Ringing in the era of competition in telecommunications<\/p>\n
By I. Christianto<\/p>\n
JAKARTA (JP): The implementation of Telecommunications Law No.
\n36\/1999 in September this year ended the era of monopoly of the
\ncountry's telecommunications sector.<\/p>\n
The new rule directly affects state-owned international
\ntelecommunications provider PT Indosat and domestic operator PT
\nTelkom, which will now have to compete to survive locally and
\nglobally.<\/p>\n
The new regulation also allows other parties to enter the
\nsector without any collaboration with either Telkom or Indosat.<\/p>\n
Previously, under Telecommunications Law No.3\/1989, any party
\nintending to deal with basic services in telecommunications was
\nrequired to establish cooperation with either of the two state-
\nowned operators in the form of a joint venture, revenue sharing
\nor joint operation.<\/p>\n
Under the new law, Telkom's exclusive rights to operate
\ndomestic telecommunications services will end in 2002 for local
\ncalls and in 2003 for domestic long-distance calls.
\nMeanwhile, the duopoly for international calls held by Indosat
\nand privately-owned PT Satelindo will expire in 2003.<\/p>\n
There will also be new categories of business lines which
\nincludes full service provider, full service network and
\nextraordinary telecommunications provider.<\/p>\n
However, one single foreign investor cannot own more than 49
\npercent stake in telecommunications infrastructure and mobile
\ncellular companies.<\/p>\n
Telkom has also set joint operation (KSO) contracts with five
\nprivate firms, including Pramindo Ikat (in Sumatra), Aria West
\n(in West Java), Mitra Global (in Central Java), Daya Mitra (in
\nKalimantan) and Bukaka Singtel (in eastern Indonesia). Each of
\nthem is responsible for operating and managing telephone
\ninstallations in its contract area for 15 years starting from
\nJanuary 1996.<\/p>\n
In the mobile cellular industry, the government has also
\nlicensed a number companies to run the service based on three
\nsystems.<\/p>\n
However, there was no real free competition in the sector as
\nIndosat and Telkom, as the major players, were given protection.<\/p>\n
Merger<\/p>\n
Following the implementation of the new law, there has
\nrecently been a proposal to merge Indosat and Telkom. This issue
\nhas become a hot topic in the nation's telecommunications
\nindustry and will likely remain so until the government's stance
\non the matter is clear.<\/p>\n
A merger, acquisition or whatever the occurrence may be
\ncalled, will likely end the era of competition which has just
\nbegun.<\/p>\n
Members of the House of Representatives have even urged the
\ngovernment to establish an interdepartmental team to review its
\nstance on a proposal to merge both companies. However, Minister
\nof Transportation and Telecommunications Agum Gumelar earlier
\nreiterated that the government would not endorse the merger
\nbecause it was against the government's blueprint for the
\ndevelopment of telecommunications.<\/p>\n
According to the blueprint, the government wants to transform
\nthe nation's telecommunications sector from a vertical to a
\nhorizontal platform with multiple players. It will support both
\nTelkom and Indosat into becoming full network service providers
\nand allow them to compete with each other in the market. Telkom
\nand Indosat will be able to operate local, long-distance and
\ninternational calls, and provide mobile cellular services.<\/p>\n
The idea of a merger has been frequently voiced, particularly
\nby Telkom which argues that a merger would provide the nation
\nstrength in facing global telecommunication rivals. Telkom said
\nearlier that it had allocated some Rp 7 trillion to grab the 65
\npercent government stake in Indosat.<\/p>\n
Some people may have wondered why Telkom wants to enter
\nIndosat.<\/p>\n
According to Telkom, there are many foreign companies eying
\nthe 65 percent government stake in Indosat. So it will be much
\nbetter if the stake is procured by a local firm.<\/p>\n
But it is believed the intention to buy Indosat stems from the
\nnew law which has lifted Telcom's exclusive rights.<\/p>\n
Though the government has licensed Telkom (and Indosat) to
\noperate GSM-1800 nationwide as compensation for the termination
\nof their exclusivity, Telkom is likely unready yet to \"ring\" in
\nthe real competition.<\/p>\n
Problems<\/p>\n
There are some factors why Telkom is not prepared for free
\ncompetition.<\/p>\n
Internally, Telkom is still poorly managed as the company has
\nsome 38,000 employees with 14,000 personnel hired on contract
\nbasis.<\/p>\n
There are also problems with the KSO concessionaires. This is
\nalso related to the termination of its exclusive rights and its
\ntariffs which have not been increased significantly in recent
\nyears.<\/p>\n
In fact, the KSO scheme, which was widely applauded in the
\nbeginning as a good arrangement for private participation in
\ndeveloping the country's telecommunications industry, has created
\nmore problems rather than benefits both for Telkom and the KSO
\nconcessionaires.<\/p>\n
Actually differences between Telkom and the five
\nconcessionaires began not long after the project started in 1996.
\nTelkom has accused the partners for performing improperly and
\nfailing to meet some prerequisites. While the partners feel that
\nTelkom interferes too much in their management and operations.<\/p>\n
With the termination of exclusive rights, the contracts for
\noperating and managing telephone installations in the KSO
\ncontract areas until 2011 will be affected.<\/p>\n
Disputes about the KSO continues and Telkom is still studying
\nhow to solve the problems.<\/p>\n
There will most likely be different resolutions as some of the
\nfive contractors may agree on setting up joint venture companies
\nwith Telkom, while others may want to see buy outs or wish to
\nretain the KSO scheme.
\nTelkom faces a huge dilemma as it has to compensate billions of
\ndollars if the KSO scheme is canceled before contracts expire.<\/p>\n
So perhaps the lobby for a merger with Indosat is likely only
\nan attempt by Telkom to shift its burden to the
\ntelecommunications industry.<\/p>\n
What is interesting is the options discussed by Telkom and
\nAria West in finding a solution to the dispute. One of the
\noptions is the possible establishment of a new joint venture
\ncompany (JVC) between Aria West and Indosat. Why does
\nAria West prefer to have Indosat, rather than Telkom, as a
\npartner in forming a JVC. The other options are a buy out of Aria
\nWest by Telkom; the development of a third player; and the
\ncontinuation of the original KSO contract but with modifications.<\/p>\n
Does this mean that Telkom is really unattractive? Industry
\nanalysts have said that though the company had appointed Salomon
\nSmith Barney as an advisor in seeking partners, it had won only
\ntrivial consideration in the global market due to its weak
\nmanagement.<\/p>\n
However, Telkom's belief that Indosat is being eyed by various
\noverseas companies is true. Aria West, which is owned by various
\nforeign companies, showing an interest in having Indosat as a
\npartner, is one evidence.<\/p>\n
On its financial performance, Indosat's net profit rose by 13
\npercent to Rp 1.35 trillion in the third quarter of this year
\ncompared to the corresponding period last year. The company
\nnetted a consolidated operating income of Rp 2.18 trillion, up by
\n1.8 percent from Rp 2.14 trillion in the same period last year.
\nMeanwhile, Telkom's net profit and income figures reached Rp 2.2
\ntrillion and Rp 6.94 trillion, respectively, in the third quarter
\nof this year.<\/p>\n
Is it good to have the companies operating separately and
\ncreating a more competitive atmosphere? Or, will it be better for
\nthe companies to merge and become a strong controller of the
\ncountry's telecommunications sector? Lets hope the government
\nwill be consistent with its blueprint for the development of
\ntelecommunications.<\/p>",
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