VII. INVESTMENT CLIMATE A1. Openness to Foreign Investment As part of its program to diversify the economy, the Government of Bahrain actively encourages foreign private investment, especially in sectors which are export-oriented and do not compete directly with established local enterprises. Firms making industrial investments in Bahrain may be 100 percent foreign-owned. In addition, 100 percent foreign-owned companies amy be set up for regional distribution services, or representation, and such companies may operate within the domestic market and offshore. Procedures for obtaining licenses have been streamlined, and all the necessary formalities can usually be accomplished within one week. Bahrain offers several advantages to foreign investors, including: no personal or corporate taxation, no restriction on capital and profit repatriation, a developed infrastructure with excellent transportation and communication facilities, duty-free access to GCC member states for products manufactured in Bahrain, and a history of political stability. Joint ventures - up to 49 percent foreign ownership - are permitted with Bahraini companies, but a 100 percent purchase of an existing Bahraini company would probably not be permitted, as the new incentive arrangements are aimed at attracting additional companies, rather than at reducing the number of Bahraini-held companies. Under a law adopted in 1994, individual expatriates who have been living in Bahrain for at least three years may buy up to one percent of the shares in any publicly listed Bahraini corporation. Bahrain's liberal taxation and import laws apply equally to Bahraini and foreign-owned companies. Foreign-owned companies are eligible for partial financing from the state-owned Bahrain Development Bank, if they meet certain criteria such as providing employment to a significant number of Bahrainis. Private investment (foreign or Bahraini) in petroleum extraction is permitted only under a production-sharing agreement with the state-owned petroleum company; as of 1994, only one company - U.S.-owned Harken Oil - had such an agreement. In general, industrial enterprises which would compete with government-owned or parastatal firms are not permitted; this rule applies equally to Bahraini and foreign-owned companies. Investment incentives offered to foreign firms are equal to those available to Bahraini companies. For manufacturing investments, these incentives include: --Labor: A subsidy of $11,925 per year for the first three years for each Bahraini employee employed by companies setting up factories in pioneering industries, $7,950 per year for downstream industries, and $2,650 per year for companies setting up factories in existing industries. --Electricity charges: A 50 percent rebate for the first five years, in all industries --Land rental: A 100 percent rebate of rental in government industrial areas for the first five years, for all industries. --Customs duties: A 100 percent rebate of customs duties for the first five years, for all industries. --Export Credit Facility: Available for all industries. --Tariff Protection: Subject to the approval of the National Committee on Tariff Protection, 10-20 percent protection may be given to pioneering or downstream industries. A2. Conversion and Transfer Policies Bahrain's currency, the Bahraini Dinar (BD), is fully and freely convertible at the fixed rate of $1.00 = BD 0.377. There are no restrictions on converting or transferring funds, whether or not associated with an investment. As the financial and banking center of the Middle East, Bahrain offers ample and instant access to the U.S. and international banking systems. A3. Expropriation and Compensation In 1976, during a period when most oil producing countries in the region nationalized their oil industries, the government fully nationalized the extraction of petroleum, paying compensation to the foreign owners of the company which had previously operated in that field. In 1979 the government took over a 60 percent share in the petroleum refinery, compensating its original owner, the U.S. firm Caltex, which remains as administrator and 40 percent owner. There have been no expropriations in recent years, and none are anticipated. Denationalization, or partial denationalization, of some government-owned enterprises may take place in the near future. A4. Dispute Settlement There have not been any investment disputes in Bahrain over the past few years involving U.S. or other foreign investors, although there have been cases of lawsuits against businesses and businessmen for nonpayment of debts. Such debt cases are adequately handled by Bahrain's court system. Bahrain has a long-established and clearly-defined framework of commercial laws. English is widely used, and well-known international firms of lawyers, working in association with local partners, provide expert legal services both nationally and regionally. Fees are charged according to internationally-accepted practices. Bahrain is a signatory to the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards. An international arbitration center is in the process of being established in Bahrain. Most commercial disputes are resolved privately without recourse to the courts or formal arbitration. Bahraini law is generally specified in all contracts for the settlements of disputes that reach the stage of formal resolution. The guidelines laid down by the International Chamber of Commerce (ICC) in Paris are generally respected, and disputes are occasionally referred to arbitration at the ICC in Paris. A5. Performance Requirements/Incentives There are no special performance requirements imposed on foreign investors. Foreign and Bahraini-owned companies must meet the same requirements and comply with the same environmental, safety, health, and other labor requirements. Companies wishing to qualify for investment incentives must hire a specified percentage of Bahraini employees: 30 percent Bahraini employees in existing industries, and, for pioneering and downstream industries, there is a requirement for 15 percent Bahraini employees the first year and 25 percent in subsequent years. Foreign or Bahraini-owned factories must also produce a value-added of at least 40 percent, and must export at least 25 percent of their production (15 percent for existing industries) in order to qualify for incentives. Officials of the Ministry of Labor and the Ministry of Development and Industry supervise companies operating in Bahrain, on a non-discriminatory basis. A6. Right to Private Ownership and Establishment In general, the Bahraini government does not license companies wishing to compete with existing government-owned or parastatal companies, or which would be a danger to public health or other aspects of the general welfare. Foreign-owned companies may not be set up for the exclusive purpose of engaging in commercial sales in Bahrain, except in minority partnership with one or more Bahraini companies, and sales in Bahrain of foreign-produced products are mostly accomplished through Bahraini agents. Foreigners may not acquire legal control of a Bahraini company, and expatriate ownership of a publicly-listed Bahraini corporation may not exceed 24 percent of total outstanding shares. Foreigners, other than nationals of the other five Gulf Cooperation Council (GCC) states, may not own land in Bahrain at present although this law may be revised in the near future for long-term expatriate residents. With the above provisos, foreign and domestic private entities may establish and own business establishments and engage in all forms of remunerative activity. In general, private entities may freely establish, acquire, and dispose of interests in business enterprises, subject to the limitations noted above. A7. Protection of Property Rights Bahraini laws adequately protect patents and trademarks. A copyright law was issued in 1993, but it does not meet international standards of copyright protection. Bahrain is not a signatory to any of the key international agreements on intellectual property rights. Aside from copyrights, the Bahraini legal system adequately protects and facilitates acquisition and disposition of other property rights. A8. Regulatory System: Laws and Procedures Bahraini commercial laws allow competition, but limit it in numerous ways, for example making importers of goods of a given brand pay five percent of the goods' value to the local agent for the brand, setting the price of key consumer goods, and limiting the holding of store sales. Bahrain established a "fast-trade" procedure a few years ago under which companies can complete all registration requirements within seven days. The government has established offices with the specific goal of helping businessmen through the registration process. A9. Efficient Capital Markets and Portfolio Investment: Bahrain's banking policies facilitate the free flow of financial sources, with credit generally being allocated on market terms. Foreign investors are able to borrow on the local market, and the private sector has access to a variety of credit instruments. Legal, regulatory, and accounting systems in the financial sector are transparent and consistent with international norms. The government in 1993 undertook a concerted effort to encourage the establishment in Bahrain of major international investment companies. In addition, 22 investment banks, mostly foreign, had offices in Bahrain as of the beginning of 1994. Bahrain is the banking center of the Middle East, with a sound and well-developed banking system. The estimated total assets of Bahrain's 19 full commercial banks at the end of 1993 was $6 billion, with most of that concentrated in the five largest banks. The 47 Bahrain-based Offshore Banking Units (OBU's) had assets of $60.3 billion as of the end of 1993. With only a few exceptions, shares in Bahrain's companies are not open to purchase by foreign investors. The shares of most Bahrain companies traded on the relatively young Bahrain Stock Exchange may not be purchased by investors from outside the six GCC Countries. A10. Political Violence Bahrain is a peaceful country, with crime rates well below those of the U.S., and there have been no incidents in recent years of politically-motivated damage to projects and/or installations. This situation is not expected to change in the near future. Bahrain has a long-term territorial dispute over some uninhabited islands near Qatar, but this dispute has no effect on conditions in the inhabited parts of the country. B. Bilateral Investment Agreements Bahrain has no bilateral agreements in force at the present time, but is in the process of negotiating such an agreement with the U.K. C. OPIC and Other Investment Insurance Programs On April 25, 1987, Bahrain and the U.S. Government signed an agreement regarding the inauguration of activity in Bahrain by the Overseas Private Investment Corporation (OPIC). The agreement opened the way for extension of such OPIC facilities as investment insurance, reinsurance, and investment guarantees to U.S. private investors interested in doing business in Bahrain. D. Labor The Bahraini labor force as of the end of 1993 totalled about 235,000, of whom nearly two-thirds were expatriates. Half of the roughly 80,000 Bahraini workers were government employees, and women made up slightly more than one-sixth of the Bahrainis in the workforce. Because modern education developed here roughly a generation or more earlier than in other Gulf countries, Bahrainis are the most highly-educated of the Gulf state nations, and, since relatively low oil income has not allowed the Bahraini government to provide the same level subsidies as other states in the region, Bahrainis tend to have a relatively better-established work ethic as well. Private employers tend, however, to favor hiring expatriate workers on the grounds that they are harder working and more productive. Private employers, both Bahraini and foreign, sometimes object to government efforts to encourage them to hire more Bahraini employees. In 12 of the major state-owned industries, joint labor-management consultative councils (JCC's) have been set up to provide a means for labor and management to discuss issues of mutual concern, including labor disputes, wages, working conditions, and productivity. The JCC system covers approximately 70 percent of Bahraini's indigenous industrial workers, plus some expatriate workers. Although there has been discussion of possible establishment of JCC's in additional companies, there are no Western-style labor unions. Labor-management relations in Bahrain are relatively smooth; there are occasional, though not frequent, brief work stoppages in the private sector, but no major strikes in recent years. Bahrain is a member in good standing of the ILO. Although age levels in Bahrain are generally below levels in OECD countries, they are well-above Third World averages, and the government has recently attempted to crack down on illegal foreign workers. Bahrain's leading industries, particularly petroleum and aluminum and downstream industries, tend to be capital-intensive more than labor-intensive. E. Foreign Trade Zones/Free Ports Mina Sulman, Bahrain's major port, provides a free transit zone to facilitate the duty-free import of equipment and machinery. Another free zone is located in the North Sitra Industrial Estate. Raw materials intended for processing in Bahrain and machinery imported by Bahraini-owned firms are also exempt from duty. Such imported goods may be stored duty-free. Foreign-owned firms have the same investment opportunities in these zones as Bahraini companies. F. Capital Outflow Policy Bahrain has no restrictions on the repatriation of profits or capital and no exchange controls. It provides neither incentives nor disincentives for investment in developing countries. G. Foreign Direct Investment Statistics There are no reliable statistics on the volume or origin of foreign investment in Bahrain. Traditionally, most foreign investment in the country has come from the United States and Great Britain and has been concentrated in the petroleum, banking, and communications sectors. In the past ten years, significant new foreign investment has come to Bahrain from neighboring countries (primarily Saudi Arabia and Kuwait) and has been concentrated in the banking services, industry, trade, and real estate sectors. Saudi and Kuwaiti investment has been facilitated by the special exception allowing nationals of these two countries to own real estate in Bahrain. Although, again, reliable statistics are unavailable, Bahrain is probably a net exporter of investment funds, with Bahraini capital invested overseas exceeding foreign capital invested in Bahrain, with the majority of Bahraini investment in the U.S. and Western Europe. H. Major Foreign Investors Aluminum Bahrain (ALBA), the Arab Petrochemical Industries Complex (GPIC) are each owned as joint investments by several states from the Gulf region. The Bahrain Petroleum Company (refinery) is 40 percent owned by the U.S. firm CALTEX. Recently, the Kuwait Petroleum Company (KPC) acquired the former Arab Iron and Steel Company, reportedly worth approximately $70 million. In 1993, construction was begun on a $33 million tissue factory, jointly owned by Kimberly-Clark (U.S.) and Olayan Saudi Holding Company (Saudi Arabia). Also in 1993, DHL (U.S.) inaugurated a $9 million regional distribution center at the Bahrain Airport. A U.S. pipeline manufacturer, Shaw Industries, will open a plant in Bahrain in 1994, in partnership with a Bahraini firm. Construction began in 1993 on a $13 million dollar sulphur derivatives plant, with 15 percent ownership by Qatar Industrial Manufacturing Company (Qatar) and 10 percent by Arabian Industrial Development Company (Saudi Arabia).