Bahrain continues to improve internationally in ease of doing business rankings

 

Economic diversification has been a strategic priority for GCC finance ministries for decades, and the recent decline in oil prices has only served to underscore the importance of hydrocarbons-driven economies reducing their dependence on oil and gas to ensure their long-term economic stability. Much of the momentum behind this process in the GCC is derived from direct government investment, with hydrocarbons revenues often diverted towards areas of the economy that government planners consider potential growth drivers.

REACH OF THE GOVERNMENT: The government’s hand reaches as far down the business scale as start-ups and micro-businesses. One of the notable characteristics of the region is the prominent role played by the public sector in financing and providing infrastructure for domestic entrepreneurs. The recent appearance of a small number of angel investors in some of the Gulf’s markets has done little to alter the existing paradigm by which national diversification strategies are primarily driven through government spending.

However, while this is likely to remain the case for some time, the persistently low oil price has reminded government planners of the limits of state power. Attracting investment from outside national borders has therefore never been more important, and there is increasing competition amongst GCC counties to capture the limited global supply of it. Enhancing the investment environment has risen to the top of the agenda in finance ministries across the region, a battle that is fought across the broad fronts of regulatory frameworks, infrastructure provision and the offering of incentives.

A range of global organisations and foundations map this struggle for the benefit of international investors, and therefore a good performance in these indices has become of paramount importance to regional governments, including Bahrain’s.

GAINING GROUND: Bahrain has already established itself as a welcoming destination for investment. From 2008 the “Business Friendly Bahrain” campaign produced by global advertising giant M&C Saatchi did much to highlight the attractions of the kingdom’s advanced regulatory structure, financially savvy workforce and low-cost environment.

This achievement is a concrete one, rather than a simple exercise in public relations. In the World Bank’s “Doing Business 2017” report Bahrain ranks 63rd out of 190 countries, the second-highest in the GCC and three places higher than its level in 2016.

The kingdom performs particularly well in areas such as paying taxes, where it is ranked fourth globally thanks in large part to a total tax rate (as a percentage of profit) of 13.5%, compared to a MENA average of 32.3%. Another area in which Bahrain has traditionally performed well is that of property registration, for which it ranked 25th in the world in 2017. Its key advantage here is one of cost, which in the kingdom works out at 1.7% of property value, compared to the MENA average of 5.6% and an OECD average of 4.2%. This metric has been particularly useful in Bahrain’s attempts to persuade multinational firms to use Manama as a base from which to orchestrate their Gulf operations — an effort which has proven to be quite successful.

In terms of its recent improvements, Bahrain has made particularly good progress in the field of starting a business, where it climbed 69 places in the “Doing Business 2017” report.

It is significantly cheaper and quicker to open a business in Bahrain than elsewhere in MENA, costing just 1.2% of income per capita compared to a regional average of 26.3%, and taking just nine days compared to the MENA average of 20.

The kingdom also made gains in the areas of securing electricity and access to credit in 2017. The latter move was important, as the availability of credit has for some years been an area which has been identified as needing attention. In 2017 Bahrain ranked 101st out of 190 countries in this field, with legal rights in terms of collateral and bankruptcy laws emerging as a particular challenge. Enforcing contracts is another area which has negatively affected Bahrain’s overall rating, with the kingdom ranking 110th overall in 2017. A new bankruptcy law is expected in 2017.

The average time between a plaintiff filing a lawsuit and receiving payment in Bahrain is 635 days, slightly quicker than the MENA average, while the average cost as a percentage of the claim is 14.7%, considerably lower than the 25% average of the region. Where the World Bank finds fault is in the area of judicial process, which includes court structure and proceedings, case management and alternative dispute resolution. Here Bahrain scores a four on an index of 0-18, against a MENA average of 5.8.

THE BROADER PICTURE: In terms of setting up and running a business, Bahrain scores well in global terms and is almost at the top of the regional ranking, with room for improvement in a small number of areas. By other measures, the nation is even further ahead of its regional competition.

The kingdom ranked 18th in the 2016 index of Economic Freedom, an annual guide published by the Wall Street Journal, which covers 10 areas — from property rights to entrepreneurship — in 186 countries. This places Bahrain above advanced economies such as Luxembourg, Japan and Sweden, and one place behind Germany. In regional terms, Bahrain tops the list, followed by the UAE and Qatar.

Bahrain places above the global average in nine out of 10 of the index’s main criteria, and is strongly rated in the areas of regulatory efficiency, fiscal freedom and financial freedom. The kingdom’s vulnerabilities are concentrated within the legal sphere, such as in the appointment of judges by the executive and weak enforcement of anti-corruption laws. The report stated, however, that instances of expropriation are rare and property is secure.

Perhaps just as important as the strong position Bahrain enjoys in the economically-focused indices is the kingdom’s performance in the field of social development. This has become especially significant since the unrest of 2011, as the importance of meeting the social needs of the population has grown. The Islamic International Ratings Agency acknowledged Bahrain’s progress in developing a sustainable workforce in its 2016 ratings report of the kingdom, citing the government’s efforts in education and training, as well as the establishment of institutions mandated with supporting Bahrainis in the early phases of their careers.

Bahrain has also risen steadily in the human development index, published by the UN Development Programme (UNDP). In 2016 the kingdom ranked 45th out of 188 countries, a climb of three places from 2012, largely attributable to improvements in life expectancy. Other areas of improved performance include the educational system and health care, the majority of which has come from the kingdom’s pursuit of the Millennium Development Goals set by UNDP in the year 2000.

Of the eight goals established by the Millennium Declaration of that year, Bahrain has achieved five, a feat which required it to meet a wide array of specific targets and indicators. Areas where full attainment have yet to be achieved include the fostering of gender equality and environmental stability.

LOOKING AHEAD: Bahrain’s relatively small landmass has made the task of basic infrastructure provision a relatively straightforward one, and the kingdom’s road network, port infrastructure and telecoms systems are already well established. This is a result of years of investment in the kingdom’s transport infrastructure.

The infrastructural focus over coming years, therefore, will be on the new Bahrain International Airport terminal. The UAE’s Arabtec and Turkey’s TAV were awarded a $1.1bn contract in January 2016, with a mandate to expand the airport’s capacity to 14m annual passengers. Work on the new passenger terminal should be completed by 2019.

Bahrain’s ability to stay ahead of its rivals rests primarily on the extent to which it can continue to provide institutional frameworks that offer comparative advantages to investors viewing the region from afar. This will include the further development of the laws and national bodies it has established to guide the expansion of crucial sectors such as finance, telecoms and health care.

The task of cutting red tape and reducing bureaucracy will also remain an important one for the kingdom. From the perspective of the major indices, however, judicial reform offers the greatest gains in terms of overall ranking — an enticing prospect for government planners, but also one of the most challenging propositions currently on the table.

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The Report: Bahrain 2017

Economy chapter from The Report: Bahrain 2017