Telkom-Indosat landmark deal
Most of the independent shareholders, including foreign investors, who together own 3.3 billion shares or 33.57 percent of PT Telkom predictably voted on Thursday to approve the US$1.5 billion transaction between the domestic call operator and PT Indosat, initialized in February to end their crossholdings in several telecommunications subsidiaries.
The government, as the controlling shareholders in both publicly-listed companies, is correct in outrightly rejecting the request from several members of the House of Representatives to postpone the shareholders meetings of PT Telkom and PT Indosat and annul the deal to end their crossownerships.
The equally firm stance taken by the government against the demand from striking employees that the Telkom-Indosat transaction be canceled could be a very positive signal to the market. Investors can rest assured that despite its beleaguered position at the moment, a consequence of the sharply eroded credibility and popularity of President Abdurrahman Wahid, the government remains determined to hold firmly to the supremacy of the law and the sanctity of legal contracts.
Irreparable damages would have been inflicted on the credibility of our capital market and the privatization of state companies had the government opted for a populist measure, succumbing to demands from House members and the demonstrating employees of Telkom.
The dismantling of crossholdings between Indosat and Telkom had been thoroughly prepared with the assistance of independent foreign consultants and appraisal companies as part of wide- ranging reforms to create two full-service telecommunications operators in the country. This move is a logical follow-up policy measure to the new telecommunications law, enacted in September, 2000, which will end Telkom's monopoly on local calls in August, 2002 and domestic long-distance calls in August 2003 and Indosat's duopoly (together with Satelindo) on international call services in August 2003.
The transactions will remove uncertainty about which company will control key mobile phone operators and how contracts to install new fixed-lines across the country will be resolved. This, in turn, will pave the way for foreign investors to enter the sector where foreign investment is crucial in view of the rapid changes in information technology.
The deal will also settle, once and for all, speculation that Telkom and Indosat would be merged into a single giant monopoly, something that has hampered investor sentiment in the industry.
As part of the transaction, Indosat will take over Telkom's assets (fixed lines) used in its joint-operating scheme with PT Mitra Global Telekomunikasi Indonesia (MGTI) -- a joint venture of Indosat, Japan's Nippon Telegraph and Telephone Corp and Australian Telstra Corp -- thereby gaining a foothold in domestic fixed-line services ahead of the liberalization of domestic telecoms services in August 2003.
Telkom, in turn, will acquire Indosat's 35 percent equity in Telkomsel to make it a 77.3 percent owner of the mobile phone company, thereby allowing it to play a leading role in the fast growing cellular market.
But the MGTI deal, which was opposed by many Telkom employees, is also quite important in that it will provide a benchmark for Telkom and its other four joint-operating scheme operators -- all involving international giant telecommunications operators -- to resolve disputes.
Telkom and its joint-operating scheme operators have been holding tedious and prolonged negotiations on how to resolve their revenue-sharing contracts, which have to be changed or terminated 10 years ahead of their 15-year deal following the termination of Telkom's monopoly on domestic call services in August 2003. Satisfactory resolution of these potential disputes would also be pivotal in attracting new foreign investors to the country.
The role of telecommunications as a public utility with the dual role as a distinct industrial sector and the underlying means of transport for other economic activities is so vital for a modern economy to grow that countries which fail to develop adequate telecommunications infrastructure will surely fall behind.
Rapid technological changes that generate all kinds of innovative services can be made possible only by continuous investment and research, now extremely scarce in Indonesia. Hence, opening the telecoms market to foreign investors by creating level-field competition is the most effective way of accelerating the development of telecommunications in this country.