Asia Times: Indonesian monopoly turns the screws


	July 17, 2001	atimes.com

Southeast Asia

Indonesian monopoly turns the screws
By Bill Guerin

JAKARTA - "The problem is ... who's got the cash, who has control of the wallet here. Who's got the wallet here is PT Telkom and they're refusing to transfer the money." With these words, PT AriaWest International's chief financial officer Stephen R Dowling last week went on the offensive against the state telecommunications enterprise, PT Telkom and the government.

AriaWest is one of five foreign-funded telecom operators who won revenue sharing deals with Telkom in 1996. The other four KSOs (joint operation schemes) are PT Mitra Global Telekomunikasi Indonesia in Central Java, PT Pramindo Ikat Nusantara in Sumatra, PT Cable & Wireless Mitratel in Kalimantan and PT Bukaka SingTel International in eastern Indonesia. Telkom itself, surprise surprise, controls the most profitable markets of Jakarta and East Java.

After months of protracted bickering, threats and counterthreats, government-run PT Telkom last week unilaterally terminated its contract with AriaWest, which is 52.5-percent owned by Indonesia's PT Artimas Kencana Murni, 35 percent by the American company MediaOne International BV, of which the mighty US telecom giant AT&T is a part, and 12.5 percent by Hong Kong's Asian Infrastructure Fund

In the heady times of early 1996, when there were only 3.92 million telephone lines in the whole of Indonesia, these deals with major foreign telecom operators were seen as the dawning of a new era of efficiency and growth in Indonesia's telecommunications sector. International consortia, all involving telecom operators from the United States, United Kingdom, Japan, France, Australia and Singapore, did their sums, made their bids, and won. Telkom appointed and authorized the five companies to finance, build and operate domestic fixed-line telephone services separately across the country under a revenue-sharing scheme until 2010.

The downfall of the rupiah upset the apple cart and largely accounts for the poor infrastructure performance of Telkom and its joint operation partners since 1997. Even now there are only 6.8 million lines in service, 3.7 million of these in Telkom's two regions of Greater Jakarta and East Java and the other 3.1 million lines in the KSO regions. About 97 percent of the 210 million population are not connected to a telephone and any chances of Internet Service Providers expanding their Internet access businesses have been stymied by the dearth of extra lines.

The original agreement required KSO partners to install 2 million new lines across their work areas during a three-year construction period from 1996 to 1999, but due to the economic crisis, in September 1998, the government revised the target to 1.2 million.

Other amendments in 1998 required AriaWest to install a minimum of 190,000 new telephone lines. In return for this they would have to pay Telkom $30 million up front as a license fee as well as a monthly minimum fee of rupiah 25.9 billion ($2.3 million).

The AriaWest agreement and amendments were similar to those signed with the other four regional KSOs. They have to pay Telkom a three-monthly fixed amount known as Minimum Telkom Revenue (MTR) and Distributable Telkom Revenue (DTR) based on their revenue. The 1998 amendments revised the revenue-sharing proportion, the DTR, to 10 percent for Telkom and 90 percent for the partners, from the previous 30 percent and 70 percent respectively.

AriaWest's 15-year contract mandated that Telkom would allocate its employees and facilities in West Java for the exclusive use of the operator. AriaWest, in turn, is responsible for the complete gamut of operational and financial control for the region.

Different interpretation of these two fundamentals have caused both parties to enter into a highly public war of words, with Telkom holding firmly to the letter of the contract.

AriaWest said Telkom withheld funds from West Java telephone subscribers which caused AriaWest's refusal to pay June salaries to the Telkom employees. The government, with a green light from the House of Representatives, boldly agreed to temporarily take over the day-to-day operations of AriaWest in West Java to ensure basic telecommunications services in the area.

Dowling says their KSO account is down to 300 million rupiah, scarcely enough to cover a day's operating costs, whilst Telkom is holding on to 265 billion rupiah. This is money paid by subscribers to settle their phone bills. It is paid directly to Telkom through Telkom approved banks. Telkom then transfers the money to the KSO accounts. It is not disclosed how much interest Telkom receives on these vast amounts.

Telkom has been extraordinarily confrontational and recalcitrant throughout the disputes, happy to look on as sections of the media spurred on what was effectively a Telkom worker's revolt against AriaWest. Was this because the Telkom troops were not happy with the transparent tender processes forced on them by the KSOs, or was it a sign that mindsets have changed little in the country since the downfall of Suharto? A monopoly is a monopoly after all.

AriaWest is in the front line for any flexing of muscles by Telkom, as the KSO controls West Java, the largest of the operator franchises. Cynics would say another reason is that Telkom's head office is in Bandung, the capital of West Java.

Telkom and AriaWest have fought over the number of lines installed, management and operational issues, and the infrequent increases in telephone rates. This latter issue is, of course, the root cause of the reduced revenues for both parties.

AriaWest earlier refused to disburse 340 billion rupiah in revenue-sharing due to an alleged failure by Telkom to meet its obligations. They said Telkom was not able to provide documentation proving it had delivered on its promise to build another 107,536 telephone lines in West Java. Based on this promise, AriaWest coughed up an additional revenue share to Telkom from February 1996, making a grand total of 340 billion rupiah paid in additional revenue share to Telkom over the past four years despite the fact Telkom could not prove it had installed these lines. Telkom flatly denies this, saying they have already fulfilled all obligations under the 1995 contract to transfer assets to Ariawest, including delivering the promised new lines.

Back to AriaWest, who say that the only time Telkom ever provided any document was in 1997 when they handed AriaWest executives a spreadsheet claiming the company had built some lines.

Telkom, although making money, has a poor customer service image and admitted that 39,510 subscribers canceled their lines during the first quarter of this year. Of these, 23,928 lines were in Telkom's own regions and 15,582 lines in the KSO regions.

The KSO operators are miffed at the way in which Telkom and Indosat, with government backing, swapped their exclusive rights without any thought for the enormous losses the change would inflict on the foreigners' KSO operations. When Telkom agreed to end its monopoly in 2002, all the assumptions that had been made to calculate investments already made, went down the tubes. The investors believed they had 15 years of monopoly deals to succor and sustain them, but Telkom's monopoly will end some nine years prematurely.

What happened was that in May this year most of the independent shareholders, foreign investors as well, who together own a third of Telkom, predictably voted to approve a $1.5 billion transaction between Telkom and Indosat to end their crossholdings in several telecommunications subsidiaries. The announcement set off vigorous trading in the shares of both companies and lifted the Composite Index at the Jakarta Stock Exchange by 4.02 percent.

The government, as the controlling shareholders in both companies, fought off pressure from parliament to ditch the deal, and gained kudos for refusing to bow to some pretty nasty strike action over the issue. This was a timely, though belated, message to the market that the sanctity of legal contracts would be upheld.

Foreign consultants had come up with the deal, touted as ushering in the liberalization of Indonesia's telecommunications industry, following the new telecommunications law No 36/1999 of September last year. This decreed that Telkom's monopoly on local calls will end in August 2002 and domestic long-distance calls in August 2003. Not only that, but Indonesia agreed to halt all monopolistic practices in the country's telecommunications sector. New entrants will no longer have to collaborate with Telkom, or Indosat.

Good news for Indonesia, then, but discouraging for those telecommunications giants who were set to ride on the back of a Suharto style state monopoly for 15 years.

This particular law laid to rest a long held fear that Telkom and Indosat would be merged into a giant monopoly, which would have driven investors away for years. Telkom would be the short-term winner in this deal, but some industry analysts question how Telkom would have funded the purchase.

The government, which currently owns 66.19 percent of Telkom and 65 percent of Indosat, has been warned by the House of Representative's powerful Commission IV to postpone these privatizations instead of selling too early and too cheap. Many legislators want the government to retain majority ownership in such strategic state enterprises. Conversely, the hoped-for 6.5 trillion rupiah gained from the privatization of 16 state-owned companies this year, including these two giants, would be a big boost to financing the 2001 state budget deficit.

There are also signs of nervousness from the government over the spat. Djamhari Sirat, the director-general for Post and Telecommunications at the Ministry of Communications rightly warned. "If we take the wrong steps, what was once a dispute between AriaWest and Telkom could easily turn into a dispute with the government of Indonesia."

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