Bahrain nears goal of becoming regional ICT hub

 

Bahrain boasts one of the best-developed telecommunications markets in the region, and the authorities are planning for further infrastructure upgrades, including the rollout of an ultra-fast broadband network across the country.

Work is under way to develop the kingdom as a regional ICT hub, with a particular focus on areas such as the cloud, e-commerce, gaming, cybersecurity and the local start-up scene. Such efforts have been bolstered by a recent surge in foreign investment into the ICT sector, led by a landmark investment by Amazon Web Services (AWS) in 2017 in the cloud and data centre segment.

Oversight & Regulation

The telecommunications sector is overseen on a day-to-day basis by the Telecommunications Regulatory Authority (TRA), while the Telecommunications Directorate of the Ministry of Transportation and Telecommunications is responsible for developing legislation and policy covering the industry. The latter also prepares and implements the sector’s development strategy, the National Telecommunications Plan (NTP), which is currently in its fourth iteration.

The industry is governed by the Telecommunications Law, which came into force in 2002 and liberalised the market, allowing for other mobile service providers to begin operations.

More recent regulatory developments include a requirement announced in May 2018 for the kingdom’s largest operator, Bahrain Telecommunications Company (Batelco), to split into separate retail and wholesale entities, with the latter to take charge of infrastructure. “The moves to separate the network are positive and will make Bahrain’s telecommunications sector more competitive,” Ahmed Al Hujairy, group CEO and chairman of local IT company Gulf Future Business, told OBG.

In August 2018 the company was given a deadline of the following month to submit its plans on how it would go about this division, and until the end of the year to establish the wholesale unit. The move is aimed at creating healthy competition, particularly in the fibre-optic segment, which Batelco currently dominates via its own fibre-optic network.

Additionally, the wholesale unit will be responsible for the development of the National Broadband Network, an objective outlined in the fourth NTP.

Sector Performance

Bahrain’s telecommunications sector is well developed, particularly when evaluated by regional standards. The kingdom ranked fourth globally out of 193 countries in the 2018 UN Department of Social and Economic Affairs global index for telecommunications infrastructure. Additionally, it ranked 31st out of 176 countries and first among Arab states in the 2017 UN International Telecommunications Union (ITU) ICT Development Index, with a score of 7.6 out of 10. In June 2018 consultancy firm BuddeComm classified Bahrain as the most developed telecoms sector in the Middle East.

According to the Bahrain Economic Development Board (EDB), the transport and communications sector expanded by 5.4% in 2017. The sector represented 7.1% of total GDP in the fourth quarter of 2017, according to figures from the Bahrain Information and eGovernment Authority (iGA).

A report published by consultancy McKinsey in April 2018 estimated the contribution of the kingdom’s digital economy at 8% of GDP, close to twice the average of the region and in line with major Western markets, including the US.

Telecommunications sector revenue stood at BD430m ($1.1bn) in 2016, about 4% of GDP, based on the latest available data from the TRA. This was down from revenue of BD450m ($1.2bn) the previous year, likely due to the challenging macroeconomic situation in the wake of lower oil prices since mid-2014. The compound annual growth rate of revenue between 2012 and 2016 stood at 13%.

Within retail telecommunications services, internet use and leased lines have been the main growth drivers in recent years. The former accounted for 21% of retail revenues in 2016, up from 12% in 2012, while the share represented by leased lines grew by five percentage points to 19% over the same period. Simultaneously, the contribution of international calls has been falling, from 26% to 16%. Fixed-line and mobile services have both also seen slight decreases in their contribution to GDP.

Investment

Foreign investment in the ICT sector has ramped up in recent years. “In 2017 we saw 13 investments in the industry, up from just two in 2014,” John Kilmartin, executive director of ICT Business Development at the EDB, told OBG. “For 2018 we set a target of 18 investments, and by September 2018 we had already secured 17.”

According to the EDB, in 2017 the sector registered $397m worth of investment – not including $9m of investment in the start-up segment – created 374 jobs and accounted for more than half of total investment in the kingdom.

As regards source markets for investment, the EDB is targeting China, India, Europe (with a particular focus on the UK) and the US. “Chinese ICT companies tended to be inward-looking for a long time, but now they are increasingly looking abroad for more growth opportunities and receive support from the Chinese government,” Kilmartin told OBG. In particular, the EDB is focused on attracting investment in the cloud, e-commerce, gaming and business segments, such as back office and business process outsourcing (BPO).

In September 2017 the cloud segment received a major boost in the form of an announcement by AWS that it planned to open three regional data centres in Bahrain, the first of their kind in the region. The amount of the investment has not been confirmed, but it is has been estimated to stand within the range of $500m to $800m. The first data centre is due to open in 2019. As Rashid Al Snan, CEO of telecommunications company Etisalcom, told OBG: “Amazon’s entry into the country is certain to bring new opportunities and some challenges for existing market participants. We are already seeing many companies train their employees on AWS and already have a number of AWS clients.”

To support cloud development, in September 2017 the government launched the Cloud First strategy, which commits state entities to the adoption of cloud technology and involves measures to help enable the upgrade of government systems, which it estimated could save between 30% and 90% of IT-related costs, depending on the system. The strategy also aims to have 1500 government employees ready to use the cloud by 2019.

Those in the private sector will also be getting a leg up, with Tamkeen, a government-backed agency that provides support for locally owned businesses, announcing at the end of September 2018 that it will reimburse 100% of the costs involved for local businesses using AWS for the first 18 months of a three-year contract.

Additionally, Al Hujairy told OBG that his firm was working with the agency on a project that aims to move small and medium-sized enterprises (SMEs) to the cloud. “We have already helped the first 100 companies to do so, and are now working on a plan for a further 2000,” he said, adding that an impact assessment for the programme had shown that cloud technology could help SMEs conduct more business internationally. “The beauty of the cloud is that companies need little upfront investment because they do not have to develop their own data infrastructure,” he told OBG.

By comparison, e-commerce is less developed, but the authorities believe it has strong potential. “It is still early days for e-commerce in Bahrain, but the segment represents a big opportunity,” Kilmartin said. “The kingdom offers a good value proposition for e-commerce companies in terms of logistics and also as a location for their regional headquarters, given factors such as local language capabilities and the low cost of doing business.” Kilmartin pointed out that Asian gaming companies represent a particular niche opportunity for the kingdom, especially in the fields of game localisation and translation.

Cybersecurity

However, along with the opportunities associated with innovative technologies are various new challenges. One rising concern in Bahrain – as well as in other countries around the globe – is the threat to cybersecurity. “Cybersecurity is a huge concern within the region,” Kilmartin told OBG. “Most companies in the MENA region have lost more than $500,000 through online attacks. Only 40% of them had a solid security strategy in place, according to a report published by PwC in 2016. However, this offers an opportunity for companies to come in and help the region deal with cyberthreats, and Bahrain is a good destination for that.”

In order to support the development of the segment, the authorities are working on creating a common cybersecurity framework for both public and private entities. “There is a need for a unified understanding of what aspects of cybersecurity government entities and companies need to consider, and also a common language to discuss how they can protect themselves,” Kilmartin said.

The iGA has been tasked with developing the National Cybersecurity Strategy, which will be adopted by public and private entities in the Kingdom as they deem it appropriate to do so. Once the strategy is published, it will give cybersecurity companies a clear perspective on how they can work with local clients and allow them to explain what elements of the strategy they are able to fulfil.

According to Al Hujairy, from a national security perspective the kingdom is well protected in the domain, aided by the efforts of public institutions. “The central bank is doing a good job of raising awareness at banks,” he told OBG. “However, the number of attacks overall is increasing, not decreasing, so there is still a requirement for large-scale investment in cybersecurity-related systems, infrastructure and human resources.”

Career opportunities in cybersecurity in the kingdom are reportedly growing at a faster rate than in any other IT segment. According to Kilmartin, the cloud is another fast-growing segment that presents numerous opportunities. “If you have skills in the cloud or cybersecurity in Bahrain, you have a job,” he said, arguing for more work to build the kingdom’s skill bases in these domains.

Business Process Outsourcing

When it comes to attracting investment in the BPO segment, however, the kingdom faces several challenges, namely external competition for lower prices. “To be competitive in outsourcing, your costs have to be low, and while Bahrain is not the most expensive place for BPO within the Gulf, it faces strong competition from Asian countries,” Al Hujairy said. The chairman of Gulf Future Business also added that even when competing for business deals that require Arabic language skills, Egypt can offer lower costs.

However, according to Kilmartin, there is room to develop higher-value-added BPO subsegments, such as customer experience-related activities. “The cost base is high for basic call centres, but firms that leverage the local dialect in domains further up the value chain are increasingly picking up regional customers,” he told OBG. Kilmartin also noted that many IT services firms were entering Bahrain as a stepping stone to access the Middle Eastern market.

While the sector is attracting growing foreign investment, industry players say that local firms will eventually need to set their sights beyond the kingdom if they wish to continue expanding.

“Bahrain is a small market, and competition is high in the ICT sector,” Al Hujairy told OBG. “So, for local companies to grow, they need to look at opportunities outside of the kingdom.”

In this respect, the launch of AWS should help to build capacity among local players, boosting their ability to expand across the region. “Opportunities in Saudi Arabia are particularly promising, and Bahrain has an advantage there given strong bilateral relations and the fact that Bahraini talent does not face any visa challenges,” he said. Even a small share of the Saudi market could present major business opportunities for Bahraini firms, and that competition for small and medium-scale IT projects in Saudi Arabia was not that high given the barriers to entry for international firms.

National Strategies

The authorities are currently implementing the kingdom’s fourth NTP, which was approved in mid-2016 and is scheduled to take three years to roll out. Key aspects of the national strategy include Bahrain’s emergence as a regional ICT hub and the development of the National Broadband Network, an initiative to ensure access to ultra-fast broadband for all businesses and 95% of residences. In March 2018 Batelco signed a memorandum of understanding with Chinese telecommunications company Huawei to work together on deploying the infrastructure.

The current NTP also covers efforts to ensure 5G readiness. To this end, a 5G frequencies working group was established and tasked with developing and deploying the action plan for the initial introduction of 5G commercial mobile networks in the kingdom. It held its first meeting in April 2018. It is not yet clear when the TRA will award 5G licences.

There are also various strategies in place to develop other aspects of the ICT industry, including an e-government strategy and a cybersecurity strategy. Currently, however, there is no overarching ICT strategy, something Kilmartin argued should be tackled next in order to support sector development.

In 2017 the EDB and Tamkeen launched the annual Bahrain Tech Week to promote and encourage support for the sector. Some 4500 individuals attended the first iteration of the event, which was based around the announcement of the AWS investment. Attendance increased to 6600 in 2018, underscoring growing interest in the sector.

Mobile Phone

Mobile services accounted for 54% of industry turnover in 2016. According to the latest full-year figures from the TRA, there were 2.36m mobile phone subscriptions in the kingdom in 2017. This was down from 2.9m in the previous year, likely as a result of new SIM card biometric registration requirements and restrictions on who could sell cards that were introduced in mid-2017. The rules also limit the number of cards that can be registered to a single identity.

The year 2017 also saw some mobile operators withdraw their offering of unlimited subscription packages, which likely played a role in the contraction in mobile phone subscriptions. By the end of June 2018 the figure had fallen further to 2.19m, down 18% on the same period of the previous year.

The impact of this was felt largely in the prepaid market: 74% of mobile subscriptions were prepaid in 2017, down from 81% in 2016, while 26% were postpaid, up from 19%. The proportion of the market made up by the prepaid segment dropped further, to 71%, in the first half of 2018.

The TRA reported a mobile penetration rate of 163 subscriptions per 100 individuals in 2017, while the UN’s ITU estimated the figure at 158.4, which ranked Bahrain 11th out of 171 countries globally, and second in the MENA region, after the UAE. This represented a sharp decline from 210.1 the previous year, when the kingdom ranked fourth out of 203 countries globally. As of mid-2018 the industry regulator put the mobile penetration rate at 141 subscriptions per 100 individuals.

In line with falling subscriptions, voice traffic has also been on a downwards trend recently, with domestic outgoing mobile traffic standing at 1.19bn minutes in the second quarter of 2018, down from 1.29bn in the fourth quarter of 2017 and 1.63bn in the fourth quarter of 2015.

However, traffic per user, having fallen steadily in recent years, has begun to rise again, from 233 minutes in the third quarter of 2017 to 252 minutes in the second quarter of 2018.

Internet Use & Penetration

In 2017, 95.88% of residents in Bahrain used the internet, according to ITU figures. This ranked the kingdom sixth out of 73 countries globally, and second in the Middle East, after Kuwait. In 2016 the kingdom also ranked sixth out of 230 countries with penetration of 98%.

The total number of both fixed and mobile broadband users in the kingdom stood at 2.37m at the end of 2017, down 1.4% on the previous year, giving a penetration rate of 164 subscriptions per 100 individuals. Of the total, 93% represented mobile broadband connections. The figure fell in the first half of 2018 to 2.29m, for a penetration rate of 148%. The decline in penetration is likely due to the aforementioned crackdown on unregistered SIM cards, as well as the fall in expatriate resident numbers in Bahrain in 2017.

Data Traffic

In contrast to voice traffic, data traffic has been rising rapidly in recent years. Total traffic stood at 136.8m GB in the second quarter of 2018, up 14% from 111.8m GB on the same period the previous year and more than double the end-2015 figure of approximately 55m GB. Mobile broadband data traffic outweighed fixed traffic up until the third quarter of 2017; by the second quarter of 2018 fixed broadband traffic stood at 71m GB, compared to mobile data traffic of 65m GB.

Consumption per user is also rising sharply. Fixed broadband consumption stood at 128 GB per subscription in the second quarter of 2018, up from 44 GB in the fourth quarter of 2015, while mobile consumption rose from 6 GB to 10 GB over the same period. Of the total mobile broadband usage, 61% was used as an add-on to voice connections, 24% was used on a pay-per-use basis and 16% was used via standalone mobile internet subscriptions.

Fixed-Line Market

In the fixed telephony segment, the sector regulator put the number of subscriptions at 234,857 in mid-2018, for a penetration rate of 15%. By comparison, the ITU recorded a rate of 19.1% in 2017, ranking Bahrain 62nd in the world and second in the GCC. The figure was largely unchanged from end-2017 numbers, which were up only slightly on 2016 figures. In mid-2018, 80% of subscriptions in the segment were wired connections and 20% were fixed wireless connections, with the proportion of the latter having steadily fallen from 32% in 2014. Domestic voice traffic on fixedline networks has been in steady decline over recent years, dropping from a total of 51.95m outgoing minutes in the fourth quarter of 2015 to 29.7m outgoing minutes in the second quarter of 2018. Domestic voice traffic per user has also been falling, from 216 minutes in the fourth quarter of 2015 to 127 minutes in the second quarter of 2018.

Main Players

According to the TRA’s 2017 annual report, there were 25 telecommunications firms operating in Bahrain. Of these, three were licensed to provide mobile services, namely Batelco, Zain Bahrain and VIVA Bahrain. The three mobile operators were awarded 4G/LTE licences in 2013, with services commencing operation the following year.

Batelco is a unit of the Batelco Group, which is largely owned by the Bahraini state. As of October 2018 the largest individual shareholder in the company was the kingdom’s sovereign wealth fund, Mumtalakat, with a share of 36.7%. Three different branches of the kingdom’s Social Insurance Organisation have a combined holding of 20.3%, while Amber Holding, a unit of the international telecommunications company Cable and Wireless based in the Cayman Islands, holds a 20% stake. The remaining 23% of shares is floating on the Bahrain Bourse.

The Batelco Group has become a significant player in the Middle Eastern and international telecommunications markets, with units in Jordan, Kuwait, Saudi Arabia, Yemen, the Maldives and several UK territories. In February 2018 the company announced that it was seeking opportunities for further acquisitions.

The Batelco Group had 9.2m subscribers worldwide at the end of June 2018. In 2017 the group recorded revenue of BD379.4m ($1bn), up 3% on 2016 figures. By contrast, net profits declined by 91% to BD3.5m ($9.3m), due primarily to losses at its operations in Jordan, where a new tax was introduced and electricity prices were increased; and Yemen, where there is ongoing conflict. However, profitability partially recovered in 2018. In the second quarter the company posted a net profit of BD15.7m ($41.6m) and revenue of BD110.5m ($292.8m), up 45% and 10% year-on-year, respectively. This followed an annualised increase of 60% in net profit in the first quarter of 2018.

Zain Bahrain is majority-owned by Kuwait’s Zain, formerly known as the Mobile Telecommunications Company, with a 54.8% equity holding. A member of the royal family, Sheikh Ahmed bin Ali Abdulla Al Khalifa, has a 16.1% stake in the operator, while Saudi government-owned, Bahrain-headquartered financial institution Gulf International Bank holds an 8.5% interest. Shares in the firm have also traded on the Bahrain Bourse since 2014 as a requirement of its licence, which was issued in 2002, making it the second mobile network operator to enter the market. The company recorded revenue of BD73m ($193.4m) in 2017, up from BD64.6m ($171.2m) the previous year, and a profit of BD4.3m ($11.4m).

VIVA Bahrain, which is fully owned by Saudi stateowned telecommunications operator Saudi Telecom Company, became the third licensed mobile network operator in Bahrain in 2009 and launched its commercial services the following year.

VIVA grew its combined net profit by 1%, rising from KD39.8m ($98.8m) in 2016 to KD40.1m ($132.9m) in 2017. Over the same period total revenue dropped slightly from KD279m ($925m) to KD278m ($921.7m). By the end of 2017 VIVA’s customer base reached a total of 2.3m.

In January 2018 VIVA acquired Bahraini internet services provider Menatelecom from Kuwait Finance House. In April of that year the telecommunications company signed a system and network transformation contract with Huawei to upgrade Menatelecom’s existing infrastructure.

Start-Ups & Emerging Technologies

Developing the start-up segment is a key element of the kingdom’s efforts to promote the ICT sector. As part of this drive, 2016 saw the launch of StartUp Bahrain, an initiative by the Bahrain Development Bank, the EDB, Tamkeen, and the Ministry of Industry, Commerce and Tourism.

According to the EDB, the number of start-ups in the kingdom grew by a compound annual growth rate of 46% between 2015 and 2018. Despite the rapid growth, however, the segment remains small. In 2017 start-ups in the kingdom attracted $9m of investment, compared to $397m for the wider ICT sector. “There is a burgeoning start-up ecosystem in Bahrain and the wider region, but it is still fairly immature, and there is a need to put the right structures in place to support it,” Kilmartin told OBG.

To this end, the EBD is working on six pillars for developing the industry, namely community, incubators and accelerators, funding, skills, corporate support, and policy and regulation.

Attracting incubators and accelerators is necessary for the development of the sector. “A couple of start-ups are beginning to take their first steps outside of Bahrain, but we do not yet have a lot of firms that have been through major funding rounds, exits and so on,” Kilmartin said. “Thus, there is a need to bring in organisations outside of Bahrain that have experience in areas such as raising finance, scaling companies and exiting.”

Some such outfits have already started work in the kingdom. For example, in May 2018 Brinc MENA, the regional unit of Hong Kong-headquartered start-up investor Brinc, launched an incubation initiative in the country in partnership with Tamkeen. The project focuses on start-ups in the fields of connected hardware and the internet of things (IoT). In July 2018 Brinc MENA – together with Batelco – launched an IoT-focused accelerator programme called the Brinc Batelco IoT hub.

Fintech

In keeping with the kingdom’s status as a regional financial hub (see Banking chapter), a particular area of focus for start-ups and other new IT initiatives is financial technology (fintech).

Some fintech applications are already taking off in the kingdom, including mobile payment and wallet services, of which four are currently available. The Central Bank of Bahrain is working on an initiative to ensure their interoperability, which is expected to boost their uptake among the population. The Central Bank of Bahrain is also planning to introduce a regulatory framework to guide both equity- and debt-based crowdfunding initiatives.

To further support the development of related technologies, April 2018 saw the opening of Bahrain FinTech Bay (BFB), a fintech-focused incubator and co-working space established by the EDB and the FinTech Consortium, a Singapore-headquartered fintech incubator. Spanning over 10,000 sq feet, the BFB is the largest fintech hub in the MENA region. In August 2018 financial services software provider Finastra became a partner in the initiative. The launch of the BFB followed the establishment of a regulatory framework for a fintech sandbox by the central bank in June 2018, which enables companies to test their technologies over a period of up to nine months. The test period is extendable once, for a duration of three months.

“The Bahraini fintech sandbox was the first one in the region and it has been very successful, with 14 companies currently working with customers under the framework and at least one looking at full registration,” Kilmartin told OBG. “One of its major advantages is that it is an onshore sandbox, which allows companies to deal with a wider range of customers.” In addition, the sandbox framework may be expanded to cover other technologies, including artificial intelligence (AI). “Some providers are already building solutions with AI, such as a local restaurant-recommendation service that is looking to utilise AI-powered chatbots,” Kilmartin also said.

In addition to AI, there is strong interest in developing applications of blockchain, the distributed-ledger technology on which cryptocurrencies are based (see analysis). “There are exploratory projects happening in Bahrain, such as vehicle registration by the General Directorate of Traffic,” he told OBG. “Other government entities are looking at what has been achieved elsewhere using this technology in order to implement such solutions in Bahrain.”

To help encourage further activity in the segment, the BFB and the EDB hosted the international blockchain conference, BlockOn 2018, in November 2018. More than 300 industry figures attended the event. Additionally, the BFB announced in early 2019 that a conference on insurtech will take place that year.

Outlook

Foreign investment in ICT has been growing steadily and shows no sign of slowing down in the near future. Honing in on the strength of Bahrain’s ICT industry, the expected launch of AWS’ data centres in 2019 is a milestone for the development of the sector and encourages others to follow in its footsteps. Strong international interest, together with government plans to expand and upgrade fixed, high-speed broadband services, as well as moves to boost competition among mobile operators by sharing Batelco’s fibre-optic infrastructure, the sector is set to continue along an upwards trajectory, making the emergence of Bahrain as a regional ICT hub over the coming years a highly conceivable outcome.

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