SAUDI ARABIA SPECIAL REPORT -
TELECOMS.
The race is on to boost capacity
ALI al-Jehani is a rarity among government ministers.
He has no qualms about speaking his mind. Plucked
from the campus classroom to become Post,
Telegraphs & Telephones (PTT) minister in 1995, the
former professor's frankness has been put to the test
in one of the government's most demanding portfolios.
Saudi Arabia is screaming for more phone lines and it
has been Al-Jehani's job to deliver them. Unable, until
quite recently, to make many new lines available, the
minister has had to deflect a lot of flak over the past
four years.
At the same time the system he manages is being
corporatised, in preparation for the first privatisation
of a Saudi utility. This has raised popular expectations
even further. The creation of the Saudi
Telecommunications Company (STC) as the
corporate vehicle to run telecoms also puts Al-Jehani
in the curious position of presiding over the steady
demise of the ministry he heads. No stranger to
controversy, the minister plainly relishes the prospect.
"I would like to see it completely privatised and the
ministry of PTT gone," he says. That would be just
the start. "We also envision competition to STC in a
very short time. We'll start with cellular and I
envisage competition in data as well." The actual
route to privatisation still has to be determined. Under
the decree that created STC, the process will have to
be approved by the new company, which Al-Jehani
heads, and both the government's privatisation
committee and the council of ministers.
The decree also directed the PTT and the Ministry of
Finance & National Economy to jointly appoint an
advisor to define a privatisation programme. JP
Morgan was duly selected and has since brought in
Booz Allen, Price Waterhouse, Baker & Mackenzie
and others to work on every aspect of the project.
Says Al-Jehani: "My intention is that we would have
shares issued in both the international and local
market and hopefully JP Morgan will help us with the
process."
In the meantime, the challenge of adding capacity
continues. The main focus of attention and a potential
source of controversy is the so-called TEP-8 tender,
for which bids are now being evaluated. Ever since
the TEP-6 expansion - worth about $4,000 million -
was awarded in its entirety to Lucent Technologies of
the US in 1994, rival suppliers have been desperate to
get back into a market the US company has come to
dominate. Siemens of Germany, France's Alcatel,
Nortel of Canada, Ericsson of Sweden and Lucent
are all in contention.
In an effort to contain the expectations raised among
the suppliers by the TEP-8 tender, Al-Jehani insists
that it is only a framework for establishing unit costs
and is not a mega-project like TEP-6. He is positively
averse to the notion of awarding giant contracts as
was the practice in the past: "The board of STC
decided to totally disregard TEP-8 except to try and
gain from it - we'll use bits and pieces. I hope STC
never has a TEP-8, TEP-9 or 10." If STC gets its
way, equipment will be bought in future from a
variety of suppliers and installed and integrated
contract-by-contract. The aim of the tender still
referred to as TEP-8 is to add up to 2.2 million new
lines over time but not through a single gigantic award
to one or even several contractors.
That hasn't stopped the high-level lobbying. In late
April, Jacques Dondoux, the French Secretary of
State for Foreign Trade, was in Jeddah, accompanied
by a top level Alcatel delegation, to press the case
with Crown Prince Abdullah for a French share of
what is still perceived as a giant expansion scheme.
Bigger French guns are on their way. Foreign
Minister Hubert Vedrine is expected in the kingdom
soon to prepare for a visit by Prime Minister Lionel
Jospin later this year.
Al-Jehani is adamant that any awards must be based
on technical merit. "The technical evaluation is for
quality and compatibility with the existing system," he
says. "There's a substantial difference between the
cost of equipment and integrating it with the system.
And to the ones who don't comply technically, we'll
just say goodbye."
In the minister's view, technical merit is an important
criterion but it is not the sole one. "The ethical
standard of the vendor comes before anything else,"
he says. "We know vendors who will try to
short-change us. It's not an easy process." Recent
work to make the system compliant for the year 2000
and replace older analogue lines with digital ones has
revealed shortcomings in the execution of past
contracts that Al-Jehani is anxious not to repeat.
"STC has the challenge of accommodating demand
and undoing what was not done right in the past," he
says. "We are in a privatisation process. We will add
only the kind of services that will add to the value of
STC - remember, we will have to sell shares in STC."
There is a growing realisation among the suppliers
that the TEP-8 tender is likely to make Saudi Arabia
more like other telecoms markets and that STC will
opt for master purchase agreements with a number of
manufacturers. This will almost certainly preclude the
award of a giant deal, whatever the lobbying efforts,
but generate steady if less spectacular levels of
business over the longer term. "It's an obvious project
to split," says the Riyadh representative of a major
European equipment supplier. "The consultants are
telling them they are a private company and they
have to count their pennies. Maybe the calls of
Clinton and Chirac won't work."
However it is eventually awarded, there is no
shortage of demand for more capacity. Teledensity
has almost certainly improved on the 10.6 lines per
100 residents reported by the International
Communication Union in 1998 but precise figures are
elusive. The minister says there may be about 2.9
million fixed lines by the end of 1999, a figure which
should rise to about 4 million lines by the end of next
year, according to a major contractor to STC.
"Nobody really knows," admits Al-Jehani. "Some lines
are going in, some are coming out."
The new lines are coming mainly from the handover
of TEP-6 work as the project approaches completion.
Instead of the original commission for 1.5 million lines,
Lucent will be delivering a total of 1.7 million lines,
with most of the work completed by the end of this
year. After a very shaky start mobilising for the
contract Lucent managed with the help of Bechtel to
get its construction programme under control and has
been handing over lines at a rapidly increasing rate
since the middle of last year. This coincided with the
creation of STC and the transfer of responsibility for
payments, long a bone of contention, from the
Ministry of Finance & National Economy to the new
company. However, the damage was already done as
the perception of early delays had tarnished Lucent's
local reputation and focused popular irritation at the
shortage of new lines on the minister.
In fact, the TEP-6 project is now set to come in
ahead of schedule and under budget. With most of
the work finishing this year Lucent has more than
caught up with itself as the original contract called for
work to be delivered by June 2001, with a final
signing off on the project a year later. It is understood
that the contract may also end up costing STC about
$400 million less than expected. After all the earlier
anxiety, Al-Jehani seems more than satisfied: "The
original contract stated that TEP-6 would be finished
in June 2001 and now it will be completely done with
by November 1999. Since Lucent was spun out of
AT&T the progress has been phenomenal."
Other additions are coming from the TEP-7 project
which included 1.1 million fixed lines. This scheme,
which was split between Siemens and Lucent, was
focused on the replacement with digital switches of
the old analogue ones - which could have
malfunctioned in 2000 - rather than on the addition to
new capacity. Work on the replacement of the
existing lines and the expansion of existing exchanges
is due to end in the first quarter of 2000.
New technology is making further, faster
enhancement of the network feasible at much lower
cost than a few years ago. For example, in May STC
received bids for a copper enhancement project
which will multiply the number of lines that can be run
down a single existing copper line. The project is
budgeted at about SR 400 million ($107 million) and
will enhance capacity on 300,000 existing lines around
the country.
STC also has the capability to raise money
independently, now that it is free from reliance on the
Ministry of Finance & National Economy. It recently
secured a SR 2,250 million ($600 million) loan from
local banks, used mainly to pay past obligations, and is
near to closing a second SR 2,800 million ($745
million) loan. PTT revenues were $2,200 million in
1997 and banks are keen to lend to STC. "STC has
no problem paying what needs to be paid," Al-Jehani
says. "It does have a problem with cashflow. There's
a time lag between installing the lines and deploying
the services."
Capacity has also been enhanced by the rapid
expansion of the cellular network. Contracts for the
supply of some 1.1 million global standard for mobile
(GSM) lines have been awarded since the mid-1990s
and mobile phone use has proliferated. The system
has grown so rapidly that it is not coping well with the
traffic volume and calls are often interrupted. "The
system still leaves a lot to be desired," complains a
Saudi bank manager in Jeddah. More than 50 per
cent of the GSM network suffers from interference
from other wireless communications invading the
spectrum in which it operates. "They need a
regulatory body," says a telecoms company manager
in Riyadh. "All the wireless is in different spectrums.
They need, at the minimum, a body to allocate and
manage the spectrum."
There have been similar difficulties in another new
area, internet services, which were opened up for
ordinary Saudis this year. Some of the glitches can be
blamed on the remaining analogue lines in the
network that still have to be replaced with digital but
the essential problem is capacity. "There's no doubt
that we are having teething troubles," says Al-Jehani.
"You need international gates to connect and we
agreed on a particular company that was supposed to
give us eight gates but there was an explosion of
demand so we had to bear with them. We now have
14 gates and it has improved but we still have a long
way to go."
Telecoms development is universally recognised as an
essential component of more rapid economic growth
and the TEP-6 expansion, in particular, has fostered a
sizeable local support industry. It is estimated that
about 70 per cent of the input for TEP-6 was sourced
locally from companies such as Riyadh Cable
Company and the Advanced Electronics Company,
which assembled and tested many of the circuit
boards and switches for the project.
Lucent alone employs 3,520 people, of whom 740 are
Saudi nationals, contributing to the creation of a cadre
of local telecoms experts. Subcontractors have
mobilised another 15,000 workers for the scheme. If
the capability and capacity that has developed is not
to be dispersed, new orders will be needed soon from
the TEP-8 programme. Says a manager engaged on
the TEP-6 project: "A significant local industry has
developed but it needs advance warning because of
the lead times. Towers can take six months from
order to delivery. If the orders get going soon they
shouldn't feel the difference but if they wait until
September there will be a gap."
No one is keener than Al-Jehani to get the next round
of expansion and service enhancement under way.
And he wants to make sure that network growth
continues on a steady trajectory rather than in fits and
starts as under the previous TEP projects. If all goes
according to plan, he may also be able to lay claim to
more than the kingdom's first big privatisation.
"Hopefully Saudi Arabia will be the first country in
the third world to have a completely digital network,"
he says. It may soon be able to leave the third world
behind in teledensity terms as well, but that will
depend on how soon new expansion contracts are let
and how substantial they turn out to be. |
