End Telkom monopoly

End Telkom monopoly

A potentially ugly confrontation between PT Telekomunikasi
Indonesia (Telkom) and consumers appears to have been defused by
the government's decision to review the increases in domestic
telephone rates. Bowing to public pressure, the government has
cut the phone rate increase to an average of 15 percent from the
24 percent announced earlier by Telkom. The government has also
decided to impose a single rate for all local calls within
Greater Jakarta and Bandung, instead of the two rates which had
been proposed.

The looming consumer revolt against the company which has a
virtual monopoly over the domestic telephone service was a real
threat. PT Telkom's hardheaded response to the potential consumer
boycott -- or of a rash of consumers refusing to pay their
telephone bills -- was to counter that it would simply cut off
their telephone lines.

Ironically, the row did not begin when Telkom first announced
the new telephone rates just before they were to take effect on
Feb. 1. A 24 percent hike was stiff indeed, but few people
complained at the time. There may have been some grumbling, but
generally the increase was accepted.

Complaints only began to arise in the middle of this month
when some subscribers in Jakarta realized that, for them, the
actual increase was not 24 percent, as Telkom would have had them
believe, but more like 24 fold. This was because Telkom had
quietly divided Jakarta into two zones and dictated that calls
for distances exceeding 30 kilometers were long-distance, not
local.

Telkom argued that since all subscribers outside of Jakarta
already paid long-distance rates for calls exceeding the 30 km
distance, it saw no reason to treat Jakartans differently. While
Telkom's argument makes sense from a purely economic point of
view, the telephone monopoly is guilty of failing to inform, or
alert, its subscribers of the serious implications of this sudden
change.

Besides owing an explanation for such a hefty increase, Telkom
should also have given subscribers a period of adjustment,
gradually phasing in the rate increase over a period of time.
Instead, Telkom kept silent. This silence could be interpreted as
Telkom hoping that subscribers would overcome their shock at the
size of their new phone bills and pay up because it was too late
for them to fight the hikes. Whether this silence was deliberate
or not, Telkom's actions bordered on deception. For a state
company whose main business is communications, Telkom's
management is guilty of failing to properly communicate its new
policy to subscribers.

Telkom holds a very special role in Indonesia's corporate
world. It is a publicly listed state-owned firm which ranks among
the country's top corporate income taxpayers. As the single
largest company traded on the Jakarta Stock Exchange and one of
the few Indonesian firms listed on the New York Stock Exchange,
Telkom is indeed a blue chip company. As such, changes in the
price of its stock are bound to affect the overall performance of
the local market.

The government, the largest shareholder in Telkom, is only one
of many shareholders in the company. Investors who bought shares
in Telkom in Jakarta or New York are also owners whose interests
Telkom should serve. This means Telkom is responsible for
maximizing profit and growth so that it can increase the value of
its stock and pay stock dividends. However, as a state-company
with a virtual monopoly over a vital public service, Telkom also
has an obligation to another group of unregistered shareholders:
the Indonesian public.

While we wait to see if the government's intervention will
placate the angry public, this row has exposed the ugly side of
monopolies.

In the absence of competition, Telkom was able to dismiss,
somewhat lightly, public complaints and threats of a boycott,
knowing that consumers had nowhere else to turn. When it
countered threat with threat, Telkom became a textbook example of
a big, bad monopoly.

During the current economic recession, most companies have
found it difficult to increase their prices. Telkom, because it
had a monopoly and a captive market, had no qualms with jacking
up its rates. A small dose of competition would have forced
Telkom not only to rethink its pricing policy, but also to
operate more efficiently and strengthen its finances. As a
monopoly, however, Telkom can afford inept management, as was the
case when the company failed to hedge a huge portion of its
foreign debts, a failure which cut into its 1998 profits.

Unfortunately, the new antimonopoly law still allows the
government to monopolize vital public services. This, presumably,
includes the domestic telephone service. In any event, Telkom's
monopoly will likely remain intact for at least another decade
before Indonesia is obliged to open the domestic telephone market
under rules established by the World Trade Organization.

Yet, if anything, this episode with Telkom has destroyed the
myth that public services are run more effectively and
efficiently under a government monopoly. There is one lesson
which we must take away from this episode: the sooner we end
Telkom's monopoly the better it will be for the public and for
Telkom's shareholders.