Foreign telecoms operators

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.