Spending on smart cities, smart hospitals and smart schools looks set to continue in 2015, with the Kingdom’s budget showing the government is committed to major upgrades to infrastructure and services despite the fall in oil revenues. According to research and analysis firm Interactive Development Company, spending on ICT products in the Kingdom will exceed $36bn in 2015 as consumers acquire the latest generation of smartphones and government bodies and businesses invest in third platform technologies associated with mobility, the cloud, social media and big data. “Within the IT and telecoms sector, the government has made some significant progress in awarding projects,” Sami Saadi, the managing director of Saudisoft, told OBG. “Indeed, public procurement is increasingly more efficient and transparent.”
As the Kingdom grows, its IT businesses see opportunities to play a role in its expansion, but many hope to leverage their location to adapt global services to the Arab context and to create an IT hub in Saudi Arabia serving the 300m people in the region.
State Spending
Spending by government departments and state-owned enterprises dominates the corporate market for IT services, and accordingly the sector received a significant boost when Saudi Arabia’s government maintained an expansionary outlook on expenditure in its 2015 budget despite the decline in revenues triggered by the fall in the price of oil in late 2014. Analysis from Jadwa Investment shows planned expenditure in the health, social and education sectors accounted for 44% of the total 2015 budget, or SR377bn ($100.5bn), with a number of new projects coming on stream that have potential implications for IT services. The education budget includes SR14bn ($3.7bn) for new projects and SR12bn ($3.2bn) for the refurbishment of existing university campuses and the construction of three new universities.
The driving philosophy behind this expansion is to use education for sustainable development to ensure a significant proportion of the country’s GDP is driven by knowledge and service industries in the future, rather than hydrocarbons. This means creating learning environments adapted to utilise the latest IT products and services. Health and social care spending was boosted by 48% to SR160bn ($42.6bn) in the budget with projects including the construction of three new hospitals, 11 medical centres and many primary health care centres across the country. Transport and infrastructure projects received 7.3% of the budget with an allocation of SR63bn ($16.8bn), around SR33bn ($8.8bn) of which is being spent on roads, ports and infrastructure projects for the industrial cities of Jubail, Yanbu and Ras Al Khair.
All of these projects will require IT services. Saudi Arabia has been using its Yesser e-government service since 2005, but there is a need for new, innovative solutions. “There is a priority to serve citizens better and e-services are a must as they improve speed, accountability, transparency and simplicity of government processes,” Abdullah Al Kasabi, general manager of Adaptive Techsoft, told OBG.
New Plans
Saudi Arabia’s longer-term government strategies are spelt out in five-year plans and the latest of these, the 10th Development Plan, covers the 2015-19 period. The strategy includes a number of objectives that suggest continued and enhanced investment in IT services. It calls for optimal utilisation of communication and information technology in all sectors, particularly in education and training, and also suggests investment should be directed towards high technology and sectors encouraging creativity and innovation. The plan said the national economy’s productivity can be raised by encouraging investment in companies capable of “development and innovation activities and utilisation of ICT”. The result of these policies is a lucrative market for IT services companies. “There is very, very strong demand from the government side, even when it comes to traditional connectivity services, because the government is running so many huge ICT development projects and digitisation is a key pillar of plans to have much more efficient government services,” corporate performance management general manager at Saudi Telecoms Company (STC), Sacha Dudler, told OBG. However, the pace and scale of development taking place in the Kingdom, coupled with Saudiisation rules, have been blamed for some delays in the mega-projects taking place across the Kingdom. A Mace report on construction industry prospects for 2015 in the MENA region said that in Saudi Arabia, “Construction output has been somewhat constrained by delays to some infrastructure projects and shortages of labour and materials in some areas. It is likely that these factors will continue to play a part.”
Service Providers
The growth in spending and demand for new IT solutions comes at a time when companies in the IT sector, both globally and in the Kingdom, are adjusting their offerings and priorities in the search for sustainability and profit. “From my own view, the technology market is passing through a huge service redefinition exercise,” Amjad Abdel Hafez, CEO of NourNet, a private IT services firm, told OBG. “Hardware companies are expanding into software industries, software companies are shifting their business model into services, and so everyone more or less is reshaping. The telecoms companies are trying to become total ICT players, and the ICT companies are trying to become cloud and solution providers. It is a very interesting time before the market matures and shapes its direction, both locally and globally.” The two biggest mobile operators in Saudi Arabia are making additional inroads into the ICT market and have both identified services as a segment where they see growth to replace some of the falling revenues witnessed as over-the-top data services – like internet audio and video – cannibalise voice earnings.
“People want data and they want it fast,” said Suleiman Al Zahrani, the CEO of Sale Co. “This means we are seeing telecoms companies spending heavily on 3G and 4G networks as well as establishing good relationships with the over-the-top players to develop things such as cache systems to improve customer service while reducing their own costs.”
In its 2013 annual report published in 2014, Mobily declared it had committed more than SR22bn ($5.9bn) in capital expenditure for 2013-17 to “underwrite the company’s transition to becoming an integrated full-service telecoms and ICT operator”.
Largely state-owned STC, which has already seen its prime market shift from landlines to mobile, is also realigning its operations with a greater focus on ICT. In October 2014 the company announced that it was rebranding its subsidiary, Awal IT Services, as STC Advanced Solutions as part of “STC’s ongoing commitment to transform itself into a leading regional ICT player”. The newly rebranded business sees the government’s expansion agenda as a lucrative source of future work. “STC Advanced Solutions will address the market with focus on industries including health care, education, oil and gas, financial services, transport, and other critical government infrastructure sectors,” said Sultan Binsaeed, CEO of the subsidiary. Binsaeed said the firm’s offering would include cloud computing, managed services, systems integration and machine-to-machine (M2M) solutions.
Global Players
Although STC was the biggest telecoms firm in the Middle East in late 2014, with a market capitalisation $19.5bn, it is not necessarily the biggest ICT company looking for a share of the Saudi market. Customers looking for corporate ICT solutions can turn directly to Microsoft, Google, Cisco Systems or SAP, as these players vie for their share of third-party platform opportunities. STC and Mobily both have local agreements with these larger companies, but the market is continually evolving.
Start Up Sector
For smaller, private ICT companies agility is one of the keys to maintaining a foothold in the sector. “I see challenges coming globally because if you look at providers, they are actively working on addressing local market requirements and global companies are expanding into our markets as part of their international plans, so ultimately it is becoming a global game,” Hafez told OBG. “For us, we are really trying to work on things that must be localised for this market to fit into global providers’ plans, because we do not really want to be in an area where we are competing against Google, Microsoft or Oracle.” As Saudi Arabia’s mobile operators move into the sector, smaller ICT firms also face challenges closer to home. Abdulaziz Al Helayyil, regional director for Saudi Arabia, Kuwait and Bahrain at the International Data Corporation (IDC), believes the government could take steps to nurture and protect smaller ICT firms, enabling them to grow in size and export their software, services and solutions to the wider region.
“There is a huge need for Saudi ICT professionals and if a proper plan is put in place, we can address this shortage, which will also create high-quality job opportunities for Saudis,” Al Helayyil told OBG. He identified IT project management and help-desk support staff as two areas facing a shortage of Saudi staff in the ICT sector. However, Al Helayyil also said that Saudi Arabia’s IT industry has tended to be overshadowed by the telecoms sector, and that the small companies developing new programmes and providing IT services should be given a greater voice and also incentivised to create products that can be sold in Saudi Arabia, as well as in markets abroad. “The government is developing Saudi Arabia into a knowledge economy,” he said. “IT will be key in facilitating this, which is why the government needs to better support local IT companies that are creating value.”
One way in which this could be done is by putting IT development on a par with the manufacturing industry, and to make IT companies eligible for funding through the formal channels, like Saudi Industrial Development Fund. “Saudi Arabia has the potential to export ICT products and services to the region,” Al Helayyil said. “We are already spending and will continue to spend on the newest technology, and this should be a springboard for our growing number of ICT graduates to get exposure and familiarise themselves with the latest technologies.”
Mergers & Acquisitions
As Mobily and STC expand their footprint in the ICT sector, the telecoms companies are looking for ways to enhance their range of capabilities. This suggests there may be areas of overlap where smaller ICT firms, or groups of smaller ICT firms, can work with the bigger companies. “It’s not just about STC, the issue of talent goes wider. In the ICT landscape in Saudi Arabia there are small firms scattered around, but some consolidation would help to create regional champions that will then be attractive enough to be part of the STC family, and we definitely want to grow in that ICT space,” Dudler told OBG.
Nurturing Talent
The Ministry of Labour and the Human Resources Development Fund said the Nitaqat employment drive, which uses a system of financial penalties and rewards to encourage businesses to employ Saudis rather than expatriate staff, helped create jobs for 750,000 Saudis across all sectors in 2014, a 15.6% increase in the Saudiisation rate. As of April 2015 the third phase of Nitaqat was on hold, but is expected to see these quotas raised. According to Arab News, big firms and those in the retail and wholesale sector will be penalised unless the proportion of Saudi workers increases from 25% to 41%, while large business groups will see the Saudiisation rate raised from 29% to 66%. Firms in the ICT sector are responding to this challenge in different ways.
“We are working very hard on localisation and are injecting this policy into our company’s natural DNA to make sure we employ locals,” Hafez told OBG. However, he identified retention of qualified staff as an issue, rather than recruitment. “The biggest problem we had with young Saudi workers in the past was commitment, but we are really seeing this changing. The challenge now is if you find a Saudi worker, it is sometimes hard to retain him if he is approached by the big firms like Saudi Aramco, the Saudi Electricity Company or STC, because of market competition for qualified Saudi resources.” At STC a new graduate programme was being introduced in 2015, with the aim of identifying candidates with the potential to rise up through the ranks of the company to become the next generation of leaders. “The race is on for talent in the ICT industry and it’s about finding the talent to develop services and solutions to sell,” Dudler told OBG. “We are upgrading the way we develop management through coaching and individual development plans.”
Outsourcing Opportunity
While the Nitaqat quota system helps to make qualified Saudi ICT professionals prized employees, it might also serve as an encouragement for young Saudis with an entrepreneurial spirit to create ICT businesses. Majid Al Otaibi, CEO of Takwa Company, which has interests in manufacturing, logistics and industrial recycling, said some businesses in Saudi Arabia are seeking to boost the percentage of nationals they employ by closing departments that relied upon expatriates. “Saudiisation is forcing companies to outsource some departments, such as IT and finance,” Al Otaibi told OBG. While this process might pass the responsibility for improving Saudiisation quotas onto other firms in Saudi Arabia, or overseas, it may also potentially act as a lever to enable home-grown ICT firms to fulfil those roles.
Employing Women
While there are no employment quotas based on gender, there are a very high number of unemployed Saudi women. The latest figures from the Central Department of Statistics and Information (CDSI) show that the unemployment rate for Saudis in the last three months of 2014 was 11.6%, 5.9% for male Saudis and 32.5% for Saudi women.
Large employers in the Kingdom have seen the potential to tap this pool of talent. Cisco said 20% of its current workforce in Riyadh is women who work in both customer-facing and virtual roles, and 35% of the students enrolled in its Cisco Networking Academy courses are female. The company also held its fifth annual “Girls In IT” day in 2014 to explain career opportunities to secondary school students. In November 2014 STC opened its first call centre staffed by women, in collaboration with the Contact Centre Company, which employs 3000 people across the Kingdom, following the September 2014 launch of a call centre by India’s Tata Consultancy Services, to be staffed by 3000 women in the next three years. Preparing women for roles with ICT companies is also a priority for the Colleges of Excellence, a network of vocational training schools. “Young women lend themselves to high-tech work, and are extremely valuable for anyone who is building up a high-tech workforce,” Mohammed Almajed, vice-president for strategic business development at the Colleges of Excellence, told OBG.
Infrastructure
STC and Mobily are busily creating the physical infrastructure that will bring next-generation access networks, and with them the possibilities offered by the cloud-driven “internet of things”. In 2013 alone Mobily added 2040 new 4G long-term evolution (LTE) sites, bringing its 4G mobile coverage to 80% of the Kingdom, while it targeted laying fibre-optic cable to 1.2m households by the end of 2014. STC was aiming to cover 90% of the Kingdom with its 4G LTE network by the end of the same year, by which time it hoped to have provided fibre-optic cable to 1.5m households.
Take-up of these services began modestly, with 368,000 fibre-to-the-home (FTTH) subscribers registered by June 2014, and Telegeograpy’s “CommsUpdate” report suggested STC had just 750,000 4G LTE subscribers in October 2014. The faster download speeds both systems promise lay the foundations for a raft of new high-speed online services.
“FTTH will change customers’ perspective,” the CEO of Qanawat Telecom Company, Mohammed Sadyeh, told OBG. “Operators should think of themselves as infrastructure companies, not as service providers,” he told OBG. “They should deal with Google or Microsoft, not try to beat them.”
Predictions
The ICT sector is regulated by the Communications and Information Technology Commission (CITC), which also oversees the country’s telecommunications businesses. In its June 2014 report on ICT trends in the Kingdom CITC stated that with 18.3m people in Saudi Arabia using the internet, or 60.1% of the total population, increased numbers of customers were seeking higher speeds and generating higher data traffic on both mobile and fixed networks. The organisation predicted that demand for internet services would increase significantly in the years ahead as more users connected to FTTH networks and invested in handheld devices.
The analysis and data company IDC went further in predicting 10 emerging trends that will affect Saudi Arabia’s ICT market in 2015. One of its predictions was that there would be a 28% increase in shipments of smartphones capable of using the 4G LTE network, resulting in more than 16m smartphones being used in the Kingdom by the end of 2015.
Among IDC’s other predictions were: faster internet speeds on next-generation access networks, such as FTTH and fibre-to-the-block; increased adoption of internet-of-things systems where devices communicate with each other; the development of hybrid cloud models; more investment in business continuity and disaster management; and greater use of enterprise resource planning systems in both the private and public sectors. According to local players, the market’s sophistication is creating opportunities for custom IT services. “As the market is becoming increasingly sophisticated, corporate clients from various horizons have growing needs for tailored IT solutions and services,” Amer Kabbara, the general manager of Baud Telecom, told OBG. “One size does not fit all.”
Outlook
The latest wave of technological advances, sometimes referred to as the third platform, is being released at the same time that Saudi Arabia’s government is investing billions of riyals in expanding and updating the Kingdom’s technological infrastructure. This would suggest there are multiple opportunities for new solutions, many of them cloud-based, to help facilitate the country’s development. However, the ICT space is contested, with large regional players, global technology giants and smaller local firms offering their own solutions. As the market matures, roles and territories may become more defined, but for now the sector’s champions say the challenge will be to ensure the Kingdom makes the most of the opportunities that ICT offers to diversify the economy while creating quality jobs and ensuring sustainability.
