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.