US embassy cable - 04MANAMA511

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 
------------------------ 
 
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