Bahrain attracting an increasing flow of FDI with investor-friendly policies

As part of the kingdom’s long-term development strategy, private sector investment and innovation is set to play a key role in Bahrain’s future prosperity. The country has a long history of trade and has created an attractive environment for companies wishing to invest and establish a base from which to do business in the Middle East and beyond.

The Bahrain Economic Development Board (EDB), which is responsible for facilitating foreign direct investment (FDI) in the kingdom, noted a brisk upturn in activity in 2013. Vivian Jamal, the executive director of business development at the EDB, listed the attractions for international companies as “competitive taxation, clear regulation, the most highly skilled workforce in the region and unrivalled access to the fast-growing $1.6trn Gulf market”. According to Jamal, the influx of new business to the country will boost economic growth. “Foreign investment is a key driver of growth and is providing more and better jobs for Bahrainis. Targeting international investors will be a continued focus for the EDB in 2014.”

The UN Conference on Trade and Development’s “World Investment Report 2014”, which was released in June 2014, put FDI flows into Bahrain at $989m in 2013, up 11% from $891m in 2012 and outpacing global FDI flows, which increased by 9%.

In The Rankings

The kingdom has long enjoyed favourable rankings in comparative international assessments of business conditions, ranking first in the MENA region and 13th in the world in the Heritage Foundation’s 2014 Index of Economic Freedom. According to the report, “Bahrain continues to be a financial hub for dynamic economic activity with high levels of trade and investment, bolstered by a competitive and efficient regulatory environment.” Bahrain was also ranked eighth in the world in terms of economic freedom by the 2013 Fraser Institute Economic Freedom of the World Index.

However, the country slipped in the World Economic Forum’s “Global Competitiveness Report”, from 35th out of 144 countries in 2012-13, to 43rd out of 148 countries in 2013-14 and 44th in 2014-15. Bahrain’s rankings are somewhat constrained by its size, which, to a certain extent, puts a limit on its scores for the scale of its internal market and the number of world-class research institutions. By contrast, the kingdom received high scores in terms of its macroeconomic environment and standards of health, primary education, higher education and training.

Jarmo Kotilaine, chief economist of economic planning and development at the EDB, explained Bahrain’s value proposition. “You can set up a company here and control it fully. That means it is a GCC company, which can operate in the broader region, and the company can benefit from the sustained growth in that region.”

Regional Base

For international courier company DHL – which has been established in the Middle East for 30 years – Bahrain is a key regional hub, and the company has benefitted from its location, as well as the locals it employs. “All DHL drivers and couriers here are Bahraini, and as a private sector company, we employ 1400 people and our regional distribution centre is here,” Emad El Hajjami, the commercial manager for Bahrain at DHL, told OBG.

As GCC citizens that are bilingual in Arabic and English, these Bahraini drivers are able to ensure express delivery services to Saudi Arabia using the King Fahd Causeway and through DHL’s own Dammam Gateway Customs-clearance facility. The company also operates a nightly air-freight service to Riyadh from Manama using its own aircraft. According to the EDB, the 25-km King Fahd Causeway is the fastest of the 35 road entry points into Saudi Arabia, and companies in Bahrain are able to capitalise on both this ease of access and the strong local talent.

The Japanese engineering firm Yokogawa established its Middle East headquarters in Bahrain in 1990 and employs 100 Bahraini engineers. “Yokogawa serves the Saudi market in the Eastern Province and manages work there on a project basis,” Jamal told OBG. “They utilise Bahraini engineers that can easily travel with no visa requirements within the GCC.”

New Arrivals

According to the EDB, 35 international firms established themselves in Bahrain in 2013, which will help to create more than 800 jobs over three years in sectors such as finance, logistics, health care and IT. The new companies include the Japanese air freight forwarding business Kintetsu World Express; Swiss private banking group Julius Baer, which set up local operations to provide wealth management and private banking services; and Cigna SAICO, a joint venture between US-based health services firm Cigna and the Saudi Arabian Insurance Company.

In addition, China Middle East Investment and Trade Promotion Centre (Chinamex) is investing in Bahrain’s $3.2bn mixed-use Diyar Al Muharraq development. Chinamex will build Dragon City, a wholesale and discount retail park that will lease space to Chinese and Bahraini businesses. Dragon City hopes to have around 1m-2m visitors per year and plans to target both Chinese tourists and shoppers in the GCC region.

Trusted Regulations

With a track record in international finance dating back to the 1970s and a long tradition of clear regulation, Bahrain remains an attractive destination for firms in the financial sector. When Takaud Savings & Pensions was established as a new business with ambitions to target the Middle East region, one of the attractions was its central bank. “I give a big, big plus to the regulator; they are flexible and what they provide is added value to businesses,” Eric van Biesen, chief financial officer of Takaud, told OBG. “They have a wider view and they will suggest alternatives if they see a problem. If you want to do something, you can work with these regulators.”

Skilled Workforce

With over 60% of Bahrainis working in the private sector, the kingdom also offers businesses investing in the country an experienced and skilled workforce. Tamkeen, a government fund aimed at developing the local labour pool, provides vocational training programmes, while the Bahrain Institute of Banking and Finance offers education and training in banking, finance, Islamic finance and insurance to school leavers, graduates and professionals.

Trade Agreements

Bahrain has had a free trade agreement (FTA) with the US since 2006 and is one of just 12 countries in the world to have a unilateral agreement. While this has helped to encourage imports from the US, it also presents an opportunity for companies to establish a business in Bahrain in order to take advantage of the arrangement. For example, Belgium-based Bell Racing, a leading manufacturer of motorsport helmets, moved its plant to Bahrain, where it also runs a research and development centre. West Point Textiles also has a factory in Bahrain that spins, weaves and dyes over 50m yards of bedding textiles each year. It supplies stores in the US, including Ralph Lauren and Walmart.

The FTA also provides an incentive for US businesses to trade with Bahrain and the GCC. “Over the past few months there has been a marked increase in inquiries and interest in bringing products and brands into Bahrain,” Myrna Al Mehaiza, a commercial specialist at the US embassy in Bahrain, told OBG. “They include companies with an interest in medical, health care, infrastructure and manufacturing. The FTA with the US makes it very attractive.”

The GCC, of which the kingdom is a member, is negotiating an FTA with the EU as well. The bloc has also been in FTA talks with China since 2004, with several agreements and private deals signed between China and Gulf states in 2013. In October 2014, during a Bahrain business delegation’s visit to China and Hong Kong, 13 memoranda of understanding were signed with Chinese businesses and trade organisations to strengthen economic and trade ties. This followed on a February 2014 meeting between Bahrain and India that resulted in three agreements aimed at boosting cooperation and economic engagement.

Tax Conditions

In its “Bahrain Highlights 2014” international tax report, the consultancy Deloitte noted that while companies in oil, gas or petroleum are taxed, there is no corporation tax for most companies in the kingdom. Income tax is levied on the profits of oil companies, while corporate income tax is only levied on oil, gas and petroleum firms engaged in exploration, production and engineering.

There is no tax on dividends, capital gains or foreign tax credit for all other companies. Furthermore, trading losses may be carried forward indefinitely. There is also no capital duty, payroll tax or real property tax. For Bahraini employees, the employer’s social insurance contribution is 12%, which covers old age, disability and unemployment. Meanwhile, for non-Bahrainis, the employer’s social insurance contribution is 3%, which covers employment injuries.

A training levy of 1% is placed on Bahraini employees’ salaries, while a 3% levy on the salaries of expatriate employees is imposed on companies with more than 50 employees that do not provide training for their workers. A 10% municipal tax is also charged on leased offices and residences rented to expatriates.