JP/6/WINAHYO

Indosat, good governance and paper companies

Winahyo Soekanto Lawyer Consumer Care Foundation Jakarta winahyo@yahoo.com

At least on paper, the controversial sale of 41.9 percent of government shares of Indosat to Singapore telecommunications firm Singapore Technologies Telemedia (STT) will ease budget deficits, despite criticism that it could have been sold at higher prices. It will also provide consumers with more choices as Indosat has stated its ability to develop 759,000 new fixed wireless lines or more.

One of the many flies in the ointment is the revelation of a special purpose vehicle in the transaction -- namely the use of a paper company, the Indonesian Communication Limited, by the ST Telemedia when Indonesia signed the sale and purchase agreement. It has been reported that ST Telemedia wholly owns the Mauritius- based company.

Among the many questions that the public have expressed include: Who was the legal entity that was registered to represent the Temasek Holding since bidding opened up until the final bid and the announcement of the winning party? Was it ST Telemedia? Was the ICL name ever recorded? Has the government ever explicitly agreed to the use of a special purpose vehicle in the bidding process?

Answers to those questions may lead to serious legal repercussions.

If the name of ICL appeared just before the signing of the sale and purchase agreement (SPA), then of course it did not have any right to close the deal given that it was the ST Telemedia that had been announced the winner of the bidding. If this was the case then it posed a serious problem of transparency.

Let us assume that the government could not have been that careless and that the ICL had been mentioned as the special purpose vehicle of ST Telemedia all along. Though common, the practice (which aims to gain tax efficiency) can be fraught with legal problems. For instance, what if the tax exemption sought for by ST Telemedia was one that originated from Indonesia's own regulations? Has the government allowed this to happen without explicitly declaring it part of a tax holiday -- meaning, has the government violated its own taxation regulations?

If the Indonesian government had in fact approved the use of a special purpose vehicle by the ST Telemedia for the purpose of gaining tax efficiency, did the same policy apply to all bidders? If this was not a common policy of the bidding process, then the losing bidders could certainly question the legality of the transaction between the Indonesian government and ST Telemedia. They could even accuse the government of discrimination in the bidding.

In a private-to-private transaction, the use of a special purpose vehicle (a euphemism for a paper company) is indeed common. A paper company or a dormant company is one that is established not to produce real goods or services but to serve as a tool of transaction -- for instance to purchase a company or to keep escrow account. Mauritius, Cayman Island and British Virgin Islands are known as tax havens that authorize the establishment of such companies and apparently profit from the practice.

Indonesia, too, applies tax breaks to foster the growth of foreign investment, but when it comes to a transaction between a private institution with a public one such as in the case of Indosat, the government should indeed be more careful in how it regulates its bidding procedures.

Otherwise, the line that separates the private from the public domain could be trampled upon. If the government had indeed intended to provide tax breaks in the Indosat sale, it should have gone public with the policy and informed all potential investors. And if the government had meant the policy to be a public domain, then the same policy should apply to similar transactions.

We do not wish to tolerate certain interests seeking to turn a transaction, that is public by nature, into a mere private business because the resulting problems would be breaches of the principles of good governance.

It looks certain that the Indosat transaction will not earn the government new tax revenues, nor will it create incentives for investors in the same field, nor boons for the campaign to create a good investment climate here; and thus it will neither lead to incentives for the campaign for good governance.

Are we that much mistaken if we believe that the tax breaks planned by the government in this Indosat transaction would only be an incentive to certain interests while harming the public interests?

The government's duty is not done when it finished announcing the winner of the bidding, because the principles of good governance, public accountability and transparency have yet to be satisfied.

We should hold a public examination of the transaction within a certain period after the winner is announced -- the way we seek to prove or disprove that money politics was involved in the election of, say, a provincial governor. We are, after all, the world's third most corrupt country -- stamped by the World Bank's assertion that leakages in the government spending range between 10 and 50 percent.

Besides, the public as the potential consumers of the fixed telephone lines had been virtually without access to information about the bidding process of government shares in Indosat, apart from the tidbits offered by the media. When no information is forthcoming, who can blame the public for suspecting that a greater loss had in fact incurred in the transaction? The former legislator Ichsanudin Noorsy has recently alleged the privatization of Indosat to be a failure because in the deal with ST Telemedia, the state suffers a loss of Rp 1.2 trillion. That was the amount spent on restructuring the company before the sale of its shares, which includes the purchase of 25 percent of Deutsche Telecom shares in Satelindo worth US$325 million.

Even greater losses are looming, including the Indosat workers' strikes. Risks of further damage abound including possible disruption of services, and investment and development plans. Ultimately, the whole Indosat debacle might serve as a disincentive to the already declining foreign investment, to the campaign for the development of fixed line services and of network access, and to the telecommunications industry in general.

Unless the government hastens to solve the problem as soon as possible, those opposing the divestment of Indosat could question the apparent absence of transparency in the process and turn it into evidence of a lack of good governance in the whole enterprise.