PRIVATISATION in six months and financial autonomy for a new private telecoms operator are promised this year in Saudi Arabia. Six months ago such a suggestion would have been greeted with incredulity. But frantic work is underway at the Ministry of Posts, Telegraphs & Telephones (PTT) in Riyadh to transfer telecoms into a new private company, possibly as early as June. 'Preparations are in full swing,' says an executive with a Europen telecoms company. 'The minister is very excited about it.'

The Saudi state prides itself on catering for every need from antenatal care to old age pensions so the speedy privatisation of telecoms, first announced last October and confirmed by the council of ministers (cabinet) in mid-December, is a major innovation.

Privatisation has been a tenet of economic policy for years but little has been done to put the rhetoric into practice. However, having taken the decision to start with the telecoms sector, the process is advancing with unexpected urgency. One reason is money. 'They have to privatise, or at least implement the first phase, by June,' says a US executive in Riyadh. 'It's largely a financial thing so they don't have to go through the ministry of finance to get their finance. They need a new financial system and are focusing on that.'

At present the PTT is obliged to hand over revenues to the Ministry of National Economy & Finance and is often unable to pay its suppliers. With many suppliers and consultants reported to be experiencing late payments - some arrears running to several hundred million dollars - radical reform of the way telecoms is financed may offer some relief.

Creating Saudi Telecommunications Company (STC) to take over all telephone and telex services from the PTT is the first step towards a full-blown privatisation. Capitalised at SR 10,000 million ($2,670 million), STC will be floated within two years, according to PTT minister Ali al-Jehani. Plans for STC to set up subsidiaries, either to cover specific regions or to manage different services, are under study.

The minister says he expects to see lower call charges as a result. He also claims that the company will be the largest in Saudi Arabia, eventually employing 70,000 Saudis, compared with the current 20,000. The issue of how a payroll of 70,000 can be squared with delivering cheaper services at a commercially-run company was not raised by the minister when he spoke on national television in December.

While broadly welcomed by Saudi Arabia's telecoms equipment suppliers, the privatisation process has created uncertainties too. 'The question is whether they will have foreign companies as equity partners or advisers,' says the European executive. 'They don't need external money but they could use an adviser.' Of more immediate concern to suppliers is the impact of the restructuring on new orders. 'Before they have established STC, they will not make any major move - they will not commit,' he adds.

The proposed transfer of authority to STC also comes in the midst of a 1.5 million-line extension project which has fallen behind schedule. Both the supplier, ATT/Lucent Technologies of the US, and the PTT have come under fire for the delays. Although Lucent has installed 18 out of 22 planned switches and secured acceptance on 530,000 lines, only 150,000 lines are actually in service. 'The biggest problem is getting the copper from the nearest exchange to the house,' says a source familiar with the project. The contractor is understood to have imported at least 5,000 Chinese labourers to dig ditches and install infrastructure to speed up connections.

As part of the same Telephone Expansion Project 6 (TEP-6) Lucent has delivered 360,000 out of 500,000 global standard for mobiles (GSM) lines. The take-up has been enthusiastic. Like elsewhere in the Gulf, mobile phone demand is almost insatiable and subscribers are active users. Rates are not cheap and it is estimated that the PTT's receipts from the new GSM services are fast approaching $1,000 million.

Awarded in 1994, TEP-6 was unusual in being assigned to a single supplier. Two years earlier a deal had been negotiated for TEP-6 by the PTT with a combine of Ericsson and Alcatel but this was thrown out by the cabinet. But as delays have mounted, Lucent may even have come to regret the fine pricing and strong political support that helped it win the $4,000 million award.

'They will probably assign TEP-7 to a number of suppliers because of lessons they have learnt with TEP-6,' says the Middle East representative of a European telecoms supplier. 'Having a single vendor puts tremendous pressure on the PTT,' says another supplier. 'TEP-6 was originally bid in modules - even AT&T didn't expect to get the whole project.'

The fixed line element of TEP-7 is a smaller proposition, likely to involve the upgrade of exchanges serving 200,000 lines installed by Ericsson and Siemens. Some telecoms suppliers anticipate a larger fixed element, possibly up to 700,000 lines. But the tender is also expected to include as many as 1 million more GSM lines.

Big push

'There is a big push for TEP-7. They need to get that out as soon as they can because of the GSM demand,' says the Riyadh observer. 'GSM is much easier and the ministry is more amenable to approving it, but I don't expect to see it before the fourth quarter. They need consultants to help put the tender together.' Norconsult, the consultant supervising TEP-6 for the PTT, is considered well-placed to fill this role.

An even bigger series of contracts is looming in the form of TEP-8. Telecoms companies expect this project to involve a 4-million line expansion of the fixed system and further GSM capacity to boost teledensity significantly in the early years of the next century. No deadlines have been mentioned for this scheme which is likely to be the sole responsibility of the STC once it has found its feet. Suppliers are keen to contend for Saudi telecoms contracts because of their scale, but many were frustrated by the way the award of TEP-6 was handled. Siemens, which is finalising an earlier 190,000 line expansion, Ericsson and Alcatel will all be keen to secure a new major project in a market that Lucent has dominated since 1994.

Suppliers will be equally keen to see if privatisation will improve the ability of the telecoms operator to pay contractors, by freeing receipts from the grip of the finance ministry. Says one company executive: 'In theory, we would bid for TEP-7 but you have to ask how big is the corporate appetite for negative cashflow.' By removing telecoms from the state sector and granting it financial autonomy, privatisation may go a long way to allay such concerns.

Peter Kemp