Amman October 1-2, 2003 Presentation Evolution of Saudi Telecom During Sector Reform 3 rd Annual Private Sector Cooperation Meeting in the Arab Region Dr. Homoud Al-Kussayer General Manager, Regulatory Affairs

1 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Introduction Challenges  The changing environment during telecom reform introduces various challenges to incumbent operator Optimized Regulations  Regulatory framework can be optimized, through consultation, to benefit all sector stakeholders Incumbent Proactiveness  Incumbent proactiveness in dealing with liberalization challenges can lead to successful results

2 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom In the Kingdom, significant progress has been achieved in telecom sector reform Telecom Sector Reform Milestones – Saudi Arabia Mid 1998  Corporatization of STC: The Saudi Telecom Company (STC) is separated from the Ministry and starts operating on a commercial basis Q  CITC Ordinance is issued by Council of Ministers decision  Telecom Act is issued by Royal Decree and goes into effect  CITC Ordinance is issued by Council of Ministers decision  Telecom Act is issued by Royal Decree and goes into effect Q  The Communications and Information Technology Commission (CITC) is established Q  The Commission Board approves the Telecommunications Bylaw which is issued by the Minister in June 2002 Q  The Saudi Telecom Company launches partial privatization process through IPO in December 2002

3 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Corporatization resulted in substantial service growth STC PSTN Subscribers Base ( E) (in Million) Post Corporatization +84% STC Mobile Subscribers Base ( E) (in Million) +2267% Post Corporatization Source:Adapted form STC Operational Reports

4 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Objectives of Liberalization in Saudi Arabia Telecom Sector Development  Develop the telecommunications sector in terms of coverage and network with the objective to meet the social and economic requirements of the Kingdom Investment Stimulation  Stimulate investments in the telecommunications sector and create a competitive environment that provides services at fair charges Economic Efficiency  Promote economic efficiency of the sector in general and the incumbent telecom operator in specific through well functioning market economy Privatization  Withdraw the Government’s active engagement (financing, strategic planning, operating) from the telecommunications sector which is better suited to private enterprises Expansion of Local Capital Market  Spread share ownership, and contribute to the expansion of the local capital market Liberalization is an integral element of telecom reform in Saudi Arabia

5 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Adequate consultation between the telecom sector stakeholders can identify the optimal path to liberalization Transition Paths to Liberalization Managed Transition  Competition drives performance by attracting more players  Adequate management of market liberalization ensures the viability of competition  Experiences of delayed competition or over-rushed full competition have proven to be detrimental to all stakeholders  Competition drives performance by attracting more players  Adequate management of market liberalization ensures the viability of competition  Experiences of delayed competition or over-rushed full competition have proven to be detrimental to all stakeholders Sector Performance Regulatory Framework Rudimentary Average Advanced World-Class MonopolyEarly Competition Managed Competition Full Competition Singapore Japan Germany USA UK

6 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom STC Policy Environment SAUDI TELECOM COMPANY Ministry of Telecommunication and Information Technology Ministry of Finance Ministry of Commerce Ministry of Municipalities Investment Authority Telecom Regulatory Authority (CITC) Telecom Regulatory Authority (CITC) During telecom reform, incumbent operator proactively interacts with various institutions

7 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Telecommunications Regulatory Framework SAUDI TELECOM COMPANY Commission Decisions Regulations  Terms of Service  Interconnection Guidelines  Numbering Plan  National Frequency Plan  Tariff Regulation  Universal Access and Universal Service Policies  Terms of Service  Interconnection Guidelines  Numbering Plan  National Frequency Plan  Tariff Regulation  Universal Access and Universal Service Policies Telecommunications Bylaw  Legal document derived from the Telecom Act and specifying the authority of the Commission and the roles and responsibilities of service providers  Issued by the Commission and approved by the Telecom Minister  Legal document derived from the Telecom Act and specifying the authority of the Commission and the roles and responsibilities of service providers  Issued by the Commission and approved by the Telecom Minister Rules of Procedure  Describes how STC should interact with the Commission and how to apply specific proceedings (Rule-making proceedings, License Proceedings, Tariff Applications, etc.)  Issued and approved by the Commission  Describes how STC should interact with the Commission and how to apply specific proceedings (Rule-making proceedings, License Proceedings, Tariff Applications, etc.)  Issued and approved by the Commission Telecommunications Act  Primary legislation document used to regulate the telecom sector  Issued by Royal Decree and gone into effect on December 26, 2001  Primary legislation document used to regulate the telecom sector  Issued by Royal Decree and gone into effect on December 26, 2001 STC License  Grants a service provider the right to operate according to certain conditions, and defines its obligations and responsibilities  Issued by the Commission and approved by the Council of Ministers  Grants a service provider the right to operate according to certain conditions, and defines its obligations and responsibilities  Issued by the Commission and approved by the Council of Ministers CITC Ordinance  Establishes Commission Board and Governor and responsibilities  Defines sources of funding of the Commission  Establishes Commission Board and Governor and responsibilities  Defines sources of funding of the Commission Incumbent should comply to different telecommunications regulations

8 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Regulated Environment Competitors Interconnection SAUDI TELECOM COMPANY Customers Ministries and Agencies Commission Policy Setting Regulation Agreements Partners, Dealers, and Suppliers Service Obligations In order to succeed in a regulated environment, incumbent should efficiently manage its relationships with its counterparts

9 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Future Status and Performance of Incumbent Operator Challenges Facing Incumbent Telecom Operators Regulatory Framework Telecommunications Sector Development and Growth Telecom Operator Business Strategy Organizational Structure Future Alliances Operational Efficiencies Environment Incumbent Operator Internally, incumbent should improve its capabilities to face environment challenges

10 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Incumbent operator should develop comprehensive regulatory program to succeed in the new environment Regulatory Program Understand Policy and Environment Analyze new environment Analyze regulatory framework Assess impact of regulations on STC Contribute to License Development Develop position on license content Review draft license Define and Implement Regulatory Function Define key regulatory processes Design Regulatory organization Interact within the Company and with the Commission Coordinate with Commission and respond to its requests Implement external and internal regulatory communication Implement regulatory compliance program Monitor performance Develop position on licensing policy Institute Interconnection Program 4 4 Analyze current situation and define scenarios Undertake gap analysis and develop action plans Implement required changes

11 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Incumbent can improve operational performance and efficiency Productivity in Number of Lines (Fixed & Mobile) per Employee (Saudi Telecom, ) Productivity in Revenue per Employee (in SR Thousand) (Saudi Telecom, ) CAGR ( ) 61% CAGR ( ) 25%

12 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom Appropriate incumbent action can benefit customers, government and shareholders Value Transferred to STC Customers Through Tariff Reductions ( ) (in SR Billion) STC Revenues ( ) (in SR Billion) CAGR ( ) 18%

13 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom The positive results would reflect in the continuous increase of share price value STC Share Price Evolution – Tadawul (January 25 – September 22, 2003) Comments  Initial share offering set at SR 170 for 90,000,000 shares, representing 30% of the Company’ shares  Opening share price on first day of trading was SR 190  Average share price for September 16-22, 2003, period was SR 400, representing a 110% appreciation  Initial share offering set at SR 170 for 90,000,000 shares, representing 30% of the Company’ shares  Opening share price on first day of trading was SR 190  Average share price for September 16-22, 2003, period was SR 400, representing a 110% appreciation

14 3 rd Annual Private Sector Cooperation Meeting in the Arab RegionSaudi Telecom THANK YOU