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.