Mirror of Indosat divestment likely to produce good impact
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.