The telecom spring
Feb 1st 2007
From the Economist Intelligence Unit ViewsWire
Saudi Arabia's increasingly open telecoms market
The Saudi telecom market is poised to enter a second phase of rapid expansion, as bidders prepare to submit offers for a third mobile-phone licence and for a licence (or licences) to compete with Saudi Telecom in providing fixed-line services, hitherto the exclusive preserve of the part state-owned operator. The entry of new players will not only provide impetus for growth in the quantity and range of telecoms services; it will also have a financial spin-off as 40% of the equity of the new mobile firm and 25% of the fixed-line operator(s) will have to be raised through public share offerings. Competition for the licences is likely to be intense, owing to the high purchasing power of the Saudi population and the large scope for growth in the telecoms market.
The initial surge took place in the late 1990s, with the conversion of Saudi Telecom into an autonomous corporation and with the creation of a regulator, the Communications and Information Technology Commission (CITC). Other landmarks included the state's divestment of 30% of Saudi Telecom through an initial public offering (IPO) at the end of 2002, and the award of a second mobile licence to Etihad Etisalat, a UAE-led consortium, whose Mobily services started up in May 2005. Following Saudi Arabia's accession to the World Trade Organisation (WTO) at the end of 2005, the government made undertakings to open up the telecoms sector progressively to foreign investment.
Shallow penetration
According to the most recent CITC annual report, mobile telephony has been the fastest growing area of the market in recent years, with the total number of subscribers rising from 1.5m in 2000 to 14.2m in 2005, providing mobile teledensity of 60.5%; the fixed-line telephone market has grown much more slowly, and, with 3.8m lines, had a penetration rate of only 16.3%. By contrast, the number of Internet users has trebled in the past five years to 3m (13% of the population), and broadband subscribers increased rapidly to 68,000 by end-2005, four years after the service was introduced. Total telecom revenue has risen by about 15% per year since 2001, and reached SR34.2bn (US$9.1bn) in 2005. The Economist Intelligence Unit forecasts that the number of mobile-phone subscribers and Internet users will both virtually double over the next five years, while broadband subscribers will increase more than sixfold from an estimated 90,000 in 2006 to 575,000 in 2011.
The bid deadlines have been put back, at the request of prospective participants, to February 24th for the mobile licence and March 10th for the fixed-line operations. As with a number of similar tenders across the Middle East and North Africa over the past few years, the main contestants are likely to be emerging market operators, including the dominant regional firms. The price is expected to be comfortably above the US$3.2bn winning bid for the second licence, owing to the improvement in Saudi Arabia's economic prospects in the intervening period. Egypt's Orascom Telecom, which came third in the second licence contest, and MTC of Kuwait, which was in fourth spot, have indicated that they are strongly interested in the new opportunity. Other firms mentioned as prospective bidders include Oger Telecom--a Saudi-based firm with operations in Turkey and South Africa--and MTN of South Africa, which holds the second mobile licence in Iran.
The fixed-line licence may prove to be less of a draw, owing to the relatively modest prospects for growth in this segment. The licence terms entitle the operator to provide all forms of voice and data communications services, and certain other related services, including text and video. It does not allow for the provision of Internet services. The service must be rolled out to at least three Saudi provinces within three years and to all 13 provinces in seven years. The fixed operator will also have to pay a commission of 5% of net revenue to the government in its first year, rising to 8% in the second year and a maximum of 10% per year over the 25-year life of the licence. For the mobile operator, the commercial provisioning fee has been set at 5% for the first year, 10% for the second and 15% thereafter.
Foreign ownership
In line with the commitments made to the WTO foreign investors will be entitled to hold up to 60% of both fixed- and mobile-phone companies in Saudi Arabia from end-2008. The foreign ownership ceiling for mobile firms was lifted to 51% at end 2005, according to CITC, and 51% foreign ownership in fixed-line phone companies will be allowed from end-2007.
At all stages in the tender process, CITC has provided ample scope for public debate, and has posted, in full, the questions and answers in its consultation exercise. By the time the new licences are active, Saudi Arabia will have one of the most open telecoms systems in the Middle East, a remarkable turnaround for a country which until quite recently was a byword for inadequate and extortionately priced telecoms services.
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