Telecommunications investors answer challenges

Telecommunications investors answer challenges

Three years after the inauguration of the KSO Scheme in
Indonesia's fixed-line telecommunications business, the total
number of telephone lines has increased significantly, with more
than one million new subscribers.

Major foreign World Class Operators in Indonesia, known as KSO
Investors or partners, have overcome the challenges to fulfill
their commitments by completing new telephone lines target by the
government. This supports the state telecommunications company PT
Telkom in installing and managing the telecommunications network
as part of the country's basic infrastructure.

Joint operations (KSO), which involve the private sector and
multinational telecommunications companies, have changed the
business map of Indonesia's telecommunications industry, given
the fact that private and overseas companies are now involved in
the fixed-line business. Previously, Telkom was the sole company
to build, manage and operate the country's domestic
telecommunications network and services.

Joint effort

The KSO Scheme allows Telkom to obtain revenue from the one-
time payment in U.S. dollars, income from Minimum Telkom Revenue
(MTR), and Distributable Telkom Revenue received from the KSO
partners.

In 1995, the government, after a long open tender process
involving the World Bank, assigned five KSO partners: PT Pramindo
Ikat Nusantara, PT Ariawest International, PT Mitra Global
Telekomunikasi Indonesia (MGTI), PT Daya Mitra Telekomunikasi
(Cable & Wireless Mitratel) and PT Bukaka Singtel International
(BSI), to provide some two million new telephone lines in
Sumatra, West Java, Central Java, Kalimantan and Indonesia's
eastern part within three years, starting in January 1996 and to
manage the operation of the KSO Unit. The five companies were
awarded 15-year joint-operation contracts until 2010 to
supervise, manage and improve telecommunications networks in the
concession regions.

The Scheme won international applause because the KSO partners
comprise private and foreign telecommunications investors that
were selected under a highly competitive, liberalized and
transparent telecommunications regulatory environment. The
government considers KSO partners as a strategic point in the
restructure agenda of Indonesia's telecommunications sector.

New Target

Unfortunately, scores of telephone subscribers have
disconnected their lines as a result of a tough economic
situation. The economic crisis since mid-1997 had also made the
demand for new lines decrease.

That is why the government decided to cut the two-million-line
target to 1,268,000 lines.

The deadline remained the same, the end of March 1999 and it
is important to note that the new target is still sufficient for
supply within the next one to two years.

The agreement was a solution for Telkom and the KSO partners
to rescue the continuation of development in that sector due to
the economy crisis.

Despite the revised target being a blessing or controversy,
the five KSO partners have performed well in installing the
required figures. By the end of March, the realization reached
1,371,548 lines, 8.2 percent higher than the targeted figure.

Increasing lines

Pramindo has built 297,290 lines in Sumatra, exceeding the
target of 290,000 as of the end of March. Ariawest installed
324,325 lines in West Java, more than 290,000 as targeted. In
Central Java, MGTI built 403,500 lines, higher than the target of
350,000. Mitratel constructed 120,000 lines in Kalimantan, above
a target of 115,000, while BSI developed 251,300 lines in the
eastern part of Indonesia, surpassing a target of 223,000.

Representing the KSO Investors, D. Siregar of MGTI said that
in total, there are now 2,579,291 subscribers in the five
regions.

"We have seen over one million new subscribers compared to
some 1.5 million subscribers before KSO started ," he said.

Based on the contract, each of the KSO partners is also
required to provide telephone lines to 50 percent from all
villages in each KSO region or spend 5 percent of investments on
Universal Service Obligations (USO) KSO achievement target.

Siregar said that in three years of existence, investments by
the five KSO partners amounted US$1.56 billion, of which $568
million was cash equity.

Of the total revenue collected across the five KSO partners in
the last three years, a total of 45 percent (Rp 5.03 trillion)
was paid directly to Telkom and the KSO partners received a total
of 20 percent, he added.

Problem solving

Problems do exist for the KSO partners. The ongoing crisis in
Indonesia remains a barrier for their expansion. When the KSO
Agreement was signed in 1995, the rupiah was trading at 2,250
against the U.S dollar. Now, the exchange rate is about 7,500. It
is a burden, since KSO partners have to provide payments in
dollars while the income is in rupiah.

The government's policy regarding telephone tariffs is also
considered to be confusing. In addition, KSO partners have been
disadvantaged as some banks have stopped their funding. The
government decreased recently the annual rise of domestic
telephone rates from 24 percent to 15 percent following
widespread protests from the public.

Due to the economic difficulties, hundreds of subscribers have
had their telephone service disconnected, while purchasing powers
are potentially sluggish.

Despite the problems, the five KSO partners have performed
well by fulfilling their commitments. John G. Vondras of Ariawest
said that his company even planned to build more lines as the
demand in West Java remained firm.

Siregar said that, to date, the KSO partners have been
successful in fulfilling the Government's objectives for
developing Indonesia's telecommunications industry.

"The KSO Scheme has accelerated telecommunications development
in Indonesia. There were 1.4 million new lines constructed in the
last three years. Foreign investments have been attracted,
enabling the Government to reduce its financial burden in loans
and guarantees as the KSO partners have arranged their own
loans," he said.

Crisis management

However, due to the economic crisis, certain changes need to
occur to be able to meet future development needs, he said.

People in smaller towns must be patient waiting for telephone
lines, with several areas in the archipelago having the same
problems in facing uncertainty or frustration in obtaining
telephone lines.

This can be a new challenge for the KSO partners: how to
provide the people with telecommunications access sooner, while
the rest of the world is already enjoying high-tech information
services.

The KSO Scheme was a brilliant strategy to develop Indonesia's
telecommunications industry, but the KSO partners now need to
change into a more solid structure to again accelerate the rate
of development for the future of Indonesia.