SAUDI ARABIA: Telecoms competition shows reform will

Analysis

The tender for the second GSM licence in Saudi Arabia was hotly contested. The Etisalat-led group of companies outbid seven competitor consortia, some of them led by major international players, and including well-connected Saudi heavyweights such as Prince Walid bin Talal's Kingdom Holding and Saudi Oger (tied to former Lebanese prime minister Rafik al-Hariri and Prince Abd al-Aziz bin Fahd). Etisalat's local Saudi partners include the government-controlled General Organisation for Social Insurance (GOSI) and several private companies.

GSM award. The Etisalat group made the highest financial bid in the final -- closed-envelope -- stage of the tender of 12.21 billion riyals. There have been rumours that heavyweight players from losing consortia have subsequently petitioned the al-Saud to be accorded a role in the GSM implementation, but that these demands were rejected by Crown Prince Abdallah.

Ettihad Etisalat IPO. In line with a generally cautious approach to economic reform, the Saudi telecommunications commission (CITC) imposed specific requirements for a GSM consortium: it had to include at least five Saudi partners, with a maximum stake for the foreign partner of 49%. Of the capital, 20% was to be raised via local initial public offering (IPO); a further 20% is to be sold off later.

In mid-October, the newly founded Ettihad Etisalat embarked on its IPO, managed by local bank SAMBA (see GULF STATES/MALAYSIA: Islamic finance links grow - December 22, 2004). Twenty million shares were on offer, at 50 riyals per share, and a limit of 10,000 shares per person was imposed in order to increase participation -- previous IPOs, including the 30% IPO of government monopolist Saudi Telecom (STC), had been dominated by large interests (see SAUDIA ARABIA: Compromise inevitable - November 21, 2002). Demand was huge: the IPO was 51 times oversubscribed, indicating the abundance of liquidity in the kingdom. Etisalat has announced plans to increase its capital from 5 to 7 billion riyals.

Telecoms impact. Etisalat is expected to expand considerably the choice of services available to Saudi customers, who have thus far been served by STC (see MIDDLE EAST: Competition transforms telecoms sector - August 10, 2004). The potential clientele is large and very rich by Middle Eastern standards, and interest in technical kit among the kingdom's predominantly young consumers is considerable. Large proportions of household incomes are being spent on mobile communications. Technological upgrades have come slowly in the past, and although mobiles have been booming, GSM penetration is still less than 35%. Etisalat, which will have to build its own network, has announced that it envisages investments of 20 billion riyals in the mid-term.

STC reactions. Despite its assertions to the contrary, STC is under considerable pressure. Although its services have been improving in recent years compared to those of the old PTT ministry, it has had little pressure to be at the forefront of technological development. In the first half of 2004, its net profits were 5.14 billion riyals.

The Saudi press has seen vociferous complaints about the quality of services and customer care. Many are likely to switch to another provider. STC has cut its rates and launched an aggressive marketing campaign, including free upgrades of Sawa pre-paid cards to new contracts, but the response seems to be muted so far.

In a clear indication of STC's nervousness, the company has told authorised dealers of Sawa pre-paid cards that they cannot be agents of Etisalat. However, this is unlikely to stand. The fairness and capacity of telecoms regulator CITC -- partly staffed by old hands from the PTT ministry -- will be put to the test in the coming years; but in view of the domestic and regional unfolding STC-Etisalat competition, it probably cannot afford blatant favouritism. Furthermore, the conduct of the tender seems to bode relatively well for a level playing field.

Public services impact . Etisalat's impact on the quality of telecom services in the kingdom is likely to be felt quickly:

• The company plans to launch full-scale GSM services in major Saudi cities providing one million mobile lines by mid-2005. The CITC says that the company will be free to set its tariffs.
• Third generation mobile services, including transfer of video and other broadband data, are likely to be introduced soon, and the recent lifting of a ban on camera mobile phones indicates that cultural specificities will not impede the uptake of new technologies.
• It has been estimated that by 2007 revenues in the kingdom's GSM market will rise to 7.9 billion dollars.

The entry of an international service provider sends an important signal about the broader privatisation process in the kingdom. Potential investors in the electricity and water sectors are watching closely. The investment conditions in the kingdom are very different from sector to sector, both in terms of prices, markets and infrastructure and in terms of agencies involved. However, the apparently successful Etisalat entry seems to demonstrate that in principle a partial opening of public service markets can be managed in a reasonably clean way -- or at the very least in a fashion lucrative for foreign partners.

No allegations of undue manipulation have been made, and the well-orchestrated involvement of important local interests seems to have bolstered the position of the foreign partner. Saudi agencies, including CITC, seem to have stuck to the book, drawing on extensive foreign expertise. The transition from PTT ministry to STC, and then to STC-Etisalat competition shows that the gradualism of Saudi reform processes can work in clearly delimited policy areas and institutional contexts such as privatisation. This is in contrast to broader economic reform moves (eg in labour markets, foreign investment and tax reform) which involve more actors, interests and institutions and tend to flounder due to their complexity and the limited capacity of the Saudi state to coordinate and implement comprehensive change.

Capital markets impact. The abundant availability of local capital was one factor which made the involvement of a foreign lead investor palatable (see GULF STATES: Lessons of last boom may not be heeded - November 25, 2004). Two thirds of the Ettihad Etisalat capital is in Saudi hands. Saudi capital is looking for local investment opportunities, as demonstrated by the participation of numerous large business actors in the tender consortia, the IPO oversubscription and the rise in share price to over six times the offer price.

Repatriation of capital has become increasingly important since September 11, 2001, and the private sector is exerting pressure on the government to open up investment channels, not least to prevent further overheating of the local stock market. Additional privatisations under way currently include partial sell-offs of the national insurance company NCCI and the public mining company Maaden.