KPMG Cost of Doing Business in Bahrain - 2014

8/10/2019 KPMG Cost of Doing Business in Bahrain - 2014

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Cost of DoingBusiness in

Bahrain Financial Services

November 2014


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Contents

1 Executive Summary 1

2 Licensing & Registration Costs 3

3 Renting Commerci al Office Space 4

3.1 Bahrain 4

3.2 Dubai 5

3.3 Qatar 6

4 Occupancy cost s 7

5 Manpower costs 8

6 Cost of Utilities 10

7 Communication Costs 11

7.1 Telephone Services 11

7.2 Internet Services 12

8 Corporate Taxes 13

9 Renting Residences 14

10 Education Costs 15

11 Total Costs Summary 16

Appendix 17


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1 Executive Summary

This report looks at the typical costs associated with operating a financial services firm in Bahrain,Dubai and Qatar. The report analyses the cost of licensing and registration, commercial rental rates,manpower costs, communication and utility expenses, as well as corporate taxes across these

jurisdictions.

In addition to analyzing the costs of operating a financial services firm in these jurisdictions, the studyalso presents an overview of the average cost of living, focusing on the cost of education and the costof renting residential properties. Overall, the total cost of doing business in Dubai and Qatar issignificantly higher (35% and 46% respectively) 1

Rental rates of commercial properties in Bahrain remain considerably lower than Qatar and Dubai,where office rents are more than two times the r a tes in Ba hrain. Commercial rental rates for Dubaiand Qatar are assessed for free zones only (DIFC

than that of Bahrain.

2 and QFC 3

Although communication and utility expenses vary upon consumption, Dubai has the highest averagecost for utilities (water and electricity) and telecommunication.

respectively) as financial services firmsare restricted to these locations (in the case of Dubai) or are predominantly located in these freezones (as in the case of Qatar). Bahrain, however, has no such restrictions and an investment

company would be permitted to setup operations in any commercial office location.

From a cost of living perspective, residential rents in addition to the cost of schooling are higher inDubai and Qatar, making Bahrain the most affordable country to live in. On average, the rental rate of2 bedroom apartments and 3 bedroom villas in Dubai and Qatar are twice that of Bahrain. Educationcosts in Bahrain are lower than Dubai and Qatar which exceed the education cost of Bahrain by 80%and 103% respectively.

Bahrain also has the lowest manpower costs when compared with Dubai and Qatar, with the averagesalary in Bahrain for the year 2014 being 6-15% less than Dubai and Qatar, respectively.

1 Calculated based on an office of 300 sqm with 7 employees2

DIFC : The Dubai International Financial Centre is a financial free zone located in Dubai which operates as an independent jurisdiction within the UAE3 QFC: The Qatar Financial Centre is a financial centre located in Doha which operates as an independent jurisdiction within

Qatar


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The following tables outline the overall cost of setting up and operating a business, in addition to theliving costs across Bahrain, Qatar and Dubai:

Figure 1: Comparison of various cost heads 4

Average Annual Cost of Operat ions (USD)

Cost Head Bahrain Qatar Dubai Commercial Rent 5 75,930 221,340 222,160

Manpower 6 69,810 86,510 77,170

Telephone Services 7 1,670 2,260 3,510

Internet Services 8 3,500 5,270 3,750

Utility (electricity & water) 310 280 660

Total Cost 149,790 313,720 304,240 Source: KPMG analysis

Figure 2: Indicative Costs of Living 9

Average Annual Cost of Living (USD)

Cost Head Bahrain Qatar Dubai

Residential Units 102 Bedroom Apartment 17,280 33,840 37,440

3 Bedroom Villa 23,040 47,280 63,840

Education 6,710 13,650 12,080 Source: KPMG analysis

4 All figures have been rounded off to the nearest 105 Reflects the average annual cost of renting 300sqm of commercial office space6 Reflects the manpower costs of 1 employee, and includes occupancy costs7 Reflects the telephone charges of 1 employee and includes monthly rental charges8 Reflects the corporate rates for 8Mbps packages9 All figures have been rounded off to the nearest 1010 Reflects the annual cost of renting a 2 bedroom apartment or a 3 bedroom villa


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2 Licensing & Registration Costs

Financial services institutions operating in banking and investment activities are regulated by theCentral Bank of Bahrain (CBB) in Bahrain, the Duba i Financial Services Authority (DFSA) in the DIFC,and the Qatar Financial Centre Regulator Authority 11 (QFCRA) in QFC. In particul ar , this study looksat financial institutions that are permitted in dealing with investments (as principle) 12 and dealing withinvestments (as agent) 13

Licensing and registra tion costs are presented in the form of non-refundable application fees, inaddition to annual fees

.

14

Figure 3: Licensing and Registration Fees of Financial Services Institutions

charged to the licensees, depending on the type of license held, should theapplication be successful.

Annual Fees & Appli cat ion Fees (USD)

Regulator Category Application Fees Annual Fees

CBB15 Dealing with Investments (as principle) 270 14,910 (floor) 63,660 (cap)

Dealing with Investments (as agent) 270 14,910 (floor) 63,660 (cap)

DFSADealing with Investments (as principle) 40,000 40,000

Dealing with Investments (as agent) 25,000 25,000

QFCDealing with Investments (as principle) 25,000 25,000

Dealing with Investments (as agent) 10,000 10,000Source: Central Bank of Bahrain Rulebook: A Guide to the CBBs Licensing Process, The DFSA Rulebook: Fees Module, Qatar Financial Centre Regulatory

Authority: A Guide to the Application Process

11 Qatar has a dual regulatory system whereby the QFCRA as well as the Qatar Central Bank (QCB) regulate entities undertheir jurisdictions

12 Dealing in investments as principle refers to the buying, selling, subscribing for or underwriting of financial instruments onown account, including the underwriting of public offerings and private placement of third parties

13 Dealing in investments as agent refers to the buying, selling, subscribing for or underwriting of financial instruments on behalfof a client

14

Annual fees payable to the CBB are variable, and are based on a percentage of the institutions adjusted operating cost base(subject to a minimum and maximum amount). Furthermore, the DFSA charges an annual fee of 0.1% for each USD 1 millionin turnover

15 The application and annual fees charged by the CBB are rounded off to the nearest 10


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3 Renting Commercial Office Space

3.1 BahrainRental rates for commercial office space have fallen by an estimated 7% between 2013 and 2014.This is due to the current competitive market whereby supply of prime office space exceeds demand.

At these rates, Bahrain is the most competitive commercial office space market when compared withDubai and Qatar.

The table below reflects the rentals for the Net Internal Area (NIA) 16

Figure 4: Prime commercial asking rental rates in Bahrain

. Typically, an additional 15% ofthe rent would be charged as maintenance charges for the common areas which include staircasesand lobbies.

Ask ing r ental r ates in Bahrain by of fi ce l ocations (USD per sqm per month) 17

Location 2012 2013 2014

Bahrain World Trade Center 24 24 21

Bahrain Financial Harbor 24 24 24

Seef Area 22 21 19

Diplomatic Area / Manama 24 22 19

Source: Primary Research, KPMG analysis

Both Bahrain World Trade Center and Bahrain Financial Harbor offer furnished and non-furnishedoffice space options.

Figure 5: Typical prime commercial asking rents

Bahrain asking rent s in 2014 (USD per mon th)Location 50 sqm 100 sqm 200 sqm 300 sqm

Bahrain World Trade Center 1,060 2,120 4,240 6,370

Bahrain Financial Harbor 1,200 2,400 4,800 7,200

Seef Area 960 1,910 3,820 5,730

Diplomatic/Manama 1,000 2,000 4,000 6,010


16 Net Internal Area refers to the total floor area excluding area taken up by lobbies, stairs and escalators, lifts and othermaintenance areas.

17 All figures have been rounded to the nearest integer


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3.2 DubaiRental rates for commercial properties in Dubai remain high when compared to Bahrain. On average,prime office space rental rates in Dubai are 193% higher than Bahrain.

Figure 6: Prime commercial asking rental rates in Dubai

Ask ing r ental r ates in Dubai by major of fi ce locati ons (USD per sqm per month) 18

Location 2012 2013 2014

DIFC Gate Village 56 56 56

DIFC Gate Precinct 62 62 62

DIFC Gate Building 67 67 67


DIFC further charges USD 14.7 per square meter per month as service and utility charges.

Typical rents for occupying at the DIFC are as below:


Dubai asking rents i n 2014 (USD per month)

Location 50 sqm 100 sqm 200 sqm 300 sqm

DIFC Gate Village 2,810 5,620 11,230 16,850

DIFC Gate Precinct 3,090 6,180 12,360 18,540

DIFC Gate Building 3,360 6,720 13,430 20,150




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3.3 QatarRental rates in the Diplomatic District / West Bay have increased due to the development of the areaas having the greatest amount of A-Grade office space in Qatar. Rental rates at QFC reduced asmore prime office supply became available in Qatar. On average, prime office space rental rates inQatar are 192% higher than Bahrain.

Figure 8: Prime commercial asking rental rates in Qatar

Ask ing r ental r ates in Qatar b y major of fi ce l ocati ons (USD per sqm per mon th) 19

Location 2012 2013 2014

Qatar Financial Center (QFC) 69 69 66

Diplomatic District / West Bay(average) 54 55 57

Source: Primary Research, Asteco Qatar Report Q1 2014, KPMG analysis

In addition to the base rent in Diplomatic District/West Bay, 15% of the monthly rate is charged asservice charge. QFC charges 10% of the asking rental rate as service charge.


Qatar asking rent s in 2014 (USD per month )


Qatar Financial Center 3,300 6,610 13,220 19,830

Diplomatic District / West Bay(average)

2,840 5,690 11,370 17,060

Source: Primary Research, Asteco Qatar Report Q1 2014, KPMG analysis



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4 Occupancy costs

Occupancy costs per employee ar e calculated based on the average workstation area per employeeand the rental rate of the location 20

As illustrated below, the occupancy cost per workstation in Bahrain continues to be significantly lowerthan QFC in Qatar and the DIFC in Dubai. On an average, the annual occupancy in QFC and DIFCare around three times that of Bahrain.

.

Figure 10: Average annual occupancy costs per workstation 21

Total occupancy costs (USD per workstation per annum)

Country 2012 2013 2014

Bahrain 4,780 4,780 4,370

QFC 13,662 13,662 13,090

DIFC Village Gate 13,680 14,040 12,750

DIFC Precinct Gate 14,580 14,940 13,760

DIFC Building Gate 15,480 15,840 14,730

Source: DTZ Occupier Perspective Global Occupancy Costs Offices 2013 & 2012, KPMG analysis

20 DTZ Occupier Perspective Global Occupancy Costs Offices 2013 & 2012; average workstation area per employee adopted

as 15.0 sqm gross area (i.e. including staircase, lobbies and other common areas). Bahrains rate for utilities and servicecharge of commercial properties is 15% of the rent per sqm, while the DIFCs utilities and maintenance charge is USD 15 persqm, and the QFCs rate for utilities and service charge is 10% of the rent per sqm

21 Please refer to the Appendix for a detailed explanation of the calculations and methodology adopted


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5 Manpower costs

When comparing the average salary earned working in the financial sector, Bahrain continues to havethe lowest man power cost in comparison to Dubai and Qatar. The salaries quoted below include thebasic and HRA 22

Figure 11: Average finance sector salaries

components, but does not include the other expatriate benefits.

Average Annual Finance Sector Salary 23 (2014)

Country Local Currency USD

Bahrain BHD 22,070 58,540

Dubai AED 229,460 62,470

Qatar QAR 251,480 69,070

Source: Hay Group Compensation and Benefits Report 2014, Ministry of Development Planning & Statistics Qatar, KPMG analysis

The tables below outline the overall annual costs of hiring in Bahrain, Dubai and Qatar. Each tableprovides past and future trends of the wages, housing rent allowance, and additional benefits ofexpatriate employees working in the financial sector.

Figure 12: Overall costs of hiring in Bahrain

Average Annual Cost in the Financial Sector fo r Bahrain (USD)

Overall costs 2012 2013 2014 2015 (E) 2016 (E) 2017 (E)

Salary 35,240 37,070 38,360 39,890 41,490 43,150

HRA component 19,220 19,500 20,180 20,980 21,820 22,700

Expatriate Benefits 10,730 10,890 11,270 11,720 12,190 12,670

Total Cost 65,190 67,460 69,810 72,590 75,500 78,520Source: Hay Group Compensation and Benefits Report 2014, KPMG analysis

Figure 13: Overall costs of hiring in Dubai

Average Annual Cost in the Financial Sector fo r Dubai (USD)


Salary 34,570 36,260 38,080 40,250 42,540 44,970

HRA component 22,890 23,230 24,390 25,780 27,250 28,810


Total Cost 71,260 73,490 77,170 81,570 86,220 91,150Source: Hay Group Compensation and Benefits Report 2014, KPMG analysis

22 HRA: Housing rental allowance is the allowance in the remuneration of an employee to meet rental expenses23 Including only basic and HRA components, other expatriate benefits are not included


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Figure 14: Overall costs of hiring in Qatar

Average Annual Cost in the Financial Sector fo r Qatar (USD)


Salary 38,410 40,520 42,810 45,120 47,560 50,130

HRA component 23,080 23,420 26,260 27,680 29,170 30,750


Total Cost 76,820 79,500 86,510 91,190 96,110 101,300

Source: Ministry of Development Planning & Statistics Qatar, KPMG analysis

The following graph illustrates the t re nds in employment costs between 2012 and 2017. Based onprojected inflation and salary growth 24

, the overall cost of manpower in Bahrain is expected to remainsubstantially lower than that of Dubai and Qatar.

24 Forecasted salary growth is projected as 4% for Bahrain and 5% for Dubai and Qatar - Hay Group Compensation andBenefits report 2014

65,190 67,46069,810 72,590

75,500 78,52071,260 73,490

77,17081,570

86,22091,150

76,820 79,50086,510

91,19096,110

101,300

0

20,000

40,000

60,000

80,000

100,000

120,000

2012 2013 2014 2015 (E) 2016 (E) 2017 (E)

Bahrain Dubai Qatar


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6 Cost of Util ities

Electricity and water tariffs for commercial consumption differ in accordance to the total number ofunits utilized. When compared, Dubai charges the highest commercial tariffs for the utilization of bothelectricity and water.

Figure 15: Electricity & Water Tariffs

Electricity & Water Tariffs for Commercial Consumption (USD)

Country Electricity Tariff per kWh Water Tariff per M 3

Bahrain 0.05 0.80

Dubai 0.10 2.10

Qatar 0.04 1.43

Source: www.mew.gov.bh, www.dewa.gov, www.qewc.gov

The charges quoted compare the commercial tariffs applied for utilizing more than 30,000 kilowatt-hour (kWh) units of power against tariffs applied for utilizing less than 450 cubic meters (M 3) of water.

The table below outlines indicative charges for electricity and water consumption for typical primecommercial office sizes across Bahrain, Dubai, and Qatar:

Figure 16: Indicative Utility Charges

Electrici ty and Water Charges Scenarios (USD per month)


Bahrain

Electricity 40 90 170 260

Water 10 10 30 50

Total 50 100 200 310

Dubai


Water 20 40 80 120

Total 110 220 440 660

Qatar


Water 10 30 50 80

Total 40 100 180 280Source: KPMG analysis


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7 Communication Costs

7.1 Telephone ServicesThe cost of telephone services has been calculated based on the corporate rates offered from leadingtelecommunication providers in Bahrain, Dubai and Qatar. The table below compares the call ratesapplied for business telephone lines for both international calls and local calls:

Figure 17: Indicative Local vs. International Call Rates

Average Local vs. International Cal l Rates per Min (USD)

Country Local Call Rate 25 International Call Rate 26

Bahrain 0.03 0.64

Dubai 0.03 0.52

Qatar 0.04 0.54

Source: www.batelco.com, www.etisalat.ae, www.ooredoo.qa, KPMG analysis

Telephone charges are presented in th e form of fixed rental fees and an estimate of call charges(based on average employee ut ilization) 27 . The costs quoted below compare the average charges forbusiness telephone packages 28

Figure 18: Indicative Telephone Charges

.

Average Telephone Charges per Month (USD)

Country Rental Charges Call Charges Total Charges

Bahrain 6 14 20

Dubai 25 16 41

Qatar 9 18 27

Source: www.batelco.com, www.etisalat.ae, www.ooredoo.qa, KPMG analysis

Bahrain has the lowest average telephone charges per employee when compared to Dubai andQatar.

25 Local call rates are calculated based on fixed line to fixed line and fixed line to mobile call rates with a utilization of 60% and40% respectively

26 International call rates are shown as the average of Peak Rates and Off-Peak Rates27

Call charges are presented per employee with an estimated utilization of 300 minutes (local calls) and 10 minutes(international calls) per month 28 Please note that the features and added benefits vary between the packages offered by each telecommunication company

across Bahrain, Dubai and Qatar


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7.2 Internet ServicesSimilar to calculating the cost of telephone services, the cost of internet services are based oncorporate rates offered by telecommunication compa nies across Bahrain, Dubai and Qatar. The costsquoted below are for an 8Mbps Business package 29

As outlined in the table below Qatar has the highest cost for internet services when compared toBahrain and Dubai.

, suitable for moderate internet utilization of acommercial office of 25-50 employees, and excludes set-up fees and installation charges (one-off).

Figure 19: Average Cost for Internet Services 30

Rental Charges for Internet Services (USD per mon th)

Country Rental Charges

Bahrain 31 290

Dubai 32 310

Qatar 440

Source: www.batelco.com, www.du.ae, www.ooredoo.qa, KPMG analysis

29 Please note that the features and added benefits vary between the packages offered by each telecommunication companyacross Bahrain, Dubai and Qatar

30 The average cost for internet services has been rounded off to the nearest 1031 Based on a 1 year contract32 As above


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8 Corporate Taxes

In Bahrain, there is no corporate tax for most companies. Qatar, Dubai and Bahrain apply differentquantum of taxes on corporations operating in these locations, ranging from social securitycontributions, training levies, and municipality taxes.

The following tables outline the corporate taxes applied in Bahrain, Qatar and Dubai.

Figure 20: Corporate Taxes in Bahrain

Overview of Corpo rate Tax

Category Description

Municipality Tax 10% on the rental of the commercial property

Social Security Contribution 12% of salaries for local employees, and 3% for expatriate employees

Training Levy 33 1% of the salaries for local employees, and 3% for expatriate employees

Source: Bahrain Ministry of Finance

Figure 21: Corporate Taxes in Dubai



Municipality Tax 10% on the rental of the commercial property

Social Security Contribution 12.5% of salaries for local employees only

Corporate Tax Income is taxed at 20% only on branches of foreign banks

Source: United Arab Emirates Ministry of Finance

Figure 22: Corporate Taxes in Qatar



Social Security Contribution 10% of salaries for local employees only

Corporate Tax Income is taxed at 10% for QFC entities that are wholly owned by Qatari orGCC nationals

Withholding Tax

7% on interest paid to non-residents5% on royalties paid to non-residents7% on technical service fees paid to non-residents7% tax is applied on commissions, brokerage fees, directors fees, and fees

from other services performed in Qatar Source: Qatar Ministry of Finance

33 Only applicable for companies with more than 50 employees that do not provide training to their employees


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10 Education Costs

An indicative analysis of the total cost of education across Bahrain, Dubai and Qatar are presented inlocal currencies and USD in the table below. Overall, the annual cost of education in Bahrain issubstantially lower than in Dubai and Qatar, where education costs are higher by 80% and 103%respectively. 37

Figure 26: Indicative Education Costs

Average Educat ion Costs per An num (2014)

Country Local Currency USD

Bahrain BHD 2,530 6,710

Dubai AED 44,350 12,080

Qatar QAR 50,120 13,650

Source: Primary research, KPMG analysis

The cost of education in Bahrain is significantly lower than Dubai and Qatar across all three gradelevels and curriculums. The cost of education for Pre-School levels, Primary levels, and Secondarylevels in Bahrain, Dubai and Qatar are compared in the table below:

Figure 27: Average Cost of Education

Annual Costs per Grade Level 38 (USD)

Country Curriculum Pre-School Level Primary Level Secondary Level

Bahrain

American 6,370 8,180 9,990

British 5,710 8,390 12,050

Indian 2,510 3,160 4,070

Dubai

American 11,870 16,840 18,920

British 10,130 11,690 16,640

Indian 5,920 7,560 9,110

Qatar

American 12,360 18,460 18,460

British 10,040 13,880 15,600

Indian 8,580 12,040 13,410


37 Average education costs have been rounded off to the nearest 1038 The average education costs takes into account the fees of American, British, and Indian Curriculums for all three grade

levels.


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11 Total Costs Summary

An indicative analysis of the total estimated employee related costs in Bahrain, Dubai and Qatar ispresented in the following table:

Figure 28: Overall costs of hiring

Estimated average employment costs in USD per month per employee

Location Occupancy cost Average Wages HRA Benefits ExpatriateBenefits Total

Bahrain 360 3,200 1,680 940 6,180

QFC 1,090 3,570 2,190 1,450 8,300

DIFC 1,150 3,170 2,030 1,230 7,580

Source: KPMG analysis

Although HRA benefits and expatriate benefits are lower in Bahrain in comparison to Qatar andDubai, expatriate employees continue to relocate to Bahrain due to its low living costs.

To better compare the costs of doing business in Bahrain, QFC and the DIFC, a scenario highlightingthe costs associated in operating an office with 10 employees is presented in Figure 29. Overall, thecost of doing business in Bahrain remains lower than DIFC and QFC. When compared to Bahrain, themanpower cost associated with operating an office of 7 employees is 23%-34% higher in Dubai andQatar respectively.

Figure 29: Office mix scenario

Office mix scenario costs (USD per month)

Location Occupancy cost Average Wages HRA Benefits Expatriate

BenefitsTotal

Bahrain 3,600 32,000 16,800 9,400 61,800

QFC 10,900 35,700 21,900 14,500 83,000

DIFC 11,500 31,700 20,300 12,300 75,800

Source: KPMG analysis


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Appendix

1. Calculations for Cost per workstation

Methodology of calculation cost per workstation: - 15 sqm space utilization standard per worker in the Middle East. Rental rate of the building (in sqm per month). Utilities and maintenance charges per sqm (10% of rent for QFC, and USD 15 for DIFC) Calculation for annual cost per workstation= 15.0 sqm x (Rent + Service Charge) x 12

For example:

Annual Occupancy Cost per Workstation for QFC in 2014 =

15.0 sqm x [USD 66.0 per sqm x (1+10%)] x 12

=13,662

2. Workforce benefits

Expatriate benefits calculated in the subject report assume educations benefit for two children, andadditional for medical insurance and once a year home travel for a family of four. This does notinclude any end-of-service benefits.

Citizen benefits vary from country to country and can include marriage benefits, benefits upon birthof children etc. These considerations have not been included in this study.


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2013 KPMG Fakhro, a Bahrain partnership registered with Ministry of Commerce andIndustry (MOIC), Kingdom of Bahrain and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International Cooperative (KPMGInternational), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavor to provideaccurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. Noone should act on such information without appropriate professional advice after a thorough

examination of the particular situation.The KPMG name, logo and cutting through complexity are registered trademarks or

trademarks of KPMG International.

KPMG Cost of Doing Business in Bahrain - 2014

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