By Andrew England Published: November 9 2009 17:47 | Last updated: November 9 2009 17:47

Next month, as Bahrain marks the 10th anniversary of rule under King Hamad bin Isa al-Khalifa, the feelings of Bahrainis will be decidedly mixed.

Some will celebrate and point to development projects, greater freedom of speech and labour reforms as illustrations of progress on the small island state, which has carved out a reputation as one of the Gulf’s most open business destinations. Others will look back on the past decade with a grimace as the hope for political and social changes they clung to in the early years has turned sour.

Like other Gulf states, Bahrain has sought to use the 2003-2008 rise in oil prices to develop infrastructure, raise living standards and diversify its oil-dependent economy by attracting new industries and developing the private sector. In Manama, the capital, the signs of modernisation are conspicuous as gleaming multi-story buildings rise up on land reclaimed from the sea.

In one new building, officials at the Economic Development Board (EDB) map out a 2030 vision, which they hope will double household income and reduce the state’s dependency on oil. Bahrain claims to be the most diversified Gulf economy but oil still contributes about 75 per cent of government revenue even though hydrocarbons account for just 14 per cent of gross domestic product.

It is estimated that annual household income is around 15,500 dinar ($41,100) per family, but the government is conducting a review to produce a more accurate figure. Bahrain hopes to build on its reputation as a financial centre, its proximity to Saudi Arabia and its relatively well-educated population compared to others in the region.

But as the country seeks to modernise and find its place in an increasingly competitive region, surrounded by wealthier neighbours pursuing similar goals, it is blighted by an age-old problem that shows few signs of abating – a bitter sense of discrimination among the Shia majority.

The Shia are estimated to account for 60 to 70 per cent of Bahrain’s indigenous population but are ruled by the Sunni al-Khalifa family. This makes the kingdom unique in the Sunni-dominated Arab Gulf, and Shia have long complained of economic and political marginalisation. It is a situation many argue remains unresolved.

Government officials, however, seek to play down talk of discrimination and instead suggest the criticism is a sign of Bahrain’s democratic credentials. They say education, labour and economic reforms – led by Sheikh Salman, the crown prince, and the EDB he chairs – will benefit all and address the socio-economic ills that fuels much of the Shia anger.

“Eight years ago if you drove through the villages, half of the roads weren’t paved – 90 per cent of the roads weren’t paved. Today, 90 per cent are paved,” says Sheikh Mohammed bin Essa al-Khalifa, the EDB’s chief executive. “Things have got better. Can you do more? Yes. I’m the one who is always pushing to do more.”

Bahrain does have areas to build on, including its reputation for being one of the most liberal Gulf states with a favourable investment climate boosted by lower costs than neighbouring Dubai. It is also further ahead with economic diversification than others, with financial services accounting for around 27 per cent of GDP and a regulatory regime that is touted as among the best in a region that lacks transparency.

So far, the kingdom has survived the global economic crisis relatively unscathed. Some projects have been delayed and jobs have been lost, particularly in finance and construction, but the country is still expected to achieve positive growth this year. This is partly because oil represents a far smaller proportion of the nation’s $21.9bn GDP than its neighbours, but also because its real estate sector developed at a less spectacular pace and so did not fall as sharply. But with oil expected to run out in 10 to 15 years according to some estimates, Bahrain faces myriad hurdles as it looks to find its niche, raise living standards and avoid being eclipsed by neighbours.

Officials say the EDB is still identifying sectors that will take the kingdom through the next stage of development.

They talk of a knowledge-based economy and leveraging its proximity to Saudi Arabia and Qatar as a transport and logistics hub. But they still have some convincing to do.

“In spite of an impressive track record of innovation and resilience, Bahrain seems to be a bit lost,” says Jarmo Kotilaine, chief economist at NCB Capital. “Right now the approach seems to be try a little bit of everything, but where is the Bahrain idea? Why Bahrain rather than other countries?”

He says the “Bahrain formula” needs to be more crisply defined to differentiate it from the rest of the Gulf.

Finding the right future economic model could go some way to appeasing frustrated Shia, observers say, with small groups of youths regularly taking to the streets to protest their lot.

“They have to come up with something in the near term because it will take so long to overcome the social challenges the Shia face,” says a western diplomat. “The important thing is the crown prince has become more powerful and is committed to economic liberalisation. As for political liberalisation – it can’t be rolled back but I’m not sure how far he wants to push it.”

During the 1990s Bahrain was plagued by violence that saw hundreds of Shia detained and others forced into exile.

When King Hamad succeeded his father in 1999 he inspired optimism that things would change by introducing political reforms. He put a new National Charter to a referendum that led to the reconstitution of parliament for the first time since the 1970s, released political prisoners and allowed exiled Shia leaders to return from overseas.

There have been two parliamentary elections since – rarities in the Gulf – although politicians grumble that the National Assembly is toothless. Still, activists have more freedom to speak out against the government and the allegations of torture and arbitrary arrests that dogged the 1990s have subsided, if not completely disappeared.

But Shia activists complain that discrimination has become more institutionalised, with Shia representation in high-ranking government jobs falling – there are just two Shia who are full cabinet ministers. Government critics – Sunni and Shia – also accuse the government of granting citizenship to Sunnis from other countries in a bid to counter some of the Shia’s demographic dominance.

In contrast to the capital, Shia villages dotted around the island are made up of scruffy apartment blocks and flat-roofed houses that are often dirtied by graffiti lambasting the government and ruling family.

“The only hope will be when the government changes its policies,” says Jalal, who lives in a Shia area in Sitra, an industrial area to the east of the island.

When King Hamed visited Sitra at the beginning of the decade, the neighbourhood’s Shia wanted to “lift him up” into the sky, such was their optimism, Jalal says. But now “there’s anger. He promised and has not stuck to his word.”

The picture is muddied by ruling family politics.

Observers agree that Sheikh Salman’s influence has increased, while that of Sheikh Khalifa, the veteran prime minister, has waned.

But the crown prince’s focus is deemed mainly to be economic, while political issues, particularly the treatment of Shia, is thought to be under the influence of Sheikh Khaled, another ruling family member who is head of the royal court.

And few expect further political reform any time soon – even though failing to address Shia frustrations risks jeopardising economic progress.

“There are enough people in the regime who can manage the [Shia] problem. We just want to see it happen soon. If not ... the worst case scenario more likely is the cycle of low-level violence with Shia youth will happen more often and last longer,” says the Western diplomat.

“And at some point Western bankers will send their families home and before long it’s not as attractive as a banking hub. It undermines everything, if you don’t manage it you cannot move forward.” Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web

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_______________________________________________________ Education: New university combats entrenched attitudes By Abeer Allam

Published: November 9 2009 17:47 | Last updated: November 9 2009 17:47

At Bahrain Polytechnic, a lecturer displays a controversial Ralph Lauren advertisement, in which a model’s waist appears smaller than her head and asks students how they would avoid a similar marketing debacle.

For further education in the Arab world, this is a fresh approach. Formal lectures and rote learning are the dominant teaching methods in public universities rather than the development of problem solving skills or practical knowledge.

But in the red and blue buildings of Bahrain Polytechnic, which was launched last year, teachers from New Zealand, Australia and the UK now offer pragmatic instruction in fields such as accounting, marketing and logistics for the first time.

The university, which has 900 students, and expects 2,000 next year, is a focal point of the government’s National Education Reform, which aims to equip students for the needs of the workplace, rather than allowing them to accumulate academic credentials from hours in the classroom.

“We spoke with industries, searched jobs advertised in engineering and we developed a programme that Bahrain desperately needed,’’ says John Scott, chief executive of the school.

Bahrain is an island nation of around 1m people. Up to 100,000 Bahrainis will enter the workforce in the coming decade. In spite of government efforts to reduce employment from 16 to 4 percent, jobs remain elusive.

Unemployed men have joined street protests to demand jobs from the government.

But employers complain that few Bahrainis possess the skills they require, particularly technical or language skills, even with university degrees – in spite of numerous accounting programmes, up to 90 per cent of accountants are foreigners.

As many as 20 per cent of schools and 40 per cent of vocational training institutes are failing their students, according to an October report by the country’s newly established Quality Assurance Authority for Education and Training (QAAET).

“Education must be at the beating heart of national plans for the future,” Crown Prince Salman bin Hamad al-Khalifa, told delegates at an education conference last month. “It is in the interest of the country and the national economy to ensure a steady supply of skilled and qualified workers.”

Bahrain spends up to 11 per cent of its budget (BD4.2bn) on education. But spending on glamorous buildings and expensive programmes, sometimes costing as much as 20 per cent of the national budget, has produced unimpressive results in the Arab world, says a recent report by the UNDP.

In Bahrain and other Gulf states, oil wealth has created a culture in which nationals feel entitled to jobs, regardless of skills. While the problem in Bahrain is less acute – many Bahranis work as taxi drivers or shopkeepers – many trades such as plumbing and nursing are filled with foreign workers.

It is a mindset that Bahrain Polytechnic is trying to change. “We try to develop a culture that they are primarily responsible for their own future, not us,” says Mr Scott. “We also work with industry, which has to provide proper work environment.”

Key sectors with significant gaps include accounting, tourism and services, translation, conference organising and transport and freight logistics.

Other reforms include a teacher training programme, secondary school vocational training and the Quality Assurance Authority that periodically reviews academic standards.

Tamkeen, a BD66m fund established last year, helps fund the career development of university graduates, particularly for potential accountants.

Unlike in other Gulf states, Bahrainis make up 70 per cent of the country’s bankers, but the number of prestigious jobs does not match the demand from underskilled graduates. But with such expectations, it is hard to imagine Polytechnic students settling for a manual job.

The school, which currently runs two-year diploma courses, has had to promise to add a four-year degree to appease parents and students unimpressed with the lesser credential. School officials hope the mindset of students and employers will eventually change, but the reform process is still in its early stages.

Aside from the training, however, students see other advantages to studying at the Bahrain Polytechnic: “It is backed by the crown prince,” says Khalid al Khawaja, 19, a business student.

“I am sure they will find jobs for us.” http://www.ft.com/cms/s/0/1b6205d6-ccbd-11de-8e30-00144feabdc0,dwp_uuid=e80c109e-ccc3-11de-8e30-00144feabdc0.html

+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Economy: Awards don’t pay the bills By Digby Lidston

Published: November 8 2009 23:18 | Last updated: November 8 2009 23:18

Like an eager student, Bahrain likes to collect awards. The past few months have seen the kingdom judged “20th best country for ease of doing business” (World Bank), “the best country for business in the Gulf” (Forbes), “the freest economy in the Middle East” (Heritage Foundation) and “fifth most stable macro-economic environment in the world” (World Economic Forum).

Each accolade is accompanied by a glowing press release – and Bahrain could do with the praise.

As the smallest economy in the Gulf, Bahrain has often felt left behind by its neighbours, unable to muster the huge oil and gas revenues of Saudi Arabia or Qatar and outflanked by the rapid growth of Dubai as a trade and services hub.

By the same token, it has also avoided the worst of its neighbours’ excesses.

After realising in the 1960s that its oil reserves were in decline, the government set about encouraging new industries, building up a small but thriving banking centre and a modest manufacturing base.

And with hydrocarbons accounting for around 14 per cent of gross domestic product, the lurching oil prices of the past year have affected Bahrain’s macro numbers less than energy producers such as Saudi Arabia and Kuwait. Equally, it has avoided the speculation that brought the Dubai real estate market crashing to earth.

The International Monetary Fund forecasts the real economy to grow by 2.6 per cent in 2009. More bullish figures from the country’s Economic Development Board put that figure closer to 3.8 per cent, even though this is well shy of the 6.1 per cent growth of last year.

“Bahrain has managed to muddle through the crisis better than most. One of Bahrain’s key advantages is the nimbleness it owes to its small size and diversity,” says Jarmo Kotilaine, chief economist at NCB Capital.

Yet the chaos of the past 12 months has also given Bahraini policy makers food for thought.

Crude oil, which the kingdom imports from neighbouring Saudi Arabia and refines for export, still accounts for about 75 per cent of government revenues. And there is a growing realisation that an over-large financial sector could leave the economy unbalanced and exposed to instability elsewhere in the region.

“Two years ago, we expected the financial sector to grow at a very rapid rate; today, our attitude has changed,” says Sheikh Mohammed bin Essa al-Khalifa, chief executive of the EDB. “We have always adopted a demand-led model of economic growth. The financial sector will continue to be important, but the economy has to evolve over time.”

Rather than drift with the tides, however, the government has decided to give the economy some sense of direction. To this end, it launched its Vision 2030 in October last year. “It came at an opportune time,” says Sheikh Mohammed. “It is good to have a target to focus on as we go through challenging times.”

The planned Bahrain of two decades’ time is not dissimilar to the island kingdom of today, albeit with a heavier reliance on high-tech and service industries, an extensive public transport system, a better educated workforce and, more importantly, a wealthier one. A key pledge of Vision 2030 is to double household income, though how that is achieved, and on what basis it is calculated, remain nebulous.

Bahrain enjoys a comparatively high per capita GDP of $18,250, but its wealth is skewed heavily towards a small middle class.

The kingdom’s poorer, largely Shia communities face shortages of low-cost housing and poor employment prospects – the average private sector salary is only BD305 a month, according to the Labour Market Regulatory Authority.

Labour reform is a key plank of Vision 2030, and the area where there has been most notable progress. Tamkeen, a labour fund that derives its BD66m budget from a tax on foreign workers, is already training nationals entering the job market and those looking for a step-up in their career. Unlike many wealthier Gulf states, where local Arab populations are a middle-class veneer over a working base of expatriate labour, it is not uncommon to see Bahrainis stacking supermarket shelves and fixing cars.

“Provided they can maintain their edge, then human resources are a real asset,” says Tony Mallis, chief executive of Sico, an investment bank. “More than 70 per cent of my staff are Bahrainis, and they are extremely bright and well-trained. That’s not something you would say elsewhere in the Gulf.”

In other areas of the economy, the cogs are only just beginning to turn. A national economic strategy, a six-year programme intended to screw down some of the high-minded sentiments of the vision into working practice, was approved by the cabinet in February. “It will be a gradual process, as we streamline the civil service and swing them behind the programme,” says Sheikh Mohammed.

In a region that has become used to grand gestures, from the purpose-built economic cities of Saudi Arabia to the skyscrapers of Dubai, Vision 2030 leaves many commentators wondering how Bahrain can compete against its neighbours. Transport, light industry, technology, finance and tourism all offer the potential for economic growth, but there are few industries where Bahrain stands above the rest.

Ultimately, says Sheikh Mohammed, the country’s strength lies in its diversity, rather than individual talents. “We need to be more nimble and we need to adapt, but our fundamentals are the quality of our workforce and the quality of our services. We want a balanced economy.” The open question is whether that is enough to ensure the accolades keep rolling in. Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

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++++++++++++++++++++++++++++++++++++++++++++++++++++ Politics: A sham or a transition to democracy? By Andrew England

Published: November 9 2009 17:47 | Last updated: November 9 2009 17:47

With a year to go until Bahrain’s next parliamentary elections, the nation’s opposition parties are already grappling with an internal debate that accompanies every Bahraini poll.

The question: should they or should they not participate in a process they condemn for being flawed – a façade, critics claim, that is held up to the west as a sign of Bahrain’s democratic credentials but which in reality has little impact on the ground.

Proponents of participation argue that it is better to attempt to reform the system from within, with hopes of pressuring the government to make amendments to the constitution to give parliament more power and to redraw constituencies that they claim favour the Sunni minority at the expense of the Shia.

They also say that media coverage of parliament allows them to raise social issues such as the need for more housing and allegations of discrimination against the Shia.

“At least you can expose the government from within their house,” says Abdul Jalil Ebrahim, a parliamentarian with the al-Wefaq movement, the main opposition in parliament. “From day one we knew the game, but we have to fight.”

On the other side of the debate, however, the belief is that entering parliament only serves the interests of the royal family, which retains ultimate power in the nation.

“Participation would put an obstacle [in the way of] real reform because it legitimises the system,” says Abdulwahad Hussein, leader of al-Wefa, a religious Shia movement formed this year.

Officials with the societies – political groups are not allowed to call themselves parties – say they have yet to make a final decision, but it is generally expected that Wefaq will take part in the 2010 election, as it did in 2006.

However, Wefa and Haq, another Shia movement, are expected to sit out the process, with mutterings that they may call for a boycott of Shia voters.

If that proves the case, the vote will be a key test of how much Wefaq’s credibility has been damaged by its failure, in the eyes of many, to bring genuine change during its time in parliament.

Turnout will also be a barometer of whether Shia have any faith left in a system that was hoped would help soothe years of frustration and feelings of political and economic discrimination.

“Al-Wefaq are in a real pickle; damned if they run, damned if they don’t,” says a western diplomat. “If they don’t, they admit to a mistake [in taking part in 2006], if they do they might get an embarrassingly low level of support.”

Elections were reintroduced to Bahrain following a quarter of a century hiatus only in 2002 after King Hamad bin Isa al Khalifa had put a “National Charter” to a referendum, which reconstituted parliament for the first time since the 1970s.

At a time when the US was pushing for greater democracy in the Middle East, a region bereft of democratic institutions, Bahrain was widely praised by its Western allies.

But the 2002 poll was blemished after leading opposition parties boycotted the vote in protest at King Hamad’s decision to adopt unilaterally a new constitution that gave the upper house, or Shura Council, equal voting rights to the 40-member parliament.

The Shura Council is appointed by the monarch, while critics complain that the parliamentary constituencies are drawn up in such a way that it would be impossible for Shia groups to get a majority in the National Assembly.

In 2006, Wefaq won 17 seats after gaining around 60 per cent of the vote, according to its own officials. Yet its experience over the past three years has reinforced critical views of the assembly.

Some believe it has bolstered support for other Shia groups, like Haq, which are deemed to pursue more radical change.

“Sure, our reputation has been damaged,” says Jasim Husain Ali, a Wefaq MP. “Our problem is that we do not have any champion cases.”

The government, however, insists the system is working and that it is a question of the fledgling system going through teething pains.

Observers and politicians also raise questions about the quality of some of the MPs, both among the Shia and the Sunni Islamists that control most other seats.

“There is not a unified vision by those who are in the parliament and this vision need to be drafted, need to be worked on and needs to be followed,” says Nazar al-Baharna, minister of state of foreign affairs. “People here are not patient.”

He says the system has to mature, “grow and has to be sustainable.”

“There is no way we can jump from zero to 100. It has to be progressive,” adds Mr Baharna, who is a former member of Wefaq.

Critics, however, say the process will remain flawed unless there is serious reform.

“The government uses us as a decoration for the state,” says Ebrahim Sharif Al Sayed, a Sunni and senior official at the National Democratic Action Society, a liberal opposition movement. “We are just a picture in a house owned by the royal family, and if you come from abroad it looks like a good picture.” Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web

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+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Shia population: Fed up with immigration and discrimination By Digby Lidstone

Published: November 9 2009 17:47 | Last updated: November 9 2009 17:47

October brings an end to the humidity that keeps Bahrainis indoors for four months in every year. It also heralds a new political season for the poorer Shia villages, where in recent weeks protesters have taken to the streets by day and daubed anti-government graffiti by night. In northern settlements such as Karbabad and Diraz, the roads are mottled with black scorch marks, the scars left by barricades of burning tyres.

Bahrain has a long history of political activism: “There had been riots, and burning of cars, and it was said [it turned out to be untrue] that one of the sheikhs had been pulled from his car and stoned to death,” a visiting archaeologist wrote in 1956, after a scuffle in a vegetable market escalated into a national strike.

Back then, the focus of resentment was the British colonial presence. These days, the protests have a sectarian flavour. Bahrain is the only country in the world where a Shia majority population is ruled by a Sunni minority, led by the ruling Al-Khalifa family. Shia citizens account for 60 to 70 per cent of Bahraini nationals, yet hold only 13 per cent of high-ranking public posts, according to the Bahrain Centre for Human Rights.

This figure has fallen from about 25 per cent at the beginning of the decade, says Nabeel Rajab, from the centre. “The biggest problem is inequality, people feel marginalised, they feel like second or third-class citizens,” he says.

Add to this shortages of housing and well-paid jobs, and you get a combustible mix. “There is a lot of resentment among these young people,” says Abduljalil Alsingace, a senior official from Haq, an opposition movement associated with many street protests.

“They can’t afford to marry, they can’t get a house, and they see Syrians and Pakistanis being given jobs in the security forces and their families given homes by the government.”

In an attempt to defuse tensions, the government has stepped up the pace of social reform. It has pledged to double average household income by 2030, and intends to build 50,000 low-cost homes in the next five years. “It’s a slow process, we don’t have the financial resources of Qatar or Abu Dhabi, but it is a priority,” says Sheikh Mohammed bin Essa al-Khalifa, chief executive of the Economic Development Board and a member of the ruling family.

Wary of a return to the civil unrest of the 1990s, when bombings and bloody clashes between Shia protesters and security services left more than 30 dead, the authorities have reined in heavy-handed tactics. “Ten years ago, the security could come in your house and break your things. Now, they need to have a certificate [search warrant],” says a Shia resident of Sitra, an industrial area to the east of Bahrain.

Discrimination has proved a stickier charge. At the end of October, a three-kilometre human chain of more than 2,000 demonstrators lined Manama’s eastern waterfront to protest against “political naturalisation” – the award of nationality to foreign, especially Sunni Arab and Asian, members of the military and security forces.

Shia groups claim they are excluded from jobs in the military and other security services, and accuse the government of attempting to alter the sectarian balance of the island.

“In the past, just a few hundred people would get citizenship every year, but the rate has really increased in the past seven years,” says Ebrahim Sharif al Sayed, secretary-general of the National Democratic Action Society, which helped organise the rally. As many as 9,000 foreigners a year have been naturalised recently, he says – a significant number for an island of just 1.2m people. “Many of them are poor or from Bedouin backgrounds, so they have large families, and these families are not reflected in the statistics.”

In a rare public statement on the issue in October, Interior Minister Sheikh Rashid bin Abdullah al-Khalifa denied claims of systemic discrimination. “The king has ordered the naturalisation of 7,648 since the start of the decade, 95 per cent of whom are Shia,” he told the pro-government daily Al-Watan.

Finding common ground may prove difficult: “I wish they would meet the opposition’s concerns on naturalisation,” says a senior western diplomat. “The Shia exaggerate it but it’s clear there are new neighbourhoods of Syrians that were not there a few years ago.”

The Al-Khalifa family bears the brunt of the graffiti in many Shia villages. But what worries the authorities are the stencilled faces of religious leaders from other countries, such as Ayatollah Ali al-Sistani, the most senior Shia cleric in Iraq, and Ayatollah Khamanei of Iran.

Since the invasion of Iraq in 2003, many Arab governments have been concerned by the perceived spread of Iranian influence across the Middle East. Iran has posed an overt threat on at least one occasion in Bahrain’s recent history, when it backed a failed coup attempt in 1981. Yet analysts say the main grievances of the kingdom’s Shia communities today are social, rather than political or religious, in nature.

“There has been a tendency to point the finger of blame at Tehran for the slightest disturbance, and to assume demonstrations are instigated from overseas, but I’m not sure many Bahrainis look to Iran for political inspiration,” says Steven Wright, a specialist in Gulf politics at Qatar University. “The demands for political change really stem from socio-economic issues, from poverty and discrimination. Dressing it up as a sectarian problem only masks these underlying social concerns.” Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web

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Published: November 9 2009 17:47 | Last updated: November 9 2009 17:47

The main road from Manama loops south past the oasis of Riffa into the southern desert of Bahrain. It is a scrubby expanse broken by Jebel Dukhan, the smoky mountain that studs the island’s navel, and the tracks of oil and gas pipelines, tawny with rust, that hiss quietly to themselves in the silence.

This is the site of Oil Well Number One, an unremarkable spigot about eight feet high and the scene, in 1931, of the first oil strike in the Gulf.

Bahrain was the original Arab oil state. Revenues from oil exports helped build one of the first modern cities in the region and eased the decline of older industries such as fishing and the pearl trade. Yet Bahrain will also be the first to run out of oil. Declining production in the 1970s spurred the government to diversify its economy, using gas once flared off as waste to fuel new industries such as aluminium and petrochemicals.

The result today is that Bahrain has one of the most varied economies in the region, with a modest manufacturing base and decades-old factories and smelting plants. But its attempts to diversify away from oil and gas have hit a snag. Local industries still depend on the fuels from which Bahrain is supposed to be weaning itself.

“We have guaranteed supplies of gas, and can rely on both the reliability and quality of supply, but if we want to expand we have to look for new resources,” says Mahmoud al-Kooheji, chairman of Aluminium Bahrain, or Alba.

Alba is one of the oldest industries in the kingdom, set up in 1968 to produce some 56,000 tonnes a year of aluminium – what is known in the industry as frozen energy for its highly intensive use of gas.

Alba can now produce up to 880,000 tonnes of aluminium in a year, making its smelter the second largest in the Middle East after a similar facility in Dubai.

The company has considerable strategic importance for the small economy of Bahrain, employing more than 3,000 people and contributing about 12 per cent of gross domestic product. As importantly, it feeds a wider industry of rolling mills, cable manufacturers and foil manufacturers.

“We’ve managed to develop a very good downstream industry, and nearly 50 per cent of our products go into the local market,” says Mr Al-Kooheji. “That gives us an advantage over any competitors, as it will take them years to develop their own downstream industries.”

Yet Alba would have problems competing with new arrivals even if wanted to. Plans for a sixth production unit have been kept on hold for several years, pending the provision of more gas. With the population expanding at 1.8 per cent a year on average, Bahrain needs to dedicate as much of its supplies as possible to fuelling its power and desalination plants.

“They give us the gas, instead of giving it to Alba, because for us it’s a necessity,” says Abdulmajeed Ali Alawadhi, chief executive of the Electricity & Water Authority. Plans to expand the local Gulf Petrochemical Industries Company have stalled for much the same reason.

Worse, Bahrain’s natural gas reserves are in decline. Reserve estimates stand at about 84bn cubic metres, with this figure expected to fall to 75bn by 2011, making the discovery of new resources or increased imports essential to keep Bahrain’s existing heavy industries afloat and ensure the lights stay on in Manama.

Bahrain has talked to its neighbours about possible gas supply agreements, so far to little avail. Discussions with Iran about building an export pipeline south from the Islamic Republic stalled last year after a political spat. Qatar, the obvious supplier of last resort, continues to observe a moratorium on any new gas deals, worried about the effect on its giant North Field.

This leaves scope for creative thinking. “We believe we can increase production to about 1.2 million tonnes for just a fractional increase in gas,” says Mr Kooheji. “By replacing our old power plant and upgrading our lines, we can build a sixth line using no more than 10 per cent additional gas.”

There is the chance of a future respite. Royal Dutch Shell has signed an agreement with the government to examine a range of gas import proposals, which include construction of a liquefied natural gas terminal – a costly investment, but one that would make Bahrain less reliant on its neighbours for supplies.

The government is also beginning to shift the focus of its industrial plans away from energy-intensive companies such as Alba towards light manufacturing. Several investment zones have been set up next to the newly-opened Khalifa bin Salman Port at Hidd, and Bahrain’s free trade agreement with the US and easy access by road to Saudi Arabia have been heavily marketed to potential investors.

“One of the main advantages of Bahrain is access,” says Nicola Pero, chief executive of @Bahrain, a $3.5bn mixed-use technology and industrial park being developed in the south of the island.

“You have huge markets on your doorstep and a benign investment environment, which is a powerful argument.”

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Published: November 9 2009 17:47 | Last updated: November 9 2009 17:47

Ask any Bahraini banker how the financial industry fares, and you tend to get the same answer: the worst of the crisis appears to be over, but a long climb awaits.

“We’re in a pit, I don’t think anyone disputes that,” says one. “But we’re grateful the pit’s not filling with water.”

Like many banking centres, Bahrain has had a bumpy ride in the past 12 months. “It was inevitable we would feel repercussions, and most difficulties here are derivative of troubles in the wider Gulf and the global markets,” says Tony Mallis, chief executive of Sico, an investment bank.

Bahrain has an outward-looking financial industry, with more than half its 146 banks classified as wholesale – in effect, offshore institutions with an eye on neighbouring markets such as Qatar and Saudi Arabia.

Cash has been in short supply in the past year. But the full extent of the crisis was brought home in July, when Awal Bank and The International Banking Corporation were placed in administration.

Though based in Manama, both institutions were the offspring of the troubled Saad and Algosaibi groups of Saudi Arabia. The family conglomerates ran into financial difficulties this year, and are believed to have more than $20bn of liabilities. Bahrain’s central bank took control of Awal and TIBC after both banks defaulted on their debts and failed to come up with suitable restructuring plans.

“I think it was a big shock to the industry, but I don’t think anyone was actually surprised,” says Gary Muriwai, director of the Bahrain Institute of Banking & Finance. “There had been a lot of lending against reputation and family names across the region. A lot of people are seriously reassessing how they manage risk.”

Not least among these is the governor of the Central Bank of Bahrain (CBB). Rasheed al-Maraj oversees one of the most rigorous regulatory environments in the region, with strong capital adequacy ratios and stringent rules on disclosure. Yet the central bank was taken aback by “how the reported liquidity position of these banks could have deteriorated so suddenly”, as he told the Financial Times at the time.

Four months later, any concerns about systemic risk have been mollified, say bankers, but confidence has been knocked.

Compared with its oil-rich neighbours, Manama has fewer financial resources to bail out banks in the event of a crisis. At $224bn, the combined assets of the Bahraini financial sector are equivalent to more than 10 times the nation’s gross domestic product. Nor does the central bank “consider itself a lender of last resort”, says Mr Maraj, arguing this would undermine the competitive nature of the industry.

Before the financial crisis hit, Bahrain worked hard to claw back financial business from other Gulf states. Once the undisputed offshore banking centre for the Middle East, the country slid from pole position after 2000 as the likes of Qatar and Dubai launched purpose-built financial centres and banks gravitated towards their larger, thriving economies.

Between 2006 and last year, Bahrain regained some momentum, with the industry averaging 18 per cent annual growth. It now hosts more than 400 financial institutions, and the industry accounts for 27 per cent of GDP, making it the largest sector of the economy.

The country has traded off its reputation for a mature legal and regulatory environment, which has been lauded by the likes of the International Monetary Fund. “The CBB is generally very well regarded,” says Atif Abdulmalik, chief executive and founder of Arcapita bank.

The central bank moved rapidly to apply lessons learned from the Awal/TIBC affair, drafting new rules on bank liquidity within weeks and tightening up its scrutiny of banks’ balance sheets.

“At the end of the day, it’s not the job of the regulator to sniff out fraud, their job is to prevent systemic risk, and on that basis the CBB have done a good job,” says a European financier working for a local Islamic bank. “It’s a pretty thankless task, but they seem to strike the right balance.”

Yet the events of the past year have led many to question where Bahrain’s financial industry is headed. “If there is one criticism, it is the sheer number of licences that have been granted,” says Mr Mallis. “I think there will be more thought about where Bahrain’s strengths lie, and less attention paid to its size.”

http://www.ft.com/cms/s/0/1d69e56a-ccbd-11de-8e30-00144feabdc0,dwp_uuid=e80c109e-ccc3-11de-8e30-00144feabdc0.html

+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Labour: Liberalised labour laws help country stand out from peers By Abeer Allam

Published: November 9 2009 17:47 | Last updated: November 9 2009 17:47

When Bahrain abolished much of its expatriate sponsorship system this summer, the move sparked an avalanche of protests from the business community. Executives complained that the move would destroy their businesses and turn employees against them.

“They said there would be chaos in the market,” says Majeed al Alawi, the labour minister. “But cheap labour distorts the whole labour market. We want to ensure the human rights and contractual rights for expatriates are respected.”

In other Gulf countries, sponsorship, or kafala, gives employers scope to exploit foreign workers. Because they are dependent on obtaining consent before travelling, changing jobs, or being joined by their families, employers have leverage over them.

Expatriate workers dominate most high and low skilled labour markets in the Gulf. Bahrain has calculated that freeing its labour market will give it a competitive advantage. If foreign employees can switch jobs, they may move to better conditions or demand better salaries,reducing the salary gap between Bahraini and foreign nationals.

Labour reforms, which also extend unemployment benefit to Bahraini citizens, are part of the Bahrain’s Economic Development Board‘s plan to overhaul the labour and education systems. Fees for work permits for foreigners have been increased to BD200 ($533), and sponsors now pay a BD10 monthly fee for each expatriate worker.

Officials hope increasing the cost of foreign workers will induce employers to hire nationals. The policy, experts say, may be emulated by other Gulf states, where governments have focused on quota systems, which are open to abuse.

Periodic unrest in Bahrain is often galvanized by unemployment and under-employment among young Bahrainis, particularly from its Shia majority.

But the government says the plan should yield opportunities for all. Government efforts have reduced unemployment, with the official rate falling from 16 per cent six years ago to around 4 per cent.

But young Bahrainis are hard to please, business owners say. They show up for work for few days but then leave and go back to protest to the labour ministry. Many shun manual work and expect cushy government jobs.

“The private sector considers Bahrainis to be undisciplined, untrained and demanding,” says Mr Alawi. “Young people say salaries are too low, there is no future or benefit.”

Tamkeen, a BD66m ($175m) fund set up two years ago, supports vocational training and career development for Bahrainis. By offering loans to qualifying small and mid-size businesses that can pay up to 50 per cent of start-up costs for equipment, the fund subsidises companies that gradually replace foreign workers. It also retrains Bahrainis for the job market. It has helped as many as 5,600 companies in two years, officials say.

“We want Bahrain to be the first choice of employment,” says Nazar al Baharna, chairman of Tamkeen. “Raising the productivity should broaden the middle class and fill gaps in the business sector.”

Official statistics show that 460,352 foreign workers were employed until the second quarter, amounting to roughly 77 per cent of the labour force.

But at the end of the day, salaries drive the system. Bahrainis say they cannot afford to live with the low wages businesses pay foreign workers. Also jobs in the tourism industry are not welcome because they may mean serving alcohol.

Bahrainis, particularly from the Shia community, remain skeptical and suggest that factors unrelated to their skills are the real cause of unemployment.

“Shia are still second-class citizens,” says Ali Abdel Imam, political activist and blogger. He cites the scholarships and job positions, which he says favour Sunni candidates over Shia. In a job application to be an army nurse, his sister was required to specify her religious sect. She never heard back, he says.

“The gang that controls the decision-making is sectarian, that is the problem,” he says. http://www.ft.com/cms/s/0/25ecf01a-ccbd-11de-8e30-00144feabdc0.html?nclick_check=1