Datacenters drive economic diversification and digital transformation in the Middle East

Introduction

The Middle Eastern Gulf Cooperation Council region is transitioning toward digitalization with a strong focus on technology competitiveness and national economic diversification initiatives. In the past decade, the United Arab Emirates has set the regional pace. Through long-term leasing arrangements, sovereign-backed investing and free zones for digital, the UAE has built a datacenter ecosystem to support local demand as well as international growth. Saudi Arabia is not too far behind. Backed by the Saudi Public Investment Fund, the kingdom is rolling out plans to develop its datacenter footprint. The other Gulf Cooperation Council countries — Qatar, Kuwait, Bahrain and Oman — are smaller in scale but are also pursuing digitization, offering subsea connectivity, cloudfirst services and disaster recovery/edge to render themselves digitally relevant.

The Take

The Gulf Cooperation Council (GCC) countries have experienced a significant transformation over the past few years in terms of rapid modernization, which has heightened demand for digital infrastructure, particularly datacenters. Private and government organizations across the region are implementing digital agendas, and in response to this, datacenter providers have begun to position themselves not only as suppliers of conventional colocation service, but also as partners for cloud computing. The UAE and Saudi Arabia will most likely continue to be the largest regional digital hubs, but this doesn't mean that we won't see innovation and developments taking place in neighboring countries — just on a smaller scale.

Context

The Gulf Cooperation Council is an economic and political union of six Middle East countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. Established in 1981 to ensure collaboration and development in the region, it allows for coordinated regulation, as well as provides a customs union and free movement of goods and capital. Bahrain has a well-established banking and financial sector; Kuwait offers heavily government subsidized electricity rates; Oman is recognized for having a very neutral foreign policy; Qatar has a strong media sector; Saudi Arabia is the largest GCC member in terms of population and is undergoing significant economic reforms; and the UAE has established itself as a hub for tourism and business not only in the region but also globally.

UAE and Saudi Arabia

The United Arab Emirates' leased datacenter market continues to be the lead player in the region — and it's on the rise. Over the past decade, the country has focused on developing Abu Dhabi and Dubai. Most UAE datacenter operators are based in free zones in these two cities, both of which offer a bevy of economic benefits to foreign companies.

Datacenter demand has traditionally been spurred by local businesses serving local markets, along with international companies expanding to augment their operations in the Middle East. Many organizations have adopted a blend of cloud and colocation strategies. Government institutions at the local and federal levels have themselves become among the largest consumers of datacenter services in the UAE, with organizations like the Abu Dhabi Digital Authority leading the way in delivering digital government services.

More recently, the UAE has emerged as a potential hub for AI in the region. The country was one of the first to appoint a Minister of State for Artificial Intelligence in the Middle East, and Abu Dhabi recently unveiled mega projects led by Stargate in a bid to boost innovation and establish a robust AI ecosystem.

Saudi Arabia is also seeing strong developments take place in its datacenter sector fueled by government investments and strategic initiatives. New datacenter construction projects must be approved in advance by the Saudi Public Investment Fund, which is dedicated to pursuing digitization while keeping the country's financial objectives in mind.

Riyadh, Dammam and Jeddah are turning into prime datacenter hubs in the country. As the capital city, Riyadh is the country's economic and political center. Dammam, situated near large oil reserves, is undergoing digitization of the energy sector; and Jeddah, being a port city with high visibility for trade and tech innovation opportunities, presents diversified prospects for technology innovation and trade.

Cloud giants such as Microsoft Corp., Oracle Corp. and Amazon Web Services are expanding their presence in Saudi Arabia, identifying the growth potential in the market for cloud and artificial intelligence. Saudi Arabia is also pushing to become a regional AI hub, with the biggest announcement being plans for Humain to fund the construction of AI datacenters in a $10 billion investment.

Rest of the GCC

Kuwait, Qatar, Bahrain and Oman collectively form the rest of the GCC. While remaining small markets in terms of scale relative to the UAE or Saudi Arabia, these countries are carving out niches in hyperscaler alliances and sustained enterprise growth. Their road forward — which hinges on cloud adoption and smart infrastructure — highlights the Middle East’s ambitions to become an integrated hub of digital innovation.

Kuwait's leased datacenter space remains in its infancy, but buildout plans are estimated at 19 megawatts of capacity, which is significant for the size of Kuwait's market. Three drivers are facilitating this growth: government-funded digitalization, telco investment in cloud-bordering services, and rising connectivity. The main telcos — Zain Kuwait, Ooredoo QPSC and STC (a subsidiary of STC Saudi Arabia) — are constructing colocation facilities for enterprise uptake and positioning them as contenders for hyperscaler interest.

Regional connectivity also is being bolstered by projects such as FALCON, FOG and GBICS, as well as subsequent phases of the 2Africa subsea cable system. However, Kuwait has a significantly small population compared with Saudi Arabia and the UAE, which curtails local demand and can potentially deter interest by international cloud suppliers versus more substantial neighboring markets.

Qatar has established various laws promoting data sovereignty and public cloud services. The country has 13 operating colocation facilities and three under development, supported by seven subsea cables. However, infrastructure costs are high, and there is a shortage of tech talent.

Bahrain is a pioneer in the region for establishing the "cloud first" policy to encourage early involvement by hyperscalers and bestow upon them a leadership benefit. AWS launched its Middle East region in Bahrain in 2019, and Tencent Cloud followed suit via a strategic partnership with Batelco, confirming the country's cloud-market credentials. Bahrain's strengths rest on its digital governance.

Free zones like BIIP and BLZ, along with the wider Economic Vision 2030 initiative, have attracted international capital. Today, Bahrain has telco colocation facilities from the likes Batelco, Zain and STC, all clustered around Manama and Hamala. It boasts a small market size (five operational facilities), but the country's early cloud uptake, regulatory transparency and regional location could make it appealing — particularly for disaster recovery and edge hosting.

Oman's leased datacenter market is in its nascent stages, but the country can be viewed as at a digital crossroads, enabled by its submarine cable environment. It is a landing point for 2Africa and the Oman–Australia Cable. This could position Oman as an access gateway of regional proximity linking Asia, Europe and Africa. Top operators looking to establish a presence include Equinix Inc. (in collaboration with Omantel SAOG), Oman Data Park, Ooredoo, Cloud Acropolis and Gulf Data Hub.