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Cablegate: Bahrain: Investment Climate Statement 2007

VZCZCXYZ0063
PP RUEHWEB

DE RUEHMK #0291/01 0881414
ZNR UUUUU ZZH
P 291414Z MAR 07
FM AMEMBASSY MANAMA
TO RUEHC/SECSTATE WASHDC PRIORITY 6636
INFO RUCPDOC/USDOC WASHDC PRIORITY

UNCLAS MANAMA 000291

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA, NEA/ARP
COMMERCE FOR 4520/ITA/ANE/-THOFFMAN
STATE PLEASE PASS TO USTR FOR JBUNTIN

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD ELAB KTDB OPIC PGOV USTR
ECTRD, BA
SUBJECT: BAHRAIN: INVESTMENT CLIMATE STATEMENT 2007

REF: 06 STATE 178303

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A.1 Openness To Foreign Investment
----------------------------------

Bahrain is widely considered to be one of the most open
countries in the region and generally follows an open-market
philosophy. The country has been able to make significant
progress in its ongoing process of economic liberalization,
diversification of national income, and openness to
investment policies in recent years. Bahrain has already
amended existing legislation and promoted new laws aimed at
facilitating and encouraging foreign investment. Senior
government officials believe it is imperative to continue
working toward economic diversification and to increase the
volume of investment in the services, tourism, industry, and
the financial sector. Officials make frequent public
statements citing the importance of foreign direct
investment, bolstering the private sector's role in the
economy, lessening the burden on government, and eventually
decreasing government subsidies.

Upon the August 2006 implementation of the US-Bahrain Free
Trade Agreement (FTA), 100 percent of bilateral trade in
consumer and industrial products became duty-free. Bahrain
will phase out tariffs on the remaining handful of
agricultural product lines within ten years. Textiles and
apparel trade is duty-free, promoting new opportunities for
U.S. and Bahraini apparel manufacturing. The FTA requires
qualifying textiles and apparel to contain either U.S. or
Bahraini yarn and fabric and allows for a temporary
transitional allowance for textiles and apparel that do not
meet these requirements so that U.S. and Bahrain producers
can find ways to work together. The FTA requires transparency
and efficiency in customs administration, including
publication of laws and regulations on the Internet and
procedural certainty and fairness. In addition, the FTA
requires customs procedures designed to facilitate the rapid
clearance through customs of express delivery shipments.

The 2007 Heritage Foundation's "Index of Economic Freedom"
ranked Bahrain 39th, marking a decline from the previous
year's ranking of 25th. The ranking reduction was
attributable to the decline of its monetary policy score, as
a result of a 0.04 percent jump in its annual inflation rate,
a decline of its IPR score, and "upon more detailed analysis
and based upon the fact that the judiciary is not fully
independent from the King." The Index rated Bahrain as
"mostly free." Even so, the Heritage Foundation recognizes
Bahrain as "the second freest (economy) in the Middle East
and North Africa after Israel."

The United Nations Conference on Trade and Development's
(UNCTAD) World Investment 2006 Report ranked Bahrain second
after the UAE among all Arab countries in its Inward FDI
Performance Index. The UNCTAD index ranks countries by the
FDI they receive relative to their economic size. Bahrain
improved its ranking by 10 positions to occupy 22nd place
worldwide.

The Government of Bahrain is determined to increase the entry
of new private firms in an economy that has long been
dominated by parastatals (outside of the financial services
sector). Following the creation of a Supreme Privatization
Council in the spring of 2001, the King of Bahrain, Shaikh
Hamad bin Isa Al-Khalifa, issued a decree in October 2002
laying out guidelines privatizing telecommunications,
transportation, electricity, water, ports and airport
services, tourism, oil, gas and postal service.

Bahrain's Crown Prince, Shaikh Salman bin Hamad Al-Khalifa,
is also an outspoken proponent of privatization and economic
reform in Bahrain. The Crown Prince was entrusted with the
King's labor, economic, and training/education reform
initiatives in 2004 and assumed the Chairmanship of the
Economic Development Board (EDB). Following ministerial
changes in January 2005, the King issued Royal Decree No. 31
for 2005, amending article 9 of 2000, delegating the national
economic and investment portfolio to the EDB, which had
formerly served as an economic think tank. Under the
Chairmanship of the Crown Prince, the EDB was entrusted with
the implementation and execution of a three-tiered reform
initiative, focusing on labor, economic, and education
reform. The EDB's main strategic functions are to promote
investment in key economic sectors, support and encourage
foreign investment, attract foreign companies to establish a
presence in Bahrain, support and develop local
entrepreneurial skills, simplify and eliminate investment
obstacles, and secure Bahrain's economic leadership and
competitiveness as a regional business and commercial hub.

Following the King's decree to privatize
government-controlled sectors, the first key sector to be
liberalized was telecommunications, which ended the monopoly
of the 33.3 percent state-owned telecom service provider,
Bahrain Telecommunications Company (Batelco). Under
Legislative Decree 48, the Telecommunication Law of 2002
established the Telecommunication Regulatory Authority (TRA).
In accordance with Article 15 of the Telecommunication Law,
the National Telecommunication Plan was issued in 2003. The
plan serves as a guideline for the liberalization process and
addresses licensing opportunities, Universal Service
Obligations, the Bahrain Internet Exchange (BIX), Batelco's
licensing activities, and the government's role in Batelco.

Under the National Telecommunication Plan, and in accordance
with the government's progressive elimination of Batelco's
monopoly, an unlimited number of licenses could be issued in
ten areas of telecommunication service. However, the Plan
also provided for limitations on the number of licenses
issued for BIX and mobile telecommunications services. It
stated, "In the mobile area, one license will be issued to
Batelco, and one further license will be issued to a market
entrant under the provision that, in normal circumstances,
further licenses shall not be issued for a minimum of two
years from date of award." (MTC-Vodafone was granted the
mobile provider license in 2003.) According to TRA figures,
as of January 2007 the following telecommunications licenses
were granted:

-- two Individual Mobile Telecommunication Licenses;
-- ten International Telecommunication Facility Licenses
(IFL);
-- twenty-six International Telecommunication Services
Licenses (ISL);
-- five Individual National Fixed Service Licenses;
-- eight VSAT Licenses;
-- one Individual Paging Service Licenses;
-- thirty Value Added Services (VAS) "Class" Licenses;
-- one Individual Public Access Mobile Radio Service License;
-- one Bahrain Internet Exchange License;
-- sixteen Internet Service Provider Licenses (ISP);
-- two Frequency Licenses;
-- three Temporary WiFi Frequency Licenses.

Following the privatization of public transportation service
in 2003, CARS, a Bahrain-UAE joint venture operates 41
modern, air-conditioned, 52-seat buses, representing a $10
million investment in the local economy.

The Kingdom's first independent power plant project (IPP) was
also successfully tendered and awarded to the equally-shared
Belgian-Gulf consortium Tractebel EGI and Gulf Investment
Corporation (GIC) to design, build, own, operate, and
maintain the 1,000MW, $498.4 million Al Ezzel Independent
Power Plant. The first phase, with a
production capacity of 400MW, was completed in May 2006. The
second phase, with a capacity of 600MW, is set to be
completed in May 2007. Upon completion, the project will have
created 140 jobs, 120 of them for Bahrainis. The proposed
network is part of a $26.5 million upgrade and setup of new
transmission grids, linking Al Ezzel station with the
government's main power network. The government also has
plans to expand its distribution network and award contracts
for three new sub-stations, in anticipation of the extra
electricity generated by the plant.

In January 2006, the $1.25 billion Hidd Power and Water
Station project was sold to an international business
conglomerate of British power supplier International Power,
Japanese Sumitomo Corporation, and Belgian electricity
company Suez Energy International (Suez Tractebel). The
privatization of Hidd Power and Water Station reinforces the
government's privatization strategy, which is aimed at
enhancing the private sector's role in Bahrain's development
process and fostering a positive business-based climate by
attracting more local and foreign investments.

A 25-year port management bid for the concession to operate
the Mina Salman port and the new Khalifa Bin Salman Port was
awarded to a consortium of Dutch-based APM Terminals and
Bahrain-based Yusuf Bin Ahmed Kanoo Holdings WLL in May 2005.
The consortium began operating the Mina Salman port in
December 2006. The Khalifa Bin Salman Port is expected to
open by the fourth quarter of 2008.

Under the privatization law, the government's commitment to
gradually divest of its interests and stakes in certain
companies is intended to increase the private sector's
competitiveness. The Public Shareholding Directorate at the
Ministry of Finance contracted the consulting arm of UK-based
HSBC to carry out the consultancy and survey on the sale of
the government's shares in Batelco. In January 2006, the
Cabinet approved the formation of a $5.31 billion holding
company, Mumtalakat, to control the government's commercial
and investment interests in 20 local and 9 foreign companies.
The firm will have a paid up capital of approximately $3.44
billion, and an authorized capital of approximately $5.03
billion.

Law 64 of 2006 ordered an upgrade of the Bahrain Monetary
Agency to the new Central Bank of Bahrain (CBB). Law 64
consolidated several laws that had previously governed the
various segments of the financial services industry. Under
the law, the CBB enjoys reinforced operational independence
and enhanced enforcement powers. Article 9 of the law, for
example, outlines investigational and administrative
proceedings at the CBB's disposal to ensure compliance of
rules and regulations by licensees. CBB is the sole
regulatory authority for the Bahrain Stock Exchange (BSE).
The Governor of the CBB chairs the BSE Board of Directors,
but the BSE operates as an independent corporate entity. Dow
Jones Indexes and the Bahrain Stock Exchange launched the Dow
Jones Bahrain Index on July 5, 2005. Gulf Cooperation Council
(GCC) firms and citizens are permitted to own up to 100
percent of companies listed on the BSE. Non-GCC
firms/citizens may own up to 49 percent of listed companies.
Under the terms of the U.S.-Bahrain Bilateral Investment
Treaty (BIT) and the U.S.-Bahrain Free Trade Agreement, U.S.
investors are eligible for most-favored-nation treatment and
national treatment (or GCC) treatment (with an exception of
any in-kind limitations applied to Bahraini, GCC, or
third-country investors). If discrepancies occur, U.S.
firms/individuals are encouraged to contact the U.S. Embassy.

In March 2004, as part of an effort to stimulate the
insurance industry and reinforce Bahrain's position as a
major insurance center in the Middle East, the CBB lifted the
requirement that foreign insurance brokers and loss adjusters
partner with a local company. These foreign firms, which were
previously required to have at least 51 percent
Bahraini-ownership, are now permitted to operate with 100
percent foreign-ownership. The CBB is holding consultations
on further reform in areas such as captive insurance,
solvency, business conduct, risk management and financial
crime, enforcement, CBB reporting and public disclosure,
intermediaries, and Islamic insurance.

Taxation and import laws apply equally to Bahraini and
foreign-owned companies, and foreign investors must comply
with the same requirements and legislation, as do local
firms.

In anticipation of the GCC Customs Union, Bahrain reduced
customs tariffs to five percent in January 2002 for imported
goods, with exceptions for alcohol (125 percent) and tobacco
(100 percent), and entirely exempted customs duties for a
list of 417 food and medical items.

Bahrain requires that pharmaceutical products be imported
directly from a manufacturer with a research department and
that the products be licensed in at least two other GCC
countries, one of which must be Saudi Arabia. Drugs and
medicines may be imported only by a drug store or pharmacy
licensed by the Ministry of Industry and Commerce (MOIC)
after approval by the Ministry of Health. Bahrain prohibits
the importation of weapons (except under special license),
pornography, wild animals, radio-controlled model airplanes,
foodstuffs containing cyclamates, and children's toys
containing methyl chloride (and other articles declared
harmful by the Ministry of Health). Bahrain is also taking
steps to ban the import of 127 chemicals. In response to the
threat of Avian Influenza, Bahrain has restricted the
importation of live birds and has established an Avian Flu
Committee to oversee the importation of poultry. Bahrain
currently imports poultry meat only from those countries
certified free of Avian Influenza by the World Health
Organization.

Bahrain has phased out subsidies for export industries, but
permits duty-free importation of raw materials for export
products and of equipment and machinery for newly established
export industries. All industries in Bahrain, including
foreign-owned firms, benefit from government-subsidized
utilities.

Periodically, foreign firms experience difficulty obtaining
required work permits and residence visas for expatriate
employees due to the Bahraini government's efforts to promote
greater numbers of Bahraini citizens in the workforce.
However, this does not appear to be a matter of policy, and
often can be resolved on a case-by-case basis. Where problems
occur, U.S. businesses are encouraged to apply to the highest
levels of the concerned ministries, and to consult the U.S.
Embassy. The government has created a Labor Market Regulatory
Authority to modernize Bahrain's labor market, implementing
policies designed to reduce Bahrain's reliance on cheap
expatriate labor.

The government actively seeks Bahraini and foreign private
investments in large infrastructure projects. Previously,
most such activity (other than hotels) was funded by
development agencies from other Gulf countries (particularly
Kuwait, UAE, and Saudi Arabia). Foreign-owned companies are
eligible for partial financing from the state-owned Bahraini
Development Bank (BDB), if they meet certain criteria such as
providing training and employment to a significant number of
Bahrainis. The BDB's capitalization was increased from $26.5
to $132.6 in 2005, as part of the government's efforts to
increase funding for new businesses and investments, and
offering 'fast-track' loans to Bahraini entrepreneurs. The
BDB has also launched an Islamic Financing facility,
reflecting the growing demand for Islamic financial
instruments and products.

------------------------------------
A.2 Conversion and Transfer Policies
------------------------------------

Bahrain has no restrictions on the repatriation of profits or
capital and no exchange controls. Bahrain's currency, the
Bahraini Dinar (BD), is fully and freely convertible at the
fixed rate of USD 1.00 = BD 0.377 (1 BD = $2.65). There is no
black market or parallel exchange rate. Foreign exchange is
readily available and a devaluation of the Bahraini Dinar
over the next year is highly unlikely. In mid-January 2007,
the Central Bank publicly reaffirmed its commitment to
maintain the USD-BD peg. There are no restrictions on
converting or transferring funds, whether or not associated
with an investment.

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A.3 Expropriation and Compensation
----------------------------------

There have been no expropriations in recent years, and no
cases in contention. The BIT protects U.S. investments by
banning all expropriations except in accordance with
customary international law.

----------------------
A.4 Dispute Settlement
----------------------

Bahrain has a long-established framework of commercial law.
English is widely used, and well-known international
(including U.S.) law firms, often in association with local
partners, provide expert legal services both nationally and
regionally. Fees are charged according to internationally
accepted practices.

The BIT outlines three dispute settlement options: 1)
submitting the dispute to a local court; 2) invoking
dispute-resolution procedures previously agreed upon by the
national or company and the host country government;
and 3) submitting dispute for binding arbitration to ICSID
(International Center for Settlement of Investment Disputes)
or any arbitral institution agreed upon by both parties.

The GCC Commercial Arbitration Center, established in 1995,
serves as a regional specialized body providing arbitration
services. It assists in resolving disputes between GCC
companies or between other parties and GCC countries. The
Center implements rules and regulations in line with accepted
international practice. Thus far, few cases have been brought
to arbitration. The Center conducts seminars, symposia, and
workshops to help educate and update its members of any new
arbitration related matters. The Center's contact details are
as follows:
GCC Commercial Arbitration Center
P.O. Box 2338
Manama, Kingdom of Bahrain
Tel: (973) 17-214-800
Fax: (973) 17-214-500
Website: www.qccarbitration.com Email: arbit395@batelco.com.bh

Arbitration procedures are largely a contractual matter.
Disputes are historically referred to an arbitration body as
specified in the contract, or to the local courts.
Increasingly, Bahraini companies, in dealings with both local
and foreign firms, include arbitration procedures in their
contracts. Most commercial disputes are resolved privately
without recourse to the courts or formal arbitration.
Bahraini law is generally specified in all contracts for the
settlement of disputes that reach the stage of formal
resolution. Occasional lawsuits against individuals or
companies for nonpayment of debts have been adequately
handled by Bahrain's court system. The guidelines laid down
by the International Chamber of Commerce (ICC) in Paris are
generally respected, and disputes have been occasionally
referred to arbitration at the ICC in Paris. Bahrain is a
signatory to the New York Convention of 1958 on the
Recognition and Enforcement of Foreign Arbitration Awards.

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A.5 Performance Requirements and Incentives
-------------------------------------------

There are no special performance requirements imposed on
foreign investors. This is reinforced by the BIT, which
forbids mandated performance requirements as a condition for
the establishment, acquisition, expansion, management,
conduct or operation of a covered investment. Foreign and
Bahraini-owned companies must meet the same requirements and
comply with the same environmental, safety, health, and other
labor requirements. Officials at the Ministries of Labor and
Commerce and Industry supervise, on a non-discriminatory
basis, companies operating in Bahrain. Industries must be set
up in officially identified industrial areas. An
Environmental Impact Statement (EIS) must be filed by all
manufacturing facilities.

--------------------------------------------- ---
A.6 Right to Private Ownership and Establishment
--------------------------------------------- ---

In principle, private entities may freely establish, acquire,
and dispose of interests in business enterprises, subject to
the limitations noted in this chapter.

The BIT provides benefits and protections to U.S. investors
in Bahrain, such as most-favored-nation treatment and
national treatment, the right to make financial transfers
freely, international law standards for expropriation and
compensation cases, and access to international arbitration.
The BIT guarantees national treatment for U.S. investments
across all sectors, with exceptions for ownership of
television, radio (or other media), fisheries, and
privatization of oil dredging or exploration. Bahrain also
provides most-favored-nation or national treatment status to
U.S. investments in air transportation, the buying or
ownership of land, and the buying or ownership of shares
traded on the Bahrain Stock Exchange (BSE). Where problems
occur, U.S. businesses are encouraged to apply to the highest
levels of the concerned ministries, and to consult the U.S.
Embassy.

As a result of the national treatment offered to U.S. firms
in the BIT, American firms interested in selling products
exclusively in Bahrain are no longer required to appoint a
commercial agent, though they may opt to do so. A commercial
agent is any Bahraini party appointed by a foreign party to
represent the foreign party's product or service in Bahrain.

Bahrain permits 100 percent foreign-ownership of new
industrial entities and the establishment of representative
offices or branches of foreign companies without local
sponsors. Wholly foreign-owned companies may be set up for
regional distribution services and may operate within the
domestic market as long as they do not exclusively pursue
domestic commercial sales. Private investment (foreign or
Bahraini) in petroleum extraction is permitted only under a
production-sharing agreement with BAPCO, the state-owned
petroleum company.

Since January 2001, foreign firms and GCC nationals may own
land in Bahrain. Non-GCC nationals may now own high-rise
commercial and residential properties, as well as property in
tourism, banking, financial and health projects, and training
centers, in specific geographic areas. In December of 2006,
Bahrain legalized 100 percent foreign ownership of investment
properties.

---------------------------------
A.7 Protection of Property Rights
---------------------------------

The Bahraini legal system adequately protects and facilitates
acquisition and disposition of property rights. However,
there is currently no mortgage law that guarantees lenders
the right to repossess property in case of mortgage
non-repayment.

The U.S.-Bahrain FTA commits Bahrain to enforce world-class
protection of intellectual property rights (IPR). Bahrain
signed the Berne Convention for the Protection of Literary
and Artistic Works and the Paris Convention for the
Protection of Industrial Property in 1996. Bahrain has joined
the Patent Cooperation Treaty, Madrid Agreement, WIPO
Copyright Treaty, WIPO Performances and Phonograms Treaty,
the Rome Convention, the International Convention for the
Protection of New Varieties of Plants and the Patent Law
Treaty.

Pursuant to the FTA, Bahrain ratified the Budapest Treaty,
the Trademark Law, and the Convention Relating to the
Distribution of Programme-Carrying Signals Transmitted by
Satellite in mid-2006. At the same time, the government also
passed the following WIPO-compliant laws regarding:

-- trade secrets;
-- copyright and related rights;
-- designs of integrated circuits;
-- geographic indicators;
-- individual drawings and designs;
-- patents and utility models;
-- plant varieties;
-- trademarks.

The government's copyright enforcement campaign began late
1997 and was based on inspections, closures, and improved
public awareness. The campaign targeted the video, audio and
software businesses, with impressive results. Bahrain has
been aggressive in combating video and audio piracy. However,
software piracy and certain forms of signal theft remain
problematic.

There are no technology transfer requirements that force
firms to share or divulge technology through compulsory
licensing to a domestic partner, nor are firms forced to
commit to undertake research and development activities in
Bahrain.

IPR protection for U.S. companies:

The Department of Commerce and other U.S. federal agencies
stand ready to assist U.S. businesses with registering and
enforcing their intellectual property rights, in the U.S. and
in international markets.

Obtaining and Protecting IPR Abroad:

U.S. companies can contact the U.S. Department of Commerce
Office of Intellectual Property Rights (OIPR) for assistance
in obtaining and protecting your intellectual property rights
abroad. OIPR and Commerce's country experts stand ready to
work with U.S. firms to help them protect their intellectual
property abroad. In many cases, OIPR can provide companies
with information to aid in navigating a foreign government's
legal system, including lists of local investigative firms
and attorneys, and share experiences and expertise in that
country. However, the government cannot provide American
companies with legal advice or advocate on a company's behalf
when a matter is before a court or administrative agency.
U.S. companies can reach an OIPR trade specialist by
telephone at (202) 482-1191.
The U.S. Government offers several resources to help U.S
companies protect their intellectual property. For more
information on U.S. Government resources to help U.S.
companies protect their intellectual property, please visit
the official website: http://www.stopfakes.gov/contactus.asp.
Companies may also contact the U.S. Embassy.

-------------------------------------
A.8 Transparency of Regulatory System
-------------------------------------
In October 2002, Bahrain implemented a new government
procurement law that establishes the basic framework for a
transparent, rules-based government procurement system. It
provides that certain procurements may be conducted as
international public tenders open to foreign suppliers. To
implement this law, a tender board, chaired by a cabinet
official, was established in January 2003 to oversee all
government tenders and purchases. In the past, government
tendering procedures for large projects were not highly
transparent. U.S. companies sometimes reported operating at a
disadvantage compared with other international firms.
Contracts were not always decided solely based on price and
technical merit, and selected, pre-qualified firms were
occasionally invited to bid on major government tenders. As
of January 2003, however, the Tenders Board is responsible
for processing all tender decisions valued at $26,525 (BD
10,000) or higher. Individual ministries and departments may
still process projects valued at less than $26,525 (BD
10,000). U.S. firms report that the process is greatly
improved over the previous system, though some challenges
remain. A local representative with strong connections may
still add value in the bidding process.

In the case of manufacturing enterprises, bureaucratic
procedures and red tape had historically created stumbling
blocks mainly due to the lack of coordination between
government ministries, which must sign off at one stage or
another of the licensing procedure. In an attempt to
streamline licensing and approval procedures, the Ministry of
Industry and Commerce opened the Bahrain Investors Center
(BIC) in October 2004 for both local and foreign companies
seeking to register in Bahrain.

This high-tech, customer-friendly and easy to find facility,
located in one of Bahrain's largest malls, is part of a
larger effort by the government to attract firms to use
Bahrain as their "Gateway to the Gulf" by setting up regional
operations here. The BIC is designed as a "one-stop shop"
providing all commercial licensing and registration services.
It houses representatives from all relevant ministries (over
a dozen) and private sector representatives from the
telecommunication, legal, banking, and consulting industries
under one roof.

Officials from the Ministry note that the BIC can process and
issue 80 percent of commercial registration applications
within 24 hours and another 10 percent of commercial
registrations within five working days. The remaining 10
percent, mostly those having to do with health, environment,
power and other essential services, are processed separately
according to sector specific regulations and licenses that
are issued on a case-by-case basis.

Draft legislation is proposed by the Cabinet and by both the
lower house (Council of Representatives) and upper houses
(Shura Council) of the National Assembly. Once the government
produces a draft law and submits it to the lower and upper
houses of the National Assembly for approval, it is then
passed to the Cabinet for the King's signature. After the
King signs the law, the law is published in the Public
Gazette and it enters into force.

Entrenched local business interests with government influence
can cause problems for potential competitors. Interpretation
and application of the law sometimes varies by ministry, and
may be dependent on the stature and connections of an
investor's local partner, if one exists.

--------------------------------------------- ---------
A.9 Efficient Capital Markets and Portfolio Investment
--------------------------------------------- ---------

Consistent with the government of Bahrain's liberal approach
to foreign investment, government policies facilitate the
free flow of financial resources. Foreigners and Bahrainis
alike have ready access to credit on market terms. Generally,
credit terms are variable, but often are limited to 10 years
for loans under $50 million. For major infrastructure
investments, banks will often offer to assume a part of the
risk, and Bahrain's onshore and offshore banks have shown
extensive cooperation in syndicating loans for larger risks.
Generally, Bahrain's banks are described as hungry for solid
investment opportunities. The banking system is sound, and
undergoes examination and supervision by the CBB, which has a
solid international reputation.

-----------------------
A.10 Political Violence
-----------------------

While conditions in Bahrain are largely calm, there has been
some political violence over the past several years. Bahrain
is a majority Shia country with a Sunni ruling class. Some
elements within the Shia community have turned to street
actions -demonstrations, protests, petitions, and occasional
clashes with security forces - to promote their political
agendas. From late 2005 until early 2006, there were a series
of confrontations between youth and police in or near Shia
population centers that often resulted in violence. The
clashes eventually subsided and the King has since ordered
detainees picked up during confrontations released.

------------------
A.11 a. Corruption
------------------

According to U.S. firms, high-level corruption is sometimes
an obstacle to foreign direct investment and contracting,
particularly in the contract-bidding process and in operating
investments. In the case of some high-value contracts,
government-tendering procedures have not always been
transparent and contracts have not always been decided on the
basis of price and technical merit. The creation of a tender
board in 2003 has largely addressed these complaints.
However, petty corruption is relatively rare in Bahrain. The
bureaucracy is sometimes inefficient. Giving or accepting a
bribe is illegal, although the relevant laws are rarely
enforced. Officials have been dismissed for blatant
corruption, but it is never so stated officially. The King
and Crown Prince have come out publicly in favor of reducing
corruption and some Ministries have initiated clean-up
efforts to reduce the problem. The expatriate business
community is cautiously optimistic that there is growing
transparency in the government procurement process. A law to
thoroughly revamp government procurement procedures went into
effect in January 2003. Bahrain is not a signatory to the
OECD Convention on Combating Bribery.

----------------------------------
b. Bilateral Investment Agreements
----------------------------------

The U.S.-Bahrain Free Trade Agreement was implemented on
August 1, 2006 - the first FTA between the United States and
a GCC state. As of January 2006, Bahrain had bilateral
investment protection agreements in place with Algeria,
Turkey, China, Egypt, Jordan, Malaysia, Morocco, Syria,
Philippines and the UK. Bahrain has economic and commercial
cooperation agreements with Australia, Bangladesh, Pakistan,
Italy, China, Egypt, France, Greece, India, Iraq, Jordan,
Morocco, the Netherlands, Russia, Singapore, South Korea,
Syria, Tunisia, Turkey and the UK. Bahrain has air
transportation tax agreements with China, France, Greece,
Singapore, Switzerland, Turkey, UK, U.S. and Yemen, and two
transportation agreements with Syria. Bahrain has concluded
double taxation agreements with Egypt, France, India, Turkey,
Jordan, Malaysia, Morocco, Pakistan, the Philippines,
Thailand and Tunisia.

--------------------------------------------- --
c. OPIC and Other Investment Insurance Programs
--------------------------------------------- --

In 1987, Bahrain and the U.S. Government signed an agreement
regarding 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 is estimated at 320,000, roughly 57
percent of whom are expatriates. The CIA World Factbook cites
2005 unemployment (the most recent year available) at 15
percent. The Bahraini government does not maintain official
unemployment statistics. However, government officials report
that unemployment has dropped from 15 percent to 3.8 percent
since January 2006 as a result of the National Employment
Project (NEP). The NEP, a training and aptitude-testing
initiative, seeks to match unemployed workers with suitable
job openings. Another of the government's primary initiatives
for combating unemployment is "Bahrainization," or the
replacement of expatriate workers by Bahrainis. Certain
professions, including heavy vehicle drivers, have been
reserved for Bahraini nationals since 2002.
Laws creating the Labor Market Regulatory Authority (LMRA)
and the Labor Fund were passed and implemented in 2006. The
LMRA is chaired by the Labor Minister and will take over the
management of all aspects of the expatriate work force from
the Ministry of Labor. The Labor Fund is chaired by the
Minister of State for Foreign Affairs and will be a
depository of funds collected from labor fees that will then
be used to provide further training for Bahraini workers.
Labor market reforms established a phased fee to be paid to
the government by employers of foreign workers with a view
toward equalizing the business costs of hiring expatriate
versus national personnel. The LMRA is expected to be fully
operational by mid-2007.
The Ministry of Labor has also begun working with local
companies, 250 of which have participated thus far, to raise
the skill level and increase the productivity of their
workers through training, while supplementing their salaries
to reach a total of 200 BD monthly. After six months of this
supplement from the Ministry, companies have pledged to
maintain the salary level at 200 BD. The Ministry has also
begun registration for a national unemployment insurance
program that will include both Bahraini citizens who are
between jobs and new graduates and school dropouts who are
seeking first employment.
The government seeks to establish Bahrain as a regional
center for human resource development. Bahrain has over 50
training institutes that offer training in a variety of areas
such as hospitality, information technology, business
studies, English language studies, and banking. Major
training institutes include the Bahrain Institute for Banking
and Finance (BIBF), Bahrain Training Institute (BTI), KPMG,
and the British Council. Both educational and vocational
training curricula have been criticized recently for not
adequately preparing Bahrainis for the workforce. The
government is making concerted efforts to turn this situation
around.
Another major step that the government is undertaking is
development of the labor union movement. Unions first became
legal in 2002 and the government is in the process of
bringing its labor codes into compliance with ILO core labor
standards. In 2006, the government ratified different
legislation to promote labor rights in Bahrain in line with
the Free Trade Agreement requirements. One of the main laws
is the protection of trade union activists against dismissal.
A Prime Ministerial decree was issued in November 2006 that
banned strikes in 12 sectors.

---------------------------------
e. Foreign Trade Free Zones/Ports
---------------------------------

Mina Salman, Bahrain's major port, provides a free transit
zone to facilitate the duty-free import of equipment and
machinery. The North Sitra Industrial Estate is an industrial
free zone. Work on Bahrain's new Khalifa bin Salman Seaport
in Hidd, which will serve the Kingdom's emerging
manufacturing facilities and light industries, is scheduled
to be completed by September 2008. Khalifa Bin Salman Port
will have substantial room for growth over the current
capacity at Mina Salman. Furthermore, with a draft alongside
of 15 meters, the port will be able to handle vessels up to
Post-Panamax size. Foreign-owned firms have the same
investment opportunities in these zones as Bahraini
companies.
A 1999 law requires that investors in industrial, or
industry-related, zones launch a project within one year from
the date of receiving the land, and development will have to
conform to the specifications, terms and drawings submitted
with the application. Changes are not permitted without
approval from the Ministry of Industry and Commerce.
In December 2006, the Bahraini Government and Al Khaleej
Development Company (Tameer) announced the development of the
1.7 million square meter Bahrain Industrial Wharf, located in
the Hidd industrial area. The public-private project provides
direct access to major sea, air and road networks. The wharf
is divided into four major sectors, each fully equipped with
state-of-the-art infrastructure to meet the demands of
businesses. The sectors are: the Industrial Park of around
800,000 sqm., which will accommodate both medium and small
industries; the Logistics Park of around 190,000 sqm., zoned
for warehousing, storage, cold storage and redistribution of
goods; the strategic Business Park of 320,000 sqm., well
suited for low-rise office blocks, training centers,
conference halls and other commercial facilities, and the
Residential Park, which has an approximate area of 70,000
sqm. and will accommodate a park management center and living
quarters for employees including workers and middle
management along with a hotel.
Customs duty exemption is also included on the following:
capital goods, goods for re-export, raw materials for
manufacturing, semi-finished commodities imported for further
processing, and imports required for development projects.

---------------------------------------
f. Foreign Direct Investment Statistics
---------------------------------------

Foreign investments in Bahrain range from partial foreign
ownership of large parastatals in the oil and
telecommunications sectors to restaurant franchises. As the
economy is virtually tax-free, the government does not
maintain detailed statistics on foreign direct investment
flows. US investments to Bahrain in 2005 reached $194
million, marking and increase from $180 million in 2004. FDI
data is supplied below.

U.S. Direct Investment in Bahrain (in millions of U.S.
dollars)

1999: 37
2000: 39
2001: 46
2002: 70
2003: 144
2004: 180
2005: 194

-------------------------
US Investments in Bahrain
-------------------------

-- According to U.S. Embassy records, approximately 180 U.S.
companies were operating in Bahrain as of August 2006. U.S.
investments in Bahrain are divided by sectors, and are listed
below:

INFORMATION TECHNOLOGY (ICT):

-- In July 2005, Microsoft, Bahrain Training Institute (BTI),
Esterad Investment Company, Bahrain Internet Society (BIS),
and the Bahrain Institute of Technology and Bahrain
Development Bank, signed a $1.3 billion deal with the Bahrain
Financial Harbor development to co-market IT, upgrade skills,
and support services of the Bahrain Financial Harbor
Development. This project was endorsed by the Ministry of
Labor.

-- Microsoft Bahrain launched its "B-OnLine" initiative in
November 2004. The B-OnLine initiative is designed to address
the obstacles faced by Bahraini SMEs in acquiring and using
the latest technologies for the benefit of their day-to-day
operations. Microsoft works with the Ministry of Industry and
Commerce, Batelco, and Bank of Bahrain and Kuwait to form an
initiative consortium that provides the necessary advice and
value-added services to support B-OnLine.

-- In March 2004, Microsoft and BDO Jawad Habib were awarded
Bahrain's e-investor project contract. The system offers
investors and potential investors an online one-stop shop
government database of information and services.

-- Cisco Systems has entered into a significant technology
partnership with Bahrain's Amwaj Telecom, signed in September
of 2005, to provide next generation network infrastructure
for Amwaj Islands' Smart City, the technological backbone of
Amwaj Islands.

CONSTRUCTION/ENGINEERING

-- Skidmore, Owings & Merrill LLP was selected by the Kingdom
of Bahrain to develop a set of comprehensive national
planning strategies and is preparing a strategy to address
and integrate Bahrain's physical, economic, social and
environmental development, focusing mostly on land-use and
development.

-- Great Lakes Dredge & Dock is performing dredging
operations in conjunction with the $464 million new Shaikh
Khalifa Port in Hidd Industrial area. A $105 million dredging
contract has also been awarded to US-Bahraini joint venture
Great Lakes - Nass.

-- Parsons provided the designer and supervising engineers
for a $26 million-flyover project in Bahrain's Seef area.
-- Binnie, Black and Veatch International Limited are the
consultants for Phase 3 of the Hidd (Power) and Desalination
Complex. The project was estimated to cost $400 million.
-- Turner International and Atkins are set to start
construction on the $1.5 billion Bahrain Business Bay. The
Four Seasons hotel will be the centerpiece of the
development. Skidmore, Owings and Merrill has completed the
master plan for the first phase of the project, which is
being developed by Bahrain Bay Development, a joint venture
between Arcapita Bank and a Bahrain-based investment group.

-- General Electric Energy, Stone and Webster and Chicago
Bridge and Iron Company were among five companies that
participated in the feasibility study of Kuwait Finance
House's $1.3 petrochemical plant project. The planned
facility will be capable of providing total power capacity of
1,000MW per hour and 30 million gallons of water per day
while simultaneously producing seven key petrochemical
products. These include: 345,000 tons of ethylene dichloride
(EDC), 564,000 tons of caustic soda, 231,000 tons of propane,
150,000 tons of butane, and 44,000 tons of gasoline in
addition to some quantities of hydrogen and sulfur.
Approximately 255 million standard cubic feet per day of
natural gas will be required to operate the complex at full
capacity. The complex is expected to be completed by the
first quarter of 2008.

-- Bechtel was responsible for the Engineering Procurement
Construction and Management (EPCM) of aluminum smelter ALBA's
$1.7 billion fifth pipeline expansion project, which opened
in 2005.

FINANCIAL SERVICES

-- The CBB has granted a license to global insurance
brokerage and consulting giant, Aon Corporation, to establish
Aon Re Middle East, an insurance brokerage firm in Bahrain.

-- A joint venture between Bahrain-based Ithmaar Bank,
US-based Overland Capital Group, Bahrain-based Gulf Finance
House BSC, and Kuwait-based Gulf Investment House established
The First Leasing Bank, with authorized capital of $50
million and paid-up capital of $10 million.

HEALTH
-- Joslin Diabetes Center Affiliate - Bahrain (a partnership
between the Joslin Diabetes Center and local businessmen).
Joslin Diabetes Center Bahrain has invested a total of $9
million, and is expected to increase its investments with its
new expansion plans.
-- Accenture was awarded a contract to structure the Ministry
of Health's Information and Communication Technology Strategy
(ICT), revamping the Ministry of Health's management and
organizational structure, which will include interrelated
systems, functional requirements, business requirements,
administrative requirements, as well as technical
infrastructure requirements. The Ministry of Health's
E-Health project initiative has yet to be finalized by the
Ministry of Cabinet Affairs.

INDUSTRIAL MANUFACTURING

-- Kraft Foods is investing roughly $200 million in a new
cheese and powdered beverage production plant at the Bahrain
International Investment Park in Hidd. The official
announcement was made in July 2006.

-- Tactics Middle East is setting up a $60m car parts factory
near the Bahrain International Circuit.


Foreign/non-US investments:

INDUSTRIAL:

-- Aluminum Bahrain (ALBA) and the Gulf Petrochemical
Industries Complex (GPIC), each of which is owned as a joint
investment by several Gulf States.

-- The Arab Shipbuilding and Repair Yard (ASRY), which is
jointly owned by Bahrain, Kuwait, Saudi Arabia, the United
Arab Emirates, Qatar, Iraq (participation frozen) and Libya
(participation frozen).

-- A Saudi company has been granted a license to form a $92.8
million operation to manufacture laptops. Riyadh-based Arab
Values is currently undergoing negotiations with Japanese
manufacturers to select a suitable branding partner, who will
also provide technical expertise and other support.

-- Tabreed Bahrain, a subsidiary of the UAE company, has
signed its largest-ever contract in the Kingdom to provide
cooling services to Bahrain Financial Harbor (BFH). The
project, which will be fed by the company's North Shore
District Cooling Network, will provide about 30,000 tons of
refrigeration to the entire $1.3 billion Bahrain Financial
Harbor development. Tabreed Bahrain was set up in 2004 and is
a joint venture between UAE-headquartered National Cooling
Company PJSC (Tabreed), Esterad Investment Company and AA Bin
Hindi Group.

-- Germany's high performance sports car maker, RUF
Automobile, will set up a joint venture factory in Bahrain,
the first car manufacturing plant in the Gulf region. A
cornerstone-laying ceremony took place on location at the
Bahrain International Circuit Business Park in Sakhir on
March 8, 2006.

INFORMATION COMMUNICATION TECHNOLOGY (ICT):

-- Britain's Cable and Wireless' 20 percent holding in
Batelco was sold in late 2006 to the government-owned
Mumtalakat and Bahrain's Pension Fund.

-- MTC-Vodafone was awarded the Kingdom's first mobile
operator license in 2003, with a total investment of $160
million. MTC-Vodafone Bahrain is 40% owned by Bahraini
investors and 60% by MTC Kuwait.


INFRASTRUCTURE:

-- Amwaj Islands tourism project is jointly owned by
Bahraini, Kuwaiti and Saudi corporate and individual
investors.

-- The $600 million tourism project of Al Areen Desert Spa
and Resort is owned by the Government of Bahrain, Gulf
Finance House, and various other investors.

-- The development of the $1.3 billion Bahrain Financial
Harbor project is owned by Gulf Finance House as well as
individual and corporate GCC investors.

-- UAE-based regional property developer Majid Al Futtaim
Investments has invested $398 million in a 140,000 square
meter "City Center" Mall in Bahrain. Al Futtaim Investments
has signed another $23.4 million agreement with Bahrain
Cinema Company to equip and lease 20 cinema screens for their
Mega Cinema Complex in the Bahrain City Center Mall.

-- Kuwait-based Rasmal Holding Company in June 2006 launched
the $300 million Sarab Al Areen development project in
Bahrain. The project will include a mall, residential units,
a commercial zone and a hotel. The announcement was made in
June 2006 and is set to be completed at the end of 2008.

-- Kuwait-based Gulf Holding Company in July 2006 launched
the $450 million residential and commercial Villamar at the
Harbor, located at the Bahrain Financial Harbor. Villamar
will consist of the Twisting Towers, the Floating Villas and
the Terraced Podium. Scheduled for completion in June 2009,
the development will comprise a total of 494 one-to-four
bedroom apartments, 54 villas and 6 penthouses.

-- Ossis Property announced in August 2006 that it will build
a business park on Bahrain's $1 billion Amwaj Islands
development. The 76,000 square foot park will feature offices
and amenities in a landscaped setting. The project is divided
into two phases, with the north section set for completion in
late 2007.

FINANCIAL AND BANKING SERVICES:

-- Abu Dhabi Investment House (ADIH) was licensed by the CBB
to start the first Islamic investment bank for women in
Bahrain with an authorized capital of $1 billion and a paid
up capital of $500 million, in June 2006. Shareholders
include Qatar Islamic Bank, and Kuwait Investment Company,
and other individuals.

-- Bahrain-based Ithmaar Bank announced in June 2006 a $2
billion Islamic private equity fund that will be invested in
infrastructure projects worth over $20 billion. Ithmaar will
invest about $750 million in at least three different
projects in the Kingdom in addition to four projects in

China. The fund is under formation and is likely to be based
in Bahrain, and will be managed by Dubai-based Abraaj Capital
and co-sponsored by Bahrain-based Ithmaar Bank and Deutsche
Bank. The key targeted sectors for the fund will be oil and
gas, petrochemicals, telecom, power, water, roads, healthcare
and education. The combined investment opportunity components
reportedly exceed $1 trillion.

-- Abu Dhabi Investment House is investing $86 million in The
Lagoon, which will consist of eight low-rise buildings,
housing restaurants, cafes and other retail outlets, and a
1-km walkway that encircles the lagoon in Amwaj Islands.

-- United International Bank was granted a license by the CBB
to operate as an Islamic investment bank, with an extended
capital of $2.5 billion and paid up capital of $291 million.
Shareholders will include high-level GCC investors.

-- First Gulf Bank was granted a license by the CBB to
operate as an Islamic investment bank, with an extended
capital of $1 billion, and paid up capital of $100 million.
Investors include Venture Capital and 23 GCC investors.

-- Al Salaam Bank was licensed by the Government of Bahrain
as an Islamic banking service with a paid capital of $300
million, in December 2005. Al Salam Bank's main investors in
Bahrain are Emaar Properties, Amlak Finance, Dubai Investment
Group, Dubai Holding, Lebanese Canadian Bank, Al Salaam Bank
in Sudan and Aman Insurance and Re-insurance Company, in
addition to a large number of establishments, companies and
individuals from Bahrain, UAE and Saudi Arabia.

TOURISM:

-- UAE-based Abraaj Capital and Bahrain's Ithmaar Bank have
announced the formation of The Serai Group on July 5, 2006.
The Serai Group is a joint venture company that develops and
manages an international chain of shariah-compliant hotels.
The Bahrain-based company will be capitalized at $500
million, partially funded by Abraaj and Ithmaar.

OIL, GAS, WATER, AND ELECTRICITY:

-- The Ministry of Water and Electricity sold Hidd Power and
Water Station in January 2006 to a consortium of three
international companies, Japan's Sumitomo Corp, UK-based
International Power and Belgian utility Suez-Tractebel, a
subsidiary of the French energy conglomerate Suez, at a cost
of $1.3 billion. The power and water station will sell power
and water back to the government for 20 years. The project is
expected to provide 20 percent of Bahrain's power and 65
percent of its water needs.

-- The Bahrain National Gas Company "Banagas" was formed by
Amiri Decree in March 1979 and is 75 percent owned by the
Government of Bahrain with the remaining 25 percent equally
owned by the Arab Petroleum Investment Corporation and Caltex
Bahrain.

********************************************* ********
Visit Embassy Manama's Classified Website:
http://www.state.sgov.gov/p/nea/manama/
********************************************* ********
ZIADEH

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