Telkom vs AriaWest

Telkom vs AriaWest

State PT Telkom's decision to unilaterally terminate its joint
operation scheme (KSO) contract with PT AriaWest International
could turn what was hailed in early 1996 as the herald of world-
class management and efficiency in Indonesia's telecommunications
sector into messy litigation proceedings.

Telkom said on Monday it had to make the move following a
number of disagreements with AriaWest over their KSO for the West
Java region, which was launched in January 1996 and was supposed
to run until 2010.

The termination notice, which was immediately rejected as
invalid by AriaWest, was the culmination of protracted disputes
between the two parties over the KSO implementation. The two have
traded allegations in the media of breaches of contract since
1999, and in May AriaWest filed a US$1.3 billion arbitration
claim against Telkom with the head office of the International
Chamber of Commerce in Paris.

The KSO contract signed in October 1995 essentially stipulates
that Telkom will allocate its employees and facilities in West
Java to the exclusive use of the investor (AriaWest), who in turn
shall be responsible for the operation and financial management
of the telecommunications facilities in that region during the
15-year KSO period.

Under the contract, which was amended in mid-1998 after the
meltdown of the rupiah, AriaWest is required to install a minimum
of 190,000 new telephone lines, pay Telkom an up-front license
fee of $30 million and a monthly minimum fee of Rp 25.9 billion
and to give Telkom a specified share of the KSO profits.

Similar terms were applied to four other KSOs in Sumatra,
Central Java, Kalimantan and Eastern Indonesia. These KSOs were
signed with international consortia, all involving telecoms
operators from the U.S., France, Australia, Japan, Britain and
Singapore.

However, even before the ink on the contract with AriaWest had
dried, the deal had run into trouble, embroiling Telkom and
AriaWest in endless bickering over technical details related to
the number of lines transferred or built, financial control,
operation management and incremental increases in telephone
rates.

Telkom management and employees, long accustomed to enjoying a
monopoly with all its attendant privileges, seemed unhappy with
the KSO, which was enforced during the authoritarian Soeharto
regime. For example, Telkom employee cooperatives, which were
used to being given procurement contracts for equipment and
services from utility companies, were required under the KSO to
go through a bidding process. But the disillusionment only
exploded into an employee revolt against AriaWest after the fall
of Soeharto.

That the dispute between AriaWest and Telkom appears to be
more acrimonious than the row between Telkom and other KSO
operators is partly due to the fact that the KSO in West Java is
the largest of the five KSOs, and the capital Bandung, where
Ariawest is headquartered, also happens to be the site of
Telkom's head office.

The problems were exacerbated by the meltdown of the rupiah in
late 1997, which made the KSO operations unprofitable without a
significant increase in telephone rates. But the last straw was
the new telecommunications law enacted in September 1999, which,
among other things, allows for the early termination of Telkom's
monopoly of domestic telecommunications and Indosat's monopoly of
international telecommunications.

But the law itself should not have caused problems for the
KSOs. The legislation that opened the domestic and international
telecommunications markets to new competition was, in fact, long
expected by foreign investors. But the way things have developed,
even foreign investors operating the KSOs seem desperate to get
out due to the uncertainty and Telkom's hostile attitude

What really burned the KSO operators, especially AriaWest, was
the manner in which Telkom and Indosat, with the government's
consent, swapped their exclusive rights without any consideration
for the enormous losses the change would inflict on the KSO
operations. As Telkom agreed to end its monopoly in 2002 and
Indosat in 2003, all the basic assumptions used for investments
already made by the operators in their 15-year KSO deals were
turned upside down.

But it is not too late for Telkom to mend things with AriaWest
and work out an amicable settlement. What is urgently needed,
though, is for the government to take the initiative to
facilitate negotiations between Telkom and AriaWest to adjust the
KSO to the new telecommunications law and the new business
environment it brought about.

Unilaterally terminating its KSO with AriaWest could plunge
Telkom into messy litigation proceedings with the accompanying
negative international publicity, and could also severely strain
Telkom's financial resources to compensate for the KSO assets and
consequently debilitate its investment capacity.