Rift between Telkom, its KSO partners continues

Rift between Telkom, its KSO partners continues

By Christiani S.A. Tumelap

JAKARTA (JP): The rift between state-owned PT Telkom and its
five partners in the joint cooperation scheme (KSO) continues as
the deadline nears for a settlement of their differences.

A source in the telecommunications industry said a compromise
was very hard to reach since both Telkom and its partners have
come up with strikingly different demands.

"Telkom insists it only wants to make a slight adjustment to
maintain its clout in the contract. While the partners have quite
a lot of demands ... enough to overhaul the whole contract," he
said over the weekend.

He said talks were running very slow because only two of the
five partners had been contacted by Telkom with only six weeks
until the Dec. 31 deadline.

The five KSO partners are PT Pramindo Ikat Nusantara, which
operates in Sumatra, PT Ariawest International in West Java, PT
Mitra Global Telekomunikasi Indonesia in Central Java, PT Cable &
Wireless Mitratel in Kalimantan and PT Bukaka Singtel
International in parts of Eastern Indonesia. Cable & Wireless
Mitratel and Bukaka Singtel are now in negotiations with Telkom.

The partners were appointed by Telkom in 1995 to finance,
build and operate domestic fixed line telephone service across
the country on behalf of Telkom under a revenue-sharing scheme
through 2010.

Telkom retains control over the most profitable markets of
Jakarta and East Java.

Under the existing contract agreement, KSO partners are
required to install, during a three-year construction period from
1996 to 1999, a total of two million new access line units (ALU).

The government, however, revised the figure in September 1998
to only 1.2 million after the partners said the initial targets
were impossible to meet amid the economic crisis.

The Distributable Telkom Revenue (DTR), which is part of the
revenue-sharing agreement, was also revised last year by the
government from 30 percent to 10 percent for Telkom and from 70
percent to 90 percent for partners.

According to the initial contract, KSO partners must pay
Telkom a monthly fixed amount known as a Minimum Telkom Revenue
(MTR) and DTR based on their total revenues.

The revision in the contracts is valid for only one year until
Dec. 31, but KSO partners have refused to return to the original
if some of the contract's terms are not amended.

Performance

An official in Telkom, who spoke under the condition of
anonymity, told The Jakarta Post on Saturday that one of the
important issues Telkom wanted to settle was a proper mechanism
to measure the partners' performance.

"For example, there should be a strict guideline on the
procedures and number of access line units (ALU) the partners
must build so that they can never find an excuse to revise the
terms whenever they wish," he said.

Stephen R. Dowling, director and chief financial officer of
AriaWest International, said the most important issue of the
contract that the partners wanted to revise was the clarification
of who was in charge and in control of the daily management and
operational activities.

"It has been like one boat with two captains. The contract
says we are in charge of the financing, developing and operating
and the staff, too. But the reality shows that Telkom rules over
all," he said during the weekend.

Separately, Philip W. Green, the president of Cable & Wireless
Mitratel, one of the two partners which have started talks with
Telkom, said substantial adjustments to the contract were
necessary to ensure the continuation of the investment the
partners had made in Indonesia's telecommunications industry.

He, however, declined to reveal what kind of amendments his
company or Telkom had to offer.

"I'm not prepared to talk about that. All I can say is that
the talks are ongoing and that we have not reached any
agreements," he told the Post.

Negotiations for the future KSO arrangement started last month
after Telkom president A.A. Nasution said that Telkom would make
necessary amendments to the KSO initial contract so that the
cooperation could continue until it finishes in 2010.

He urged KSO partners to cooperate in the talks.

"We are going to impose a penalty if they refuse to
cooperate," he said as he criticized the partners earlier
suggestion to terminate the current scheme and replace it with a
joint venture.

The partners recently proposed what they called a win-win
solution to the dispute by replacing the KSO scheme with a joint
venture between Telkom, the partners, the government and Indosat,
another state-run telecommunications firm, which owns a 30
percent stake in MGTI and 13 percent in Pramindo.

Telkom's strong objection and the vague responses from the
government and Indosat have apparently pushed KSO partners into a
corner.

The partners recently expressed their flexibility, saying that
they were very much open to go into any form of negotiations and
any type of cooperation with Telkom.

The KSO scheme has been under fire since its establishment in
1996 with much of the criticism leveled at the five partners,
questioning their performance in meeting terms of contracts and
the allocation of profits to Telkom.

"KSO partners demand a bigger share of the revenue-sharing
agreement even though they have never been able to meet the
installation targets. They always ask the government to bail them
out whenever they fail to perform their tasks. And they (the
foreign partners in KSO) still call themselves world class
operators?" a critic said.

Dowling said his company was considering to propose an
elimination of MTR and change the DTR share to 50-50 for Telkom
and its partners to ensure both share the equal risks and
profits.

"But other partners may have a different stance on this
revenue-sharing matter," he said, suggesting Telkom accelerate
the talks with a more comprehensive approach.