Looking to the future: Still maintaining its competitive edge, the country is opening up to new opportunities

With a long history as a pioneer in the Gulf region, Bahrain was the first country to discover oil in the 1930s. It was also the first to face the issue of declining reserves, replacing reliance on hydrocarbons by developing one of the first heavy industries in the region, Aluminium Bahrain (Alba), in the mid-1960s. During the 1970s and 1980s the country saw continual growth in industrial output, building up a base in petrochemicals and metals. While other Gulf states with greater oil and gas reserves are now starting to follow in Bahrain’s wake, with large aluminium smelter and petrochemicals projects springing up across the lower Gulf, the country has fought hard to retain its edge.

GOOD REPUTATION: The country operates a very liberal regime for doing business, coming in at 42 in the World Bank’s “Doing Business 2013” report. Setting up a company is relatively easy, taking just nine days, according to the World Bank. Regionally, Bahrain’s financial system is extremely well regarded, with a regulatory environment going back over 40 years, and this has helped Bahrain emerge as a regional financial centre. The country is actively seeking out foreign investment, and is signatory to both the Greater Arab Free Trade Agreement area and in 2006 became the first country on the Arabian Peninsula to sign a free trade agreement (FTA) with the US. Bahrain is a member of the GCC, which is in the process of negotiating a bloc-to-bloc FTA with the EU.

The Heritage Foundation ranked the country number one in the MENA region in its 2012 Index of Economic Freedom, while Canada’s Fraser Institute ranked Bahrain in joint first place (with the UAE) in its 2012 “Economic Freedom in the Arab World” report. As a small, open economy, exporting is a necessity, not a luxury, for Bahraini industry, which is beginning to turn to greater specialisation to compete in an ever more crowded market. Waleed Al Kooheji, the CEO of the Gulf Rubber Factory, told OBG, “It is important that Bahraini companies understand the opportunity that the US FTA presents us. The American market is extensive, and we haven’t taken proper advantage of it.”

NUMBERS: According to the latest statistics available from the Bahraini government’s Central Informatics Organisation, over the first half of 2012, manufacturing accounted for some 19.9% of GDP, compared to 16.2% in 2011 and 14.3% in 2010. In absolute terms, the value added by manufacturing was worth BD532.7m ($1.4bn) in the first half of 2012, compared to BD444m ($1.16bn) in 2011. In terms of exports, these represented 81% of the value of total GDP in 2009, compared to 97% of GDP in 2008, according to the latest figures available from the World Bank. In 2010 principal industrial exports were non-crude petroleum products and aluminium products, and the main export destinations were Saudi Arabia, Qatar, India, the UAE and the US, according to figures from the UN Comtrade database. The main imports were crude petroleum, iron ore and motor cars. In 2011 the country attracted $781m in foreign direct investment (FDI) compared to $156m in 2010, according to a report by the UN Conference on Trade and Development.

REGULATORY ENVIRONMENT: The Ministry of Industry and Commerce is the main regulator for the sector, and is responsible for registration, licensing and trade policy, as well as industrial standards. The Economic Development Board (EDB) is responsible for investment promotion, as well as drawing up the country’s overall development plan, known as Vision 2030, which is structured around three main areas: the economic and business environment, the labour market and the education system. In terms of industry, Vision 2030 sees Bahrain becoming a centre for high-valued-added manufacturing, leveraging geographical and regulatory advantages, as well as its low-cost base compared to many other countries in the region, and good connectivity. Since 2006, a state holding company, Mumtalakat, has acted to expand the non-oil and gas assets in state hands, and currently owns subsidiaries across a range of businesses, in fields from transport to manufacturing. In 2011 it reported revenues of BD1.29bn ($3.4bn), a net loss of a little over BD270m ($710m), and assets worth BD4.2bn ($11.05bn). This compares with respective figures of BD1.19bn ($3.13bn), BD234m ($615m) and BD5.07bn ($13.3bn) for 2010.

CEMENT: The government retains a few strategic industries designed to produce primarily for the local market. One is Bahrain Flour Mills, located at the old Mina Salman Port. Another is Falcon Cement Company, which opened in 2009 and is the island’s largest cement producer. Traditionally, Bahrain imported a great deal of its cement needs from Saudi Arabia, but export restrictions and delays led the country to seek to upgrade its domestic cement base. Falcon has the capacity to produce 950 tonnes per day of cement, and is in the process of completing an expansion project to bring capacity up to 3400 tonnes per day, which is due for completion in 2013. Other cement producers in the country include Star Cement.

ALUMINIUM: The single-biggest industrial facility in Bahrain continues to be Alba. In 2012 the company produced around 890,200 tonnes of aluminium, compared to 881,000 tonnes 2011. Alba is a joint venture between the Saudi Arabian Basic Industries Corporation (SABIC), which holds around 20.62%, and Mumtalakat, through which the Bahraini government holds a 69.38% stake. Another 10% of the company is floated on the Bahrain Bourse. In 2011 the company reported net profits of $564m on the back of turnover of $2.3bn. This compares to $1.9bn of turnover in 2010 and $368m net profits, a rise of 53%. However, in 2012 net profits dropped to $257m, and turnover dropped back to $1.9bn. In 2010 Bahrain exported 157,000 tonnes of standard aluminium ingots, 288,000 tonnes of extrusion billets and 101,000 tonnes of aluminium coils.

Alba’s main customers are either in the Saudi market or downstream firms in Bahrain. In order to meet demand, Alba is planning a sixth aluminium train at its main site, near Askar on the island’s east coast. Upon completion in 2015, this will produce an extra 400,000 tonnes per annum (tpa), with investment in the project estimated at around $2.5bn.

In terms of the downstream segment, notable producers in the country include Gulf Aluminium Rolling Mill Company, a joint venture between Mumtalakat (37.29%), SABIC (30.4%), the Industrial Bank of Kuwait (16.98%), Gulf Investment Corporation (5.9%), the Iraqi government (4.71%), the Sultanate of Oman and the Qatar Holding Company (2.36% each). Current production capacity is 165,000 tpa. Midal Cables was established in 1977 as a joint venture between Intersteel Bahrain and Australia’s Olex Cables, with Saudi Cables entering later in 1984. Midal produces aluminium rods and wires, alloyed rod and wires, extruded products, and in partnership with local firm Al Zayani Investment and German company BBS Kraftfahrzeugtechnik owns AluWheel, which makes aluminium wheel casings. In addition to its Bahrain facilities, Midal operates factories in Turkey and Australia. The Bahrain Aluminium Extrusion Company was founded in 1977 and produces extruded products (such as door and window frames) for use in the construction industry. In 2011 it reported sales of BD25.7m ($67.6m), and profits of BD1.03m ($2.71m). Bahrain Alloys Manufacturing Company, which was set up in 1996, supplies alloys to the automotive and die casting industries. Its plant next to the Alba smelter has an annual capacity of 25,000 tonnes of foundry alloys and 5000 tonnes of master alloys. According to the Gulf Aluminium Council, the region’s share of total production is set to rise from around 2m tonnes currently to about 10m tonnes by 2020. However, Alba’s status as a long-established producer and reputation among existing downstream clients as a reliable supplier mean it is likely to take the competition in its stride.

STEEL: A major new steel plant was due to open in Bahrain in early 2013. SULB is the brand name of United Steel Company, itself a joint venture between Kuwait’s steel holding company Foulath and Japan’s Yamato Kogyo. The plant, which is located at Hidd, near Khalifa bin Salman Port (KBSP), the country’s main export terminal, features a 1.5m-tpa direct reduced iron plant, a melt shop with a capacity of 1m tpa and two rolling mills with a combined capacity of 1.2m tpa. Total investment in the SULB mill is $1.4bn, and according to the company, upon completion will replace approximately 14% of current imports of medium and heavy steel beams and structural sections into the Middle Eastern market. SULB represents a step forward for economic diversification in Bahrain, as the plant has the capacity to produce a broader range of products, such as heavy and medium-to-large H-beams and structural sections, rather than just rebars. Since the downturn in the regional property market, rebar prices have fallen, at times dipping below the price of steel billets, which has caused difficulties for many steel producers in the Gulf, and led to a number of production lines being mothballed. In Bahrain itself, UNIROL, a local steel rolling plant, produces around 200,000 tpa of rebar steel, of which around 50% is exported, mostly to Saudi Arabia.

PETROCHEMICALS: In the petrochemicals sector, main player Gulf Petrochemicals Industries Corporation (GPIC) is a joint venture between Bahrain, which holds its share through the National Oil and Gas Authority (NOGA), SABIC and Kuwait’s Petrochemical Industries Company, each of which owns a third of the company. GPIC’s factories at Sitra in 2011 produced 1.58m tonnes of ammonia, methanol and urea, and feature the Middle East’s first carbon capture facility, which can recover up to 450 tonnes of CO a day. GPIC, which was founded in 1979, reported profits of $265m in 2011, an increase of $138m over 2010, though the company’s profits took a slight dip to $212m in 2012. In mid-2012 GPIC launched an expansion project aimed at tripling its output to 1.5m tpa by constructing a new ammonia plant, granular urea plant and urea granulation unit, as well as utilities, with total investment in the expansion in the region of $1.5bn.

In addition to GPIC, plastics is another growing industry. In the fibreglass segment, Bahrain Fibreglass, Abahsain Fibreglass and German firm Lauscha Fibre International are all significant operators, while local group Al Zayani Polymers opened a factory in 2011 to produce foam and polystyrene for the packaging and agricultural industries. In 2012 Indian group JBF Industries is due to open a 90,000-tpa polyester fibre plant in early 2013, with total investment of $200m. German chemicals giant BASF opened a 16,000-tpa factory to produce customer-specific blend antioxidants for use in plastics manufacture. As with the metal sector, the bulk of production goes to export, with the main market being Saudi Arabia. According to the Gulf Petrochemicals and Chemicals Association, the petrochemicals industry in the GCC is worth $74bn.

SHIPBUILDING: In addition to producing basic and semi-finished products, Bahrain is also home to a number of more specialised industries. Of these, one of the oldest is the Arab Shipbuilding and Repair Yard (ASRY), founded in 1977. The company is owned by the seven members of the Organisation of Arab Petroleum Exporting Countries, and around 80% of the yard’s business is regional, with the remaining 20% coming from international players. By late 2013, ASRY is due to complete a five-year investment programme worth $188m to increase berthing space at the yard, converting it into a multi-service onshore facility. Given its position as one of the longest established yards in the Gulf, ASRY has been able to keep business coming where other yards have struggled, as shipping firms cut maintenance to a bare minimum on the back of the global economic slowdown, but at the cost of lowering rates, and therefore profitability. As such, the company is looking to diversify into the lucrative offshore oil installation market as a way to maintain revenue. ASRY has also recently created an energy division in partnership with UK firm Centrax to offer barge-mounted power stations to the offshore industry. The General Organisation of Sea Ports is in the process of dredging a new approach channel to KBSP around 48 km long, which should help secure future business for the yard.

FOOD PROCESSING: Another growing industry with high added value is food processing. US food giant Kraft set up in Bahrain in 2007, following the FTA between the two countries. Presently, its factories on the island produce 60,000 tonnes of cheese, other dairy products and powdered drinks, of which over 60% is exported to Saudi Arabia. Local firm Arabian Sugar is in the process of setting up a nearly 600,000-tpa sugar mill in Bahrain, one of only three in the GCC. The project is due to be complete by July 2013 and the company puts total investment at around $150m.

INDUSTRIAL ZONES: In order to stimulate greater investment, the Salman Industrial City (SIC), which forms a key plank of Vision 2030, officially opened in 2010. SIC is essentially a set of three contiguous industrial areas developed around KBSP. The oldest is the Hidd Industrial Area (HIA), developed in 1987 on the island of the same name off the north-east of the island of Bahrain. HIA covers around 7.9m sq metres and is home to some 30 factories, producing commodities such as furniture, textiles and engineering products. As part of the development blueprint, HIA was joined in 2007 by the Bahrain International Investment Park (BIIP), an industrial park covering 247 ha. The park was ranked seventh-best business park in the MENA region by fDi Intelligence in 2012. The first tenant was Kraft in 2007, and 2012 was arguably the park’s best ever year, with 36 new projects taking up residence. The park looks set for a good year in 2013 as well, with three projects due to open in the latter half of that year worth $500m. Other notable factories include BASF, RMA Pipeline Equipment and MTQ Oilfield Services – the latter two factories providing pipe and repair services.

As well as larger factories, the Baytik Industrial Oasis (BIO), itself part of the BIIP, offers pre-built industrial units for small business and industrial workshops. As of January 2013, the BIIP, which is a subsidiary of Kuwait Finance House, claimed a 75% occupancy rate, and estimated total investment in the park once it reaches completion will amount to over $1bn.

The Bahrain Investment Wharf (BIW) is another business park, albeit with a slightly different focus. Developed by Tameer, a sharia-compliant real estate group, the BIW consists of 1.7m sq metres of industrial land reclaimed from the sea. Tameer, rather than the Ministry of Municipalities Affairs and Urban Planning, bears the responsibility for installing utilities, roads and the like, and offers the land ready for construction. Although Tameer charges an annual management fee, the land is offered for sale rather than for rent as the whole complex will revert to the government in 50 years in a build-operate-transfer land contract between the state and Tameer. The BIW is geared primarily toward small manufacturing and logistics companies focused on the domestic Bahraini market and neighbouring GCC countries, notably Saudi Arabia. So far, the park has attracted investors interested in office and workshop space, the new King Hamad University Hospital and BIW Labour Accommodation, which is owned by Tameer and is a dedicated 120,000-sq-metre development that will house up to 20,000 expatriate workers.

Just as BIO has targeted small manufacturers at BIIP, at BIW Majaal, a subsidiary of First Bahrain, has developed a series of light industrial units that offer flexible space to manufacturing workshops, logistics firms and storage companies, available in units of 250 sq metres and upwards. Majaal boasts a 100% occupancy rate and has brought forward its second phase, which doubles the original 12,000 sq metres. So far, the BIW has created around 5000 jobs, in addition to around 6000 construction jobs during its development, and investment so far is around $1.6bn.

All SIC industrial areas are “onshore” as regards taxation and so forth; however, next to the BIW, the Bahrain Logistics Zone is a dedicated offshore zone aimed at meeting the needs of re-exporting businesses and logistics firms. In terms of incentives, all SIC parks benefit from Bahrain’s straightforward regulations. Unlike many other countries in the region, Bahrain allows 100% foreign ownership and control and does not oblige foreign companies to set up a partnership or joint venture with a local sponsor when doing business outside of a free zone. Moreover, 100% repatriation of both profits and capital are possible. The country currently does not charge any corporate tax, and even if this should change in the future, investors into the SIC zones are guaranteed at least a 10-year tax holiday. Moreover, connectivity is a key sales point for the SIC zones, which lie between the port and airport, and are just 25 minutes by motorway from the Saudi border.

NEW ECONOMIC CITY: The rapid rate at which the SIC has filled up demonstrates both the keen appetite among foreign industrial groups to invest in Bahrain, and the need for industrial land in the islands. The population is projected to rise from 1.1m people in 2008 to 2m in 2030, with an extra 80,000 Bahraini nationals set to enter the labour force by 2020, according to the EDB. Moreover, both population and economic growth in the Gulf region as a whole indicate that demand for industrial goods is set to soar. As such, in 2011 the government announced it was considering developing a new economic city to meet this need. The new centre would be built on 95 sq km of reclaimed land, at a cost of $16bn, and would generate up to $13bn and 240,000 jobs for the local economy by 2040. As with the SIC, it will aim to attract local and foreign investment alike, and would integrate with the planned rail and metro networks. As of yet, however, the scheme remains very much at the drawing board stage.

SMES: Another aspect of Bahraini industry highlighted by the success of Majaal and BIO is the need for greater support for small and medium-sized enterprises (SMEs). In any advanced economy, SMEs tend to be major providers of jobs and incubators for future innovation. In common with many other Gulf countries, much of the younger generation has grown up with a preference for work in the public sector, and when Bahraini entrepreneurs do set up a business, it is often in some kind of service or commercial field, since this often appears less complicated and the return on investment tends to come more quickly. The government’s focus has largely been on large capital-intensive projects rather than micro-manufacturing, components and such. This is understandable given that until the development of the country’s financial sector, only the government had the wherewithal to tackle such projects. Over the long term, Vision 2030 recognises that there is a need to refocus government attention on developing a vibrant SME manufacturing sector.

NEW INDUSTRIAL MODEL: Indeed, if Bahrain is to succeed in realising Vision 2030, which envisages the development of a manufacturing sector producing high-value-added products, this may entail reorienting its industrial business model. However, competition in local industry is based largely on low prices. To keep costs low, firms often rely on imported workers, often from Asia, who are willing to work for wages lower than what Bahraini nationals can currently command in the labour market. Over the long term, this model does little to develop the country sustainably or to provide jobs for the local population. Although there has long been awareness of this conundrum in both government circles and the private sector, the current political situation has served to refocus public attention on finding ways to help smaller companies make the leap to being able to compete on quality and knowledge, as opposed to price and thus provide sustainable and well-remunerated employment for Bahrainis.

SKILLS: As such, there is a renewed focus on developing skills, especially technical skills, where historically the Bahraini education system has been somewhat lacking. One of the most successful programmes has been Tamkeen. Founded in 2006, Tamkeen (which takes its name from the Arabic verb “to enable”) charges employers a monthly levy of BD10 ($26.31) on the salary of every expatriate worker in Bahrain and uses this pot of money to offer training courses to Bahrainis. Both the unemployed and those already in work qualify for these programmes, which depending on their length and nature also offer certification. Employers across a broad spectrum of industries in Bahrain report that they have been pleasantly surprised by the effectiveness of Tamkeen’s programmes.

Over the long term, there is a need to reform the national education system to reinforce skills, and to ensure that graduates come out with a real understanding of their subject, rather than just a certificate. Although this is very much a long-term project, the EDB has identified educational reform as one of the three pillars for the success of Bahrain’s future, and in partnership with the Ministry of Education, is working on the issue. For the short term, the Bahrain Chamber of Commerce and Industry opened the SME Development and Support Centre, in January 2013, charged with offering SMEs advice and information, as well as the opportunity to network.

SUPPLY CHAINS: Another development that could give a fillip to SMEs and deliver higher added value is greater integration within the regional supply chain, particularly in tandem with the development of more downstream industries in the country. SMEs are particularly well placed to become providers of things like components and finishings to basic and large-scale downstream industries. A good example might be automobile manufacturing, where small firms specialising in a small number of highly specific products and dealing with a number of suppliers has economic benefits and provides jobs in places such as the UK’s West Midlands or the north of Italy. In this regard, the development of industry in Saudi Arabia’s Eastern Province, in particular the development of an aluminium industry at Ras Al Zour, roughly 150 km from Bahrain, offers opportunities for subcontracting and making more finished products. As greater integration between the GCC economies increases, so will opportunities.

FINANCE: As with many other sectors, industry in Bahrain has found access to finance tighter in recent years as banks moved to rebuild their reserves and generally took a cautious approach in the wake of the credit crisis. This was compounded by the fact that at the height of the Gulf real estate boom of the mid-2000s, projects in areas such as construction and tourism appeared to give higher returns for much lower risk. However, the events of 2011, when property and services saw large contractions but industry, being largely export-oriented, continued to grow, may have helped to foster a new mindset in the financial sector, which sees industry as a longer-term, more stable investment. Anmar Al Arrayed, managing director of the Arabian Sugar Company, told OBG, “A well-financed, government-owned bank could also generate significant stimulus for industrial development in Bahrain.”

Although banks are slowly gaining confidence, large industrial concerns continue to find it easier to obtain credit than SMEs. One area where banks can be of assistance to smaller firms, apart from advancing credit lines, is in the development of greater corporate governance. Given that the banks have their own internal compliance procedures, a number of them have shied away from SME lending as overly risky. Over the long term, however, the insistence by banks on creating strong corporate governance and lines of accountability is essential for small firms to move away from competing on price to competing on value, and thus help a new generation of manufacturers to emerge.

GAS AVAILABILITY & PRICING: Over the shorter term, a greater challenge for Bahraini industries is the availability and the price of gas for industrial purposes. Being less fortunate than some other Gulf countries in terms of gas reserves, Bahrain has long depended on help from its neighbours to provide gas for industry, with the second train at Alba, for instance, being supplied from Saudi Arabia at favourable rates. Over the past decade, however, many other Gulf states have set up aluminium and petrochemicals industries, and possess enough gas to supply them at prices far below what Bahrain is able to offer (although industrial gas prices across the Gulf are not uniformly lower than in Bahrain).

As a result of this increase in regional demand, Bahrain has faced difficulty in securing the necessary volume of gas supplies for its industrial expansion, and at competitive prices. One option is to build a liquefied natural gas (LNG) terminal at KBSP. Although LNG is a little more expensive than gas transported by pipeline, this would have the advantage of allowing Bahrain to procure gas from a number of suppliers, thus building in resilience. Possible sources of LNG include Russia, Norway and other producers in Eastern Europe. If the LNG terminal goes ahead, it is expected to be complete by 2015, and to have the capacity to handle imports of 400m cu feet a day. The terminal would cost between $300m and $1bn depending on the winning bidder. The Ministry of Energy was due to award the contract by the end of 2012, but as of the first half of 2013 no winner had yet been announced.

However, others question the wisdom of going to the expense of importing gas from so far away, when Qatar, which sits on the third-biggest gas reserves in the world (estimated at some 900trn cu feet, according to the US Energy Information Administration), is just over 40 km from Bahrain. While Qatar certainly has enough gas to supply Bahrain, it has already committed itself to the Dolphin Project, a scheme to transport gas from Qatar to Abu Dhabi and thence to Fujairah in order to supply industrial customers in the UAE. However, the Dolphin Project also serves as a means to transport gas to the port of Fujairah, outside the Straits of Hormuz, and thus allows Qatar to diversify its potential export routes. A pipeline to Bahrain – while short and relatively cheap to build – is less versatile and arguably, less strategically useful to Qatar, and in any event, the country is keen to retain gas for export at world prices. However, after the unrest of 2011, the GCC states have proved themselves keen to support the stability of Bahrain, and it is possible that the Gulf countries may reach an agreement to supply Bahrain with gas in the near future.

The Bahraini government is looking to raise the price it charges industrial consumers for gas, although in the current climate it is reluctant to do so for certain factories if this would result in job cuts. In January 2012 NOGA raised the price charged to Alba from $1.50 per million British thermal units (BTU) to $2.25 per million BTU, while GPIC has faced a similar rise.

This said, if phased in properly, the price rises need not necessarily result in job losses or cause firms financial hardship. Alba, for instance, is looking to move into the aluminium recycling market, which is a new area for the industry in the region, but which offers the opportunity to make substantial cost savings, while the GPIC carbon dioxide recovery facility has allowed it to boost production of methanol and urea by up to 120 tonnes and 80 tonnes per day, respectively. In the short term, the authorities are looking to raise prices first for those industries that appear strongest and better able to bear the added costs resulting from higher gas prices. However, in the long term it seems that gas prices will have to be equalised for all consumers, in order to promote the best use of scarce gas resources and ensure that the industries of the future are viable and sustainable. The examples of Alba and GPIC demonstrate that Bahraini industry is well fitted to realise efficiency savings and move from relying on low gas prices to a focus on high productivity and human capital.

OUTLOOK: FDI flows and strong regional demand underpinned continued growth in Bahraini industry in 2012, and 2013 looks set to see a similar story. The development of business parks such as the BIW and BIIP has proven attractive to domestic and foreign investors alike, although this demand means that the availability and price of industrial premises may start to become an issue in a few years’ time if such parks do not expand. While the industrial sector continues to be dominated by large firms, provision of space and changing attitudes are slowly seeing a rise in small business activity in the sector, although skill-sets and access to credit mean growth in this segment remains lower than it might otherwise be. A rise in gas prices charged to industrial consumers is leading many companies to seek greater efficiency, but over the long term this should help cement competitive advantage.