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.