AriaWest still operates West Java system

AriaWest still operates West Java system

JAKARTA (JP): The arbitration claim filed by AriaWest
International against state-owned PT Telkom is only for damages
caused by numerous fundamental breaches by Telkom of the
contract for the Joint Operating Scheme (KSO) in West Java,
AriaWest's lawyer Andrew Sriro said on Wednesday.

"The Notice of Arbitration filed with the International
Chamber of Commerce in Paris on Tuesday has nothing to do with
the issue over the planned settlement of the West Java KSO,"
Sriro told The Jakarta Post.

He asserted that AriaWest remained fully in charge of
operating and managing the West Java KSO, as its 15-year contract
with PT Telkom will expire only in December 2010.

Under the KSO scheme, designed by the government in
cooperation with the World Bank and launched in 1995, Telkom
ceded its fixed-line telephone operations in five major regions
to five joint ventures between Indonesian companies and
multinational telecommunications providers.

AriaWest, which is 52.5 percent owned by Indonesia's Artimas
Kencana Murni, 35 percent by MediaOne International BV and 12.5
percent by the Asian Infrastructure Fund, won the KSO for West
Java for 15 years.

However, AriaWest claims that PT Telkom treated the West Java
KSO in bad faith from the outset and breached many fundamental
provisions of the contract, thereby making it impossible for
AriaWest to operate efficiently and smoothly.

"The US$1.5 billion damages demanded in the arbitration notice
were the losses suffered by AriaWest due to Telkom's violation of
most of the fundamental provisions in the contract," Sriro added.

Sriro said the dispute over compensations for possible
termination of the KSO contract before its original expiry date
in December 2010 was completely another issue that also had yet
to be resolved.

Among the fundamental breaches of the contract alleged to have
been made by Telkom, but which were repeatedly denied by the
state company were:

* Telkom's failure to transfer management and control of the
KSO to AriaWest, causing serious damage to KSO operations and
management-employee relations.

* Telkom's refusal to hand over the bank accounts holding the
KSO revenues until last September, retaining control over the
collection accounts and mechanism, and since March, 2001,
stopping the transfer of funds from the collection accounts to
the KSO accounts.

* Telkom voluntarily relinquished its market exclusivities
(monopoly of domestic calls) and negotiated compensation for
itself without consulting AriaWest and without arranging for
compensation to AriaWest for its substantial losses.

The 1999 Telecommunications Law does not force Telkom to
relinquish its monopoly of domestic calls but only stipulates
that the monopolies held by Telkom and Indosat (for international
calls) could be restricted by agreement with the government in
exchange for a legal entitlement to financial compensation in
recognition of such restrictions.

Even though the West Java KSO contract will expire only in
December 2010, Telkom and Indosat subsequently negotiated swaps
of their exclusive rights between themselves. Telkom will gain an
international gateway and Indosat a domestic operating license in
2003, but no compensation was made for the enormous losses which
would affect the West Java KSO (and the other four KSOs).

The government, which owns a majority stake in both Telkom and
Indosat, reshuffled the rights of Telkom and Indosat without a
loss to itself as the majority shareholder in each. The losses
were shifted to AriaWest and the other four KSO operators.

* Even though the KSO agreement, the license and regulations
provided that the government would consider telephone tariff
adjustments in response to changes in the value of the rupiah and
the need to attract further investments, Telkom actively and
successfully lobbied the government to prevent rate increases.

There have been no rate increases since February, 1999; this
has caused revenue on investment to be so low that it barely
covers financing costs, let alone operating costs or revenue-
sharing with Telkom.

* Telkom prevented AriaWest from installing new lines, while
there was unmet demand for new lines in the province.

The well-documented contractual breaches, supported by
evidence and records, have been denied by Telkom.

"Our decision to proceed to arbitration has not been reached
lightly and only after the failure of a series of negotiations
for an amicable solution to the disputes over the contractual
breaches," he said.

He recalled that last September, for example, Telkom and
AriaWest signed a good faith interim solution agreement to settle
disputes over the contract implementation, but contractual
breaches continued and, in some cases, even escalated.

According to Sriro, the International Chamber of Commerce will
take about three to four months to appoint a panel of arbitrators
to hear the case.

"But the whole arbitration process does not close the door for
an amicable solution, provided Telkom is willing to negotiate in
good faith," Sriro added.

Sriro said AriaWest understood that Telkom, which had enjoyed
a monopoly over domestic telecommunications services, would put
up resistance to the changes as a result of the KSOs in the five
major regions.

But yet AriaWest, he added, could not understand why the
government seemed to allow such flagrant breaches of a legally
binding contract and why the Telkom management appeared to have
condoned Telkom employees in their revolt against the KSO
agreement.

Asked why the AriaWest dispute with Telkom had been more
intense and controversial than those between other KSO operators
and Telkom, Sriro said that it might have been caused partly by
the location of the AriaWest headquarters in Bandung.

Bandung, West Java's capital city, is also the seat of
Telkom's headquarters.

"But there may be other interests involved at various levels
that allowed Telkom to undermine the West Java KSO," Sriro
added.(vin)