DETRACTIONS FROM COMPETITIVENESS: BAHRAIN ON THE

UNCLAS SECTION 01 OF 02 MANAMA 000511

SIPDIS

DEPT FOR EB/TPP/MTA, EB/TPP/BTA AND NEA/ARP
DEPT PASS USTR JBUNTIN
COMMERCE FOR CLOUSTAUNAU

E.O. 12958: N/A
TAGS: ETRD ECON BA
SUBJECT: DETRACTIONS FROM COMPETITIVENESS: BAHRAIN ON THE
VERGE OF FTA

REF: A. MANAMA 496


B. 2003 COUNTRY COMMERCIAL GUIDE: BAHRAIN


1. SUMMARY AND COMMENT: Through the TIFA and FTA negotiation
processes, Bahrain has been making great strides to improve
its business and investment climate, improving regulatory
standards in banking and finance and establishing new laws to
protect IPR and enhance transparency. Nonetheless, Bahrain
is not yet an ideal destination for business investment: a
complex business formation procedure, difficulty in obtaining
work visas for non-Bahrainis, and relative scarcity of land,
water and natural gas hinder investment. If Bahrain can
address these problems, it will benefit from the
duty-advantages and investment-climate enhancements of our
bilateral FTA. END SUMMARY AND COMMENT.

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BUSINESS REGISTRATION RED TAPE
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2. The Ministry of Commerce proudly launched electronic
company registration over a year ago. And while this part of
the registration process is transparent, registering a
company requires industry-specific pre-approvals and in some
cases, also post-registration approvals from other ministries
before business can begin. Unfortunately, acquiring these
approvals is not always transparent and generally must be
done in person. This adds time and substantial inconvenience
to the registration process and discourages businesses from
establishing here instead of elsewhere in the Gulf. (See
Country Commercial Guide for a flow-chart outlining the
company registration process).

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BAHRAINIZATION
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3. "Bahrainization"--industry-specific quotas on the
percentage of Bahraini citizens a company employs--is a topic
that can heat up any discussion among members of the business
community in Bahrain. A salon owner bemoans lost business
and falling profits because she has to pay her Thai
hairstylists to stay home for a week every month or so while
she secures new work visas. A construction equipment sales
manager complains that he has to fight the Labor Ministry and
then wait months to get a visa to hire an Egyptian marketing
director. The fundamental complaint among businesses is the
same: when qualified Bahraini workers are unavailable, the
government nevertheless makes it difficult to hire from
outside the country. This policy is designed to reduce
unemployment among Bahraini nationals (officially 15 percent)
by putting the onus on companies to hire local staff. The
problem is that the quotas are not linked to the availability
of qualified Bahraini workers in a given industry, and it is
up to businesses to rectify the mismatch. To circumvent this
broken system, many companies hire Bahrainis on the books
only, because it is worth it to them to pay a few extra
employees to be able to hire skilled foreigners.
Bahrainization is a highly charged political issue, pitting
even socially-minded businessmen against the rolls of
unemployed, but a fix needs to be found.

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SCARCE NATURAL RESOURCES
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4. Land: Scarcity of land in Bahrain is a real impediment
to attracting new industry to the small island nation of
Bahrain, and hinders expansion of those industries already
situated here, a Shura council member and businessman told
ECONOFF April 10. A Bahrain Financial Harbor board member
told ECONOFF April 10 that land prices in Bahrain have gone
so high that it is now actually cheaper to create "reclaimed"
land by dredging, as the Financial Harbor project is doing,
than to purchase existing parcels. Bahrain Business
Incubator Center chairman told ECONOFF March 20 that the
government of Bahrain is able to help its incubatees rent
industrially zoned land at reasonable prices in order to
establish independently, but this bonus can last only as long
as the Government still has land available. In addition,
non-GCC citizens can only purchase land in designated areas
of the island (see Country Commercial Guide).


5. Power and water: The Government of Bahrain currently
subsidizes consumer cost of electricity 30 percent and water
55-60 percent. Bahrain's power and water outputs meet
current demand, but are insufficient to meet future needs or
to support anticipated industrial growth (see reftel). An
Ernst and Young study commissioned in 2003 indicated that
Bahrain would be in urgent need of a new power generating
facility by 2006. Fresh water is scarce on this desert
island, and the underground aquifer that currently supplies
approximately one third of Bahrain's water, will not be able
to produce more, so additional desalinization plants
(typically coupled with power plants) will be necessary.
Bahrain will need natural gas, too. Natural gas fueling power
generating facilities now is a by-product of refining on the
island. However, this supply is too limited. Therefore
Bahrain has begun negotiations with Qatar over the
construction of a gas pipeline and a long-term purchasing
agreement. ECONOFF learned April 5 that this deal was not
moving forward as quickly as the Bahrainis had hoped. Until
a steady gas supply can be secured, concerns over power and
water sufficiencies will continue.
FORD