The Saudi Arabian government's recent award of the biggest telephone equipment contract in history ended a year of international corporate suspense and left two American giants of the communications industry empty-handed.
The contract, for installing and operating 470,000 telephone lines throughout the kingdom -- or more than double the number of telephones now in use -- carries an announced value of $3.14 billion.
It was awarded to a consortium consisting of N. V. Philips of The Netherlands, I. M. Ericsson of Sweden and Bell Canada. The losing bidders were two groups headed by Western Electric and International Telephone & Telegraph, which had been invited to bid by the Saudi government after an original offer from Philips was rejected last winter as too expensive -- even for the Saudis.
Details of the maneuvering that underlay the award of this contract are only now coming to light. But information made available by sources here indicates that, as often happens in Saudi Arabia, other considerations besides money went into the decision. Politics, history and personal relationships also played a part.
The telephone contract is part of a five-year, $142 billion crash program to transform this desert kingdom into a modern country. The Saudis embarked upon the grand plan when their oil income soared after the 1974 embargo. There appeared to be no limit to what the Saudis would spend for the biggest, best and most modern of everything.
But about a year ago, several cabinet ministers began to complain that they were being overcharged by many contractors. The government cancelled several tenders and postponed others in an effort to control the pace of spending.
The most spectacular cancellation was for the extension of the telephone system, which is intended to link every village in the vast kingdom with direct-dial, computerized phone service by the end of the decade.
Philips had been engaged in non-competitive negotiations for the contract through its agent in Saudi Arabia -- Prince Mohammed Bin Fahd, son of Crown Prince Fahd, the first deputy premier and probably the most powerful man here.
Philips reportedly was asking $7 billion and Fahd vetoed the deal. According to informed sources, he did so partly because the asking price was five times what the Saudis expected to pay and partly because some technocrats had doubts about the ability of Philips to handle the contract.
So the Saudis invited new bids, touching off furious competition among some of the biggest names in the industry. In addition to the consortium that won the contract, two other groups entered bids. They were Western Electric, in collaboration with three British partners -- Plessey, the cable manufacturer BIC, and the state-owned Cable and Wireless -- and International Telephone & Telegraph, heading a group that also included United Utilities, Bell Telephone of Belgium and Standard Telephone of Britain.
According to sources who took part in the negotiations, each of the three consortia had some assets and some liabilities that were taken into consideration, beyond their dollar figures. But the Western Electric group probably could have had the contract if its operating and maintenance partner had been a firm other than Cable and Wireless.
The Saudis reportedly would have preferred American technology, which they regard as the best in many fields, but for reasons that are not altogether clear they were reluctant to bring in Cable and Wireless. The Saudis apparently were dissatisfied with some of the work C and W had done in the neighboring states of the Persian Gulf. They also felt that the stateowned company lacked the experience and managerial ability to take on the operation of a project of this size.
In addition, the two American-led consortia had some other disadvantages. The American Embassy in Saudi Arabia, which can be enormously influential in these matters, could do little because two American entries were competing instead of just one behind which the embassy could have thrown its weight.
The Americans also were obliged to raise their bids by tacking on large contingency funds to pay the income taxes of Americans who would have come here to work and faced heavy tax burdens under a proposed U.S. income tax law change, according to American sources.
The Philips-Ericsson-Bell Canada group had disadvantages, too. Ericsson has been operating in Saudi Arabia for years. While its work is respected, its local subsidiary reportedly has irritated some Saudi officials by its operating methods. And the bid offered by this group reportedly was not the lowest. Against those liabilities, however, there were strong assets.
One was the advocacy of Prince Mohammed, the agent for Philips. Another was the entrenched position of Ericsson in the kingdom. A third was the relatively low cost of the operation and maintenance component of the contract offered by Bell Canada. Some Americans, in fact, are grumbling that this component was underbid.
Like Philips, Bell Canada had an influential agent in the kingdom -- the Binladen Telecommunications Co., a division of Bin Laden Brothers, a contracting firm.
The head of Bin Laden Brothers, Salem Bin Laden, is the son of a wily, old contractor from the Hadramaut region of South Yemen who, years ago, won the esteem of the late King Faisal by building a road on the difficult route from Jeddah to the royal summer resort of Taif, using all Arab technology and labor.
According to informed sources, he capitalized on the credit he earned from that to become a successful and respected contractor whose sons have extended corporate tentacles throughout the kingdom.