JP/6/WINAHYO

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.