Foreign telecoms operators

For the first time in Indonesia's 50-year history, foreign companies will be allowed to directly provide domestic public telecommunications services. This will be done under 15-year joint operation contracts with the state domestic telecommunications monopoly, Telkom, starting early next year.

Subscribers in West Java, Central Java, Sumatra, Kalimantan and the eastern islands will have the new experience of being served by such giant telecommunications operators as Telstra Inc. of Australia, Nippon Telephone and Telegraph of Japan, France Telecom and West Inc. of the United States.

This dramatic development has been made possible through the government's announcement early this week of the winners for four out of five designated regions. The foreign investor/operator for the eastern islands (Sulawesi, Maluku, Nusa Tenggara and Irian Jaya) is expected to be appointed within the next few weeks.

Telkom, however, retains the management of basic telecommunications services in the greater Jakarta area and East Java.

We think the government deserves appreciative applause for its success in attracting such giant telecommunications firms to invest in the country. The long-term joint operation contract, which requires the contractor not only to operate existing telephone networks, but also to invest in and build, operate and transfer hundreds of thousands of new telephone lines, obviously involved complex bidding terms and tough negotiations.

The terms of the joint operation contract and the build, operate and transfer arrangements had to be made adequately attractive, otherwise the foreign investors would not have been interested in view of the long pay-back period, the political risk factor and the complex issue of currency convertibility. The investment has to be made in foreign exchange, while the revenue streams will be in local currency. On the other hand, the contracts also have to greatly benefit Telkom and contribute to the country's telecommunications development in general.

Judging from the basic requirements imposed on the foreign investors/operators, we can rest assured that the contracts will be greatly beneficial to accelerating Indonesia's telecommunications development. First of all, two million new telephone lines are expected to be installed by the foreign investors before the end of March 1999. And, as the government has estimated, Telkom can expect to get Rp 13.98 trillion (US$6.28 billion) in revenues from initial investor payments, minimum guaranteed incomes and shares from the distributable incomes from the five contractual regions during the 15-year contract period. At the end of the contract, Telkom will take over all of the telecommunications networks from foreign investors for free.

However, the biggest benefit, we think, will be the transfer of skills and technology from the foreign investors/operators to Indonesia, especially Telkom. The domestic telecommunications monopoly will benefit greatly from the training and education programs to be conducted by the foreign operators for the Telkom employees they inherit in their respective contractual regions and the new recruits they can be expected to hire. It is encouraging to note that the contracts specifically require the foreign operators to allocate at least 1.5 percent of their revenues for training and education and another one percent for research and development. Since the foreign operators also are required to establish joint ventures with national companies, many local firms will also benefit from the transfer of skills, in addition to their share of the operation incomes.

We also have to admit that state-owned Indosat, which recorded great success in its international share listing in New York last year, is an example of how an Indonesian company can acquire international quality standards for its management and services through a joint venture. Indosat was a joint venture between Telkom and International Telephone and Telegraph of the U.S. for 20 years before the government bought the U.S.company's shares in late 1980.

However, the success of the five joint operation contracts also will depend on how Telkom and the government (Ministry of Tourism, Post and Telecommunications) exercise their rights of intervention and supervision of the foreign operators, as stipulated in the contracts.

Obviously, Telkom and the government should restrict their intervention only to the most strategic matters. Hopefully, we will not hear complaints from the foreign telecommunications operators -- as we have often heard frustrations voiced by foreign oil contractors -- over the manner in which they are supervised and monitored by the state-owned Pertamina oil company.