American Telephone & Telephone Co. is pumping $300 million to $400 million

from a $4.1 billion telephone contract in Saudi Arabia back into the kingdom, and likes what it is getting from its investment.

''To us it makes good business sense" to help develop a telecommunications industry to meet Saudi domestic needs, said Bob Wyatt of AT&T.AT&T is the first firm to turn around some of its revenue from an ordinary commercial deal in the Middle Eastern kingdom to help build up the technological, industrial and commercial base that Saudi Arabia sees as vital to its future when the oil wells start to run dry.


The "you rub my back and I'll rub yours" deals, whereby companies that win big contracts in Saudi Arabia agree to plow some of the profits back into the kingdom, are called offset projects.

Such projects have been a requirement for about a decade for Saudi Arabia's immense military contracts - worth some $30 billion from now to the end of the century - but they are only now coming into play in the commercial sphere.

"It is my understanding that there is a plan to eventually require offset for all government procurement," said a senior Western executive in Riyadh.

Encouraged by the kingdom's improving finances and economic reforms, decade-old proposals to offset Riyadh's tens of billion of dollars worth of arms deals mainly with Britain, the United States and France are being revived as part of plans to set up aerospace, telecommunication and other high-tech industries.

Companies on the commercial side also see green fields.

"We are quite pleased with our experience in the field of offset . . . . In our area of interest, the Saudi market can absorb what we have in mind with potential to export to the region," said AT&T's Mr. Wyatt, whose firm won in July another $800 million deal for a 300,000-subscriber mobile phone system in the kingdom.

AT&T formed a 50-50 joint venture company recently with Riyadh-based software firm International Systems Engineering. The new firm is expected to be awarded subcontracts worth $170 million to develop specialized software for the AT&T expansion.


Saudi Arabia, expecting a deficit-free 1995 after years of huge shortfalls due to weak oil prices, said in its 1995-2000 development plan released in July that it would expand the offset program to include large non- military projects.

During the plan years, Riyadh is due to conclude many major deals for multibillion-dollar power plants, infrastructure work and a $7 billion contract to buy 61 commercial aircraft from Boeing Co. and McDonnell Douglas Corp.

Details have not been announced, but experts say firms may be obliged to

reinvest 35 percent of the value of the imported component of a civilian project for deals above 100 million riyals ($26.6 million).

The five-year plan places strong emphasis on economic reforms like privatizing some state holdings once considered strategic and granting the private sector a greater role in diversifying the oil-dominated economy.

While several successful projects have sprung from the military offset program, others faced delays and in some cases reluctance by foreign partners to get involved in what appeared to be "white elephants," experts said.


Work on the first phase of the Middle East Propulsion Co. (MEPC), first proposed in the mid-1980s as part of the U.S. Peaceshield Offset Program, started this year with the participation of U.S. engine makers Pratt & Whitney and General Electric Co. and Britain's Rolls-Royce PLC.

The national flag-carrier Saudia and three other local firms are also taking part.

"The kingdom will reap the considerable benefits of reduced repair times, smaller stockholdings and the transfer of technology . . . ," the British Offset Newsletter said.

MEPC's project will become the heart of a comprehensive aerospace industry unique in the region to service commercial and military aircraft in Saudi Arabia.

"Confidence in the Saudi economy is coming back, and people are thinking that reports that the economy is weak are incorrect They are now realizing this," said the Western official.