Saudi telcos settle disputes and agree new service royalties with government

The annual royalty for commercial service will drop from 15% to 10% of net revenues under the agreement

Zain KSA, a part of Kuwait telecom provider Zain Group, is in talks with Saudi Arabia's Finance Ministry for a debt-to-equity deal. Reem Mohammed / The National

Saudi Arabia’s telecom operators signed an agreement with the government that will settle all the old disputes and define a new investment framework and mechanism for the calculation of service and license royalties.

The deal signed with Ministry of Finance, the Ministry of Telecommunications and Information Technology and the Communications and Information Technology Commission will see annual royalty for commercial service dropping retroactively from 15 per cent to 10 per cent of net revenues, starting January 1, 2018, the three operators said in separate regulatory filings to the Saudi stock exchange.

Shares of the Zain Saudi Arabia surged 5.8 per cent while those of Saudi Telecom Company climbed 1.3 per cent after both firms said the agreements will impact their financial results positively.

Stocks of Etihad Etisalat (Mobily), a unit of UAE’s operator Etisalat, fell 3 per cent after it said the new royalty mechanism is not expected to have a material impact on its 2018 financials. Starting from 2019, the company will have to bear additional cost estimated between 450 to 600 million riyals per year over the next few years, it added.

“The new investment framework is already largely included in the company future investment plans and may lead to incremental investments depending on the evolution of the market from a pricing and customer behaviour perspectives,” the company said in the statement.

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Zain KSA, which is a part of Kuwait’s Zain Group, however expects to save 220m riyals in royalty fees for the first nine months of this year and expects the reduction in annual royalty fees will positively impact the company's financial results going forward.

The agreement with the government also includes the settlement of disputed amounts related to the payment of annual royalty fees by Zain KSA to the CITC for the period between 2009 and 2017.  The positive impact of this settlement is expected to reach 1.7 billion riyals over the next three years, which will enable to company to invest further in improving its services, the company said.

“Linking our settlement agreement on the primary condition to 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,” said Bader Al Kharafi, Zain vice-chairman and group chief executive.

The agreement will further boost Zain KSA’s liquidity position as it will reduce financial obligations the company faces, and will enable the firm to deploy additional liquidity to expand its 4G and 5G networks and fiber expansion to meet the growing demand for broadband in the kingdom, he added.

STC, the government backed operator, also expects the agreement to boost its fourth quarter earnings taking into account the provisions allocated for the royalties. Part of those provisions will be used to cover the differences resulting from the modified mechanism and the remaining part, which is about 500m riyals, will be reversed on the books, it said.

The company will use provisions already allocated in its financial statements over the past few years to meet a large part of the capital investments planned under the settlement agreement, it added.