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.