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THE INDONESIA TELECOMMUNICATIONS REGULATIONS: PRIVATIZATION AND OPEN COMPETITION
By
DR. Danrivanto Budhijanto, S.H., LL.M in IT Law Indonesia
Associate Professor in Cyber Law and Telecommunications Law University of Padjadjaran-Bandung
Abstract
Privatization in the telecommunications sector is a growing international phenomenon. Unlike the United States, telephone service in the vast majority of countries has long been provided exclusively by government-owned and operated entities under monopolistic market structures. The classic problem in develop country is the limited ability of the government to provide sufficient funds to finance the development of the telecommunications sector. The initial approach of the Indonesian government to resolve this issue was by partial privatization of the shares of TELKOM and INDOSAT, which was achieved by listing the companies’ shares in the local and international stock exchanges, in 1994 and 1995 respectively. Privatization of Indonesian telecommunications state-owned companies such as TELKOM and INDOSAT is a key component of the Indonesian government’s economic policy.Indonesia as a member of WTO has a commitment in telecommunications services. Indonesia committed to terminate the exclusive rights: exclusivity expires in 2011 for local service; in 2006 for long distance service, and in 2005 for international service.
A. Introduction B. The Overview of Indonesia Telecommunications Industry
1. Public Switched Telephone Network (PSTN) Service 2. Cellular Services 3. International Long Distance Service 4. Voice over Internet Protocol (VoIP) and Data Communications
Services 5. Satellite Service
C. The Indonesia Deregulation in Telecommunications Law 1. Privatization
a. Privatization in Telecommunications Sector b. Telecommunications Privatization in Indonesia
(i) TELKOM (ii) INDOSAT
2. Open Competition a. Indonesia’s Commitments in Telecommunications Service b. The Removal of Organizing Bodies c. The Termination of Exclusive Rights
D. Conclusions
2
A. Introduction
The Law Number 36 Year 1999 regarding Telecommunications
(“Telecommunications Law 1999”), which came into effect on September 8,
2000,1 provides key guidelines for industry reforms, including industry
liberalization, facilitation of new entrants and changes to the industry's
competitive structure. The Telecommunications Law 1999 allows open
competition within the market, terminating the exclusivity rights of PT.
Telekomunikasi Indonesia (“TELKOM”) and PT. Indonesia Satellite Corp.
(“INDOSAT”). TELKOM’s monopoly over local calls ended since August 1, 2002
and domestic long distance calls in August 2003.2 The duopoly for international
calls (IDD) for INDOSAT and SATELINDO will be removed in August 2003.3 Both
will receive compensation in the form of new service licensees plus cash or
equity from foreign investors.
Starting from that date, TELKOM and INDOSAT will be the duopoly in providing
domestic telephone services. But, at the first stage the duopoly practices will
only been implemented in Jakarta and Surabaya, the two largest cities of the
country. TELKOM calls are transmitted through cables but local calls using the
new INDOSAT system will be conveyed through wireless relay stations.
INDOSAT's relay stations are "fixed" in one location and cover a radius of five
1 Article 64 Telecommunications Law 1999. 2 WTO Secretariat, Indonesia Schedule of Specific Commitments, GATS/SC/43/Suppl.2, April 11th, 1997. 3 Id.
3
kilometers.4 INDOSAT uses the term 'fixed access' to describe this service to
differentiate it from TELKOM's traditional 'fixed-line service'. INDOSAT’s fixed
access service uses Code Division Multiple Access 2000 1X (CDMA) cellular
technology, which offers clearer sound, wider coverage, smoother transmission
and multimedia facilities.5
Stimulated by the revolution in telecommunications technologies over the past
decade, telecommunications liberalization has exceeded that of other sectors
characterized by state or private sector monopolies, such as postal services,
electricity or airlines, because of markedly improved service and cost efficiencies
available through global competition, foreign investment and joint venture
partnerships.6 The compilation's dual themes of privatization and competition are
imperative: privatization without competition actually leads to higher consumer
prices. Consequently the compelling significance of local resolves to gain the
efficiencies of open markets and of the World Trade Organization's recent
accord.
The objectives of this paper are to have an overview on Indonesian
telecommunication industry and to discuss privatization and open competition in
Indonesian telecommunication industry as a new paradigm and its legal
framework.
4 INDOSAT Annual Report 2001. 5 Id. 6 Stephen H. Willard, Robert H. Edwards, Jr. and Bonnie Weinstein, International Investment, Development, and Privatization, 33 Int’l Law. 231 (1999).
4
B. The Overview of Indonesia
Telecommunications Industry
Since 1961, telecommunications services in Indonesia have been provided by a
succession of state-owned companies. As in other developing economies, the
expansion and modernization of telecommunications infrastructure play an
important role in Indonesia’s general economic development. Moreover, the
nation’s large population and rapid economic growth have led to significant
unmet demand for telecommunications services.
The Indonesian Government has extensive regulatory authority and supervisory
control over the telecommunications sector, primarily through the Minister of
Communications (“MoC”). The Government has historically maintained a
monopoly over telecommunications services within Indonesia. Recent reforms
have attempted to create a regulatory framework to promote competition and
accelerate infrastructure investment in telecommunications facilities. The
regulatory reforms embodied in Telecommunications Law 1999, are intended to
increase competition by removing monopolistic controls, increase the
transparency and predictability of the regulatory framework, create opportunities
for strategic alliances with foreign partners and facilitate the entrance of new
participants to the industry, thereby creating new job opportunities. The
deregulation of the telecommunications sector is closely linked to the national
economic recovery program supported by the International Monetary Fund
5
(“IMF”).
Indonesia represents a large potential market with an estimated population of
228.4 million inhabitants as of July 2001. In addition to a large potential
subscriber base, from 1995 through 1997, Gross Domestic Products (“GDP”)
increased at an average annual rate of 6.9% and the average annual inflation
rate was 8.4%. In 1998, reflecting the economic downturn in Asia in general and
Indonesia in particular, Indonesia’s GDP decreased by 13.1% and the inflation
rate was 77.6% for the year. From 1998 through 2001, GDP was estimated to
increase at an average annual rate of 2.9% and totaled Rp. 378,052 billion, Rp.
396,119 billion and Rp. 409,364 billion in 1999, 2000 and 2001, respectively.7
Inflation is expected to slow to 7.2% during the same period.
Cellular penetration is low in Indonesia by international standards, but has
increased rapidly in recent years. In 1999, Indonesia had a cellular penetration
of 1.1%, which is estimated to have increased to 1.7% in 2000 and 3.0% in
2001. In 2000, the number of fixed lines was 6.6 million, representing a fixed
line penetration of 3.2%, among the lowest in the region and a result of growth
stagnating under previous regulatory systems.8
Currently, Indonesian telecommunications companies offer the following
7 Indonesian Statistic Bureau (BPS) Report 2002 and US$ 1 = Rp. 9,100). 8 TELKOM Annual Report 2001.
6
services, but not all providers offer all telecommunications options available to
Indonesian consumers.
1. Public Switched Telephone Network (PSTN)9 Service
TELKOM, a majority state-owned company, owns and operates the
country’s only PSTN. All telecommunications operators interconnect with
TELKOM’s network in order to provide access to all Indonesian fixed line
and cellular subscribers. For example, cellular calls usually originate on,
terminate on, or transit through TELKOM’s PSTN network. As such, all
providers of cellular services are subject to fluctuations in capacity and
line quality of the PSTN network.
In 1995, TELKOM entered into agreements with five private joint venture
consortia or joint venture operation (Kerja Sama Operasi or “KSO”), each
of which includes prominent international telecommunications operators,
to provide for the transfer of network development and operational
responsibility for the PSTN for certain regions in Indonesia. Due to the
depreciation of the Rupiah10 against foreign currencies, particularly the
U.S. dollar, in 1997 and thereafter, some of the KSO projects have lost
their economic viability. TELKOM and the KSO partners have conducted
9 Usually refers to the worldwide voice network accessible to all those with telephones and access privileges (i.e., in the US it was formerly called the Bell System network or the AT&T long distance network). 10 Indonesia currency (IDR).
7
intense negotiations to seek alternatives for the continued operation or
termination of the KSO projects.
TELKOM’s license under the Law Number 8 Year 1989
(“Telecommunications Law 1989”) confers on it the exclusive right as
national operator to provide local fixed wire line and local fixed wireless
telecommunications services throughout Indonesia,11 including services
through the KSO schemes, for a minimum of 15 years; and domestic long
distance telecommunications services throughout Indonesia for a
minimum of 10 years.
2. Cellular Service
Three Global System for Mobile telephone (“GSM”)12 operators currently
dominates the cellular market in Indonesia, Telkomsel (TELKOM’s cellular
subsidiary), Satelindo (INDOSAT’s cellular subsidiary) and Excelcomindo.
The three nationwide GSM operators collectively command approximately
95.5% of the national cellular market. The number of cellular subscribers
in Indonesia totaled approximately 3.7 million at the end of 2000 and
6.5million at the end of 2001, representing an annual growth rate of
41.9% during that period.13 Despite this rapid growth, the cellular
penetration rate in Indonesia, at 2.4% at the end of 2001, is still relatively
11 Article 12 Telecommunications Law 1989. 12 Global System for Mobile telephones refers to a European standard for digital cellular telephones. 13 TELKOM Annual Report 2001.
8
low compared to many other Asian countries and international markets.
According to statistics published by TELKOM, as of December 31, 2001,
Telkomsel was the largest national licensed provider of GSM services in
Indonesia, with approximately 3.25million cellular subscribers and a
market share of total Indonesian cellular subscribers of approximately
49.7% at the end of 2001. Satelindo was the second largest provider, with
approximately 1.8 million cellular subscribers and a market share of total
Indonesian cellular subscribers of approximately 27.1% at the end of
2001. Excelcomindo, the third largest provider, had approximately 1.2
million subscribers and a market share of approximately 18.7% as of the
same date. IM3, other INDOSAT’s cellular subsidiary, was a new entrant
to the GSM cellular market in 2001, and as of December 31, 2001, IM3
had approximately 148,000 subscribers and a market share of
approximately 2.3%. In addition to the nationwide GSM operators, a
number of smaller regional GSM, analog and Code Division Multiple Access
(CDMA)14 cellular providers operate in Indonesia.
In part, subscriber growth in Indonesia has been driven by the “calling
party pays” system, the launch of prepaid service, as well as the
introduction of short text messaging service (SMS). The calling party pays
14 Code Division Multiple Access refers to a wide-band spread-spectrum network technology.
9
system requires the originators of telephone calls to pay for calls. Based
on international experience, countries which implement a calling party
pays system typically experience higher wireless penetration rates
because wireless subscribers are more likely to give out their telephone
numbers and keep their handsets switched on. Since its introduction in
1998, prepaid service has been popular in Indonesia (as in other Asian
countries) because it permits customers to register for cellular service
without undergoing a credit review. Prepaid service is also considered to
be more convenient than postpaid service, giving customers more control
over monthly expenditures. Text messaging has proven to be extremely
popular in Indonesia, particularly on the prepaid platform, as it provides a
convenient and cost-efficient alternative to voice and e-mail based
communications.
Competition in the Indonesian wireless industry is based primarily on
service quality, pricing, availability of data services and special features
(such as voice mail and text messaging) as well as network coverage.
3. International Long Distance Service
International long distance providers in Indonesia generate revenues from
both inbound and outbound international call traffic. The two players
include INDOSAT, which offers its “001” service and SATELINDO, which
10
offers its “008” service. Outgoing tariffs are based on rates set by the MoC
while incoming tariffs are settled at the applicable accounting rates. All
traditional, International Direct Dialing15 or IDD (non-VoIP), international
telecommunications between Indonesia and other countries pass through
the networks of INDOSAT or SATELINDO. Outgoing traffic is generated by
fixed line and mobile subscribers and delivered to the two international
service providers directly through international gateways or indirectly
through TELKOM’s PSTN. Incoming international traffic is received at
international gateways and either routed directly to its intended
destination from the gateways or indirectly through TELKOM’s PSTN
network, or a cellular network, through which it is ultimately switched to
its intended destination.
In Indonesia, as in many emerging market countries, inbound
communications traffic has exceeded outbound traffic as more developed
countries generate a disproportionate amount of international long
distance traffic. Inter-operator traffic is settled based on a concept of
accounting rates that provide a common method of compensating the
originating and terminating carrier. In general, international long distance
carriers negotiate per minute accounting rates on a route-by-route basis
with a single rate used by all carriers on that route. This accounting rate is 15 International Direct Dialing is a service that allows a user to make international calls without using a telephone operator.
11
usually denominated in U.S. dollars or special drawing rates (“SDRs”) or
Gold Franc, determined by reference to a basket of currencies. The
accounting rate framework results in countries, such as Indonesia, which
have imbalances in their international long distance traffic, generating
large net settlement revenues denominated in U.S. dollars and SDRs.
Future agreements that reduce the international accounting rates between
Indonesia and foreign countries may adversely affect Indonesian IDD
providers’ results of operations.
4. Voice over Internet Protocol16 (VoIP) and Data Communications
Services
Competition from VoIP providers offering services including budget calls
and prepaid calling cards has begun and is expected to adversely impact
revenues from traditional international long distance calling revenue.
Historically, data services in Indonesia primarily comprised narrow
bandwidth leased line services, x.25service, digital data network service
and integrated service digital network service.17 Digital data network
services are digital leased line services for data transmission. Integrated
service digital network is a protocol that offers high capacity dial-in access
for public networks. This protocol allows simultaneous handling of
digitized voice and data traffic on the same digital links via integrated
16
Voice over Internet Protocol refers to a means of sending voice information using IP. The voice information is transmitted in discrete packets in digital form rather than the traditional circuit-committed protocols of the PSTN, thereby avoiding the tolls charged by conventional long-distance service providers. 17 INDOSAT Annual Report 2001.
12
switches across the public network. x.25 is an open standard packet
switching protocol that allows low to medium speed terminals to have
either dial-in or permanent access to a network from a user’s premises
and operate on a network. Charges for these services have been declining
in recent years.
The rise of the Internet and the wider adoption of multimedia applications
are expected to increase demand for sophisticated broadband data
services. Operators in Indonesia are deploying advanced broadband
networks to provide high-end data services such as frame relay,
asynchronous transfer mode18 (ATM) and Internet protocol19 service. In
particular, virtual private network services20, utilizing ATM and Internet
protocol technologies may capture a larger portion of the market share as
they provide a reliable and cost-effective alternative to private networks
that rely on dedicated leased lines.
As the data communications infrastructure expands in Indonesia, demand
for VoIP services may increase. VoIP uses data communications
connections to transfer voice traffic over the Internet connection, which
18 Asynchronous Transfer Mode refers to the standard packet-switching protocol for transmitting and receiving data via uniform 53-byte cells, allowing for data transmission speeds surpassing 600 mbps. 19 Internet Protocol refers to the method by which data is sent from one computer to another on the Internet. 20 Virtual Private Network refers to a “virtual” network constructed by connecting computers together over the Internet and encrypting their communications.
13
usually provides substantial cost savings to subscribers. Currently, some
domestic and foreign VoIP providers offer services illegally and without
paying applicable tariffs and interconnection charges, thereby obtaining
market share from legal providers.
Although the Government has implemented a licensing system to limit the
number of VoIP operators in Indonesia, the Government does not
presently control the rates charged to end users of VoIP services.
However, the Government has indicated that it is in the process of
finalizing specific regulations with respect to VoIP rates, and it is expected
that such regulations would limit VoIP tariffs to amounts that represent a
maximum discount from the then current PSTN tariffs of approximately
40%.21
5. Satellite Service
In recent years, competition in the Asia-Pacific satellite business has been
intense. Companies in this business compete primarily on coverage power,
product offerings and price. The Indonesian satellite industry is loosely
regulated, and in practice operates in accordance with an “open-sky”
policy. This means that Indonesian satellite operators must compete with
foreign satellite operators.
21 Directorate General of Post and Telecommunications Report 2001.
14
The telecommunications industry in Indonesia will be driven by several important
trends in the future, which present major opportunities for modern
telecommunications service providers. These trends include the continued
growth in the telecommunications sector, that the telecommunications industry
will continue to grow, as continued development and modernization of
Indonesia’s economy are expected to increase demand for telecommunications
services. With relatively low fixed line telephony and cellular penetration,
Indonesia’s telecommunications industry offers positive growth potential. The
other trend is the migration of voice and data traffic from fixed to wireless
networks, that wireless services will become increasingly popular as a result of
wider coverage areas and improving wireless network quality, declining handset
costs and the proliferation of prepaid services. At current growth rates, the
wireless penetration will surpass fixed line telephony penetration in Indonesia in
the near future.
C. The Indonesia Deregulation in
Telecommunications Law
The Telecommunications Law 1999, which came into effect on September 8,
2000,22 provides key guidelines for industry reforms, including industry
liberalization, facilitation of new entrants and changes to the industry's
competitive structure. Under the Indonesian regulatory framework, a law only
22 See Article 64 Telecommunications Law 1999.
15
outlines the substantive principles of the subject matter. Implementation
guidelines will be further made by way of government regulations, ministerial
decrees and other forms of decrees. Therefore, the Telecommunications Law
1999 only outlines the framework and substantive principles for the liberalization
of the telecommunications industry.
16
1. Privatization Privatization in the telecommunications sector is a growing international
phenomenon. Unlike the United States, telephone service in the vast
majority of countries has long been provided exclusively by government-
owned and operated entities under monopolistic market structures. In some
cases a state-owned company has been the service provider; in others a
division of the government has operated the network and has provided
service itself. In recent years, countries all over the globe have privatized,
are privatizing, or are considering privatizing their telecommunications
services providers. For example, the U.K., Argentina, Mexico, Chile,
Venezuela, Australia, Hong Kong, Indonesia, and New Zealand have sold
interests in their national telephone companies to private investors.23
a. Privatization in Telecommunications Sector
The terms of “privatization” or “liberalization” of telecommunications
refers to a process of transferring existing state-run monopoly
enterprises that provide voice, data, and video delivery services to a
competitive private sector.24 The purpose of privatization is to facilitate
private investment in domestic and/or international telecommunications
products and services. 23 Thomas J. Casey and Simone Wu, Telecommunications Privatizations: An Overview, 17 Hastings Int’l & Comp. L. Rev. 781 (1994). 24 Andrea Johnson, Privatization of Telecommunications Network to Spur Foreign Investment, 32 L & Tech. J. 2 (1999).
17
A major part of the WTO Agreement was the process by which
privatization or liberalization was to be implemented. There are three
steps to privatization. During the first step, countries agree to enact
legislation authorizing the transfer of ownership from their monopoly to a
stock company where the shares would be sold to a strategic partner or
an independent regulatory agency.25 This typically means separating
telecommunications from existing public utilities and postal services,
which are generally run and managed by the same state-controlled
entity. In most cases, this new entity will still have close relation to the
government.
During the second step, countries agree to introduce limited competition
through a public offering or solicitation of domestic and foreign
investors.26 To date, most of the competition occurs in areas, such as
wireless or satellite communications, where the infrastructure is not
developed or it is underdeveloped, meaning that neither the government
nor the domestic private companies are well-established in the market.
In the last step, countries agree to allow actual or full competition in all
areas, including basic wireline services.27 In many developing countries,
this transformation has been motivated more by the necessity to attract
foreign investment and the expertise than a desire to hand over control 25 Andrea L. Johnson, Preserving Privatization of Telecommunications in Five Emerging Markets: Germany, Egypt, South Korea, Argentina and Mexico, 12 Alb. L.J. Sci. & Tech. 311 (2002). 26 Id. 27 Id.
18
over their systems. As a result, resistance often accompanies such efforts
from internal forces. This may well change as foreign investment begins
to dry up or is diverted to countries with more stable economies and
predictable regulations.
b. Telecommunications Privatization in Indonesia
The classic problem in develop country is the limited ability of the
government to provide sufficient funds to finance the development of the
telecommunications sector. In the past, the initial approach of the
government to resolve this issue was by partial privatization of the shares
of TELKOM and INDOSAT, which was achieved by listing the companies’
shares in the local and international stock exchanges, in 1994 and 1995
respectively. Privatization of Indonesian state-owned companies such as
TELKOM and INDOSAT is a key component of the government’s economic
policy. Aside from increasing the efficiency of these businesses, the
government hopes to raise several billion dollars in much-needed cash
from selling equity in these companies.
(i) TELKOM
TELKOM, a majority state-owned company, is the principal provider of
telecommunications services in Indonesia, providing local and domestic
long distance telephone services. In 1884, the Dutch colonial government
established a private company to provide postal services and domestic
19
telegraph services and, subsequently, international telegraph services. In
1961, most of these services were transferred to a newly-established
state-owned company to provide postal and telecommunications services
in Indonesia, apart from services in Sumatra, which were transferred in
the 1970's. The Indonesia’s Government separated postal and
telecommunications services in 1965 into two state-owned companies, PN
Pos dan Giro, and PN Telekomunikasi. In 1974, PN Telekomunikasi was
further divided into two state-owned companies, Perusahaan Umum
Telekomunikasi ("Perumtel'') and PT Inti, to provide domestic and
international telecommunications services and telecommunications
equipment manufacturing, respectively. In 1980, the international
telecommunications business was transferred to INDOSAT.
In 1991, Perumtel was transformed into a ""Persero'', or state-owned
limited liability corporation with commercial purposes, and renamed
Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia, known as
TELKOM.
On November 14, 1995, based on privatization framework, the Indonesian
Government sold their TELKOM shares through a global initial public
offering on the Jakarta Stock Exchange, the Surabaya Stock Exchange,
the New York Stock Exchange and the London Stock Exchange. As of
20
December 31, 2001, the Indonesian Government holds 5,472,235,356
shares (54.29%); Domestic Investors hold 717,008,877 shares (7.11%)
and Foreign Investors hold 3,890,755,407 shares (38.60%).28
TELKOM is currently one of the largest companies by market capitalization
in Indonesia, with a market capitalization of approximately US$4.3 billion
as of May 23, 2002. For the year ended December 31, 2001, it had total
operating revenues of Rp.16,130.8 billion (US$1.6 billion) and net income
of Rp.4,250.1 billion (US$408.7 million).29
(ii) INDOSAT
INDOSAT was established in 1967 by the US firm I.T.T. to provide
satellite-based international telecommunications services to Indonesia. In
1980, ITT sold INDOSAT to the Indonesian Government for approximately
US$43.8 million.30 After the sale, INDOSAT became a persero, or state-
owned limited liability corporation, and the sole provider of international
telecommunications in Indonesia. At that time, the Indonesian
Government transferred its ownership in INDOSAT’s facilities to INDOSAT.
28 TELKOM Annual Report 2001. 29 Id. 30 INDOSAT Annual Report 2001.
21
In 1982, in order to separate effectively the domestic and international
telecommunications networks, all of Perumtel’s ownership in international
submarine cables and its international operators and gateway in Jakarta
were transferred to INDOSAT, and INDOSAT transferred certain assets
related to the domestic telecommunications system to Perumtel.
In 1983, INDOSAT introduced international direct dialing, which is its most
important service, accounting for an estimated 90.3% of the INDOSAT’s
outgoing international telephone volume in 2000.31 While INDSOAT began
as a satellite-based company, the majority of its traffic is now carried by
submarine cable. INDOSAT controls 85 percent of the international long-
distance market in Indonesia. These factors led the government to
designate INDOSAT as one of the state-owned company targeted for early
privatization.
In October 1994 the Company completed an initial global public offering
of shares pursuant to which 103,550,000 Series B shares were sold to the
public in Indonesia by the INDOSAT and 258,875,000 Series B shares,
represented by 25,887,500 American Depositary Shares (‘‘ADSs’’) were
sold to non-Indonesian persons outside of Indonesia by the Indonesian
Government.32 The Series B shares began trading on the Jakarta Stock
31 Id. 32 Id.
22
Exchange and the Surabaya Stock Exchange on October 19, 1994. The
ADSs began trading on the New York Exchange on October 18, 1994. In
the end of 2002, Singapore Technologies Telemedia (known before as
SINGTEL) has been selected by Indonesian Government acting through
the Ministry of State Owned Enterprises to be the winning bidder for the
purchase of 434,250,000 Indonesia’s Government shares in INDOSAT,
representing 41.94 percent of the total and issued share capital of
INDOSAT.33
2. Open Competition
Successful countries will have a regulatory structure in place that will facilitate
foreign and/or private investment in telecommunications. Countries require
establishing a regulatory framework in which authority is delegated to an
independent government regulator whose mandate it is to establish and
enforce predictable and nondiscriminatory rules for market entry, licensing,
and the provision of services.
Prior to the enactment of the Telecommunication Law 1989,
telecommunications sector in Indonesia was governed by a succession of
state-owned companies. The Telecommunications Law 1989 opened the
sector to private investment. The Telecommunications Law 1989 stipulates
33 Singapore Technologies Telemedia Press Release dated 15th December 2002, at http://www.sttcomms.com/fr_homepage_1_newsroom.html (last visited April 18th, 2003).
23
that while telecommunications should be regulated and controlled by the
state, the state may license private sector participation to accelerate network
development.34
The Telecommunication Law 1989 provisions permitting private sector
participation distinguish between basic services, involving the delivery of
information without processing or modification, and non-basic services, in
which the transmitted data has been processed or modified.35 To offer basic
services private companies must obtain a license from the Indonesian
Ministry of Tourism, Post and Telecommunications (“MTPT”) and must do so
in cooperation with an organizing body. TELKOM is the organizing body for
domestic services, while the organizing body for international services is
INDOSAT. Cooperation between the private investor and the organizing body
may be through a joint venture, joint operating scheme or management
contract. By contrast, non-basic services offered by a private company need
not be made pursuant to any cooperative arrangement with an organizing
body provided that a MTPT license is first obtained to provide such non-basic
services.
34 Article 12 (2) Telecommunications Law 1989. 35 Article 12 Telecommunications Law 1989.
24
a. Indonesia’s Commitments in Telecommunications Service
The February 1997 deadline for the negotiations on basic
telecommunications resulted in the tabling of 55 offers, covering 69
governments (counting individually the Member States of World Trade
Organization included in the European Community schedule).36 This
represented a substantial improvement over the April 1996 results that
produced 34 offers covering 48 governments, also, many of the offers
submitted in April 1996 were improved, both technically and substantively,
by February.37 In the highlights of individual schedules, some of the major
substantive improvements are cited. The commitments will be annexed to
a one-page Protocol to the General Agreement on Trade in Services
(GATS) and will represent modifications of the existing schedules of
specific commitments on services.
The formal entry into force of the commitments is scheduled to be 1
January 1998. But where a participant's commitments for particular
services are to be phased in, the actual implementation would take place
on the date specified in the schedule. About 40%, or 25 of the 61
governments making offers on voice telephone services, subject these
commitments to phase in. In the highlights, phase-in-dates, where they 36 Sharon K. Black, Telecommunications Law in the Internet Age, 456 (Morgan Kaufmann Publishers 2002). 37 Id.
25
exist, are usually mentioned along with the services affected.38
Most participants, 63 of the 69 governments submitting schedules,
included commitments on regulatory disciplines. Of these, 57 committed
to the Reference Paper in whole or with few modifications. These
commitments relate to such matters as competition safeguards,
interconnection guarantees, licensing and the independence of regulators.
In April 1996, 44 governments had included regulatory commitments in
their offers and only 31 had inscribed the Reference Paper.39
In the final days of the talks, Indonesia improved its offer by deleting an
economic needs test for new entrants in domestic mobile cellular
telephone services, personal mobile cellular communication services, and
regional and national paging services. Public voice telephony, circuit
switched public data network and teleconferencing services currently
supplied by a number of suppliers with exclusive rights. However,
Indonesia committed to a policy review to determine whether to admit
additional suppliers upon the expiry of the exclusive rights: exclusivity
expires in 2011 for local service; in 2006 for long distance service, and in
2005 for international service.40 Indonesia offered competition for packed-
switched public data network services, telex, telegraph and Internet
38 WTO, Negotiating Group on Basic Telecommunications (NGBT), Reference Paper, April 24th, 1996. 39 Id. 40 WTO Secretariat, Indonesia Schedule of Specific Commitments, GATS/SC/43/Suppl.2, April 11th, 1997.
26
access services, subject to use of networks of INDOSAT and SATELINDO
for international traffic. In further offered competition in domestic mobile
cellular telephone services, paging, and public payphone services. Foreign
equity limited to 35% for all services except personal communication
services that require joint venture with state-owned company.41 Indonesia
committed to the Reference Paper on regulatory principles.
Foreign entities may participate in telecommunications-related business by
establishing an Indonesian company that has the status of a foreign
investment company (“PMA Company”). Certain foreign shareholding
limitations apply to PMA Companies engaged in the telecommunications
sector. Under Government Regulation Number 20 Year 1994 (“GR 20”),
there are two types of PMA Company, namely, a 100% foreign-owned
PMA Company and a joint venture PMA Company.
Presidential Decree Number 118 Year 2000 (commonly known as the
Investment Negative List) (“Decree 118”) determines that the
telecommunications sector is open for foreign investment through a joint
venture arrangement. Although Decree 118 does not set out a specific
permitted maximum foreign shareholding in the telecommunications
sector, GR 20 stipulates that the minimum local shareholding in a joint
venture PMA Company is 5%. A strict legal interpretation of GR 20
41 Id.
27
indicates that the maximum percentage of foreign investment in the
telecommunications sector is 95%.
However, as a matter of policy, the government has in the past limited
foreign investment in the telecommunications sector to a maximum of
only 35%, with the exception of investment in the multi-media sector
which enjoys a maximum of 95% and in a publicly listed company such as
the recent divestment tender of 41.94% of shares owned by the
government in INDOSAT which was won by Singapore Technologies
Telemedia.
To date, the government has not adopted a formal position on the issue
of maximum foreign ownership and it is in practice, therefore, determined
on a case-by-case basis.
Ambiguity with respect to permitted foreign ownership in a company
engaging in the business of operating a telecommunications network or
providing telecommunications services may have a negative impact on
efforts to increase investment in the telecommunications business and
industry. Foreign investors need a formal assurance from the government
that, within certain sensible limits, their investments in this sector will not
be restricted.
28
b. The Removal of Organizing Bodies
The Telecommunications Law 1999 eliminates the concept of state-owned
companies as Organizing Bodies, thus ending TELKOM's status as one of
the Organizing Bodies for the industry based on the Telecommunications
Law 1989. However, the transitional provisions of the Telecommunications
Law 1999, generally provides that the rights granted by the Government
to the Organizing Body for a certain period will continue until the end of
the stipulated period, unless otherwise agreed between the Government
and the Organizing Body.42 Upon the full implementation of the
Telecommunications Law 1999, TELKOM will be required to obtain the
requisite licenses to provide telecommunications services. This is further
clarified in the MoC Decree Number KM20 Year 2001 and MoC Decree
Number KM21 Year 2001.
The Telecommunications Law 1999 specifically prohibits monopolistic
practices and unfair competition among telecommunications operators.43
The role of the Government is to become that of an impartial policy maker
and supervisor of telecommunications sectors.
42 Article 61 Telecommunications Law 1999. 43 Article 10 Telecommunications Law 1999.
29
The Telecommunications Law 1999, classifies telecommunications
operations into three service categories:44 (i) telecommunication network
operations, (ii) telecommunications services operations, and (iii) special
telecommunications operations. Under these categories,
telecommunications network operation and/or provision of
Telecommunications services may be carried out by legal entity
established for the purpose on the basis of applicable regulation. These
legal entities include state-owned enterprises (BUMN), regional business
companies (BUMD), privately owned companies, and cooperatives.45 On
the other hand, individuals, Government institutions, special agencies, and
legal entities may conduct special telecommunications operations.
Licenses are required for each category of telecommunications service.
A telecommunications network provider is licensed to own and/or operate
a telecommunications network.46 Telecommunications service providers
are licensed to provide services and are not required to own a network for
such purpose.47 Such providers may therefore choose to either construct
their own network or lease those belonging to a network operator. Special
telecommunications licenses are for providers of private services or
purposes relating to broadcasting and national security interests.48
44 Article 7 Telecommunications Law 1999. 45 Article 8 Telecommunications Law 1999. 46 Article 9 (1) Telecommunications Law 1999. 47 Article 9 (2) Telecommunications Law 1999. 48 Article 9 (3) Telecommunications Law 1999.
30
Currently, TELKOM provides local and domestic long distance
telecommunications services based on Government Regulation Number 25
Year 1991 on the establishment of Perusahaan Perseroan (Persero)
TELKOM, which permits TELKOM to provide basic and non-basic
telecommunication services. The existing KSO Investors also hold licenses
for providing telecommunications services in joint operation with TELKOM
and to carry out their activities as a foreign investment company.
MoC Decree Number KM 20 Year 2001 implements the provisions in the
Telecommunications Law 1999 with regard to the new category of
telecommunication network operations, and MoC Number KM 21 Year
2001 implements the Telecommunications Law 1999 with regard to the
new category of telecommunication services operations. Under the
transitional provisions of such decrees, operators that were already
licensed at the effective date of the decrees on May 31, 2001 are required
to adjust their licenses under the new licensing regime not later than May
31, 2002. TELKOM and INDOSAT have already submitted its application
for the new licenses.
31
c. The Termination of Exclusive Rights
Indonesia as a member of WTO has a commitment in telecommunications
services. Indonesia committed to terminate the exclusive rights:
exclusivity expires in 2011 for local service; in 2006 for long distance
service, and in 2005 for international service.49 In 1995, TELKOM was
granted a monopoly to provide domestic local fixed line
telecommunications services until December 31, 2010 and domestic long
distance telecommunications services until December 31, 2005. INDOSAT
and SATELINDO also were granted a duopoly for exclusive provision of
basic international telecommunications services until 2004.
The Telecommunications Law 1999 did not expressly terminate the
existing exclusivity rights of TELKOM, INDOSAT and SATELINDO. In order
to uphold the undertakings of TELKOM and INDOSAT during their
respective initial public offerings and to maintain Indonesia's credibility
among foreign investors, the Government has announced that termination
of the exclusivity rights is to be subject to agreement between the
relevant incumbent and the Government, whereby the incumbent will be
eligible for an amount of compensation to be agreed between the
incumbent and the Government.
49 WTO Secretariat, Indonesia Schedule of Specific Commitments, GATS/SC/43/Suppl.2, April 11th, 1997.
32
On August 1, 2001, the Government, through the DGPT, announced the
early termination of TELKOM's exclusivity rights for local and domestic
long distance telecommunication services. The announcement stated the
Government's intention that INDOSAT will receive a license to provide
local telephone services from August 2002 and a license to provide
domestic long distance telephone services from August 2003, and that
TELKOM will receive a license to provide IDD services from August 2003.
The Government prematurely terminated the exclusivity rights of TELKOM
and INDOSAT in 2001, through MoC Decree Number KM 21 Year 2001 on
Operation of Telecommunications Services. The negotiations with the
Government with regard to compensation for the early termination of its
exclusivity rights have yet to be concluded. Prospective new operators,
including TELKOM and INDOSAT, will be required to satisfy technical
requirements following an inspection by the DGPT of their proposed
network, in order to secure the requisite operational licenses.
33
D. Conclusions Privatization in the telecommunications sector is a growing international
phenomenon. Unlike the United States, telephone service in the vast majority of
countries has long been provided exclusively by government-owned and
operated entities under monopolistic market structures.
The classic problem in develop country is the limited ability of the government to
provide sufficient funds to finance the development of the telecommunications
sector. The initial approach of the Indonesian government to resolve this issue
was by partial privatization of the shares of TELKOM and INDOSAT, which was
achieved by listing the companies’ shares in the local and international stock
exchanges, in 1994 and 1995 respectively. Privatization of Indonesian
telecommunications state-owned companies such as TELKOM and INDOSAT is a
key component of the Indonesian government’s economic policy.
Indonesia as a member of WTO has a commitment in telecommunications
services. Indonesia committed to terminate the exclusive rights: exclusivity
expires in 2011 for local service; in 2006 for long distance service, and in 2005
for international service. The Government prematurely terminated the exclusivity
rights of TELKOM and INDOSAT in 2001, through MoC Decree Number KM 21
Year 2001 on Operation of Telecommunications Services.