Mirror of Indosat divestment likely to produce good impact

Imelda Maidir, Centre for Strategic and International Studies (CSIS), Jakarta

Marked with some falling apart of investment and liberalization commitment, this year ends with the completion of the long overdue sale of Indosat. While the market responds with enthusiasm, the political wrangling over the closings of divestment is growing mainly because of the lack of transparency. The successful sale of a 41.94 share of Indosat is certainly an important achievement regarding concern on budgetary deficits, but it is a small step in the overall effort to restructure the telecommunications system.

The divestment of Indosat is an interesting case for several reasons. First, the fact that the major shareholder will be a foreign entity is a vulnerable issue in public good services. However, if we look into the mirror of our investment and telecommunications, it is likely to have some positive impacts. Given the "the runaway bride" investment cases lately, it somehow will improve public confidence, especially among foreigners.

Second, Indonesia's telecommunications market needs foreign investment to guarantee long lasting competition through technology. Recent technological developments have increased the scope for competition for fixed wire networks from close substitutes such as cellular, wireless datacom and Internet provider services.

To some extent, it is true that it would be difficult to control such development since service providers are more easily able to enter and exit the market.

In contrast, the role of technological development in telecommunications competitiveness must be acknowledged. At the core of the problem is the fact that the introduction of competition does not hurt incumbents very badly. Most of the available data reveals that former monopoly operators are not as vulnerable to the entry of competing service providers as initially expected, according to the International Telecommunication Union Database of 2001. In fact, new entrants using identical technology faced difficulties in gaining market share.

Owning close to 100 percent market shares and 7.2 million fixed lines, Telkom is practically a monopoly in the current duopoly structure. Therefore, to ensure "real competition" in the industry, Indosat should invite strategic partners that can create added value through technological expansion.

Possessing similar operating experience vis-a-vis the market incumbents in Singapore, China, New Zealand, India and the Philippines, ST Telemedia is expected to bring the strategies adopted in those markets to Indosat.

Secondly, it may be argued that Telemedia's share take over of Indosat would amount to a monopoly, particularly in Indonesia's cellular phone business, since Temasek Holdings -- a Singapore government enterprise that controls STT -- also controls 35 percent of the shares in PT Telkomsel, the direct rival to Indosat's Satelindo in the cellular market, through another subsidiary, SingTel.

The practice has already existed regarding law No.36/1999 on telecommunications liberalization.

First, the price adjustment related to fixed-line services results in a huge monopoly profit to the incumbent. It is most likely that the government granted tariffs of fixed lines should be raised. Likewise, before Indosat gained full control over Satelindo in 1995, there had been pseudo competition in international services between both companies as they never have a price competition.

The accusation could be developed further given consistent price raising by Telkom without comparable development of new fixed lines, as written by Ayudha D. Prayoga in his paper for a telecommunications conference in September. With only 9 percent of its net profit going toward network development by September 2002, Telkom has thus been exercising its power to gain more consumer surplus that ideally goes to the consumer in more competitive markets.

Second, preventing the use of alternative technology or setting high licensing fees for using the technology hinders the development of substitutes of fixed lines such as Voice over Internet Protocol that results in an ideal lower price.

The lower tariff created a problem for incumbents. For some destinations, the difference can be as much as 85 percent lower than long distance and international telephone tariffs.

Third, unequal opportunity to access the network on a non- discriminative price. Another case in point is the abusing competition through vertical integration. An Internet service provider which is a subsidiary of Telkom, a fixed line provider, may have unfair advantage over the competitors.

A highlight of this point was the case of the Association of Indonesian Internet Providers (APJII), alleging Telkom's implicit subsidy to its subsidiary, Telkomnet, since the latter would raise its price when the telephone charge was increased.

Yet, it is biased to focus on the monopoly and ownership issue regarding ST Telemedia and SingTel domination in the cellular market, in restraining the entry of Telemedia. Again, it reflects how our "success story" of the telecommunications business is running. Thus, consistent regulatory policies that affect the choices of competitive strategies in improving market penetration and service standards is more crucial than the divestment issue itself.

However, the low, fixed costs of mobile telephone services make cellular phones the preferred entry point for many new telecommunications companies. Up to a minimum teledensity, cellular phones are considered more cost effective than fixed phones. Thus, the vested interests of Telemedia in cellular business seems rational since the mobile telephone industry creates competitive incentives even where monopoly incumbents control fixed-line systems or when the government restricts new entrants' access to networks.

Third, the price of Rp 12,950 per share is considered low relative to the market price of Indosat's subsidiary, Satelindo, which share is valued at Rp 14,000. Nevertheless, the market price of the share does not represent the real value of the asset because the share traded in the stock market is only a very small portion of the total share. In addition, allowing competition in a regulated monopoly would influence the price received for privatized assets. Experience in other countries indeed shows this issue of "stranded assets" can be costly.

However it would take time to assess Telemedia's commitment. But that does not mean that the liberalization should be delayed or stopped. It is important to make a clear contract between Telemedia and the government on each other's obligation, including the commitment to develop fixed lines by 2010. Further, the government must put in place various regulations related to duopoly so consumers can benefit from divestment added values.