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Saudi telcos get royalty reduction in return for network investment

STC, Zain and Mobily will reduce annual payment to government and invest in new infrastructure

Saudi telcos get royalty reduction in return for network investment
Saudi telcos will pay a reduced royalty to the government, and have pledged to invest in telecoms infrastructure.

Saudi telco operators Zain Saudi Arabia, Saudi Telecom Co (STC) and Etihad Etisalat have all reached an agreement with the kingdom's ministries of finance, communications and communication and information technology to change the calculation of their annual royalty fees.

All three have also agreed to settle a dispute over fees due to be paid in the years up to 2017, with a further commitment that they would invest more in expanding their infrastructure over the next three years.

The agreement stipulates that each will pay annual royalty fee of 10 percent of net revenue from telecommunications services starting from Jan. 1, 2018, reduced from 15 percent. 

Mobily also agreed to pay an annual licence royalty of 1 percent of its annual net telecommunication revenues, while STC will pay 10 percent of net revenues from fixed line services and 8 percent of net revenues from data services.

Zain Saudi Arabia said the expected impact of the unified royalty fees between January 1 and September 30 2018 will result in a total fee decrease of $59 million, Zain said in a statement.

Additionally, the agreement includes the settlement of disputed amounted stemming from the payment of annual royalty fees by Zain KSA to the CITC for the nine-year period between 2009 and 2017, on the condition that Zain further invests in expanding its infrastructure over the next three years.

The statement said that there were other conditions, but did not specify what they are.

Over the next three three ears, the impact of the settlement is expected to total $453 million.

"We acknowledge and appreciate the efforts of the kingdom's MOF, MCIT and CITC to overcome any obstacles facing the sector," said Zain Group CEO and vice chairman Badr Nasser Al Kharafi.

"Linking our settlement agreement on the primary condition of further investment in infrastructure is an insightful move by the kingdom's authorities as it enables us to develop in a higher quality network and service for the benefit of the digital-savvy Saudi community."

Al Kharafi added that the agreement is a "significant milestone" for Zain KSA that will have a positive impact on its financial results this year.

"This development will further boost Zain KSA's liquidity position as it will result in the reduction in the reduction of financial obligations the company faces," he said.

"This in turn will allow the company to utilise that additional liquidity to continue the expansion and development of its 4G and 5G network and fiber extention to meet the growing demand for broadcast in the kingdom."

In Q3 2018, Zain KSA recorded a net profit of SAR 48 million ($12.8 million), up SAR 3 million ($799,765) from the same time period in 2017.

The company also made an early voluntary payment of SAR 600 million ($159.95 million) towards its Murabaha financing agreement.

The new royalty mechanism, starting from 2018 going forwards, will consist of an annual service royalty equal to 10% of the annual net telecommunication revenues and an annual license royalty equal to 1% of the annual net telecommunication revenues.

The new investment framework, which covers a period of 3 years including 2018, allows Mobily to ensure continuous improvement of the quality of its fixed and mobile networks through the achievement of a set of pre-agreed KPIs and to invest in the proper deployment of new technologies such as the 5G.

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