Indonesian carriers brace for change - Industry Trend or Event

CommunicationsWeek International, March 20, 2000 by Nick Ingelbrecht

Incumbent operators in Indonesia are looking for new growth opportunities to prepare for the effects of market liberalization.

Radical reform of the Indonesian telecoms market now appears to be on the cards, as the country's incumbent operators ready themselves for the early termination of their exclusive franchises.

International carrier PT Indosat said it is planning to buy a controlling stake in one of the county's cellular operators, which will bring with it a national fiber backbone to complement its broadband expansion plans in the capital, Jakarta. Meanwhile, PT Telkom has acknowledged for the first time that the government may end its monopoly on domestic telephone services early, once the county's new telecoms law takes effect on 8 September.

"Maybe [the government] will shorten our exclusivity. We don't have any information because the discussion is under way," said Asman Akhir Nasution, president of PT Telkom's board of directors.

PT Telkom's local phone monopoly is not due to expire until 31 December 2010, while it notionally has an exclusive franchise on domestic long-distance services until 31 December 2005. The international services duopoly of PT Indosat and PT Satelit Palapa Indonesia (Satelindo) terminates on 31 December 2004.

The prospective liberalization of communications in Indonesia hinges on the county's new telecoms law, for which a series of implementing regulations are due to be published by the government in about four months' time.

While the new legislation was deliberately crafted to protect the interests of existing shareholders in Indonesia's telecoms oligopoly, the drafting team, guided by former telecoms secretary Jonathan Parapak, has left the door open to the early termination of exclusive franchises by mutual agreement between the state and operators.

PT Indosat said it is now planning to acquire domestic fiber backbone, on the basis that it would otherwise take three years to construct its own facilities. "[If we] prepare ourselves right now and if the market is open, maybe in three to six months, it will be much better for us," said an Indosat spokesman.

The company said it is also in negotiations to acquire a controlling stake in an unnamed cellular operator, believed to be PT Excelcomindo according to government and carrier sources. Excelcomindo is Indonesia's third-largest cellular operator, and would be particularly attractive to Indosat because it has used a loophole in the existing telecoms legislation to build its own national fiber backbone to carry domestic cellular traffic.

Indosat is using another loophole in the current law to install direct optical fiber connections to major commercial buildings in Jakarta, along with ADSL infrastructure to provide high-speed data connections for corporate customers. As such, analysts argue that Indosat stands to gain more from liberalization than it will lose from the early termination of its duopoly international services franchise.

"We see a lot of new opportunities for Indosat once the market opens up, because the company is only an international gatekeeper today," said Herbert Fung, telecoms analyst at Credit Suisse First Boston (Hong Kong) Ltd. "Liberalization could pave the way for Indosat's metamorphosis into a fully integrated carrier," he added.

Meanwhile national carrier, PT Telkom, is preparing for market restructuring by attempting to increase its shareholdings in domestic operating affiliates in which it has a dominant stake. These include the county's largest cellular operator, Telkomsel, in which it has a 42.7% stake, and Indonesia's second international carrier, Satelindo, of which it holds 22.5% and which is also 25% owned by Deutsche Telekom.

"PT Telkom's long-term strategy is to be more proactive in response to market demands," said Harry Supangkat, Telkom's chief financial officer. "More especially, the focus will be on building out a broadband network in and between key cities, improving multimedia and Internet services as well as mobile and IDD services," he added.

Telkom is also coming under mounting pressure to co-operate with the government's privatization efforts spearheaded by the Minister of State-Owned Enterprises, Laksamana Sukardi. Telkom president Nasution has steadfastly resisted the government's efforts over the past 18 months to raise funds by selling a strategic equity stake in PT Telkom to a foreign carrier, such as NTT. But last month the ministry called on Telkom to hold an EGM to discuss the replacement of the entire board of directors and company commissioners.

Nasution effectively denied the request. "According to our articles of association, there must be strong reasons for this extraordinary meeting," he said.

Laksamana has not disclosed what he plans to do next, although he last month postponed the further sale of government stock in Telkom until further notice. The Telkom board will now face its shareholders at its AGM in April, when the government is likely to use its 66% controlling stake to replace Nasution, say local observers.