Autonomy and the telecommunications industry

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.