GCC Insights: Saudi telecom on the fast track to liberalisation

For good reasons, authorities in Saudi Arabia seem determined to liberalise the telecom sector. Plans call for allowing competition in the data, GSM and fixed-line services.

The fact is that Saudi Arabia needs to speed up the opening of its telecom industry if only to catch up with fellow GCC countries.

Telecom statistics in Saudi Arabia lag behind the other GCC nations at large and the UAE in particular.

According to statistics released by International Telecommuni-cations Union, there are some 15 fixed lines per 100 inhabitants in Saudi Arabia versus a teledensity of 40 per cent in case of the UAE.

GSM penetration stands at 23 per cent in Saudi Arabia compared with 72 in the UAE.

Also, there are some 135 Internet users per 10,000 inhabitants in Saudi Arabia versus nearly 3,400 in the UAE. This partly reflects the low PC penetration rate of six per cent of the population compared with 15 per cent in the UAE.

The statistics indicate that there are opportunities for growth, notably in the mobile market. GSM subscribers in Saudi Arabia grew by 133 per cent in the period 1995-2001, the highest progress within the GCC.

To be sure, Saudi Arabia has made concrete progress in developing the telecom sector over the last few years. In late 1997, the cabinet authorised the formation of Saudi Telecommunications Co, which is known either as STC or Saudi Telecom. It was corporatised in 1998 as a joint-stock company and permitted to operate on a commercial basis.

In 2001, the government passed the telecommunications act and later set up Saudi Communications Commission (SCC) as the telecommunications regulator. Late last year, the authorities made good on their promise of partly privatising the telecom sector.

In an initial public offering, 90 million shares were offered for 170 Saudi riyals a piece, generating about 15.3 billion riyals ($4 billion). Saudi Telecom was expected to invest the fund in upgrading and expanding the telecom infrastructure.

On January 25, the first day of trading of the IPO, the Saudi Telecom shares rose to 250 riyals at the initial stage, which reflects strong demand. The IPO price contained a 23 per cent discount in light of expected competition in the telecom market. The stock carried a price-earning ratio of around 14.6 versus 17.3 PE for the Saudi equity market. Investors oversubscribed for the IPO by nearly one and a half times. Demand was partly boosted reflecting a decision by the Saudi Arabian Monetary Agency (SAMA) that allowed local banks to provide credit facilities up to 50 per cent of the value of shares to be purchased.

The IPO helped increase the market capitalisation of the stock market by five per cent. Also, the experiment indicated the presence of a massive amount of liquidity in the market. Only Saudi nationals and government institutions were allowed to purchase the shares, but foreign investors including those from the GCC were barred from investing in the telecommunications sector. The negative list of the Foreign Investment Law prohibits foreign investments in some 20 activities.

The IPO confirmed STC's success in overcoming an earlier failure to win a strategic buyer. In 2000, SBC of the U.S. decided against joining the proposed partnership.

The SCC has revealed its intentions to open up the telecom sector to competition. The most imminent is granting of licences for the opening up of the very small aperture terminal (VSAT) later this year. But the regulator must decide on many VSAT licences to be granted. The next plan calls for allowing entry of foreign operators in the mobile line by next year.

Another proposal calls for two GSM licences, one next year and a second in 2006. The fixed-line service will be opened up to competition by the distant 2008. The Internet market is fairly open, as there are about 20 Internet Service Providers (ISPs).

Saudi Telecom has proven profitable. It achieved a profit of 3.5 billion riyals in 2001, while net income of last year is estimated at 3.8 billion riyals. The IMF has argued that privatisation of the telecom, amongst other measures, will help accelerate the growth of non-oil sectors and help generate employment opportunities. The other measures include introducing liberal foreign investment rules plus welcoming investment in the gas sector.

Opening up of the sector to local and foreign competition will facilitate generating badly needed investments to help upgrade and expand telecom infrastructure.

Privatisation of the telecommunications sector will serve as a test for selling other public assets, including postal services and Saudi Arabian Airlines.