Selling the crown jewels

Saudi Telecom Company (STC) will go on the block this year, the first step in KSA’s long awaited privatisation programme.

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By  David Ingham Published  July 13, 2002

|~||~||~|Saudi Arabia’s privatisation programme is gathering pace and the first act will be a pre-Ramadan float of part of Saudi Telecom Company (STC.) The STC float and the government’s privatisation strategy were approved by a June meeting of the Supreme Economic Council (SEC) chaired by Crown Prince Abdullah.

“The strategy defines methods of privatisation,” said Ibrahim Al Assaf, Minister of Finance and National Economy, after the SEC meeting. “In some sectors, like ports, only services will be privatised. Privatisation will be total in other sectors.”

Sources are quoted as saying that the STC offering will be the country’s largest in almost twenty years. Bahrain-based Gulf International Bank (GIB) will manage the flotation of up to 30% of STC, which is expected to bring in around $1 billion (SR 3.67 billion.)

Whether it’s STC now, or Saudia further down the road, there are several factors driving the Kingdom’s privatisation plans. The primary reason is the desire to pay down the country’s long term debt, currently reckoned to be $168 billion.

Another factor is the belief that privatisation will, at least in the long term, help create jobs in a country with 20% unemployment and an exploding population. Plus, particularly in the case of STC, there is a genuine desire to improve service and further the cause of market economics in the Kingdom.

“Privatisation means a move towards more ‘Western’ type business where efficiency is more important,” argues Philippe Rixhon, managing partner, Accenture. “Through this, the customer will experience some sort of benefit. The company will be slightly more agile.”

Already, STC is making its finances more public, something that is rare anywhere in the Middle East, and Rixhon hints that STC may even be looking to spread its wings outside the Kingdom just as SABIC has been able to do. “STC now has a vice president for international affairs, which is new and may be symptomatic of STC wishing to operate outside of the Kingdom,” Rixhon adds.

Not everyone is optimistic that STC’s flotation will be positive for the public, however. ISPs have long complained that STC keeps infrastructure prices high, costs that ISPs have to pass on to their customers.

“The only way STC will reduce its prices is if it thinks it is more profitable in the long run for them,” says Dr Badr Al Badr, CEO of alamiah.net, a leading ISP. “The issue is more about monopoly than about public ownership. Better response will only come with competition.”

Mohsen Malaki, a senior telecoms analyst at IDC is more optimistic, however. “It provides more transparency that allows the private sector to take a deeper look into what is really happening on the infrastructure side,” he says. “More transparency is always appreciated.”

The flotation of STC promises to be just the beginning of a long term programme. If STC’s float is deemed a success, the government will likely turn its attention to Saudia, the national carrier, first ‘corporatising’ it as it did with STC around three years ago and then moving towards privatisation.

There is also lots of talk about having ‘public-private partnerships’ in industries such as desalination, railways, postal services and petrochemicals, although there are no firm details as yet on the form such partnerships might take.

Then there is the possibility of selling off the government’s stakes in companies already listed, such as SABIC. The government owns around 33% of the Saudi stock market’s capitalisation of around SR300 billion, and selling those stakes would raise around SR100 billion that could be used to pay down the public debt substantially.

The government clearly has lots of options, but analysts caution that the whole privatisation process must be carried out at a measured pace. Dumping too many shares at one time could overwhelm the market and push down prices.

Dr Saeed Al Shaikh, chief economist at National Commercial Bank, suggests that the right time to do this may even have passed and that the process should perhaps have been started earlier when markets were more buoyant. “They could have started this in 2000 because the market could have absorbed that amount of money without really stressing the stock market,” says Dr Al Shaikh. “It’s harder to do it in bad years; you don’t increase the supply because that will push the market further down.”

Another challenge that the privatisation programme faces is that not all companies are as desirable an investment as STC. There are plenty of government owned companies, Saudia and the electricity generators for example, that are believed not to be in such great shape.

Before these companies can be sold off, they may well have to go through what is politely called ‘restructuring.’ “One of the most sensitive issues in Saudi Arabia at the minute is that the population is growing rapidly but jobs are not growing as quickly,” points out Joseph Braude, senior analyst at Pyramid Research. “As a result, people are concerned about the loss of jobs that may happen as a result of privatisation.”

Dr Saeed Al Shaikh argues, however, that only with short term pain will there be long term gain. “As you corporatise and privatise industries they have to be run efficiently and obviously that will lead to layoffs. But that’s in the short term,” he says.

“In the medium to long term, as these companies become profitable, and the demand on their services grows, they have to expand.” KSA’s road to privatisation will clearly be a long and winding one.||**||

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