Ghassan Hasbani interview: Need for speed

Telecoms industry holds the secret to economic growth, argues Saudi Telecom’s CEO of international operations
STC CEO Ghassan Hasbani also sees 2012 as a year of opportunity, in which potential assets appear to be relatively well-priced
By Ed Attwood
Sat 18 Feb 2012 09:29 PM

“People have just started realising that we’re in a deep economic malaise that is unlikely to be resolved in the next three years,” muses Ghassan Hasbani, who is sitting in his office in the sprawling Al Mursalat complex in Riyadh. “And it may take another three years on top of that to go back to employment levels that existed pre-crisis. So the crisis started in 2008, and we’re almost four years in. That six or seven years of economic instability before jobs get back to normal — time flies.”

It’s a question that has clearly been bothering Hasbani for some time. He is the CEO for Saudi Telecommunications Company (STC)’s considerable international operations, and of the company’s 160 million odd subscribers, 126 million fall under Hasbani’s direct control. Outside Saudi Arabia, the firm has operations in Kuwait and Bahrain (where it is known as Viva), India, Indonesia, Malaysia, Turkey and South Africa.

But one might well feel justified in asking exactly why a senior telecoms executive takes such a serious interest in global job creation?

Hasbani, who has just got back from the lengthy deliberations at the World Economic Forum (WEF) in Davos, believes that his industry actually holds the key to faster, more sustainable economic growth. At the event, he put forward his belief that telecoms are vital to the success of small and medium enterprises (SMEs), which are the lifeblood of any dynamic economy.

“What is going to help SMEs grow?” he asks. “One is a good legal system that reduces the entry barrier for entrepreneurs, and secondly, it’s about creating enough market in which these SMEs can survive. Telecommunications does two things. First of all, good telecoms infrastructure does lower the barriers for entrepreneurs because it gives greater connectivity for employees and links the centres of economy together in any given country.”

“So an SME can operate with other SMEs in the country, and with larger institutions, much more easily. Secondly, telecom also creates a global market. Because if you can connect through a good international network, instantly you can play globally. You can develop software and sell it, and it’s easier now to advertise across the globe through social networks so you can have the scale instantly.”

Hasbani also lauds the industry as being one of the few industries that attracts large-scale foreign direct investment (FDI). International cashflow into the Arab world has, unsurprisingly, taken a considerable hit during the financial crisis. Between 2008 and 2010, it slipped by 40 percent, a drop in funding that has had a calamitous effect on the region’s employment fortunes. In Saudi Arabia alone, the unemployment rate is 9.6 percent of the local workforce.

“Studies by the OECD in the Mediterranean basin have said that around $700 of FDI put into developmental projects could lead to the creation of one job,” adds Hasbani. “If you look at the amount of jobs that could have been created [in the Arab world, if FDI rates had remained constant], it could have reached up to six million jobs.

“You rarely find a big country or a large conglomerate looking to invest in building roads in Africa, for example, but they would be much quicker and happier to invest in building telecoms companies, because they can get a quick return and a good return.
So telecoms is one of the biggest ways of attracting FDI.”

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That may be the case, but do regional governments really understand the importance of the industry? Hasbani says that he has “not heard enough clarity” from some governments, who tend to treat the sector as a cash cow, rather than an economic enabler in its own right.

“That’s why we see governments around the world, with very few exceptions, still viewing the sector as a direct treasury cashflow centre,” he adds. “Either through taxation or through ownership, and so on, it is still sustaining a lot of treasury income.

“And what they’re not looking at significantly is a vision to replace this direct treasury income with economic growth in the industry, which will ultimately result in even more treasury income than the telecoms sector by itself creates.”

That argument is evident in several Middle Eastern countries, who in many cases have auctioned off licences to the highest bidder, meaning that margins have been slashed and the business case for investing has become less attractive.

But nowhere has this trend been more obvious than in India, where the 2007 2G licence process has just blown up in the government’s face in the most extraordinary way. Retrospective changes to the application system and the apparent use of a ‘first come, first served’ system meant that legitimate applications were discarded.

Some winners then sold off their licences, making hundreds of millions of dollars in profit in an instant. The resulting mess left the Indian exchequer around $40bn out of pocket, while the telecoms minister was fired and has since been charged with corruption.

It’s a prime example of how mismanagement, graft and simple incompetence can ruin potential foreign investor interest in a country. It’s unlikely that the UAE’s Etisalat and Norway’s Telenor — both multinational telcos that were stung heavily by the cancellation of their 2G licences — will be looking at the Indian market with much interest in the near future.

Of course, it’s too early to say what the effects of the telco scandal will be on India’s economy, but STC clearly isn’t taking any chances. Although the firm’s deep pockets mean that it is linked with just about every licence or investment opportunity going in its strategic markets of the Middle East and Asia, Hasbani says that caution will undoubtedly be the watchword.

“In general, on the licensing process in this part of the world, today, there is a massive amount of ambiguity,” he points out. “The less clarity you have, the less interest investors would have in a specific licence. Until that is clear, we would not go into an application until all the angles are clear to us.”

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“If the clarity is not there, the investment has to be extremely low or the returns have to be extremely high. And neither is the case in any of the markets we have looked at so far.”

Although Hasbani does not explicitly rule out applying for Middle Eastern licences, his words seem to indicate that bidding for available licenses in areas such as Iraq, Syria and Libya are not on the table for the time being.

However, an acquisition seems more likely, particularly as funding doesn’t appear to be a problem.

“We are not highly leveraged,” Hasbani says. “We have a very good asset base, a good balance sheet and we also have an extremely good rating. If there is an asset, again of the right value, that delivers the right economic gains, then we would be in a position to consider it.”

Furthermore, the CEO also sees 2012 as a year of opportunity, in which potential assets appear to be relatively well-priced.

“In general, if you look at the multiples in the industry, they have come down, so it is a buyer’s market today,” Hasbani adds. “If I have the right amount of money and the asset is the right value, this year — 2012-2013 — you will probably see low multipliers on many assets unless they are strategic high-growth assets. So you can, if you have a strategic drive to go after acquisitions, find those opportunities.

“However, you are probably not going to find many people who are willing to sell at those prices because of this reason. The question is, how long can they last for? And if, for example, they are a private equity group looking to exit, can they stretch their cycle two or three more years, or will they settle for a certain margin and get out while they can?”

Any investment, however, would have to fit in with STC’s core strategy of focusing on the Middle East and Asia regions, but it also has to be complementary to its current operational footprint. Needless to say, Hasbani doesn’t name names. There is an obvious regional option, however. Zain Group was targeted by the UAE’s Etisalat last year, although the deal fell through over the $12bn valuation of the Kuwaiti giant.

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And with regard to the recent media speculation over potential Qatari interest in a 55 percent stake in Oger Telecom — in which STC already has a 35 percent stake, and is believed to have first refusal on the larger stake — Hasbani says that he won’t comment on the speculation.

“When that [the possibility of acquiring the larger stake] happens, we will deal with it at the time,” he says. “We will apply to every opportunity, including the assets we already own part of — in Malaysia, and everywhere else as well — and we would view these assets with the same rigour as a new asset. If it adds value at the right price, with the right returns, then the opportunity would be considered.”

It’s obviously too soon to say whether STC will be buying big this year, but don’t bet against it. For now, the operator is concentrating on rolling out on next-generation networks at home and abroad, which again goes back to Hasbani’s theme of boosting the economy.

“Economically, the more people who are connected together, the easier it is to conduct business, the easier it is to reach information, at an individual level,” he says. “The barriers to knowledge-sharing become much lower, which enhances educational programmes. It enhances business transactions, and enhances healthcare.”

On the other side of the coin, however, remain the difficulties that today’s telcos face in as they try to pull in profits while keeping pace with the remarkable leaps being undertaken by the technology industry. As Hasbani says, “people are used to getting free stuff on the internet”, and this is perhaps his biggest challenge.

As data grows — more high-definition video, an exponentially higher growth in social network usage and so on — companies like STC have to provide ever more advanced infrastructure, while the so-called ‘over the top’ content providers such as Google, YouTube, Facebook and company, use the same infrastructure to push their content.

“The purchasing behaviour has changed,” says Hasbani. “So the way we mitigate that risk and deal with that challenge is to collaborate with the over-the-top players, so that they get value, we get value, and together we both add value to our customers. How do we do this? By building smart networks — or smart pipes, instead of dumb pipes. We create algorithms in our networks to efficiently deliver the service required to the individual at the right price.”

Other than offering better services to customers who are prepared to pay that little bit extra, Hasbani also believes that telcos can play a much wider role in society by teaming up with banks, retailers, hospitals and other sectors.

“Your passport, identification, medical records, credit cards and so on, could be on the same chip as your SIM card,” he says. “So your SIM card becomes the gateway, or your device that is linked to the network becomes the gateway to all those other services. That is a fairly long-term vision, but ultimately, as technology evolves, and as the role of telecoms operators evolves, connectivity becomes supplemented by this kind of value-added service. It’s a great opportunity, but it also has a great deal of challenges.”

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