Universal Broadband Service in rural Saudi Arabia Innovations by USF & Operators close the Access Gap

1. Universal service fund Universal Broadband Service in rural Saudi ArabiaInnovations by USF & Operators close the Access Gap Presented by: Andrew Dymond

2. Saudi Arabia’s UAS Program – world leading case: • Advanced converged technology solution based on competitive, technology neutral OBA tendering has resulted in voice and broadband being deployed universally • 900 MHz 3G for economic wide area rural coverage • Efficient USF program roll-out since commencement in 2010 • Two area projects awarded per year across the Kingdom • USF has effectively promoted competition during a key market growth phases and achieved active participation by all leading operators • All four winning bids well below budgeted subsidy estimates • All leading operators, including new entrant, have won at least one award

3. Background • UA/US Policy created in 2006 • Provided for USF Fund to use 1% net operator levies • USF created by the CITC with operating autonomy • Competitive selection of Universal Service Projects & Providers (OBA style) • International UAS Consultant hired in Feb 2008

4. Policy Execution and USF Program Targets • Universal Service to all localities above 100 population • Despite high mobile penetration, the USF targeted improvement of voice quality to “indoor” signal strength for all US localities (Lower quality was considered under-served). • Voice and broadband Internet in a single program targeting universal 512 Kbps to all localities above 100 population • Universal Access to localities below 100 population • For voice – defined as outdoor signal quality and maximum distance of 10 Km to US service, since all users already own at least mobile handsets • For Internet - useable data access within a maximum 10 Km distance

5. UA / US Issues as originally perceived • Key questions - voice • Mobile almost ubiquitous - What role for fixed? • How much UAS voice investment for the 1-2% uncovered population is viable as smart subsidy? • What investment needed to improve existing voice service quality? • What role for public access? • Key questions – Broadband • How much investment will be required to reach the fringe areas? • What role for public access? • Data Market still “forming” - intervention problematic • KSA shaping as an advanced market - focus on Broadband

6. Market highlights • 2010 SAR 61Bn (USD16.3Bn) • 10-13% long term growth • Mobile dominant • 87% of accounts • 75% of revenues • 3G emerging strongly • Two national infrastructures • Bandwidth competition • Fixed & data liberalisation • Data will have high penetration,affordable price • Fixed-mobile competition created fast changing market Source: CITC Annual Report 2010

7. 2008-11 Network shape – quality and reach

8. Uncovered communities identified through GIS • Only around 1,000 communities not served by at least low quality outdoors 2G signal • But USF determined that if mobile is to be a vehicle of US, quality should be better. • USF also envisioned to meet voice and broadband targets in a unified approach

9. Detailed mobile coverage analysis 2008 mobile coverage scenarios – operators combined reach • Two leading operators reached • 39.2% of geographical area with medium quality outdoor signal • Population coverage • 98.4% with med. QoS outdoorsignal • 96.9% with indoor signal • 3,284 localities without indoor signal • But demand survey showed 22% of villagers “with service” have poor QoS • Less than -90dBm or -100 dBm signal strength • Thus USF targeted indoor service (above -80 dBm)

10. The Internet opportunity parallels voice   • 2G Voice telephony coverage to most areas • Two advanced digital backbones link all BTS sites • Fibre or microwave • Can be accessed & upgraded economically for broadband • Internet solution most likely to be 3G / WiMAX in competition • Internet use was within small radius from some BTS towers • WiMAX or 3G at 900 MHz could extend range to 10-15 Km – similar to 2G voice range 2G Voice   ☎          3G & WiMAX Rural voice coverage   How to provide data?    

11. Draft Strategic Plan for consultation Three voice service options were proposed Mobile QoS level for US based on existing CITC license requirements: • Signal level (minimum -80 dBm) requirement for localities above 5,000 • USF Option 1 Target USF subsidies to guarantee service above the -80 dBm contour (Orange) • All localities between 500 < 5,000 population to have US • Localities <500 guaranteed at least UA • USF Option 2 Target USF subsidies to guarantee service above the -80 dBm contour (Orange) • All localities 250 <5,000 population to have US • Localities <250 guaranteed at least UA • USF Option 3Target all localities < 5,000 with -80 dBm • Only exceptions most remote, very small places • Consultation to seek guidance on size limit -100 dBm -90 dBm -80 dBm Licence obligations to towns -70 dBm 3,839 known localities < 5,000 population currently outside -80dBm

12. Stakeholder consultation outcomes on the Draft Strategic Plan options 34 key questions / 31 responders – 7 operators, 21 Ministries & organizations, 3 international USFs, 1 supplier • Target US to voice & Broadband for all localities above 100 population • 3G &/or WiMAX capable of a meeting an Internet-for-all vision • UA coverage below 100 population with 10 Km max. travel distance • Overall policy confirmed – 7 years max, but tender lots to include representative areas in all 13 districts within first 3 years • Minimum Internet data speed 512 Kbps for all localities • Confirmed all localities >5,000 population commercially viable for 512 Kbps, thus not to be included in USF program

13. USF Program affordability • Based on 1% of market revenues, USF could afford SR 4.5 - 5.4 Bn (USD 1.2 – 1.44 Bn) over 7 years • Expected expenditures at lower limit or below, due to conservativeestimation methodology, expected natural market expansion and USF competition • Therefore the program affordable at 1% of revenues

14. USF Program Roll-out • 7 year $1.3 Bn (SAR 4.85 Bn) program to reach whole Kingdom • Strategic packaging - Each tender lot to comprise contiguous areas (Mohafadats) to maximize operator interest in the competitions • Regional balance - All 13 districts to be represented with partial coverage within the first 3 years • Mix near-viable with unviable areas • Tender lots for both voice and Internet together • Voice + Internet integrated in areas currently with no USF quality indoor voice service • Internet only – already have voice, upgrade data speed to 512 Kbps

15. (A – Internet only areas) • Existing towers • Voice already exists – short radius • No Internet service • USF supply Internet service only • Overlay /upgrade feasible solution without new towers (B – Voice + Internet areas) • No existing voice or Internet services • USF supply voice & Internet together • Larger radius, but • Voice + data radius need to be similar The expected operator solutions USF projects were tendered with both models together for minimum areas (Mohafadat)

16. Pilot project – awarded July 2010 • Three Mohafadats in two Districts • Al-Mahd in Madinah • Al-Khulies & Al-Kamal in Makka • Territorial block • Over 51,000 population & 178 localities without USF QoS voice (480) • Disimilar commercial characteristics • Wide range of % viability • USD 13.33 million subsidy awarded

17. Press Release: Connectivity project success for Mobily Nasser Al-Nasser By ARAB NEWS Feb 3, 2012 (Excerpts) Etihad Etisalat (Mobily) has announced the completion of the pilot project for the universal service fund. The project aims to provide voice and broadband Internet connectivity to the residents of the districts of Khulais and Al-Kamel in the Makkah Region, and the district of Mahd Al-Dhahab in the MadinahRegion. Mobilysaid 482 villages that belong to these provinces have been covered in a record time despite the region’s terrain nature, and 153 locations have been developed with advanced 3G technology while being connected via Mobily’s huge Optical Fibers’ Network. Al-Nasser thanked the CITC for the opportunity it has given Mobily to achieve the country’s overall orientation by having communications services reach all the Kingdom’s residents. He also praised the board’s admirable cooperation and keenness to complete the project on time, and determination ….. one of the many motives that contributed to the completion of the project on time.

18. First two year Program projects – 2010/11 Illustrate: • Regional balance • Territorial blocks • Mixture of near-viable & higher risk cases • Maximum bids totalled $127.5 million • Winning bids totalled $22.6 million • All operators won at least one bid

19. Program and cost summary to date

20. Operator solutions • All three main suppliers – STC, Mobily and Zain - proposed an exclusively 3G design concept • 3G @ 900 MHz (UMTS900) most economic solution (approved by CITC) • New towers mostly 60 m for geographic range • Radius 11-12 Km for data & UA voice in rural areas • UMTS 1800 or 2100 urban is <3 km • No investment proposed in WiMAX, in favour of 3G universally • 3G offers less guaranteed bandwidth but meets CITC quality standards and appeals to the operators as more flexible, manageable & commercially viable on a Kingdom-wide universal network • Even if BTS’s must be upgraded in future, the universal solution was still favoured • Backbone needs less enhancement • The solution offers >512 Kbps on a contention basis, i.e., not guaranteed • However all wireless broadband solutions are based on customer contention ratios and have been found to meet CITC QoS scheme & USF targets

21. Press Release: Zain Saudi Arabia completes key project By ARAB NEWS Published: Feb 11(Excerpts) ZainSaudi Arabia confirmed that it had completed the work on the second project for Universal Service Fund. The company, through this project, provided telecomservices and broadband data transmission to each of the provinces of Aldayer, Darb and Raith in Jazan Region, and all provinces in Al-Jawf region (Qurayat, Dawmat Al-Jandal and Sakaka) and the Northern Borders region (Arar, Rafha and Turaif). The company said it had completed the entire project covering about 550 villages of these provinces via the setting up of 170 sites. Through this project, the company’s new reach is over 175,000 people. Zain KSA Chief Operations Officer Ahmed Al-Faifisaid that although the company has provided higher speeds than those required in some areas in order to provide the best telecom services and data transmission to users of its network in the Kingdom. He also indicated that the second USF project awarded to Zain KSA comes in line with government guidelines for comprehensive strategic development, providing telephone and broadband Internet services to all regions and all segments of society, under direct supervision of the CITC.

22. Next phase of UAS Policy • 2 year UAS Policy update and USF benchmarking • Policy is robust, though created with stronger fixed market expectation • Updates to be fine-tuning to the needs of Broadband ICT era • Consultant carried out 67 country survey to ascertain • Policies on UA and US to voice and Internet • Level of integration with Broadband • Institutional & Administrative strategy with USFs • USF collection & disbursement

23. Conclusions • The Saudi USF’s program is a good example of • A technology and service neutral, integrated UAS solution • Flexible regulation in support of cost-effective goals • Competitive OBA approach yielding cost benefits - winning operators making strategic bids below cost • A key role played by USF in ICT market expansion • Success factors • Effective management by USF including qualified staff and internalization of subsidy modelling & implementation • Collaboration with operators through consultation

24. Thank youQ&A Andrew Dymond Adymond@inteleconresearch.com

25. Extra slides for reference

26. USF Strategic Planning 2008 to 2010 Dec 2009 June 2010 Feb 2009 June 2009 May 2008 July 2008 Jan 2009 Sector review & market study Baseline demand survey in all districts Final approved Strategic Plan released 7 yrOperating Plan Draft Strategic Plan available internally Draft Strategic Plan to stakeholder consultation UAS/USF Benchmark study 13 key countries for USF admin strategy Pilot RFP issued

27. UAS Developmental features • High level of user affordability • Average household income SAR 6,745 (USD 1800)/ month • Unserved rural households income 75% of average • Users spend around 10% of declared income on ICT at all income levels • Telephony US almost complete – 98-99% have at least an outdoors signal • However, like Australia or Canada, the last 1-2% is costly • Liberalized market and good access to competitive backbone • Data / Internet access penetration – 41% in 2010 (80% of which mobile) • Focus of the UAS program should be on broadband – fixed or mobile • Broadband demand & affordability high • Internet access was lagging others in the region but had ingredients for growth related to both demand and supply – currently in high growth, though mainly urban

28. UAS Indicators at time of planningHigh ICT indicators were predicted to drive Internet growth • Since 2007, Saudi Arabia’s mobile penetration has reached over 174 (#5 in World Ranking) • Broadband penetration doubled by 2009, together with further rises in computer penetration

29. Fixed & Mobile voice service reach • Fixed network • Reaches well less than half of villages • Present in less than 50% of Admin Centres (Markaz) • But serve 293 Markaz with DSL today • Mobile operators • Together cover the vast majority of localities, down to small populations • 39.2% geographical area coverage with at least medium quality outdoor signal strength (-90dBm) • Analysis shows that up to 3,284 villages still uncovered for indoor service (-80 dBm) Vast majority of the 1,142 Rural Administrative Centres (Markaz)in these population ranges

30. ICT market & USF potential strong even in recession • Historical trend showed ICT market growing at average 7.5% above GDP real growth • Saudi GDP was predicted to contract by 1.0% in 2009 but continue expansion at 4% between 2010-2013 • ICT market projected to outpace GDP as the Kingdom followed world trend on increased use of ICT • Market liberalization & new operators guaranteed the growth continued

31. Competitive market – USF Context • Mobily’sfinancial performance has remained strong & strengthened with data focus • Broadband has increasing role • First company to win a USF competition • STC in transition though remains strong • Was the last to win a USF competition but keen to do so • Zainnew entrant has participated strongly in the USF program to date • Has used subsidies for geographical expansion • Won two competitions

32. Saudi USF characteristics • Staff level 32 in 3 divisions • Studies & Planning • Projects • Operations • Independent unit under the CITC • Decision & budgeting efficiency hindered by multi-level authority – three CITC decision entities above the Administrator • Recommended to achieve a streamlined authority structure (as originally recommended for Policy in 2006) • Administrator answerable to one board (USF, CITC or Exec. Committee)