch or receipt thereof. Banks and companies specified by a resolution of the Minister of Commerce may keep, for the aforementioned period, microfilms of the records and documents instead of keeping the original records and documents, provided that the original copies of the documents are kept at least for a period of two years. Such microfilm copies are deemed to be admissible evidence in the courts of law of Bahrain. Further details on the information to be included in the above books and the accounting entries required are available in the Law of Commerce.
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Copy of all the relevant business laws, as translated and compiled by KPMG, Bahrain, may be ordered from KPMG’s legal department. In addition to the above, the Money Laundering Law of the Kingdom of Bahrain (2001) and the BMA Money Laundering Regulation (2001) require all institutions covered by the law and regulation to retain customer identification documents for a period of five years from the date of closure of the customer accounts.
Reporting requirements Reporting to the Ministry of Commerce The following legal entities have reporting requirements under the BCCL: • branches of foreign companies; • limited liability companies (WLL); • joint stock companies. Reporting requirements entail that all branches of foreign companies, limited liability companies and joint stock companies have to submit annual audited financial statements to the Directorate of Commerce and Companies Affairs under the Ministry of Commerce. The law requires that the annual financial statements should include a balance sheet, statement of profit and loss (income statement as it is named in the IAS) and a report of managers (directors). The managers’ (directors’) report should cover the company’s activities, the financial position and the proposed distribution of profits. Reporting to other specific regulatory authorities In addition, and depending on the business activity of the entity, the financial statements have to be submitted to other regulatory institutions. These largely consist of the BMA and the Bahrain Stock Exchange. Reporting to the BMA As stated earlier, banks and financial institutions have to submit their annual financial statements to the BMA, in compliance with IFRSs, within three months of the year end. The BMA also requires other periodic returns from the licensees, such as the monthly statistical returns and the quarterly Prudential Information Returns. In addition, all locally incorporated banks (other than the branches of foreign banks) and Islamic banks, are required to submit to the BMA and publish in a local newspaper, their quarterly financial information, as reviewed by their external auditors in compliance with IAS 34. All the commercial branches of foreign banks are required to submit to the
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BMA and publish in a local newspaper, their half-yearly financial statements (specifically, the balance sheet and the profit and loss account), as reviewed by their external auditors. The BMA has fixed a time limit of eight weeks for the submission and publication of these interim financial statements. There are further regulatory reporting requirements laid down from time to time in line with industry and supervisory best practice. The BMA ensures that the banking industry in Bahrain closely follows the regulatory environment and reporting requirements set by Basle and other leading international regulatory authorities. Annual appointment and reappointment of the external auditors is subject to the BMA’s approval. Under the Money Laundering Regulation of the BMA, licensees are required to appoint auditors to annually review the licensees’ compliance with the Regulation. The BMA has agreed a reporting format with the audit firms. Reporting to the Bahrain Stock Exchange With effect from 11 August 2002, all companies listed on the Bahrain Stock Exchange (BSE) are covered by the legislative Decree No. 21 of 2002, which amends the legislative Decree 4/1987 with respect to establishment and organization of the BSE. The new Decree of 2002 gives powers to the BMA to regulate the BSE. Also, pursuant to the above referred Decree, the BMA has issued revised Disclosure Standards, which supersede the earlier Standards issued by the BSE. The revised Standards were issued on 3 December 2003 (vide circular ODG/407/03) and came into effect on 1 January 2004. These Standards apply to listings, public offerings and sales of securities in the Kingdom of Bahrain. The Standards are intended to be used for prospectuses, offerings and initial listing documents. Companies engaged in specialized industries (ie banking, investment, insurance etc) may be required to provide additional information as directed by the BMA. As stated in Chapter III, Policy Statements on Timely Disclosure, the BMA considers that the conduct of a fair and orderly market requires every listed issuer to make available to the public information necessary for investing, and to take reasonable steps to ensure that all who invest in its securities enjoy equal access to such information. In applying this fundamental principle, the BMA has adopted the following six specific policies concerning disclosure: 1. 2. 3. 4.
immediate public disclosure of information; thorough public dissemination; clarification or confirmation of rumours and reports; insider trading;
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5. response to unusual market action; 6. unwarranted promotional disclosure. After obtaining listing on the stock exchange, to remain in the Official List of Companies on the Exchange, the listed companies are required to comply with various requirements, including the following reporting requirements: • immediate announcements to be made to the Exchange for release (Article 32); • periodic reports (Article 34); • annual financial statements (Article 35). The immediate announcements are as applicable under any listing agreements with stock exchanges in the world. The purpose is to safeguard the interests of the public and to disseminate adequate and timely information to the public to enable them to make informed decisions and to avoid any false information being leaked wrongly to the public. Each listed company must submit its preliminary annual financial statements within two months from the end of the financial year, whereas the printed annual report (consolidated) is required to be submitted to the stock exchange and to the company’s shareholders within six months from the end of the financial year. The BSE requires that the annual audited accounts, which are included in the annual report, should be prepared in accordance with the IFRSs and to be audited under the IASs. Also, on a quarterly basis, licensees are required to submit to the Exchange, interim financial statements, reviewed by the external auditors, within two months from the end of each quarter. The Exchange also requires the listed companies to publish their quarterly financial statements before the end of the subsequent quarter.
Guidelines for the issuing, offering and listing of debt securities The BMA has issued guidelines for the issuing, offering and listing of debt securities, which came in to effect from 10 March 2004. All financial institutions and listed companies quoted on the BSE and all prospective local, regional and international issuers of debt securities shall comply with the rules and requirements stipulated in these guidelines. These guidelines set out the basic conditions and requirements that have to be made as a prerequisite to the issuance, offering and listing of debt securities in the Kingdom of Bahrain. They apply to every method
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of issuance, offering and listing, and to both new applicants and existing issuers, as well as to conventional and Islamic issues, except in specific circumstances described in the guidelines. Since these guidelines could be varied in exceptional cases, prospective issuers are advised to contact the BMA to seek specific clarifications on any matters of interest.
Taxation There is only a limited direct tax implication in the Kingdom of Bahrain. There is no personal income tax or corporate taxation on profits earned or booked in Bahrain, on any type of business other than on oil exploring and refining companies, which are required to pay a tax of 46 per cent on their income per the Bahrain Income Tax Law, Decree 22/1979. Tax is collected in the form of property tax at the rate of 10 per cent of the rent payable on all unfurnished apartments and at the rate of 7.5 per cent of the rent payable on all furnished apartments for both residential and commercial purposes. The tenants/lessees are required to pay the property tax. Property tax is levied through the electricity and water billing system on a monthly basis. Under the Islamic Sharia law, Muslims in Islamic countries are required to pay a tax called ‘Zakah’ (or ‘Zakat’) at the rate of 2.5 per cent (for a lunar calendar year) or 2.5775 per cent (for a solar calendar year) on their net assets or net investments. Islamic banks and institutions may be obliged to pay their own Zakah, or Zakat on behalf of their shareholders. Indirect taxation exists in the form of import duties, customs duties and excise duties. There is also a government levy of five per cent on all amounts spent by customers in a hotel. All entities are required to pay an annual fee for their registration with the Ministry of Commerce, the amount of which varies with the type of legal form of the entity. Also, the banks licensed by the BMA are required to pay an annual registration fee. All companies listed on the BSE are required to pay an annual listing fee to the Exchange. It is a declared policy of the government of Bahrain that no corporate taxation of a general nature is envisaged, and this, combined with the absence of personal taxation on salaries, plays a significant part in attracting business to Bahrain. It follows from the absence of taxation on corporate profits of the businesses operating in Bahrain, that Bahrain has no bilateral treaties for the avoidance of double taxation.
5.4
Employment Law and Work Permits for Foreigners Hugh Stokes, AlMahmood & Zu’bi, Attorneys and Legal Consultants, Bahrain
Labour law regulations General The relationship between an employer and employee in Bahrain is governed by the Labour Law for the Private Sector, Decree Law 23/1976 as amended by Decree Law 14/1993 (‘the Law’). An employer must give preference to Bahraini nationals, thereafter other Arab nationals, and finally non-Arab foreigners (Article 13). Such priority depends on the prospective employee being suitably qualified. If there are Bahrainis in the labour market qualified to take a particular post, then a work permit for a foreigner will not be issued in respect of that post. From time to time, the Ministry of Labour and Social Affairs announces posts that are restricted to Bahrainis.
Employee statutory rights An employee is entitled to the following statutory rights under the Law: • Working hours: eight hours per day, 48 hours per week; the basic and extra hours of work shall not exceed 60 hours per week, unless special permission is obtained from the Ministry of Labour and Social Affairs; during the holy month of Ramadan, for Muslim employees six hours per day, 36 hours per week (Article 78); • Friday is a weekly day of rest and there are 12 other public holidays in the year (Articles 80 and 81);
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• Overtime payments: daytime = salary plus 25 per cent; night work and public holidays = salary plus 50 per cent (Article 79); • Annual leave: minimum 21 days for the first five years, 28 days thereafter (Article 84); • Sick leave: 15 days with full pay, 15 days with half pay and 15 days without pay; accumulation up to 182 days (Article 82); • Compassionate leave (Article 87). An employee is entitled to leave with full pay in the following circumstances: – three days in case of marriage; – three days in case of the death of a spouse or any relative up to the fourth degree of relationship; – three days in case of death of any relative of a spouse up to the first degree and one day up to the fourth degree; – one day in case of the birth of children. • Leaving Indemnity (Article 111): except for those employees who are covered by the General Organization for Social Insurance (GOSI), (ie Bahrainis in establishments with 10 or more employees), all employees are entitled to leaving indemnity on termination (except termination for cause or resignation within three years – see below). Under Article 111, on termination the employee is entitled to receive leaving indemnity based on 15 days’ wages for each year of the first three years of service and one month’s wages for each year of service thereafter. Any period of less than a year entitles the worker to a pro rata payment. Leaving indemnity is paid on the final payment of salary and is calculated by reference to the final payment of salary or wage (as defined in the Law) at the time of termination of the employment. On resignation by the employee, the calculations are as follows: – up to three years’ employment: no leaving indemnity is payable; – between three and five years’ employment: five days salary per year of service for the first three years and ten days for the fourth and fifth year and pro rata for any uncompleted year of service; – above five years’ employment: 15 days per year for the first three years and one month for each year of service thereafter, plus pro rata for any uncompleted year of service.
Type of employment contract There are usually two types of employment contract, namely definite and indefinite term contracts.
Content of employment contract Every employee must have an employment contract (Article 38), which must contain the following principal particulars:
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• the name of the employer and the address of the establishment; • the name of the worker, his/her qualifications, nationality, occupation, residential address and personal particulars of identity; • the date of appointment; • the nature, type and place of employment agreed to in the contract; • the period of the contract, if for a definite period; • the salary or wage agreed, method and time of payment, and all elements of benefits received in cash or in kind in respect of the salary or wage agreed upon; • any additional special conditions agreed to by the two parties. Under Article 41, an employment agreement may provide for a maximum three-month probationary period. During the probationary period, employment may be terminated by either party on giving one day’s notice to the other in writing. In the absence of a written contract, the worker alone may establish his rights by all means of proof.
Validity of the employment contract With regard to the validity of any contractual restriction in view of statutory rights, Article 153 provides: ‘Save where it is more favourable to the worker, any condition of an individual contract of employment which does not conform with the provisions of this Law, even if entered into before the commencement of the application of this Law, shall be null and void. Any agreement to forfeit or to relinquish any rights or obligations whatsoever under a contract of employment during its duration, or within one month of the termination thereof, shall be deemed to be null and void if such agreement is in contravention of the provisions of this Law.’
Employee tax There is no tax as such relating to employees, but if an employer has 10 or more employees, the employer must subscribe to GOSI. There are currently two classifications of benefit: Old Age, Disability and Death (covering Bahrainis only) and Employment Accident (for all employees). The present rate of contributions is shown in Table 5.4.1.
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Table 5.4.1 Contribution rates Employer’s contribution (%)
Employee’s contribution (%)
Bahrainis Old Age, Disability and Death Employment accident
7 3
5 –
Non-Bahrainis Employment accident
3
–
Medical treatment At present, medical treatment for employees is available at government hospitals for a nominal fee. However, employers can take up medical insurance through various local insurance companies (compulsory medical insurance for all expatriate employees is presently being debated. It is already compulsory for employees over 60 years of age).
Primary health care In accordance with Ministerial Order No. 1/1977, employers with more than 50 workers are required to register themselves with the Ministry of Health for provision of primary health care for their workers. Such employers are required to make the following payments to the Ministry of Heath: • BD30 annually for each non-Bahraini worker; • BD18 annually for each Bahraini worker.
Training levy In accordance with Ministerial Order No. 13/1979, employers with more than 200 employees, who are not able to provide training to Bahraini nationals, are required to pay to the Ministry of Labour and Social Affairs a training levy of two per cent of the total annual wages of Bahraini employees and four per cent of the total annual wages of expatriate employees.
‘International’ contracts Where an employer provides an ‘international’ contract, Bahrain Labour Law will nevertheless apply in respect of the period of employment in Bahrain.
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Article 12 notification requirements Article 12 states: ‘Every employer is required to submit to the Ministry of Labour and Social Affairs, at least once a year, a notification of any anticipated reduction in manpower in his establishment.’
Bahrainization As part of the government’s policy to provide employment for citizens, Bahrainization regulation is in place. A resolution of the Minister of Labour and Social Affairs (Ministerial Resolution No. 7/1996 provides the following: • A company that has 10 or more employees where Bahrainis constitute less than 50 per cent, must increase the number of Bahraini employees by not less than five per cent per annum. • Companies with less than 10 employees must employ at least one Bahraini in addition to the employer (if he is a Bahraini). • For new projects and investments, the minimum proportion of Bahrainis at the start of the project and for the first year must be 20 per cent, and thereafter must be increased by five per cent per annum. • The issue of work permits [to expatriates] must not reduce the percentage of Bahraini employees. • Employers must also attain the required percentage of Bahraini employees during the year with respect to the issue of new work permits, or the renewal of current permits. • The five per cent increase applies for a period of five years. • In case of any infringement, the Ministry of Labour may reject applications for work permits.
Law reform A new Labour Law has been proposed but it is not yet in final draft form and it is not known to what extent it may change the foregoing; no timetable for its implementation is currently available.
5.5
Commercial Agency Agreements Hugh Stokes, AlMahmood & Zu’bi, Attorneys and Legal Consultants, Bahrain
Introduction The Law of Commercial Agency in Bahrain (‘the Law’) is set out in Decree No. 10 of 1992, as amended by Decree Law No. 8 of 1998 and Decree Law No. 49 of 2002. Under Article 1 of the Law, a commercial agency is defined thus: ‘A commercial agency shall mean, for the purpose of enforcing the provisions of this Law, representing the principal in distributing commodities and products or offering thereof for sale or trading purposes, in consideration of a profit or commission, or providing facilities, of whatever nature. This shall include agencies for land, marine and air transport, tourist and travel agencies, services, insurance, publications, printing, press, publicity and advertising agencies, and other business activities for which an order is issued by the Minister of Commerce.’
Franchises and agencies distinguished In Bahraini law and practice, the most important distinction between a franchise and an agency is that a commercial agent imports goods for resale, a franchisee exploits a system or a name. Some relationships widely described as franchises are really commercial agencies, others that are clearly franchises have in the past been registered as commercial agencies; however, it is unlikely that the Ministry of Commerce would admit a genuine franchise for registration as a commercial agency at the present time. If a relationship is, in fact, a
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commercial agency but is described in an agreement as a franchise, it will be classified as a commercial agency for the purposes of the law.
Registration All commercial agency agreements, as well as any amendments to the agreements, must be registered in the Commercial Agencies’ Register at the Ministry of Commerce. Article 13b of the Law states that ‘any unregistered agency shall not be recognized, nor shall any action be heard in respect thereof ’, which means that if the agreement is not registered, neither party to the agreement would have any legal recourse under Bahraini law for a breach of the agency agreement in whatever form. An application for registration (or renewal) is made by completing the relevant application form provided by the Ministry of Commerce and submitting it to the Ministry together with a copy of the agency agreement and the prescribed fee. All applications should be considered within 30 days of the date of submission of the same. Once the application to register has been granted, a certificate shall be provided to the agent, confirming the registration or renewal. It should be noted that renewal of registration must take place within two months of the lapse of two years since the original registration or most recent renewal, after which time the Ministry of Commerce and Industry will be empowered to strike off the registration of the agency. The registration and renewal of every agency is published in the Official Gazette. An agent (if an individual) must be registered as a merchant and, if a company, must be 51 per cent Bahraini-owned. In practice, agencies are only permitted to be held by companies if they are 100 per cent Bahraini-owned, with very few exceptions.
Content of the agency agreement Pursuant to Article 3 of the Law, an agency agreement contains the following details: • the names of the agent and the principal, and the nationality of each of them; • the properties, goods and services included in the agency, as well as the rights and obligations of both the agent and the principal and the amount of profit or commission to which the agent is entitled in consideration of his agency; • the agent’s area of operation;
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• the agency’s term, if it is for a definite period; • the area of business of both the agent and the principal; • the brand names or trade marks of the goods; • the agent’s obligation to provide adequate spare parts and necessary maintenance to repair vehicles, machinery, engines, equipment, or electrical or electronic appliances covered by the commercial agency; • the arbitration clause, if any; • any other terms and conditions agreed upon between the agent and the principal provided that they do not conflict with the provisions of this Law.
Exclusivity Until the implementation of the 1988 Law, all agencies were exclusive as a matter of law, but since then, exclusivity is a matter of contract, and therefore the agency agreement should specify whether it is exclusive or non-exclusive. The 1988 Law is not retroactive and any exclusive agency entered into earlier will remain exclusive, unless amended by agreement of the parties.
Duration and termination An agency agreement can be either fixed-term or indefinite. Where an agreement has a fixed term, the agency shall only be terminated on the expiry of the fixed term. Both parties can of course agree to the renewal of the contract on the termination of the same. A fixed-term agency agreement can only be terminated early and/or registered in the name of another agent where both parties consent to this course of action. If a principal withdraws from a fixed-term agency before the expiry of its term, the agent may claim compensation for breach of contract. If the principal does not renew the agency on expiry of its term, the agent may claim compensation if his/her business activities have resulted in an obvious success in promoting the principal’s products or increasing the number of customers but the principal’s refusal to renew the contract has prevented the agent from benefiting therefrom. The agent’s right to claim cannot be waived. When the contract is for an indefinite term, either party may apply to the Ministry of Commerce for a decision as to whether to strike off the agency, even if the other party does not agree. The agent has the right (which cannot be waived) to seek compensation on the same lines as compensation for non-renewal of a fixed-term contract.
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Within one month of the termination of any agency or the expiry of any agency agreement, an agent or his legal representative must file an application with the Ministry of Commerce for striking off the agency’s registration.
Compensation It will have been noted that an agent’s right to claim compensation cannot be waived. This does not mean that compensation is automatically payable. The agent must prove his loss; but it would be possible to place a cap on the amount of compensation (if any) that might become payable, either by reference to a fixed figure or to a formula based on past performance.
Appointment by intermediary An agency may be registered between an agent and an intermediary (eg a regional or global agent, or an export house) provided that the intermediary has the authority (which must be demonstrated to the Ministry of Commerce) to appoint a local agent in Bahrain.
Transfer of agency If an agent (being an individual) dies, or if the company holding the agency is sold or merged, the agency will survive and the heirs, or buyer, or the merged company (as the case may be) has the option (but not the obligation) to continue with the agency, in which case the rights and obligations will remain the same. If the agency is for a fixed term, this will continue until expiry of the term. If an agency is transferred, the new agent must purchase the stock held by the former agent (provided it is in good condition) at the market, or cost, price, whichever is less, plus five per cent of the cost price. Both the new agent and the principal shall, on transfer of an agency, become jointly liable for all undertakings given by the previous agent to any third parties, arising from the contract. The liability will only extend to the price of the goods or services agreed to be provided by the previous agent.
Disputes If the agency contract contains an arbitration clause, disputes shall be resolved by arbitration and an arbitral award may be enforced through
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the Bahraini courts. If the arbitral award is made overseas, it may still be so enforced as Bahrain is a signatory to the New York Convention. In the absence of an arbitration clause, disputes will be resolved by the Bahraini courts. The referral of any dispute to arbitration or the filing of legal proceedings shall not prevent the goods in question from entering the country or the services being performed. However, the Minister of Commerce has the power to ban the entry of goods or the continuation of services, if this is warranted by public interest. This only occurs extremely rarely.
New legislation Bahrain introduced a Civil Code (Decree No. 19 of 2001), which took effect from September 2001. This does not impact on commercial agencies at all. Bahrain is a signatory to the World Trade Organization, and full implementation of the World Trade Organization’s principles may well have a significant effect on the law relating to commercial agencies.
5.6
Legal Regulation of the Ownership of Land and Real Estate Dominic O’Neil and Roly Denman, Trowers & Hamlins Law Firm, Bahrain
Introduction Property ownership in Bahrain is subject to the Land Registration Law. The traditional prohibition on non-ownership of land by non-GCC foreigners was relaxed in 2001, with the promulgation of Legislative Decree No. 2 of 2001. The decree provides that, without prejudice to the rights of GCC citizens to own built properties and land, non-Bahrainis, both individuals and companies, may own built properties and land in the Kingdom of Bahrain in any manner prescribed by earlier legislation and subject to the conditions to be prescribed by a resolution of the Council of Ministers. These conditions are set out in Prime Ministerial Edict No. 43 of 2003, issued pursuant to the Legislative Decree. The edict designates certain areas or zones in which non-Bahraini individuals and companies are permitted to own built property or land. These areas are divided into the following four categories: 1. areas of residential and commercial buildings of 10 storeys or more in Manama being: – Ahmed Al-Fateh District (formerly, and more commonly, known as Juffair); – Hoora District; – Bughazal Area; and – Northern Manama District including the diplomatic area; 2. Seef District (buildings of either three, five or ten storeys);
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3. tourist areas being: – Durrat Khaleej Al Bahrain Area; – Danat Hawar Area; and – Amwaj Islands Area; 4. Bahrain Financial Harbour Project, Bandar Al Seef and Pearl Island Areas. In addition to this relaxation of the rules of property ownership, it has recently been announced that foreigners investing in these, and future, designated zones will be issues with special residence permits that attach to the property. The right of non-Bahrainis to own land in these areas is, however, conditional on the fulfilment of two conditions. First, the owner must comply with the terms, conditions and procedures set out in the Land Registration Law (Legislative Decree No. 15 of 1979). Secondly, where the owner is a corporate entity, ownership of built property and land must either be one of the company’s objects or it must adopt a board resolution approving the ownership of built property and land in the Kingdom of Bahrain. In addition to granting non-Bahrainis permission to own property in the above areas, Article 3 of the Prime Ministerial Edict states the wholly foreign owned companies licensed to conduct industrial activities in the Kingdom may own property in designated industrial areas. The position with respect to the ownership of land by citizens of Gulf Cooperation Council (GCC) states is simpler. Legislative Decree No. 40 of 1999 revokes all prior legislation concerning the ownership of property by GCC nationals in Bahrain and provides that nationals of GCC states may own built properties and land in the Kingdom of Bahrain by any prescribed method of legal ownership. This includes inheritance and conveyance between individuals. The decree further states that, in this respect, nationals of GCC states are to be afforded the same rights as Bahraini nationals. Whilst the legislation does not explicitly define the expression ‘GCC national’, it has previously been interpreted to apply to GCC citizens as well as to GCC-owned corporate entities.
5.7
The Legal Environment and Settlement of Disputes Hugh Stokes, AlMahmood & Zu’bi, Attorneys and Legal Consultants, Bahrain
Background and form of legislation Bahrain is a hereditary Kingdom, governed by a Constitution promulgated in 2002. The King (HM Shaikh Hamad bin Isa Al-Khalifa) exercises the power through his Ministers who are appointed by Royal Decree on recommendation from the prime minister. The legislative authority is now the National Assembly consisting of two chambers, the Consultative Council and the Chamber of Deputies. The Consultative Council is appointed by the King, and the Chamber of Deputies is elected by direct secret general ballot. To date there has been one such election; the term of membership of the Consultative Council is four years and the term of the Chamber of Deputies is likewise four years; there is provision for by-elections. Bills are presented by the prime minister to the Chamber of Deputies who may pass, amend, or reject the Bill, but in any event the Bill must then be sent to the Consultative Council for review. Either House may accept or reject amendments proposed by the other House. If approved by a majority of the National Assembly, the Bill is referred to the prime minister for submission to the King. Subject to prescribed procedures, the King will then promulgate the Bill as Law, when it becomes a Legislative Decree. It is then published in the Official Gazette, which will state the date on which the Law comes into force, in many instances the date of publication.
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Secondary legislation Subject to the above, ministers are responsible for the creation of binding secondary legislation, by way of ministerial resolution. The relevant ministry derives its authority to legislate from Royal Decree and, once published in the Official Gazette, such secondary legislation is binding as law. Although it is possible to challenge the exercise of government administrative powers as having been ultra vires, it is not possible to challenge the government exercise of a discretion if it is validly authorized to exercise that discretion, unless it has not exercised that discretion in good faith in the purported exercise of its lawful authority. The prime minister is also empowered to issue edicts, which are binding in nature, in relation to particular matters within his sole discretion.
Administration of justice The court system was established initially by an Emiri Decree in 1971 and has since been amended in order to introduce new courts, most importantly the Court of Cassation, the highest court, which pronounces on matters of law and whose decisions (unlike those of lower courts) are binding. The decisions of other courts are persuasive, but not binding. The Sharia court system (dealing with matters of personal law for Muslims, such as inheritance, personal status and divorce) has no jurisdiction in respect of commercial matters. The civil courts in Bahrain are composed of: • the Court of Cassation; • the High Court of Appeal; • the High Civil Court (HCC); • the Minor Matters Courts and the Court of Execution; • the Court of Urgent Matters. The HCC deals with all civil matters in Bahrain, including commercial matters and disputes. Final judgements of the HCC can be appealed to the High Court of Appeal. Parties may file objections against a final judgement issued by the Court of Appeal in the Court of Cassation. It is common for the court, in cases involving complex or voluminous documentation or calculations, to refer the case to an expert, whose fees are usually payable by the plaintiff. An expert opinion is a statement of the facts and may not draw conclusions or impute liability.
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The courts are administered by the Ministry of Justice, which has the power to fix court and notarial fees. By Decree Law No. 27/2002, a Constitutional Court was established, to decide on the constitutionality of laws and regulations.
Alternative sources of law Although the published legislation is the primary source of law, in the event of there being no specific legal provision on which to rely, the judge may look to custom (both general and special), to Sharia law (in cases where this is suitable) and to general principles of equity and natural justice. The judge will only have resort to such sources if the subject matter of the case (eg a contract) is incomplete or ambiguous, and the judge requires a principle to assist him to resolve the ambiguity. Cases are conducted in Arabic and all advocates must be Bahraini citizens or citizens of a GCC country. Interpreters are available, as officials of the Ministry of Justice, to assist in cases where a litigant or witness is not fluent in Arabic. Pleadings are in writing and are submitted to a judge who will require the other party to file a pleading in reply. Oral advocacy is not resorted to very often, and is usually confined to urgent applications for emergency orders, such as arrest of a vessel.
International aspects Bahrain, as a member of both the GCC and the Arab League, recognizes and enforces judgements and orders made in countries belonging to those organizations, but not elsewhere, and at present there are no treaties or conventions whereby recognition and enforcement of Bahraini courts and those of foreign courts (other than those countries referred to above) is imposed. However, Bahrain is a signatory to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards.
Dispute resolution Arbitration as a method of dispute resolution is quite popular because: • under Bahrain law, unless both parties agree otherwise, an arbitration must be concluded within 90 days; • it is possible to conduct the proceedings in English. This is important, in particular in contracting and shipping cases where the documentation tends to be in English.
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We should also note that three arbitration centres have been established in Bahrain: • the Bahrain International Arbitration Centre, established by Decree Law No. 9/1993, which is for international arbitrations only, and applies UNCITRAL rules, unless otherwise agreed; • the GCC Commercial Arbitration Centre, established by agreement amongst the GCC states, having its seat in Bahrain; • the arbitration services of the Bahrain Chamber of Commerce and Industry. On conclusion of the arbitration, the arbitrator, or arbitral tribunal must file the award in the High Civil Court within three days of the award; the judge then places an exequatur on the award, which is then eligible for execution in the same way as a judgement of the Bahraini court. There are as yet no specialist commercial courts, although the idea has been discussed.
5.8
Forms of Intellectual Property and their Registration Mazin M Ajawi, Intellectual Property Manager, Abu-Ghazaleh Intellectual Property, TMP Agents, Bahrain
Summary of the trade mark registration system Trade mark Law No. 10 of 1991, amended by Ministerial Order No. 12 of 1993, governs the protection of trade marks in Bahrain. New legislation is expected to be issued in late 2004 or early 2005. Bahrain has been a member of the Paris Convention for the Protection of Industrial Property since 29 October 1996. However, claiming priority is not possible at the present moment and will not be possible until amendment of the law. The international classification of goods and services for the purpose of the registration of marks is followed. A separate application must be filed for each class of goods or services. Once a trade mark application is filed, it is examined as to its availability for registration. Trade mark applications accepted by the registrar are published in the Official Gazette. There is a 60-day period open for filing an opposition by any interested party. An opposition to the registration of a trade mark should be prosecuted before the registrar by an authorized agent, or the proprietors themselves, within the prescribed period as from the date of publication. In the absence of an opposition, a published trade mark is registered and a certificate of registration issued. It is noteworthy that trade mark rights are acquired by registration. However, a trade mark application can be opposed successfully upon producing sufficient proof of the prior use of the mark in Bahrain and elsewhere in the world.
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A trade mark registration is valid for 10 years as from the date of filing the application and is renewable for further periods of 10 years thereafter. The Trade Mark Law provides for a three-month grace period for late renewal of a trade mark. If a trade mark is not renewed, the law does not allow third parties to register the same trade mark until after the lapse of three years from the date of cancellation. The assignment of a trade mark can be recorded once the trade mark is registered, but an authorized user can be recorded at the time of making the application for registration. Such a recording is published in the Official Gazette. The assignment of a trade mark can be accepted only with the goodwill of the business involved. All other changes can be recorded after the registration of a trade mark. The actual use of any trade mark in Bahrain is not compulsory for filing applications for registration, nor for maintaining trade mark registrations in force. However, a trade mark is vulnerable to cancellation by any interested party who can establish that the trade mark was not actually used during the five years preceding the application for cancellation, or that there was no bona fide intention of using the trade mark on the goods in respect of which the trade mark was registered. Unauthorized use of a trade mark registered under the law, or an imitation of such trade mark applied on goods of the same class, whether for sale, storing for the purpose of sale, or exhibiting for sale of goods bearing a counterfeit mark, or by using a mark duly registered under the law by another person to serve the purpose of unauthorized promotion of goods of the same class, are offences punishable under Bahraini law.
Requirements The following are requirements for trade mark/service mark applications: • a signed power of attorney stamped with the company seal authorizing an agent to act on behalf of the owner; • one of the following documents: (a) (b) (c) (d) (e) (f)
certified copy of a corresponding home registration or application; certified copy of any corresponding foreign registration or application; certificate of incorporation of the applicant company; certificate issued by the registrar of companies; extract of the entry of the applicant company in the commercial register; certificate issued by the Chamber of Commerce.
The documents referred to in (c), (d), (e) and (f) above must indicate the specification of goods/services or the line of activity of the applicant company, and must be legalized by any Arab consulate.
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• the full name, address, nationality and profession of the applicant; • the list of the goods to be covered by the application, not more than six lines; • eight prints of the mark.
Summary of the patent registration system The Patents and Designs Regulations of 1955 were superceded by the new Patents and Utility Models Law No. (1) of 2004 which was issued on January 28, 2004. However, the Implementing Regulations for the Law have not been issued and are expected to be issued in late 2004. Accordingly, the Patent Office is not accepting any new patent applications until such regulations are issued and enacted.
Patents The Law specifies that a patent shall be granted in accordance with the provisions of this law for every invention that is new, involves an inventive step, and is capable of industrial application. Such invention may relate to a new industrial product, whether imported or produced locally; an industrial method; or a novel application of a known industrial method. A patent shall also, in accordance with the provisions of this Law, be granted independently to the owner of any modification, improvement, or addition to a prior patented invention. The Law also specifies that, if a patent application has been submitted in a country that is a member of the World Trade Organization or in a country that applies reciprocal treatment with the Kingdom of Bahrain, the applicant or his successor in title may, in accordance with the conditions, terms and procedures of this Law, apply for the registration of the same invention within one year of the filing abroad. In such case, the first filing date shall be deemed a basis for the priority right. The protection period for a patent shall be 20 years from the date of the application for registration in the Kingdom of Bahrain. Fees shall be due on the filing of patent applications. Incremental annual fees shall also be due from the beginning of the second year following the grant of the patent until the expiration of the legal protection period.
Utility Models A Utility Model registration may be granted, in accordance with the provisions of this Law, in respect of any new technical addition to the
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shape or structure of methods, tools, machinery or parts thereof, products, devices, manufacturing processes, and other devices used in commerce. Utility Model registrations shall be protected for a non-renewable period of 10 years from the date of the application for registration in the Kingdom of Bahrain.
Summary of the design and industrial models registration system The Patents and Designs Regulations of 1955, amended by Legislative Decree No. 22 of 1977, govern the protection of designs in Bahrain. New legislation is expected to be issued in late 2004 or early 2005. The validity of a design registration in Bahrain is for five years from the filing date, renewable for two further terms of five years each (15 years in total). Registration in Bahrain stipulates the existence of a home registration or any other foreign registration of the design in order to issue the registration certificate. The specifications will be exactly as shown in the basic registration and can be in the form of either drawings or photographs and should show at least three views of the design. The international specification of designs is not followed and there is no novelty requirement. Design applications accepted by the registrar are published in the Official Gazette. There is a 30-day period open for filing an opposition by any interested party.
Requirements The following are requirements for design applications: • a signed power of attorney stamped with the company seal; • authorizing an agent to act on behalf of the owner; • the name, address, nationality and occupation or nature of business of the applicant; • a certified copy of the home registration or a registration from any foreign country; • three representations of each design.
Summary of the copyright registration system Copyright Law No. 10 of 1993 governs the protection of copyright in Bahrain and, as of 29 October 1996, Bahrain became a member of the Berne Convention.
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In order to gain protection, the publishers of works that may be subject to copyright will have to deposit three copies of the work with the Copyright Protection Office at the Ministry of Information. Original works of literature, art and science, regardless of type, importance or purpose, may be protected. This includes works of art expressed in writing, sounds, drawings, photography and motion pictures, such as books, writings, speeches, oral works, plays, dramatic works, musical compositions, films, phonographic works, applied art, and 3-D works. All of these may be protected for the lifetime of the author plus 50 years following his/her death. Computer programmes and software are protected under the law for 40–50 years. In order for protection to be effective, the work of art is to be original and include personal efforts, innovation and new arrangement. The National Council for Culture reserves the right to allow publication of the work of art if the copyright holder has not done so, or if his/her heirs do not publish it within one year of being informed to do so in writing. In such case, the Ministry of Information can obtain an order from the High Court of Justice to impound the work and hand it over to the National Council for Culture, Arts and Literature, while providing the copyright holder or the heirs with fair compensation. Infringements are prosecuted before the Civil Court of Bahrain. The court can stop the circulation of infringing works, seize and destroy them and the equipment used, estimate the infringers’ proceeds, and call upon experts’ assessment. In addition, a period of imprisonment or a fine may be imposed.
Requirements The requirements for copyright applications are as follows: • a power of attorney legalized by a Bahraini consulate authorizing an agent to act on behalf of the owner; • three copies of the work; • a legalized copy of a Deed of Assignment if the applicant is not the author. A new copyright law is expected in late 2004 or early 2005.
Summary of the domain name registration system The Bahrain Telecommunications Company (Batelco) has allowed the registration of domain names since 1999. According to the regulations, the holder of a domain name registration should actively rent space for his/her website.
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Batelco has no legal obligation to screen domain name registrations and operates on a ‘first come, first registered’ basis. Any legal disputes arising will be forwarded to the courts. Nevertheless, a request for evidence of proof of ownership of the name (eg a trade mark registration or a company name) will be requested. Proof that an agent for that name exists in Bahrain also has to be recorded. Once a court order has been issued to cancel the domain name, Batelco will abide by the order to cancel or amend a name. Domain names are non-transferable once registered unless the owner is bought out or merges with another entity. If an entity is dissolved, the domain names owned by that entity can be reallocated.
Summary of the trade secrets law Legislative Decree No. 7 of 2003 in respect of trade secrets was issued on 18 June 2003. The new law prohibits the disclosure, misappropriation or illegal acquisition of another entity’s trade secrets. A trade secret is any information held by an entity that is not generally known, derives commercial value from being secret, and is subject to appropriate measures by its owner to maintain its secrecy. It is important to note that the independent conception of trade secret information by lawful means is not a violation of the trade secrets law.
New IP laws The following new intellectual property laws are also expected to be issued in late 2004 or early 2005: • geographical indications; • integrated circuits; • new varieties of plants.
Part Six Appendices
Appendix I
Transport Infrastructure Economic Development Board1
Introduction Bahrain enjoys excellent air, road and maritime connections to the region and the rest of the world. It boasts a world-class international airport, well-designed modern highways and a well-established seaport, with construction well underway on a new port.
Bahrain International Airport The Bahrain International Airport (BIA), a modern, highly efficient facility, serves as the regional hub for a significant number of international airlines, including cargo carriers and charter flight operators. One of those carriers is Gulf Air, which, along with other airlines, operates over 300 flights a week to more than 50 destinations in the Middle East and North Africa. International airlines also operate flights to all major European and Asian cities. In an ongoing effort to encourage new carriers to serve Bahrain, Civil Aviation Affairs has developed a range of incentives that includes discounts on landing and parking fees, free parking for the first two hours and reductions on hotel accommodation for crews. Bahrain also offers the best fuel prices in the region. With the 1994 inauguration of its new US$100 million passenger terminal, BIA increased its passenger handling capacity to 10 million passengers annually, in order to accommodate the steady increase in traffic. In 2003, BIA handled 4.2 million travelers, a four per cent increase over 2002 (see Table AI.1).
1
The section of this article pertaining to privatization of ports in Bahrain was provided by Mr Ibrahim Salman, Director of Customs, Ports and Free Zones Affairs.
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Table AI.1 Passenger traffic statistics Total number of passengers in 2003 Increase in total passenger traffic over 2002
4,147,105 4 per cent
Source: Civil Aviation Affairs, Bahrain.
In addition to its excellent passenger handling capabilities, BIA also possesses highly efficient air cargo facilities, with an annual capacity of over 200,000 tonnes (see Table AI.2). Its 18,000 square metre Air Cargo Centre, managed by Bahrain Airport Services, provides a full range of cargo handling services, including effective trans-shipment arrangements, inter-airport trucking, customs clearance and special storage arrangements. Break bulk facilities are also available for consolidators and bonded warehousing for specialist companies. Bahrain Airport Services is also proceeding with plans to expand its cargo handling facilities. The new extension to the cargo facility will cover an area of 2,000 square metres, and is expected to be completed by the end of 2003. Table AI.2 Air cargo statistics Total air cargo tonnage in 2003 Increase over 2003
238,000 32 per cent
Source: Civil Aviation Affairs, Bahrain
To take advantage of this ideal central location, DHL has chosen to locate its sorting hub at Bahrain International Airport. The international courier uses this facility for sorting and forwarding shipments to onward destinations. Further support for the development of BIA came in the form of the signing of a US$115 million deal to establish an airport mall and multistorey car park to serve the airport. The complex will contain 30,000 square metres of retail and leisure space and 4,000 car parking slots. The project is expected to be ready by June 2004.
Ports and privatization of the port industry Mina Salman is strategically located midway down the Arabian Gulf, providing key access to the region for the global shipping industry. The port provides a range of facilities for vessels of up to 65,000 tonnes, some of which include:
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• an outer approach channel with a minimum depth of 9.5 metres bunkering; • fuel, oil, gas or blends available at dockside or by barge (48-hour notice required); • berthing facilities; • anchorage; • fresh water; • repair, surveyor and ship chandler services.
Mina Salman Mina Salman port is the only sea gateway for the Kingdom of Bahrain, handling about three million tonnes of cargo annually. Due to the restrictions of water depth and the need to replace infrastructure and equipment, the government decided to build Khalifa bin Salman Port. The new port will be ready at the end of 2006.
Privatization The role of ports in an international business context has changed from a mere entry and exit point for cargo to an important link in the transport chain. Due to this dramatic change, port business developed into an important industry, which attracted massive investment from all over the world. In order for ports to maximize their effectiveness and economic return, they must endeavour to be part of the regional or global transport chain. This cannot be achieved through improving ports’ infrastructure only, but through proper organization and management also, which in most cases can only be realized through privatization. The process of privatizing Bahrain’s public ports began with the issue of the cabinet decision on 30 June 2002 and has progressed as follows. The formation of the privatization committee The privatization committee was formed through a Ministerial Order issued in July 2002 and consists of officials from Financial Affairs at the Ministry of Customs, Ports and Free Zone Affairs, and subsequently officials of the Economic Development Board (EDB) were added to the committee. Initiating a viability study The Committee sought offers from the following four international professional institutions to submit their bids to carry out the viability study:
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• The World Bank; • UBS Bank; • PricewaterhouseCoopers; • Seaport Terminal (Malaysia). After careful evaluation of the offers, Seaport Terminal was appointed to carry out the study. Appointing a privatization consultant The privatization committee appointed KPMG as a privatization consultant. The appointment was carried out through a tendering approved by the Tender Board. KPMG Bahrain is supported by Mericks Associates of London as shipping advisers and Trowers & Hamlins as the legal advisor. KPMG responsibilities cover the following: • to review the privatization study prepared by Seaport Terminal and recommend the necessary changes; • to prepare a privatization plan, which includes the legal framework necessary for implementing the privatization; • to assist the privatization committee in carrying out the privatization. Issues of RIB Requests for Inductive Bids (RIBs) were issued on 9 August 2004 to 21 companies – selected by KPMG and advertised through local and international publications and through direct contact with embassies in Manama, Kuwait and Riyadh. By the closing date of 5 October 2004, nine respondents sent their in bids, which were subjected to a thorough evaluation by three to five selected companies to take part in the Request for Proposal (RFP) stage, which will ultimately lead to the selection of the part operator by early 2005. The evaluation was carried out by professionals from the Ministry of Finance and National Economy (MOFNE), the EDB, Customs, Ports and Free Zone Affairs, KPMG and Posford Haskining. Trowers & Hamlins and legal advisors of the Royal Court, Crown Prince Court and MOFNE studied the existing legal structure to verify whether it was sufficient to support the Privatization Law No. 41 of 2002. All legal advisors are of the opinion that privatization can be implemented under the Privatization Law, but they differed on the need to issue a new law. This law will repeal the 1966 port ordinance and establish a new organizational structure to support the privatization of government ports.
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South Hidd port and industrial area Currently under construction, the 650-hectare South Hidd Port and Industrial Area is located at the northeastern extremity of Bahrain. The completed port will have two 300-metre container berths, a 300metre RO/RO/LO/LO multipurpose berth, three 300-metre general cargo berths and extensive storage facilities. The port will also boast two 40-tonne and two 50-tonne post panamax gantry cranes, and 14 straddle carriers, in addition to fork lifts, tugmaster units, low-bed trailers and a computerized container and cargo tracking system. The associated industrial area, with its ideal proximity to the airport and specially designed road access to the King Fahad Causeway, caters for smaller, cleaner industries. On completion, it will have refrigerated storage facilities, distribution warehouses, bulk grain facilities, a timber yard, a quay escalator crane, and a vessel bunkering facility, in addition to a business centre and medical facilities.
The King Fahad Causeway Officially inaugurated in November 1986, the 27 km causeway links Bahrain to the Saudi Arabian mainland, bringing the major population centres of the Eastern Province of Saudi Arabia within a one-hour drive, with driving time to Riyadh and the Kuwaiti border averaging four hours. Proving a boon to Bahrain’s tourism industry, the bridge has served as a major contributor to Bahrain’s status as a family retreat for regional markets.
Customs procedures The general procedures for clearing customs in Bahrain are the following: • No customs duty is payable on goods imported in transit or for trans-shipment. • No customs duty is payable on exports. • Raw materials and equipment for use in manufacturing enjoy duty relief under the Protection and Support Law. • Duty exemption is available under the GCC Trade Exchange, Bilateral Trade Agreements and the Greater Arab Free Trade Area (GAFTA) agreement, for qualified goods. • Exemption is also available for goods stored in bonded warehouses. All other imports are subject to customs duty of five per cent, except tobacco and tobacco related products (100 per cent) and alcohol (125 per cent).
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Customs duties – concessions All personal effects and gifts carried by passengers will not exceed BD300, provided that: • luggage and gifts are for personal use and not for commercial purposes; • goods are not traded; • the number of cigarettes does not exceed 400. Important duty exemptions for business travellers include: • cut samples; • advertising material with a total value not exceeding BD200 (US$540), provided it is marked as such; • dutiable goods for exhibition may be released for entry under the temporary import arrangements, after payment of a deposit refundable on re-export of same; • drawback of customs duty may be granted on imported goods reexported, subject to certain conditions.
Bonded areas Goods imported may be stored in bonded areas with suspension of payment of customs duty. Bonded areas include private bonded warehouses, subject to specific approval by the Directorate General of Customs in each case. Bonded storage is available within the Mina Salman port perimeter, where off-loaded goods can remain for up to six months, after which time the goods may be subject to disposal by sale or other method. The Port Authority has storage space, which can be used for dutyunpaid goods for an indefinite period at a charge of BD1 per tonne per month. Bonded goods can be withdrawn for import after payment of customs duty or for re-export without payment of customs duty.
Appendix II
Contributor Contact Details Abu-Ghazaleh Intellectual Property Unitag House, Government Avenue PO Box 990 Manama Kingdom of Bahrain Tel: +973 17 215 464 Fax: +973 17 216 322 Contact: Mazin M Ajawi Intellectual Property Manager E-Mail:
[email protected] Contact: Qusay T Abu-Ghazaleh Email:
[email protected] Website: www.agip.com Alba (Aluminium Bahrain) PO Box 570 Manama Kingdom of Bahrain Tel: +973 17 833 204 Fax: +973 17 830 510 Contact: Taimour Raouf Head of Public Relations Tel: +973 17 833 257 Mobile: +973 3961 6434 Email:
[email protected]
262
Appendices
Al Mahmood and Zu’bi Attorneys and Legal Consultants Bab Al Bahrain Building 150 Government Road Manama 315 Kingdom of Bahrain PO Box 502 Tel: +973 17 225 151 Fax: +973 17 224 744 Email:
[email protected] Contact: Esmond Hugh Stokes, Solicitor Arab Bank Plc PO Box 813 Manama Kingdom of Bahrain Tel: +973 17 549 000 Tel: +973 17 549 022 (direct) Fax: +973 17 541 116 Contact: Denzil Pereira, Senior Economist Email:
[email protected] Bahrain Atomisors International Building 200, Road: 96 East Riffa 949 PO Box 5328 Manama Kingdom of Bahrain Contact: Leon Fabrikanov, General Manager Email:
[email protected] Bahrain Financial Harbor (BFH) and Gulf Finance House PO Box 2210 Manama Kingdom of Bahrain Contact: Ahmed Y Taleb Corporate Communications Department Email:
[email protected] Tel: +973 17 587 100 (office) Mobile: + 973 3666 9479 Fax: + 973 17 582 511 Website: www.bfharbour.com
Contributor Contact Details
Bahrain Monetary Agency PO Box 27 Manama Kingdom of Bahrain Tel: +973 17 547 444/45 Fax: +973 17 537 554 Contact: Shaikh Salman Bin Isa Al-Khalifa, Director, Islamic Financial Institutions Directorate Email:
[email protected] or Ms Farah Mattar Assistant Senior Specialist Promotion & Media Unit Bahrain Monetary Agency Tel: +973 17 547 616 Fax: +973 17 535 904 Email:
[email protected] Website: www.bma.gov.bh Bank of Bahrain and Kuwait PO Box 597 Manama Kingdom of Bahrain Tel: +973 17 207 371 Fax: +973 17 214 345 Contact: Elham Al-Koohiji Project Manager, Research & Development Business Development Division Tel: +973 17 207 364 Fax: +973 17 214 345 Email:
[email protected] Cluttons (Prime Properties) 9th Floor Bahrain Commercial Complex PO Box 5856 Manama Kingdom of Bahrain Tel: +973 17 535 003 Fax: +973 17 530 519 Email:
[email protected] Contacts: Susan Neal, Property Manager Andrew Hinson, Chartered Surveyor
263
264
Appendices
Economic Development Board PO Box 11299 Manama Kingdom of Bahrain Tel: +973 17 583 311 Fax: +973 17 583 322 Contact: Sulaf Zakharia Manager, Research Services Unit Email:
[email protected] Website: www.bahrainedb.com Ernst and Young Bahrain PO Box 140 13th floor City Gardens Manama Kingdom of Bahrain Tel: +973 17 52 16 82 (direct) Fax: +973 17 53 54 05 Website: www.ey.com/eyme Contact: Sameer Abdi Manager, Islamic Financial Services Group Email:
[email protected] Gulf International Bank (GIB) Al-Dowali Building 3 Palace Avenue PO Box 1017 Manama Kingdom of Bahrain Tel: +973 17 522 696 Fax: +973 17 522 633 Contact: Rima Bhatia, Senior Economist Email:
[email protected] InCite Marketing Research WLL PO Box 11690 Manama Kingdom of Bahrain Tel: +973 17 243 263 Fax: +973 17 243 639 Email:
[email protected] Website: www.incitemar.com Contacts: Aldrin Luiz, Research Manager for Bahrain Email:
[email protected] Jan Stuffers, Managing Consultant (UAE office) Email:
[email protected]
Contributor Contact Details
KPMG Bahrain Chamber of Commerce and Industry Building PO Box 710 Manama Kingdom of Bahrain Tel: +973 17 224 807 Fax: +973 17 227 443 Contact: Doug Tait, Partner Email:
[email protected] Midal Cables Ltd PO Box 5939 Manama Kingdom of Bahrain Tel: +973 17 832 832 Fax: +973 17 832 800 Website: www.midalcable.com Contact: Salman Al-Shaikh Chief Executive Office Email:
[email protected] Ministry of Commerce PO Box 5479 Diplomatic Area Manama Kingdom of Bahrain Tel: + 973 17 574 817 Fax: +973 17 532 090 Website: www.commerce.gov.bh Contact: Abdul Razaq J Zaina Al Abedeen Director, Foreign Trade Relations Directorate Email:
[email protected] Ministry of Electricity and Water PO Box 2 Manama Kingdom of Bahrain Tel: +973 17 546 320 Fax: +973 17 541 189 Contact: Mariam Ahmed Jumaan Director, Planning and Studies Department Email:
[email protected]
265
266
Appendices
Ministry of Finance and National Economy PO Box 333 Manama Kingdom of Bahrain Contact: Salma Waheedi Senior Economist Directorate of Economic Planning/Free Trade Coordination Team Tel: +973 17 575 284 Fax +973 17 532 713 Mobile: +973 3940 4418 Email:
[email protected] Ministry of Information, Department of Tourism PO Box 26613 Manama Kingdom of Bahrain Tel: +973 17 201 212/5 Email:
[email protected] Contact: Badr Nasr, Marketing Dept Email:
[email protected] Norwich Union Insurance (Gulf) BSC (c) Ground Floor, Building 177 Road 2803 Al Seef District 428 PO Box 45 Manama Kingdom of Bahrain Tel: +973 17 588 248 Fax: +973 17 583 050 Website: www.nu-me.com Contact: Richard E Morrison MA ACII, Country Manager Email:
[email protected] Stratum 23rd Floor, NBB Tower PO Box 3013 Manama Kingdom of Bahrain Tel: +973 17 221 515 Fax: +973 17 224 166 Contact: Ahmed Al Umran Email:
[email protected] Mobile: +973 3933 2121 Contact: Marwan Tabbara Email:
[email protected] Mobile: +973 3966 7574
Contributor Contact Details
Telecommunications Regulatory Authority (TRA) PO Box 10353 Manama Kingdom of Bahrain Tel: +973 17 540 120 Fax: +973 17 532 123 Website: www.tra.org.bh Contact: Daneh Al Rayes Director of Communications and Consumer Affairs Email:
[email protected] Trowers & Hamlins 9th Floor, The Tower Sheraton Commercial Complex PO Box 3012 Manama Kingdom of Bahrain Tel: +973 17 530 082 Fax: +973 17 535 616 Website: www.trowers-hamlins.com Contacts: Pia Irwin Office Manager Mobile: +973 3989 1051 Email:
[email protected] Dominic O’Neil Email:
[email protected] Roly Denman Email:
[email protected]
267
Index References in italic indicate figures or tables. AAIFIOI see Accounting and Auditing standards for Islamic Financial Institutions Abu Sa’fah Field 131 accommodation see residential property accountants 220 accounting 222–28 principles and guidelines 222–25 record-keeping and reporting 225–28 Accounting and Auditing standards for Islamic Financial Institutions (AAIFIOI) 46, 99, 100 Advisory Practice, Stratum 123 advocates 220 agency agreements 235–39 content 236–37 franchises compared 235–36 registration 236 terms 237–39 agency fees, commercial property 186 AGMs see annual general meetings Ain Umm Al Sejoor 173 air transport 255–56, 256 Al-Areen Wildlife Park 174 Alba (Aluminium Bahrain) 43–44, 138 current expansion 139–42 environmental protection 143 future plans 142–43, 144 Al-Ezzal independent power plant (IPP) 57, 136 Al-Jasra House 174 Al-Khalifa family 5, 6, 7, 41 Al-Khamis Mosque 174 Aluminium Bahrain see Alba aluminium industry 138–44
development and expansion 139–42 future plans 142–44 see also Alba; Bahrain Atomisers International; Midal Cables Aluwheel 148 Amwaj Islands project 172 annual general meetings (AGMs) 61–62 annual reports 61 Anti-Money Laundering Procedures 211 Arab War Risks Insurance Syndicate (AWRIS) 194 Arad Fort 174 arbitration 209, 238–39, 244–45 Article 12 notifications 234 asset quality standards 91–92 audit 222 auditors 220 AWRIS (Arab War Risks Insurance Syndicate) 194 BAFCO see Bahrain Aviation Fuelling Company Bahrain Atomisers International (BAI) 152–57 human resource management 155 products and development 153–55 Bahrain Aviation Fuelling Company (BAFCO) 129–30 Bahrain Commercial Companies Law (BCCL) see commercial law Bahrain Field 131 Bahrain Financial Harbour (BFH) 11, 24, 56, 101, 109–15 attracting FDI 115 Financial Centre 110–12 impact 114
270
Index
International Insurance Centre 112–13 job creation 115 professional studies 113–14 role of Gulf Finance House 117 Bahrain Fort 173 ‘Bahrain in figures’ publication 70 Bahrain Income Tax Law 229 Bahrain Institute of Banking and Finance (BIBF) 83, 99, 191 Bahrain Insurance Association (BIA) 191 Bahrain International Airport (BIA) 255–56, 256 Bahrain International Circuit (BIC) (Formula One) 24, 171, 198–202 benefits 199–201 challenge 201 employment of nationals 201–02 Bahrain International Insurance Centre (BIIC) 112–13 Bahrain Internet Exchange (BIX) 163, 163 Bahrain joint stock companies (BSCs) see joint stock companies Bahrain Monetary Agency (BMA) 14, 46, 77–83, 209–10 accounting standards 209–10 anti-money laundering procedures 211 composition and administration 84–86 debt securities regulations 228–29 insurance 189, 190–91 Islamic banking 97, 98–100, 99, 101, 107 licensing process 86–92 reporting to 226–27 Bahrain Monetary Agency (BMA) Law 84, 85 Bahrain National Gas Company (BANAGAS) 129 Bahrain National Museum 173 Bahrain Petroleum Company (BAPCO) 128–29 Bahrain Refinery 131, 132 Bahrain Stock Exchange (BSE) 48–49, 82 Islamic banking 101
reporting to 227–28 Bahrain Telecommunications Company (Batelco) 160, 161, 250–51 Bahrain-US Council on Trade and Investment 31 Bahrainization 234 employment at BIC 201–02 BAI see Bahrain Atomisers International Bait Al-Jasra 174 BANAGAS see Bahrain National Gas Company Bank of Bahrain and Kuwait (BBK) 106–07 banking system 56, 77 commercial 79–80, 103–08, 105 conventional and Islamic compared 95–97, 96 Islamic 46–47, 80–81, 93–102, 94, 96, 98, 99, 102 BAPCO see Bahrain Petroleum Company Barbar Temple 174 Batelco see Bahrain Telecommunications Company BBK see Bank of Bahrain and Kuwait BCCL (Bahrain Commercial Companies Law) see commercial law Beit Al Quran 173 BFH see Bahrain Financial Harbour BIA see Bahrain Insurance Association; Bahrain International Airport BIBF see Bahrain Institute of Banking and Finance BIC see Bahrain International Circuit BIIC see Bahrain International Insurance Centre bilateral agreements 27–28, 57 see also Bilateral Investment Treaty, US-Bahrain Bilateral Investment Treaty (BIT), US-Bahrain 30, 31, 49, 208 BIX see Bahrain Internet Exchange BMA see Bahrain Monetary Agency board meetings 60–61 bonded areas 260
Index branches 216–17, 218 BSC and BSC (c) (Bahrain joint stock companies) see joint stock companies BSE see Bahrain Stock Exchange business structures 206, 214–21 companies 86, 88, 214–17 establishment 218–19 management 220 professional practices 220 specialized companies 217–18 unincorporated joint ventures 220–21 businesses, regulations for international 205–13 capital markets 82 capital requirements, bank licences 89–91 central population registration (CPR) cards 179 Central Statistics Organization (CSO) 69–70 Chamber of Deputies 8 Chevron Texaco 132 Civil Law Courts 8–9 closed joint stock companies (BSC (c)) see joint stock companies commandite companies 216 Commercial Agencies’ Register 236 commercial agency agreements see agency agreements commercial banking 79–80, 103–08 competitive strategy 107 Islamic sub-sector 106 licences 86, 90 market constituents 104, 105 market size, growth and competition 103–04 products, services and delivery channels 106–07 regulator 107 commercial laws 22, 49, 214, 222 commercial property market 184–88 charges and payments 185–86 rental 187–88, 188 lease structures 185 termination or renewal 186–87 companies 214–17
271
establishment 218–19 management 220–21 specialized 217–18 compassionate leave 231 compensation, agency agreements 238 Constitutional Court 9 constitutional monarchy system 7–8 construction-related insurances 194 construction sectors BFH job creation 115 international investment in 208 Consultative Council 8 contents insurance 192 contracts of employment 231–32 ‘international’ 233 contributor contact details 261–67 copyright registration 249–50 corporate entities 86 joint stock companies 86 corporate governance 58–63 annual general meetings 61– board meetings 60–61 directors 58–60 insider dealing 62 shareholders 62–63 corporate taxation, absence of 229 Council of Ministers 8 Court of Cassation 9, 243 Court of Execution 243 Court of Urgent Matters 243 CPR see central population registration cards cross-border services, US-Bahrain FTA 34 CSO see Central Statistics Organization Currency Museum 173 customs duties 221, 229, 260 customs procedures 259 US-Bahrain FTA 34 Customs Union, GCC 23 debt securities regulations 228–29 Delmon civilization 170–71 deposit insurance 91 Deposit Protection Scheme and Board 91 design registration 249
272
Index
dilapidation procedures, commercial property 187 directors, corporate governance requirements 58–60 non-executive directors 59–60 remuneration 60 Disclosure Standards 227 dispute resolution 209, 244–45 agency agreements 238–39 domain name registration 250–51 dress code 67 Dual Towers, BFH Financial Centre 111 duration of commercial agency agreements 237–38 Durrat Al Bahrain Resort 171–72 E&Y see Ernst & Young Ecka Granules 154, 157 Economic Development Board (EDB) 42, 49, 207 economic freedom 22–23 economic overview 11–20, 15 diversity of base 43, 44 external trade and payments 14 policies 13–14 recent developments 16–20, 16, 18, 19 structure 12–13, 13 vision for the future 42–43 EDB see Economic Development Board education facilities 66 EGMs see extraordinary general meetings electricity sector 127–28, 135–37 electronic banking 106–07 electronic commerce, US-Bahrain FTA 35 employee benefits see General Organization for Social Insurance employment law 230–35 Bahrainization 234 regulations 230–34 engineers and engineering consultants 220 entry visas 176–77 environmental protection aluminium industry 143
US-Bahrain FTA 37 equipment, import of telecommunication 168–69 Ernst & Young (E&Y) 100 European Society for Opinion and Market Research (ESOMAR) 74 European Union Cooperation Agreement 209 executive authority 8 exports see foreign trade extraordinary general meetings (EGMs) 63 external trade and payments 14, 17–18, 18 FCBs see full commercial banks FDI see foreign direct investment FIA Formula One championship 198, 199 financial centre, Bahrain as 77–83 capital markets 82 commercial banking 79–80 human resources 83 insurance 81–82 Islamic banking 80–81 Financial Centre, BFH 110–12 financial information, residential property market 180–81 Financial Mall, BFH Financial Centre 111 financial regulatory system 84–92 BMS composition and administration 84–86 licensing process 86–92 financial sector 46–47, 56, 210 GDP contribution 13, 210 US-Bahrain FTA 35 see also Bahrain Financial Harbour; banking system; financial centre, Bahrain as; financial regulatory system; Gulf Finance House; Stratum fiscal policy 18–20, 19 fitting-out works, commercial property 186 fixed telephony segment 161 foreign direct investment (FDI) 54–55, 56, 57 contribution of BFH 115
Index foreign exchange broker licences 87–88, 90–91 foreign exchange reserves and assets 18 foreign ownership of companies 50, 207 foreign trade 14, 17–18, 18, 21–29, 25, 26 imports and exports 24–26, 25, 26, 27, 28, 28 telecommunication equipment 168–69 trade relations 27–29 see also free trade agreements; USBahrain free trade agreement foreign trade statistics publication 69 Formula One racing see Bahrain International Circuit franchises, agencies compared 235–36 free trade agreements (FTAs) 23 see also US-Bahrain free trade agreement free trade zones 212–13 full commercial banks (FCBs) 79, 86, 104 licences 90 gas industry 131, 133–34 GCC see Gulf Cooperation Council GCIBFI see General Council for Islamic Banks and Financial Institutions GDP (Gross Domestic Product) 12–13, 13, 16–17, 16, 25, 26 increasing financial sector contribution 114 General Council for Islamic Banks and Financial Institutions (GCIBFI) 99 General Organization for Social Insurance (GOSI) 194–95, 232, 233 geography 3 GFH see Gulf Finance House global net capital flows 51–52 golf facilities 175 GOSI see General Organization for Social Insurance
273
government procurement, US-Bahrain FTA 36 government services, GDP contribution 13 government structure 7–9 GPIC see Gulf Petrochemical Industries Company Grand Prix circuit see Bahrain International Circuit group life insurance 195 Gulf Cooperation Council (GCC) 9, 207–08 Commercial Arbitration Centre 209, 245 Gulf Finance House (GFH) 116–19 business development 117–18 outlook for the future 118–19 Gulf Petrochemical Industries Company (GPIC) 44–45, 129 Harbour House, BFH Financial Centre 111 HCC see High Civil Court Hidd industrial area see South Hidd port and industrial area Hidd Power and Water Station 137 High Civil Court (HCC) 243 High Court of Appeal 9, 243 High Sharia Court of Appeal 9 history 3–5, 6–7 holding companies 216 holidays 230, 231 home insurance 192 hotel accommodation 172, 178 government levy 229 hours of work 230 House of Al Quran 173 household income and expenditure survey 70 housing allowances 179 human resources 83 Alba 142–43 Bahrain Atomisers International 155 Midal Cables 149–50 IASB see International Accounting Standards Board IASC see International Accounting Standards Committee
274
Index
IASs see International Accounting Standards IFRIC see International Accounting Reporting Interpretations Committee IFRS see International Financial Reporting Standards IFSG see Islamic Financial Services Group IIFM see International Islamic Financial Market IIRA see International Islamic Rating Agency IIP see International Investment Position IMF see International Monetary Fund imports see foreign trade income tax, oil and refining companies 229 incorporation requirements 218–19 independent power plants (IPPs) 57, 136 industrial models registration 249 infrastructure projects, international investment 208 insider dealing 62 institutional shareholders 63 insurance 81–82, 189–95 commercial property 186 corporate 193–95 deposit 91 market 189–91 personal 191–93 see also Bahrain International Insurance Centre; takaful sector intellectual property rights 246–51 copyright 249–50 design and industrial models 249 domain name 250–51 new laws 251 patents 248–49 trade marks 246–48 trade secrets 251 US-Bahrain FTA 36 intermediaries, in agency agreements 238 International Accounting Standards (IASs) 222, 223–24
International Accounting Standards Board (IASB) 223 International Accounting Standards Committee (IASC) 223 International Accounting Reporting Interpretations Committee (IFRIC) 224–25 International Financial Reporting Standards (IFRS) 100, 222, 223–24 International Insurance Centre 11 International Investment Position (IIP) 51, 51 International Islamic Financial Market (IIFM) 46, 47, 99, 101 International Islamic Rating Agency (IIRA) 47, 99 International Monetary Fund (IMF) 212 international organizations, membership of 211–12 international relations 9–10, 21–22 enforcement of foreign judgements 244 Internet 162–63, 163 investment 13–14, 41–47, 48–57, 207–08 foreign direct investment 54–55, 56, 57 future 42–43, 55–57 patterns 51, 51 strategies for attracting 43–47, 44, 50 trends and composition 51–54, 53, 54 investment advisers/consultants/ brokers licences 88, 91 Stratum 120–23 investment banks capital requirements 90 examples 101, 116–19 licences 86–87 IPPs see independent power plants Islamic banking 80–81, 93–102, 94, 106, 210–11 Bahrain as centre 97–98, 98 conventional banking compared 95–97, 96
Index Gulf Finance House 116 key initiatives 98–100, 99 recent activity 100–01, 102 regulations 46–47 Islamic Financial Services Board 101 Islamic Financial Services Group (IFSG) 100 Islamic Sukuk Bonds 52–53 job creation, Bahrain Financial Harbour 115 joint stock companies 86, 88, 215, 219, 220 joint ventures 215 unincorporated 220–21 judiciary authority 8–9, 243–44 King Fahad Causeway 259 knowledge-based industries, development of 42 labour law see employment law labour rights, US-Bahrain FTA 36–37 land ownership 50, 221, 240–41 language 221 lawyers and advocates 220 leases commercial property 185 residential property 180–81 leave (absence from work) 231 leaving indemnity 231 legal entities see business structures legal environment 242–45 administration 8–9, 243–44 business environment 205–13 alternative sources of law 244 dispute resolution 244–45 international aspects 244 legislative and procedural transparency, US-Bahrain FTA 37 legislative authority 8 licensing process financial institutions 86–92 telecommunications 160, 166–68, 167 Liquidity Management Centre (LMC) 46–47, 98, 99
275
life insurance 192, 195 lifestyle 64–68 limited liability companies (WLL) 215–16, 220 limited partnerships see commandite companies liquidity standards 91–92 LMC see Liquidity Management Centre Long Term Services Agreement (LTSA), Hidd Power Station 137 loss provisioning rules 91–92 Lower Court 9 LTSA see Long Term Services Agreement maintenance arrangements commercial property 185 residential property 182 management shares 217 M&As see mergers and acquisitions manufacturing sector 12–13 investment strategy 43–45, 208 marine cargo insurance 194 market access commitment, US-Bahrain FTA 33 market research 69–74 importance 73–74 practicalities 72–73 published data 69–70 research agencies 70–72 medical facilities 195, 233 medical insurance 192, 195, 233 mergers and acquisitions (M&As) 57 banking 104 Metalform 148 Midal Cables 147–51 human resource management 149–50 products and development 148–49 Mina Salman port 256–57 Ministry of Commerce, reporting to 226 Ministry of Electricity and Water 136, 137 Ministry of Oil 128 Minor Matters Courts 243 mobile telephony segment 160, 162 monetary policy 14, 20
276
Index
OAPEC see Organization of Arab Petroleum Exporting Countries OBUs see offshore banking units off-the-shelf market research data 70 office property market see commercial property market offshore banking units (OBUs) 79–80, 90, 210 licences 87 oil sector 127–34 economic structure 12 government participation 130–31, 130 potential and future challenges 131–33 status 128–30 Oil Museum 173 Organization of Arab Petroleum Exporting Countries (OAPEC) 130, 130 ownership of land 240–41
payment terms commercial property market 185 residential property market 181 pearl diving 175 permits 67 personal insurance 191–93 personal accident insurance 195 petrochemical industry see also Gulf Petrochemical Industries Company Petronas Karigali 132 PIRI see Prudential Information and Regulatory Framework for Islamic financial institutions political system 6–10 population 3 population census 69 ports 256–59 Portuguese Fort 173 price trends, consumer 17 primary health care 233 Prime Minister 8 Private Equity Practice, Stratum 122–23 privatization 43, 49, 57 electricity sector 136, 137 port industry 256–59 professional studies, BFH 113–14 property ownership 240–41 Gulf Finance House projects 117 see also commercial property market; residential property market property tax see municipality tax Prudential Information and Regulatory Framework for Islamic financial institutions (PIRI) 80 public finance 18–20, 19 public joint stock companies see joint stock companies
parking arrangements, commercial property 187 participation shares 217 partnerships 215 patent registration 248–49
R&D see research and development ratings, international 78 real estate 240–41 Gulf Finance House projects 117 record keeping 225–26
money and foreign exchange broker licences 87–88, 90–91 money changer licences 87, 90 money laundering 211, 226 Moody’s rating 78 motor insurance 191–92 MTC-Vodafone Bahrain 57, 160, 161, 162 municipal system 7 municipality tax 181, 185–86, 221, 229 museums 173 National Assembly 8 National Charter 41, 49, 205 National Number Plan 168 Natural Gas Committee 130–31 non-executive directors, corporate governance requirements 59–60 numbers, telephones 168
Index recreation 65–66 regulatory environment, international business 205–13 reinsurance 194 remuneration, directors’ 60 renewal procedures, commercial property leases 186–87 renting property commercial 187, 188 residential 179–80, 182–83, 182 reporting requirements 226–28 representative offices 216–17, 218 licences 87 research agencies 70–72 research and development (R&D) Bahrain Atomisers International 155 Midal Cables 149 residential property 67, 179–83 extras 181 financial and lease information 180–81 payment terms 181 renting 179–80, 182–83, 182 retail banking see commercial banking Rifa Fort 174 ‘rules of origin’ commitment, US-Bahrain FTA 33 Saar Settlement 173 Sakhir business park 200 S&P see Standard & Poor’s Sanitary and Phytosanitary Measures (SPS), US-Bahrain FTA 34 secondary legislation 243 securities regulations 228–29 security, personal 68 Senior Court 9 Senior Sharia Court 9 service charges, commercial property 185 services sector, BFH job creation 115 Shaikh Isa Bin Ali House 174 Shaikh Salman Bin Ahmed Al-Fatih Fort 174 shareholders corporate governance 62–63 institutional 63
277
right to vote 62–63 specialized companies 217–18 Shari-compliant financing structures 95–96, 96 Sharia Law Courts 8, 9 shopping malls 65–66 Shura Council 7 SIC see Standing Interpretation Committee sick leave 231 simple commandite companies 216 single person companies (SPCs) 216, 220 Siyadi House 174 social interaction 65 South Hidd port and industrial area 45, 57, 259 SPCs see single person companies specialized companies 217–18 sports facilities 174–75 SPS see Sanitary and Phytosanitary Measures, US-Bahrain FTA Standard & Poor’s (S&P) 78 Standing Interpretation Committee (SIC) 224–25 statistical abstracts 69 Statistics Directorate 69–70 stock exchange see Bahrain Stock Exchange Stratum 120–23 Advisory Practice 123 importance 121 Private Equity Practice 122–23 Sukuk programme, BMA 98–100, 99 Supreme Council of Oil 128 Supreme Court of Appeal 9 Supreme Judicial Council 8 Supreme Privatization Council 49 surveys, market research 69–70 takaful (insurance) sector of Islamic banking 94, 94 taxation 67, 221, 229 GOSI contributions 194–95, 232, 233 see also customs duties; municipality tax TBT see Technical Barriers to Trade
278
Index
technical assistance, US-Bahrain FTA 37–38 Technical Barriers to Trade (TBT), US-Bahrain FTA 34 Telecommunications Law 43, 158, 162, 165, 166 telecommunications sector 158–63, 164–69 economic expansion 158–59 import of equipment 168–69 numbering 168 overview 159–63, 163 privatization 43 regulatory framework 165–68, 167 US-Bahrain Free Trade Agreement 35 Telecommunications Regulatory Authority (TRA) 43, 159, 165–69 licensing 166–68, 167 Telecoms Consumer Advisory Group 165–66 tenant improvements, commercial property 186 Tenders Law 50 termination procedures commercial agency agreements 237–38 commercial property leases 186–87 employment contracts 231 textiles and apparel market access, US-Bahrain FTA 33–34 third-party motor insurance 191, 192 TIFA see Trade and Investment Framework Agreement tourism development 170–78 key points 175–77 sights and attractions 173–75 statistics 177–78, 178 TRA see Telecommunications Regulatory Authority trade see foreign trade Trade and Investment Framework Agreement (TIFA) 31
trade balance 14, 17–18, 18 trade in services, US-Bahrain FTA 34 trade mark registration 246–48 trade relations 27–28 trade secrets law 251 training levies 233 transfers, agency agreements 238 transmission development programmes, electricity sector 137 transport systems 187 infrastructure 255–60 Tylos civilization 171 unincorporated joint ventures 220–21 US-Bahrain free trade agreement (FTA) 22, 29, 30–38, 50 enforcement 38 negotiation process 32–33 overview 33–37 technical assistance 37–38 utilities costs, residential property 181 utility model registration 248–49 variable capital companies 217–18 venture capital provision, Stratum 122 visas 176–77 visitor arrivals statistics 177, 177 Vodafone 57, 160, 161, 162 voting rights, shareholders’ 62–63 water sports facilities 174–75 wildlife reserves 174 WLL (limited liability companies) 215–16, 220 work permits 234 working environment 64–65 World Trade Organization (WTO) 57, 212, 221, 239 Zakah (Zakat) tax
229
Index of advertisers and sponsors Ahli United Bank Arab Bank Bahrain Financial Harbour Bahrain International Circuit Bahrain Monetary Agency
ix–xi xii–xiii i viii, 197 xiv–xv
Big On Group
196
Economic Development Board
xvi
Midal Cables
ii, 146
