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Bahrain: Bringing Innovation and Industrialization to Life

The Freest Economy in the Middle East is an Attractive Base for Accessing the GCC Market

12.11.2013 -

Bahrain had not been on the map of many investors from the chemical industry until December 2012 when German chemical giant BASF inaugurated a new plastics additives facility in the kingdom situated off the Saudi Arabian coast in the Arabian Gulf. But for international companies looking to access the trillion dollar market of the Gulf Cooperation Council (GCC) states - Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain - the country is an attractive base to set up business.

The Value Chain Gap

In the Gulf countries, the state-owned oil and gas companies constitute the beginning of the value chain by extracting natural resources. The first wave of downstream development began with additional state-owned companies moving into refining, petrochemical industry, and other basic industries. At the other end of the value chain there are the numerous family companies active in retail and trading. In between these two ends, there is a sizeable gap in the Gulf region's value chain due to the almost complete absence of a production or manufacturing industry beyond basic ones.

Given this gap in the value chain, Gulf countries are making significant efforts to achieve sustainable, long-term industrialization on the basis of science, research and technology. The mission is to bring innovation and industrialization to life.

Bahrain was the first Gulf nation to discover oil - and later the first to diversify its economy away from oil. Although oil and gas reserves are being depleted, the oil sector still accounts for about a quarter of the country's GDP of about $27 billion. But besides the oil and gas industry, today, the finance sector contributes to approximately 25% of the nation's GDP. Other sectors are thriving too, including the downstream sector, business support services, manufacturing, and logistics to name but a few.

Foreign Investment Flow

Bahrain witnessed significant foreign investment flow throughout 2012 and into 2013, with 40 international businesses from North America, Europe and Asia as well as the Middle East region setting up their operations in the Kingdom. This was mainly due to the direct outreach activities carried out by the Bahrain Economic Development Board (EDB).

The Bahrain EDB, a public agency with an overall responsibility for attracting inward investment into Bahrain, is focusing on target economic sectors such as manufacturing, logistics and transport services as well as other sub-sectors, in which the Kingdom offers significant strengths.

Commenting on the FDI flow, Kamal bin Ahmed, Minister of Transportation and acting chief executive of the EDB, said, "The increase in the number of foreign investors over the last year illustrates Bahrain's wide-ranging attractions; from the most skilled workforce in the region and liberal business environment to the low costs, competitive taxation and ready access to the GCC market".

The Kingdom's skilled bilingual local workforce and low cost of doing business mean that it is a natural home for firms looking to invest in the region, said the minister. In fact, Bahrain is highly interesting as a production location, especially for European investors, as it is not only extremely favorable in terms of production costs, compared with Eastern Europe, but also has the relevant sales markets.

Access to a Trillion Dollar Market

The smallest of the six member states of the Gulf Cooperation Council (GCC) is one of the best places from which to access this rapidly growing market for a number of reasons. It was the eighth most economically free nation in the world, according to the Economic Freedom of the World: 2013 Annual Report published by the Fraser Institute.

EDB chief executive Kamal bin Ahmed said: "Bahrain's ranking in the top ten freest economies in the world for the second year running is a testament to more than a decade of economic reforms that have been undertaken to improve prosperity in the Kingdom. The results of which have been strong economic growth, particularly in the non-oil economy, more jobs for Bahrainis and an open, attractive and supportive business environment from which companies can access the GCC market, worth in excess of $1.4 trillion."

Other recent reports have also highlighted Bahrain's economic strengths. Earlier this year, Bahrain was ranked first place in the Middle East and 12th place worldwide in the 2013 Wall Street Journal / Heritage Foundation Economic Freedom Index.

"Bahrain's reformed institutional framework and business infrastructure is increasingly gaining international recognition", underpinned Hassan Fakhro, Minister of Industry and Commerce of the Kingdom of Bahrain. He added: "The World Economic Forum 2011-2012 Global Competitiveness Report has placed Bahrain under the ultimate "Innovation-Driven" stage of development as defined by the WEF, along with most of the major member countries of the Organization for Economic Cooperation and Development (OECD).

Economic Vision 2030

Such a bright performance is bound to further expand, in fulfillment of Bahrain's ambitious Economic Vision 2030 of attaining a knowledge-based economy, enhanced innovation, productivity, competitiveness, human resource development, fairness and sustainability. Among the government's strategic initiatives is a drive to support private enterprise, in particular small and medium-sized businesses.

Bahrain's business fundamentals are strong and economic stability is secure. The Kingdom's business sector is already supported by the most productive national workforce in the GCC. Other aspects of the business environment have also been praised. The WEF's Global Competitive Report 2011-12 highlighted the Kingdom's stable macroeconomic environment, significant improvements in healthcare, education, training and labor market practices, together with the Kingdom's strong infrastructure.

The latter maximizes its strategic location as the gateway to the Gulf and has been boosted by new developments such as the Bahrain Logistics Zone (BLZ) - the region's first boutique value-added logistics area focusing on re-export and value-added activities - and the adjacent Khalifa Bin Salman port.

Liberal Business Environment

Bahrain provides a liberal business environment not only for small and middle private sector enterprises (SMEs). Overseas investors benefit from 100% foreign ownership for most categories of business with no restrictions on repatriation of capital, profits or dividends.
This was a major reason for BASF to choose Bahrain for its new plant, which is based on proprietary technology. "It was important for BASF, which issues more than 1,000 patents every year worldwide, to select a location which offers strong protection for intellectual property", said Frank Fasdernes, business management director for BASF's plastic additives business for Eastern Europe, Africa and Western Asia. "Because we were able to have 100% ownership of the Bahrain project we have been able to assume greater control over the patented technology which runs the plant," he continued.

The facility, which manufactures customer-specific antioxidant blends at the Bahrain International Investment Park (BIIP), an industrial zone located near the country's biggest seaport, is also a significant feather in the cap for the kingdom.

"Large manufacturing firms like BASF are playing an increasingly important role in our economy and will be a significant part of our plan to create sustainable long-term economic growth and high quality jobs", said Kamal bin Ahmed of the Bahrain EDB.

Strong Economic Fundamentals

Since 2002 Bahrain has enjoyed an annual GDP growth of over 5%. Largely unaffected by the crisis of 2008/2009, growth has continued in 2010 at 4.5%. However, the beginning of the Arab uprisings has had an adverse effect on the rise in national income and growth rates decreased significantly in 2011. But the Gulf's smallest economy is recovering in 2013. In its September 2013 newsletter the central bank forecast GDP growth of 5.3% for the year - against 3.4% in 2012 - before predicting this to ease to 4.2% and 4.0 % in 2014 and 2015, respectively.

Due to the low reserves in natural resources, Bahrain is under high pressure to diversify its economy. But simmering political tensions and street protests, occasionally violent, have led some observers to question the ‘business-friendly' credentials of the kingdom touted by the Bahrain EDB prior to 2011's unrest. BASF executives, however, insist that the competitive advantages which led the company to consider the kingdom for its investment are unchanged.
"To get a world-leading multinational like BASF to invest in a country, that country must do many things right," explained Harald Kroll, BASF's Dubai-based regional managing director. "You only invest if you can be sure of a long-term safe investment," he added.

Both BASF executives make the point that the engagement with the local authorities, from the industry and commerce ministry to the EDB and BIIP management, left a positive and lasting impression. "The end result is that we were able to deliver a world-scale plant on time, despite an ambitious development timeframe, and are ready to provide regional customers with a more flexible local supply with shorter delivery lead times," said Fasdernes.

The Bahrain plant is commissioned against a healthy market backdrop, says Kroll. BASF employs more than 750 people in the region, and the new plant provides skilled employment for a number of Bahrainis. "It is always BASF's goal to provide employment for local citizens wherever we operate, and in Bahrain 70% of the plant workforce is local. In fact, good quality labor availability was another important factor in choosing Bahrain as an investment location," says Kroll.

Well-Educated Workforce

The national agency that is in charge of developing the skills of Bahraini citizens is called Tamkeen. The initiative also tasked with supporting SMEs is one of the cornerstones of Bahrain's national reform initiatives and the Bahrain Economic Vision 2030.

Khalid Al-Amin, board member of Tamkeen and of the Bahrain Chamber of Commerce and Industry explained that the government-launched initiative has made significant progress since its establishment in 2006 in providing high-quality staff for investors such as Kraft Foods, General Electric, the Indian polyester company JBF or BASF. Since international investors create jobs for local citizens, he "would like to see more multinationals investing in Bahrain."
Liberalization in the muslim country has not only enhanced the business environment for foreign investors but has also created equal opportunities for women. In Bahrain, it is not unusual to see females in leading positions in the economy. "In fact, women dominate a lot of sectors", says Khalid Al-Amin.

"One of the key competitive advantages in this part of the world is the growing young population, and so investing in human capital will be critical for the sustained expansion of the non-oil economy", said Jarmo Kotilaine, Chief Economist at the EDB. Bahrain enjoys an established track record of educational reform and liberalization. In fact, the Kingdom has one of the best educated and most diversified workforces in the region, with Bahrainis active in all sectors of the economy."

International Investment Park

Bahrain, along with the rest of the Gulf, continues to rapidly expand. One of the major business / industrial projects in the country is the Bahrain International Investment Park (BIIP).
BIIP is a landmark development in Bahrain positioned as a location for high-quality foreign direct investment and export-orientated domestic projects. In July, Industry and Commerce Minister Hassan Fakhro announced record investment results at BIIP for the first half year 2013. Sixteen new investment projects were approved bringing up to 96 companies now planning to build new facilities at the park.

The park is designed to attract value-added projects from local, regional and international companies looking to develop manufacturing or international services operations. The 247 hectare business site is divided into 6 zones, each zone targeting a different sector such as services and knowledge-based activities, high-tech manufacturing and assembly or process industry. The park offers unique incentives including 100% foreign ownership of companies; 0% tax with a ten-year guarantee; special Customs services; no recruitment restrictions and dedicated assistance with all corporate and human resource formalities. Quality facilities, offices and factory units are offered with long leases, and competitive land rentals in an environment that is professionally zoned, landscaped and managed.

BIIP is situated in a superb location with excellent connectivity and access to both the Bahrain International Airport and the new Shaikh Khalifa Sea Port. The park enjoys direct motorway access to Saudi Arabia via the 25 km Saudi-Bahrain King Fahd Causeway and will enjoy the same connectivity to Qatar via the Qatar-Bahrain Friendship Bridge after its completion in a few years.

Besides chemical manufacturing and formulation projects from a wide range of sectors have been approved for the park including food products, medical technology, household products, electronics devices, and packaging materials.

Moving forward, Bahrain is committed to sustaining and strengthening its core business fundamentals: a highly skilled workforce, stable and transparent regulation, an open business environment and sustainable growth, offering a vibrant market and attractive base for accessing the wider GCC market.