Prisma Reports (PR): As a nation, how does the Kingdom of Bahrain differentiate itself from other Gulf states in terms of competitive advantages?
EDB: One of the key advantages that differentiates Bahrain from other Gulf nations is its strategic location. The Kingdom provides duty free access to other GCC countries, a market worth around $1.5 trillion, as well as proximity to the largest economy in the Gulf, Saudi Arabia. Saudi Arabia accounts for more than half of the population and 50% of the GDP in the GCC. Due to our causeway, you can be in the Eastern province of Saudi in 30 minutes and you can be in Riyadh in 4 hours by car. That to us is very powerful. Whether you’re a manufacturer or a service provider, our proximity to Saudi Arabia is very beneficial and explains why many people that work in Saudi also live in Bahrain.
The second element that differentiates Bahrain is our regulatory environment and the freedom we provide over foreign ownership. It is why we are ranked so highly in business reports over the last 20 years. We have always had a regulatory environment that has supported entitlement to foreign ownership and it has accelerated even more over the last year.
The flexibility to develop tailored investment terms has been welcomed by investors as a more cost effective option compared to others in the area, which are currently only offered through ‘free zones.’ In Bahrain today, 98% of our business activities are open to full ownership and only 2% are restricted. Why is that important? First, you are reducing the confusion and the complexity. Second, it reduces costs because if you’re not restricted then you can choose to operate where you see fit. Third, it provides autonomy over your own business. For example, when we limit you to a zone, we can extract a premium for the real estate price in that zone. However if we allow you to own 100% of your consultancy business, then you can choose amongst all the country’s real estate options. All of these factors are why Bahrain ranks highly and why our cost base is competitive. The third element that differentiates Bahrain is the people. The Kingdom offers a high quality of life and family friendly environment where cultures truly mix. Bahrain was ranked first globally of favourite countries to live, according to a recent expatriate survey by InterNations. Bahrain was also given high marks by its expats as a place to work, raise a family, and for feeling welcomed.
From a competitive advantage standpoint, Bahrain has a highly skilled bilingual local workforce where over 60% of the Bahraini workforce works in the private sector. If you’re an investor, you ultimately want locals to be able to do the job. We think that the work ethic and skill level is superior in Bahrain and this saves companies a lot of money because they don’t have to bear the costs of hiring employees from abroad.
PR: Please assess the impact, results and challenges of Bahrain’s Economic Diversification Strategy.
EDB: This region was the first to face the risk of being reliant on one industry. The first example of disruption was when we had the cultured pearl. The Kingdom was reliant on pearls, and once other countries developed and exported cultured pearls, it threatened the industry in Bahrain. We now promote pearls in our tourism industry and take tourists out to see how difficult this actually was. It was a hard lifestyle. The pearl industry was a big lesson in diversification. Bahrain was the first in the region to discover oil and, in the 50s and 60s, we realised that we were producing an output that would decline. Necessity is the mother of invention and we didn’t have the reserves of our neighbours, so we began to diversify into other industries such as aluminium and financial services. Gulf Air, the Kingdom’s national carrier, was also established.
Diversification is a process that started from the 1960s and continues to this day. The EDB was created by His Highness the Crown Prince for two reasons: one was to focus on the economic diversification strategy, while the second was to attract investors to support the development of priority sectors. From 2002 until today, the annualised growth of the non-oil sector has been 7.5%. Today our GDP is 80% non-oil and 20% oil.
We’ve made substantial progress on cultivating our priority sectors. For example, we looked at telecoms in the early 2000s and believed in its potential as an industry. Bahrain took transformative steps by being the first country in the Middle East to deregulate the telecom sector and increase competition. We now have three mobile operators: Batelco, Zain and Viva. The sector grew substantially and employment rose by about 50%. At EDB, we are committed to ensuring continuity in implementing regulations and diversifying our economy. Half of our board are ministers and public sector officials and half are from the private sector, which gives us strong access to important stakeholders. We also have offices in 16 different countries, including the east and west coast of the USA.
PR: Mr. Al Rumaihi, how is the Kingdom capitalising on this heightened investment activity and what is the basis of the EDB's strategy in attracting further Foreign Direct Investment?
EDB: The $32 billion in infrastructure projects are in various stages of planning and execution. These are projects that we track and know will take place in the next 5 to 7 years. At a time where countries, even outside the GCC are looking to reduce their spending, it is important to note the $32 billion is not reliant on the state budget. $7.5 billion of that $32 billion are projects funded by the GCC Development Programme. This funding is going toward the building of schools, roads, and the modernisation of Bahrain’s international Airport. It is critical to monitor these projects and ensure they get executed because of the trickle down benefits for the country.
To us, these are counter cyclical projects. Most of the remaining funds are in the hands of the private sector, and these cover a range of sectors, including social housing, major modernisation and expansion projects at BAPCO and ALBA and tourism driven projects. We have a team at the EDB focusing on the real estate sector that speaks to these developers to assess challenges and address them, whether it be approvals, reviewing regulation, or a permit, etc. We look at the $32 billion as a catalyst for growth and FDI will come out of that, but we are more focused on the impact on the economy.
PR: Mr. Al Rumaihi, within the economy, we know that five sectors have been identified as the focal drivers for Bahrain. These sectors are, Financial Services, Tourism, ICT, and Manufacturing and Logistics. How successful has the development of these five pillars been?
EDB: These five areas were identified as key sectors in which Bahrain holds particular competitive advantages and where there is a strong potential for growth.
Bahrain has over four decades of experience as a regional financial centre, and has the largest concentration of financial institutions and funds registered and domiciled in the region.
The financial services sector is the largest non-oil contributor to GDP and in addition to the launch of the regulatory sandbox and e-wallet, we have seen the creation of ‘Startup Bahrain,’ regulations on crowdfunding, and a number of new initiatives that will be announced in the coming months – such as the creation of a dedicated physical space for fintech firms. In ICT, Bahrain’s low operating costs, strong connectivity and deep pool of human capital mean it is well placed to support shared services operations around the region. Amazon Web Services (AWS) recently launched their Middle East region in Bahrain and we’ve seen the launch of a number of accelerators and incubators in recent years.
We also see strong opportunities for investment in both real estate and leisure activities within tourism – helping to cater to existing and future demand; for example, over $10 billion of investment is planned in the hotel sector over the next 5 years, with 15 new five and four-star hotels and beachfront resorts in the pipeline. Manufacturing and logistics, which we view conjointly, has seen a boom in downstream aluminium, FMCG and petrochemicals and high levels of human capital to support further development. Bahrain’s central location within the region and strong manufacturing base also mean that a number of international logistics businesses are already based in Bahrain and there are strong opportunities for further investment.
PR: What particular projects/opportunities of note would you like to draw to the attention of the readership of Foreign Policy?
EDB: If we look at financial services, we believe that financial technology is going to transform the way people bank. There is a transformation occurring globally, and we believe there is a massive opportunity for Islamic Banking in the region. Fintech is going to lead in emerging markets because it will provide the unbanked solution that will be better than conventional retail banking. Fintech for the Middle East and the Arab world is an opportunity. We have created a regulatory sandbox that will support innovation while also protecting consumers; and have recently introduced directives on crowdfunding as well. Through the regulatory sandbox we aim to create a supportive fintech ecosystem that would allow investors and entrepreneurs to choose Bahrain as their model or access point.
We are setting up innovation hubs and accelerators that will allow entrepreneurs to get mentorship and funding, and we are going to create venture capital funding around this activity. We are also undergoing plans to create Bahrain Fintech Bay, a physical space in the EDB offices to support fintech startups so that these players can have a soft landing when testing their product in the market. These are just some initiatives we are taking to persuade global fintech players who are interested in the Middle East and Africa to choose Bahrain as a hub.
Likewise, the manufacturing and logistics sector is changing and companies are moving closer to their customers. One of Bahrain’s main advantages in this sector is in FMCG, as we already have Mondelez and Kimberly Clarke based in the Kingdom, where the cost of operating is 30-40% cheaper than other countries in the region. The competitive advantage of manufacturing, close to what is a 300 million population in the Middle East or 50 million in the GCC, in a cost effective country with foreign ownership rights is very compelling. In regards to aluminium, we are aiming to drive growth in the downstream sector and to create the largest single site smelter in the world. We have many investors interested in manufacturing because they can get the molten aluminium right next to the factory. We offer them specialised rates on land that is close to the factory so that they can add value—they can take that aluminium and create car wheels or they can manufacture foil for cooking. The Free Trade Agreement with the US is a great opportunity to manufacture in Bahrain and have access to the US. We also have trade agreements as part of the GCC with many significant global economies. For tourism, we are looking at $10 billion in tourism projects that will be launched in the next few years. There are many hotels and shopping malls in the pipeline to support the 12 million visitors we welcome annually - for a population of 1.3 million that is quite a lot.
PR: From the standpoint of the EDB, how much emphasis do you place on SME Development and can you please offer us a snapshot of the current environment.
EDB: A measure of success at the EDB and in Bahrain’s Vision 2030 is enhancing the life and prosperity of Bahrainis. Household incomes for citizens have grown by about 47%, but we recognise there is still a need to support job creation. About 50% of the Bahraini population is under the age of 25 and we want to create a working ecosystem where people think about creating their own business and spur innovation. In fact, a survey by Ernst & Young found that 70% of young Bahrainis were interested in the idea of starting their own business, twice as much as anywhere else in the Gulf. The government has worked hard to create a supportive environment that will allow entrepreneurs to thrive and the Bahrain model is endorsed by UNIDO as the best SME development model in the world, with over 40 countries following it.
PR: How would you summarise current Bahraini-US relations and what are your economic hopes as your two countries strengthen their ties?
EDB: Last year, we celebrated 70 years of the Defence Cooperation Agreement that we have with the United States. On an economic level, we were the first country in the GCC to sign a Free Trade Agreement with America – over ten years ago – and I would categorise it as an entrenched and long lasting relationship that we hope to continue to develop. In terms of the EDB, we have an office in New York and Los Angeles to support anyone interested in setting up in the Kingdom, as there are vast opportunities for US products in Bahrain and around the region.