Autonomy and the telecommunications industry

By Winahyo Soekanto

DENPASAR, Bali (JP): A group of Javanese fishermen recently called for a ban on fishing boats from neighboring areas entering certain waters. This petition was a direct result of the autonomy drive.

Although it was aimed at conserving a natural resource, the incident showed how the country needs a broad reference for autonomy. What would happen if regents, newly invested with major authority, considered parceling out maritime territory as sources of income?

What would happen if a regent had a telecommunications expert advise him that apart from the conventional natural resources such as mining, forestry and marine resources, there are also unconventional resources, such as a radio frequency spectrum, which can be used for a mobile communications system?

A radio frequency spectrum is a limited natural resource and therefore, by nature, it must be allocated in the best possible manner.

The allocation has become a concern for the international community seeking to ensure that global roaming and interconnection of various systems of technology and different platforms of services may be achieved.

In 1992, the World Radio Congress agreed to a radio frequency spectrum assignment of 170 MHz. However, this size is now considered adequate only for voice communication and will not be sufficient for multimedia.

Therefore, in the 2000 World Radio Congress a proposal was made to add another 160 MHz to a global allocation. This addition has increased the level of spectrum availability.

The world is now being enthralled by a tender for a radio frequency spectrum with the size of 40 MHz in England, which has yielded five winners and generated 22 billion poundsterling (about Rp 286 trillion) in revenue for the British government.

The same tender for the allocation of a cellular telecommunications spectrum of the third generation is now under way in many countries such as Germany, the Netherlands, Italy, Austria, Singapore and Hongkong.

Will the condition cited above tempt regional officials to launch them as natural resources able to generate revenue to be shared among the central government and regional administrations?

This industry is rapidly growing but, in fact, Indonesia is a country with the lowest teledensity, namely 4 percent for fixed lines and about 1.5 percent for mobile phones.

Compare this with China, which is undergoing rapid development, with a teledensity level for fixed lines by the end of 1999 accounting for 11 percent of its population of close to 1.5 billion.

The number of mobile phones by the end of 1999 was about 3.6 percent of China's population with the total number of subscribers registered at 43 million. In 2000, the number of subscribers was expected to rise to 51.7 million, a figure enabling China to surpass Japan in this respect.

Indonesia is a vast market for the development of the telecommunications industry.

Unfortunately, a protracted economic crisis has hit the boom which industries in Indonesia enjoyed in 1994, causing network development to stop. The equipment had been bought in foreign currency while the earnings of operators were in rupiah.

The weakening of the rupiah's value has made investment for the construction of telecommunications infrastructures increasingly more expensive. To build one unit of Base Transceiver System/Radio Base Station, for example, some Rp 2.5 billion is needed.

This is an industry requiring a huge investment and in Indonesia's case, the costs arising from the construction of telecommunications infrastructure will become increasingly higher, given its major geographical challenges.

While the investment needed is huge and must be in foreign currency as we do not have the capability of self-funding, it will not be easy for an enterprise owned by a regional administration to set up a local operator.

Therefore, the construction of a telecommunications infrastructure will rely heavily on foreign capital. But the current economic and political instabilities are not inviting foreign telecommunications companies to invest here.

Regional leaders must exercise caution when using data from Indonesia's national teledensity level. The figures of 4 percent for fixed lines and 1.5 percent for cellular phones are actually the national averages. When the figures are transferred onto the map, there will be incompatibility.

Take for example the number of fixed lines in Jakarta and Surabaya. In these two cities the teledensity level in the case of fixed lines has reached a level above 10 percent while for cellular phones, two-thirds of the 3.15 million subscribers registered up to September 2000 live in Jakarta and its surrounding areas.

Another fact shows that of 18 mobile telecommunications licenses the government issued and are still valid, 10 are owned by regional operators and the remaining eight by national operators. Most built networks are found in Java while all national operators have their startup in major cities in Java.

The condition is also the same with Indosat and Telkom, which have obtained a national DCS 1800 license, as they have set a target of rolling out their networks in 2001 and to be commercially operational in several major cities, namely Jakarta, Bandung, Surabaya, Lampung and Denpasar.

The licenses issued reveal that the policy the government is pursuing is to encourage national operations rather than local operations. The players in this industry are expected to be world-class operators.

In the era of laissez-faire telecommunications, control over a bigger market potential is the main attraction of foreign investors, especially if investments yield an interesting rate of return.

In Indonesia at present the majority of operators slowly developing their network are those with a national license. Most regional operators tend to be at a standstill.

As there is a vast range of national operators, regional operators must be content with being the next choice, and local operators may be a choice further down the list, especially in a region whose population density is low. There will be a time for them, though, following an increase in the GDP of the region.

Bear in mind that laissez-faire telecommunications will make telecommunications a mass market commodity, which, in frequent cases, can be reached only with a much bigger size of investment, especially if the demand for access to this service is rapidly growing.

Despite the great attraction of the market, the following will illustrate how difficult it is to attract foreign investment to enter the telecommunications market in Indonesia, now being opened and in the midst of shaping up a transparent and procompetition regulation regime.

Given the political turmoil resulting from open confrontation of our national leaders, these foreign telecommunications players have found many places of interest for their investments other than Indonesia, for example in Thailand, Cambodia, India, China, which is the hottest potential market going in Asia or elsewhere, and so forth.

These foreign investors prefer to assume a wait-and-see attitude and are putting to the test the consistency of the government as a regulator, including in the settlement of Telkom's joint operation problems, the implementation of modern licensing and the determination of the telecommunications rate structure.

In Indonesia, prospective foreign investors planning to enter are spoilt for choice: a regional AMPS operator, which may later be migrated to the digital, then there are 3 operators, the regional and national DCS operators. Even investment brokers operating in Indonesia have said they can get hold of a national license with a payment of Rp 5 million.

This was revealed to a representative of a regional operator, whose territory may be considered "a suburban area" because it was no longer said to be part of Java, as part of the territory lies in eastern Indonesia.

In 1996, prior to the onset of the economic crisis, this operator had conducted intensive negotiations with a prospective strategic investor and could get a value of over US$120 million for the project development. This value, however, is now worth only $5 million. How pathetic.

The facts referred to above show that regents must be cautious when taking a stance in this sector.

In the context of wide-ranging autonomy, they need to be patient in responding to the development of this industry. It must always be borne in mind that an incentive gained from the growth in this sector may generate a multiplier effect and a trigger for growth in other economic sectors.

The regional bureaucracy must also ensure that unnecessary bureaucratic processes be scrapped. The following story, reported by Jeffrey E. Garten, dean of the Yale School of Management, is quite fitting.

Jacques Bougie, the chief executive officer of Alcan Aluminum Ltd., was going to have a transaction with Pechiney and Alusuisse. Unfortunately, his company, adhering to the Anti-Trust regulation, had to ask for a green light from 16 countries with the application made in eight languages. The company had to hand over more than 400 boxes of documents and send over 1 million e- mail pages.

Just imagine how many more documents must be prepared if, in this context, there are also mandatory requirements from local and regional governments.

Nevertheless, there are still some opportunities for the region to tap direct and indirect incentives from the development of one of these infrastructural sectors without having to be directly involved as a player or to act as the immediate head of these unconventional natural resources.

If, for example, the government holds a spectrum auction, a regional head could ask for the region's share from the proceeds the government obtains from the auction. This share would be proportional to the scope of the license.

Another source of income for the regions may also come from non-tax receipts, as has been the practice until now and was confirmed in the provisions of Law No. 36/1999, such as operational right fees (BHP), which comprise BHP for an outstation frequency, BHP of a radio station frequency and BHP for telecommunications services.

The BHP for telecommunications services, on the basis of Ministry of Tourism, Post and Telecommunications Decree No. 47/93, is set at 1 percent of the operator's earnings each year.

Of course, this amount will be calculated proportionally in accordance with contributions made by the number of subscribers in a particular region.

The writer is a lawyer based in Denpasar.