Ringing in the era of competition in telecommunications

Ringing in the era of competition in telecommunications

By I. Christianto

JAKARTA (JP): The implementation of Telecommunications Law No.
36/1999 in September this year ended the era of monopoly of the
country's telecommunications sector.

The new rule directly affects state-owned international
telecommunications provider PT Indosat and domestic operator PT
Telkom, which will now have to compete to survive locally and
globally.

The new regulation also allows other parties to enter the
sector without any collaboration with either Telkom or Indosat.

Previously, under Telecommunications Law No.3/1989, any party
intending to deal with basic services in telecommunications was
required to establish cooperation with either of the two state-
owned operators in the form of a joint venture, revenue sharing
or joint operation.

Under the new law, Telkom's exclusive rights to operate
domestic telecommunications services will end in 2002 for local
calls and in 2003 for domestic long-distance calls.
Meanwhile, the duopoly for international calls held by Indosat
and privately-owned PT Satelindo will expire in 2003.

There will also be new categories of business lines which
includes full service provider, full service network and
extraordinary telecommunications provider.

However, one single foreign investor cannot own more than 49
percent stake in telecommunications infrastructure and mobile
cellular companies.

Telkom has also set joint operation (KSO) contracts with five
private firms, including Pramindo Ikat (in Sumatra), Aria West
(in West Java), Mitra Global (in Central Java), Daya Mitra (in
Kalimantan) and Bukaka Singtel (in eastern Indonesia). Each of
them is responsible for operating and managing telephone
installations in its contract area for 15 years starting from
January 1996.

In the mobile cellular industry, the government has also
licensed a number companies to run the service based on three
systems.

However, there was no real free competition in the sector as
Indosat and Telkom, as the major players, were given protection.

Merger

Following the implementation of the new law, there has
recently been a proposal to merge Indosat and Telkom. This issue
has become a hot topic in the nation's telecommunications
industry and will likely remain so until the government's stance
on the matter is clear.

A merger, acquisition or whatever the occurrence may be
called, will likely end the era of competition which has just
begun.

Members of the House of Representatives have even urged the
government to establish an interdepartmental team to review its
stance on a proposal to merge both companies. However, Minister
of Transportation and Telecommunications Agum Gumelar earlier
reiterated that the government would not endorse the merger
because it was against the government's blueprint for the
development of telecommunications.

According to the blueprint, the government wants to transform
the nation's telecommunications sector from a vertical to a
horizontal platform with multiple players. It will support both
Telkom and Indosat into becoming full network service providers
and allow them to compete with each other in the market. Telkom
and Indosat will be able to operate local, long-distance and
international calls, and provide mobile cellular services.

The idea of a merger has been frequently voiced, particularly
by Telkom which argues that a merger would provide the nation
strength in facing global telecommunication rivals. Telkom said
earlier that it had allocated some Rp 7 trillion to grab the 65
percent government stake in Indosat.

Some people may have wondered why Telkom wants to enter
Indosat.

According to Telkom, there are many foreign companies eying
the 65 percent government stake in Indosat. So it will be much
better if the stake is procured by a local firm.

But it is believed the intention to buy Indosat stems from the
new law which has lifted Telcom's exclusive rights.

Though the government has licensed Telkom (and Indosat) to
operate GSM-1800 nationwide as compensation for the termination
of their exclusivity, Telkom is likely unready yet to "ring" in
the real competition.

Problems

There are some factors why Telkom is not prepared for free
competition.

Internally, Telkom is still poorly managed as the company has
some 38,000 employees with 14,000 personnel hired on contract
basis.

There are also problems with the KSO concessionaires. This is
also related to the termination of its exclusive rights and its
tariffs which have not been increased significantly in recent
years.

In fact, the KSO scheme, which was widely applauded in the
beginning as a good arrangement for private participation in
developing the country's telecommunications industry, has created
more problems rather than benefits both for Telkom and the KSO
concessionaires.

Actually differences between Telkom and the five
concessionaires began not long after the project started in 1996.
Telkom has accused the partners for performing improperly and
failing to meet some prerequisites. While the partners feel that
Telkom interferes too much in their management and operations.

With the termination of exclusive rights, the contracts for
operating and managing telephone installations in the KSO
contract areas until 2011 will be affected.

Disputes about the KSO continues and Telkom is still studying
how to solve the problems.

There will most likely be different resolutions as some of the
five contractors may agree on setting up joint venture companies
with Telkom, while others may want to see buy outs or wish to
retain the KSO scheme.
Telkom faces a huge dilemma as it has to compensate billions of
dollars if the KSO scheme is canceled before contracts expire.

So perhaps the lobby for a merger with Indosat is likely only
an attempt by Telkom to shift its burden to the
telecommunications industry.

What is interesting is the options discussed by Telkom and
Aria West in finding a solution to the dispute. One of the
options is the possible establishment of a new joint venture
company (JVC) between Aria West and Indosat. Why does
Aria West prefer to have Indosat, rather than Telkom, as a
partner in forming a JVC. The other options are a buy out of Aria
West by Telkom; the development of a third player; and the
continuation of the original KSO contract but with modifications.

Does this mean that Telkom is really unattractive? Industry
analysts have said that though the company had appointed Salomon
Smith Barney as an advisor in seeking partners, it had won only
trivial consideration in the global market due to its weak
management.

However, Telkom's belief that Indosat is being eyed by various
overseas companies is true. Aria West, which is owned by various
foreign companies, showing an interest in having Indosat as a
partner, is one evidence.

On its financial performance, Indosat's net profit rose by 13
percent to Rp 1.35 trillion in the third quarter of this year
compared to the corresponding period last year. The company
netted a consolidated operating income of Rp 2.18 trillion, up by
1.8 percent from Rp 2.14 trillion in the same period last year.
Meanwhile, Telkom's net profit and income figures reached Rp 2.2
trillion and Rp 6.94 trillion, respectively, in the third quarter
of this year.

Is it good to have the companies operating separately and
creating a more competitive atmosphere? Or, will it be better for
the companies to merge and become a strong controller of the
country's telecommunications sector? Lets hope the government
will be consistent with its blueprint for the development of
telecommunications.