Indosat, good governance and paper companies<\/p>\n
Winahyo Soekanto, Lawyer, Consumer Care Foundation,
\nJakarta, winahyo@yahoo.com<\/p>\n
At least on paper, the controversial sale of 41.9 percent of
\ngovernment shares of Indosat to Singapore telecommunications firm
\nSingapore Technologies Telemedia (STT) will ease budget deficits,
\ndespite criticism that it could have been sold at higher prices.
\nIt will also provide consumers with more choices as Indosat has
\nstated its ability to develop 759,000 new fixed wireless lines or
\nmore.<\/p>\n
One of the many flies in the ointment is the revelation of a
\nspecial purpose vehicle in the transaction -- namely the use of a
\npaper company, the Indonesian Communication Limited, by the ST
\nTelemedia when Indonesia signed the sale and purchase agreement.
\nIt has been reported that ST Telemedia wholly owns the Mauritius-
\nbased company.<\/p>\n
Among the many questions that the public have expressed
\ninclude: Who was the legal entity that was registered to
\nrepresent the Temasek Holding since bidding opened up until the
\nfinal bid and the announcement of the winning party? Was it ST
\nTelemedia? Was the ICL name ever recorded? Has the government
\never explicitly agreed to the use of a special purpose vehicle in
\nthe bidding process?<\/p>\n
Answers to those questions may lead to serious legal
\nrepercussions.<\/p>\n
If the name of ICL appeared just before the signing of the
\nsale and purchase agreement (SPA), then of course it did not have
\nany right to close the deal given that it was the ST Telemedia
\nthat had been announced the winner of the bidding. If this was
\nthe case then it posed a serious problem of transparency.<\/p>\n
Let us assume that the government could not have been that
\ncareless and that the ICL had been mentioned as the special
\npurpose vehicle of ST Telemedia all along. Though common, the
\npractice (which aims to gain tax efficiency) can be fraught with
\nlegal problems. For instance, what if the tax exemption sought
\nfor by ST Telemedia was one that originated from Indonesia's own
\nregulations? Has the government allowed this to happen without
\nexplicitly declaring it part of a tax holiday -- meaning, has the
\ngovernment violated its own taxation regulations?<\/p>\n
If the Indonesian government had in fact approved the use of a
\nspecial purpose vehicle by the ST Telemedia for the purpose of
\ngaining tax efficiency, did the same policy apply to all bidders?
\nIf this was not a common policy of the bidding process, then the
\nlosing bidders could certainly question the legality of the
\ntransaction between the Indonesian government and ST Telemedia.
\nThey could even accuse the government of discrimination in the
\nbidding.<\/p>\n
In a private-to-private transaction, the use of a special
\npurpose vehicle (a euphemism for a paper company) is indeed
\ncommon. A paper company or a dormant company is one that is
\nestablished not to produce real goods or services but to serve as
\na tool of transaction -- for instance to purchase a company or to
\nkeep escrow account. Mauritius, Cayman Island and British Virgin
\nIslands are known as tax havens that authorize the establishment
\nof such companies and apparently profit from the practice.<\/p>\n
Indonesia, too, applies tax breaks to foster the growth of
\nforeign investment, but when it comes to a transaction between a
\nprivate institution with a public one such as in the case of
\nIndosat, the government should indeed be more careful in how it
\nregulates its bidding procedures.<\/p>\n
Otherwise, the line that separates the private from the public
\ndomain could be trampled upon. If the government had indeed
\nintended to provide tax breaks in the Indosat sale, it should
\nhave gone public with the policy and informed all potential
\ninvestors. And if the government had meant the policy to be a
\npublic domain, then the same policy should apply to similar
\ntransactions.<\/p>\n
We do not wish to tolerate certain interests seeking to turn a
\ntransaction, that is public by nature, into a mere private
\nbusiness because the resulting problems would be breaches of the
\nprinciples of good governance.<\/p>\n
It looks certain that the Indosat transaction will not earn
\nthe government new tax revenues, nor will it create incentives
\nfor investors in the same field, nor boons for the campaign to
\ncreate a good investment climate here; and thus it will neither
\nlead to incentives for the campaign for good governance.<\/p>\n
Are we that much mistaken if we believe that the tax breaks
\nplanned by the government in this Indosat transaction would only
\nbe an incentive to certain interests while harming the public
\ninterests?<\/p>\n
The government's duty is not done when it finished announcing
\nthe winner of the bidding, because the principles of good
\ngovernance, public accountability and transparency have yet to be
\nsatisfied.<\/p>\n
We should hold a public examination of the transaction within
\na certain period after the winner is announced -- the way we seek
\nto prove or disprove that money politics was involved in the
\nelection of, say, a provincial governor. We are, after all, the
\nworld's third most corrupt country -- stamped by the World Bank's
\nassertion that leakages in the government spending range between
\n10 and 50 percent.<\/p>\n
Besides, the public as the potential consumers of the fixed
\ntelephone lines had been virtually without access to information
\nabout the bidding process of government shares in Indosat, apart
\nfrom the tidbits offered by the media. When no information is
\nforthcoming, who can blame the public for suspecting that a
\ngreater loss had in fact incurred in the transaction? The former
\nlegislator Ichsanudin Noorsy has recently alleged the
\nprivatization of Indosat to be a failure because in the deal with
\nST Telemedia, the state suffers a loss of Rp 1.2 trillion. That
\nwas the amount spent on restructuring the company before the sale
\nof its shares, which includes the purchase of 25 percent of
\nDeutsche Telecom shares in Satelindo worth US$325 million.<\/p>\n
Even greater losses are looming, including the Indosat
\nworkers' strikes. Risks of further damage abound including
\npossible disruption of services, and investment and development
\nplans. Ultimately, the whole Indosat debacle might serve as a
\ndisincentive to the already declining foreign investment, to the
\ncampaign for the development of fixed line services and of
\nnetwork access, and to the telecommunications industry in
\ngeneral.<\/p>\n
Unless the government hastens to solve the problem as soon as
\npossible, those opposing the divestment of Indosat could question
\nthe apparent absence of transparency in the process and turn it
\ninto evidence of a lack of good governance in the whole
\nenterprise.<\/p>",
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