Bahrain‘s economy is transitioning even if not all the changes are as visible as Bahrain’s FinTech hub, Milken Institute research director Claude Lopez tells Gulf Industry in an exclusive interview.

According to her, Bahrain’s FinTech hub is the first concrete step within a much broader strategy that focuses on technology and innovation. The implementation of the strategy began in 2002 with the Telecommunication Law that established an independent Telecommunication Regulatory Authority in charge of the liberalisation of the sector, leading to the removal of all barriers to entry.

“Since then, the government consistently focused on developing the information and communication technology (ICT) infrastructure so that it would support the emergence of a thriving ecosystem of SMEs,” she said while commenting on how and when technology will transform the manufacturing sector in Bahrain.

“Bahraini companies are quite diverse in size and business profiles, ranging from start-ups and SMEs to global leaders such as BFG international. They all have different strengths and challenges. The government strategy has been extremely supportive of start-ups by providing a simplified and administratively effective environment. The streamlining of the regulatory framework has been useful for large firms too,” she noted.

However, most of the existing Bahraini firms are small and may find the transition to a digital economy with its new requirements challenging. Depending on the industry, consolidation via merger and acquisition may be the solution, as seen in the financial services, but for other industries, there may be a social benefit in keeping smaller businesses open, she warned.

Mondelez International opened a biscuit manufacturing plant that serves as a hub for exports to the Gulf region, the Levant and Africa

The government and related institutions will play a key role by educating smaller firms on the existing services or adapting these services, so they help existing firms in their transition. One major drawback for many will be the cost of such a transition.

Excerpts from the interview

Your report says that Bahrain is on the right trajectory to become a technology and innovation hub. What are the factors or the strategy, according to you, which has worked for the kingdom to enable its transition toward a technology-driven economy?

In addition to its location, low cost of doing business, advanced regulations, and effective administration, Bahrain appeals to international investors for its continued commitment to technology infrastructure, assuring investors that it has skin in the game with initiatives including digitalisation of many of its services since 2010 and the Cloud First strategy launched in 2017.

Such a pledge is vital in attracting the global players whose presence is essential for Bahrain to become a Fourth Industrial Revolution-relevant technologies hub. The most significant success to date is Amazon Web Services (AWS) establishing its first data center in Manama: After opening an office in 2017, AWS launched in July 2019 a cluster of data centers in the AWS Middle East region.

Besides developing infrastructure, Bahrain has been proactive in facilitating access to funding, especially for technology startups. The latest development to date is the $100 million Al Waha fund of funds.

The launch of Bahrain FinTech Bay has been a successful step in Bahrain’s broader strategy. How and when will it translate the transformation to other sectors such as manufacturing?

Alra Foods, the fifth-largest dairy company in the world, opened its facility in Bahrain with an initial production of 20 million kg

Bahrain’s FinTech hub is the first concrete step within a much broader strategy that focuses on technology and innovation. The implementation of the strategy began in 2002 with the Telecommunication Law that established an independent Telecommunication Regulatory Authority in charge of the liberalisation of the sector, leading to the removal of all barriers to entry. Since then, the government consistently focused on developing the information and communication technology (ICT) infrastructure so that it would support the emergence of a thriving ecosystem of SMEs.

Our report shows that a majority of the deals in telecom and technology are related to the digitalisation of industries, focusing on firms that are providing an application or platform for restaurants, event bookings, human resources, productivity, and food ordering. Furthermore, Bahrain has already observed some changes in manufacturing with some major corporations such as Mondelez International and Arla Foods that have made Bahrain their regional base.

Bahrain‘s economy is transitioning even if not all the changes are as visible as Bahrain’s FinTech hub.

What are the challenges and opportunities resulting from the ‘Fourth Industrial Revolution’ and its impact on the public and private sectors in Bahrain, particularly on Bahrain’s manufacturing industry?

Bahrain is the gateway to Saudi Arabia, to the other GCC markets and to North Africa and the Indian subcontinent. It has reliable, efficient, and cost-effective pan-GCC transport links and the lowest operating costs in the GCC, which make Bahrain very attractive to global companies.

Our analysis highlights significant steps that help to strengthen international investors’ interest, such as the increasing number of sectors open to 100 per cent foreign ownership, the enactment of bankruptcy law, and the financial system oversight that is independent and forward-looking.

Beyond attracting global firms, the new regulatory and legal framework increased the number of new financial participants, especially among the alternative financial investors funding startups. Recent years saw a fast progression in the development of infrastructure on the information and communication technology. The latest success is the Amazon regional data hub, launched in 2019.

However, the strong emphasis on startups and technology brings new challenges such as the need to help start-ups to transition to the next stage of their economic cycle, to provide access to tech-savvy workers, and to help existing local firms to transition to the digital economy. Finally, a closer look at the investor landscape shows that Bahrain strongly relies on domestic and GCC investors, which could be an issue as they all have the same economic cycle.

Are companies in Bahrain ready/equipped to navigate the challenges and opportunities brought about by the technology of the Fourth Industrial Revolution? What strategic steps are needed by Bahraini companies for the adoption of 4IR technologies?

Bahraini companies are quite diverse in size and business profiles, ranging from start-ups and SMEs to global leaders such as BFG international. They all have different strengths and challenges. The government strategy has been extremely supportive of start-ups by providing a simplified and administratively effective environment. The streamlining of the regulatory framework has been useful for large firms too.

Italian heating systems producer Ariston Thermo opted for Bahrain to open its first manufacturing facility in the GCC

However, most of the existing Bahraini firms are small and may find the transition to a digital economy with its new requirements challenging. Depending on the industry, consolidation via merger and acquisition may be the solution, as seen in the financial services, but for other industries, there may be a social benefit in keeping smaller businesses open.

The government and related institutions will play a key role by educating smaller firms on the existing services or adapting these services, so they help existing firms in their transition. One major drawback for many will be the cost of such a transition.

Besides changes in the regulatory framework, what would you suggest should be the crucial elements of a broader strategy that will enable Bahrain to transition toward a technology-driven economy?  What role can the Bahrain government play to harness the Fourth Industrial Revolution’s transformation of manufacturing?

The recent emphasis on startups and technology brings challenges and the government will play a key role in addressing them.

First, most of the firms created have fewer than 10 employees. Bahrain needs more medium-sized companies to reach the level of jobs that will allow to achieve its economic goals. Second, the size of Bahrain’s labour market will not be able to accommodate the increasing demand for highly skilled workers. Third, the transition to a digitalized economy and its new requirements can be costly for existing firms, especially the smaller ones, which are the majority.

In response, the government could (i) help micro firms to grow, (ii) facilitate the hiring of foreign workers in sectors where the qualified local labor supply is weak, (iii) ensuring that wages in the private sector are competitive, and (iv) educating smaller firms on existing services that can help them transition to the digitalisation of the economy.

Do you think there’s a need to narrow the gap between the kingdom’s technological potential and the policy agenda required to realise it? Can you suggest ways to narrow the gap?

The transition to a new economic model occurs in phases. The first and necessary step is to build the infrastructure (digital, financial, regulatory, and physical such as airports) that will enable other developments. Over the past five years, the government has focused its efforts on enhancing transparency and fairness of the regulatory system, protecting investors, meeting international standards (especially in the corporate environment), and modernising accessibility of its capital markets. Ultimately, the goal is to increase and diversify the pool of international investors it attracts.

Recent amendments to the legal framework, especially on commercial companies, and competition confirm a continued commitment in facilitating both local and foreign investments. They strengthen Bahrain’s convergence toward international standards, requirements, and expectations.

In addition to these economy-wide and fundamental reforms, the financial sector continues to employ strategic reforms to modernise its accessibility and expand opportunities for the capital markets, reinforcing Bahrain’s position as the regional FinTech hub.

Bahrain’s liberalisation and ability to meet international standards are a work in progress, with further major regulatory reforms forthcoming. The next significant areas are health insurance and real estate, following the new laws on these sectors. Finance will also remain at the forefront with initiatives such as the launching of e- KYC (a blockchain-based know-your-customer and anti-money laundering platform) that will streamline doing business in Bahrain while complying with international requirements.

Your report says: “The emergence of a strong technology hub relies heavily on the availability of an adequate supply of qualified labour.” A key requirement for promoting 4IR in any country is reforming education and training systems. Is enough being done here on that front? What would be your strategy to highlight the importance of education in promoting the Fourth Industrial Revolution?

Bahrainis capture 21 per cent of the labour force, and 66 per cent are in the private sector. The private sector will have a growing need for highly skilled workers to a level that the local population, assuming it has the required set of skills, could not meet. The Bahraini authorities are investing in training programmes with initiatives such as the launch of the AI Academy, a joint venture between Bahrain Polytechnic, Microsoft and Tamkeen, and cloud-related training, a joint venture between AWS, the University of Bahrain and Bahrain Polytechnic. 

Yet, several estimates confirm that more is needed to satisfy the expected future labour demand. AWS reports that there will be a need for “10,000 data solution architects in the next five years in the Middle East.” To produce such tech-savvy workers, Bahrain will need to consider significant additional investments in science, engineering, and technology training, and education. It should also facilitate the hiring of foreign workers in sectors where the qualified local labour supply is weak. Ultimately, Bahrain could also become a hub or a pool of expertise and skilled labour for the region and, more specifically, for its neighbour, Saudi Arabia.