Telecommunications reform in Indonesia: Achievements and challenges

Abstract

Telecommunications reform in Indonesia has occurred in two phases. In the first, from 1989, private participation was permitted in the fixed-line sector through public–private partnership (PPP) arrangements. In the current reform phase, which began in 1999, a duopoly structure was created in fixed-line sector operations, accompanied by a pro-competitive regulatory regime. The first reform phase was not successful. This paper explains that contract-based PPP programs provided only short-term solutions to the problem of lack of capacity. The more wide-ranging 1999 reforms acknowledge the importance of competition and a sound regulatory regime in telecommunications reform, but there are still limits on market entry, and the problems of lack of interconnection and network development disparities remain.

Notes

¹ ‘Telecommunications’ and ‘telecom’, unless otherwise specified, are used as interchangeable terms in this paper.

² Under the Indonesian legal system, the Telecommunications Act outlines only the basic principles, and authorises detailed implementation measures to be determined by the designated ministry (the Ministry of Communications) through governmental, ministerial and DG PosTel (Directorate General of Posts and Telecommunications) administrative decrees, depending on the nature of the subject.

³ Teledensity measures the percentage of inhabitants connected to a telephone line (ITU 1998).

⁴ While for the convenience of discussion we use the passage of the 1989 Act to denote the beginning of the first reform phase, the actual reform process did not start until 1991, with the conversion to limited liability corporate form (Persero), and partial privatisation, of the two state-owned incumbents.

⁵ Satelindo, a joint venture between Telkom (30%), Indosat (10%) and the Bimagraha Group (60%), started operations in 1995 by taking over three domestic satellites previously operated by Telkom. Although the true reasons for the government's decision to allow a second international operator, and for the concession made by Telkom, are unclear, some commentators believe that Bambang Trihatmojo, founder and major shareholder of the Bimagraha Group and second son of then president Soeharto, played a vital role in the process (Asia Week, 12/4/1996; Asia Times, 31/10/2003). One thing is clear, though: the intention was not to introduce competition in the international service market. In fact, Indosat and Satelindo are bound by cross-ownership, and apply the same set of retail prices decided by the government.

⁶ Indonesia had implemented a cross-subsidy scheme in which regulated local call tariffs, including connection, monthly rental and per-call charges, were set below actual costs, and the losses were subsidised by revenues from above-cost long distance and international tariffs. While Telkom itself was not involved in the provision of international services at that time, it nonetheless shared the revenues through collecting interconnection fees from the two international service carriers.

⁷ GSM (Global System for Mobiles) is a second-generation international digital standard for cellular phone communications.

⁸ At one point during the dispute, AriaWest evacuated a substantial number of its staff (mostly former Telkom employees) from its head office in Bandung to Jakarta, which resulted in Telkom's unilateral cancellation of the KSO contract with AriaWest; <www.laksamana.net/vnews.cfm?ncat=30&news_id=1606> (viewed 26/5/2005).

⁹ AT&T, the parent company of the foreign operator (MediaOne BV) involved in Aria-West, announced in 2001 that it planned to scale down its existing investment and would not consider any future involvement in Indonesia; <www.laksamana.net/vnews.cfm?ncat=30&news_id=1606> (viewed 26/5/2005).

¹⁰ Each KSO operator is able to retain the charges for long distance calls made from its KSO region (a ‘sender keep all’ or SKA arrangement), but the revenues must be shared with Telkom in the form of MTR and DTR contributions.

¹¹ The per-call charges for outbound international calls are collected by Indosat in the first instance; payment is then made by Indosat to Telkom or the KSO partner for providing the originating/terminating services at a wholesale rate. Similar structures apply for mobile calls.

¹² Industry Canada Market Report, dated 5/9/2004, available at <strategis.ic.gc.ca/epic/ internet/inimrri.nsf/en/gr124567e.html> (viewed 26/5/2005).

¹³ US Foreign Trade Summary 2004, available at <www.ustr.gov/assets/Document_Library/Reports_Publications/2005/2005_NTE_Report/asset_upload_file472_7502.pdf> (viewed 13/4/2005).

¹⁴ Item 41, Memorandum of Economic and Financial Policies, Letter of Intent of the Government of Indonesia to the IMF, 31 October 1997; available at <www.imf.org/external/np/loi/103197.htm> (viewed 17/8/2005)

¹⁵ Item 14, Memorandum of Economic and Financial Policies, Letter of Intent of the Government of Indonesia to the IMF, 13 November 1998; available at <www.imf.org/external/np/loi/1113a98.htm> (viewed 18/8/2005).

¹⁶ Indonesia's WTO telecom commitments for fixed-line services (WTO 1997) are to eliminate exclusivity for local, long distance and international services in 2011, 2006 and 2005 respectively; ‘… the Government will conduct a review of policy with respect to whether to permit additional suppliers of such services upon the expiry of this period’.

¹⁷ According to Indonesia's Letter of Intent to the IMF dated 20 January 2000, all the arrangements mentioned above were to be completed by the end of 2000.

¹⁸ CDMA (Code Division Multiplex Access) 2000 1X is a 2.5 generation (2.5G) digital cellular communications technology that supports higher data transmission bandwidth (speed) than GSM (2G) technology, but does not reach the minimum bandwidth requirement set by the ITU for third generation (3G) mobile services.

¹⁹ Industry Canada Market Report, dated 26/6/2003 (information supplied by STATUSA), available at <strategis.ic.gc.ca/epic/internet/inimrri.nsf/en/gr117158e.html> (viewed 22/8/2005).

²⁰ In its tendering document, Singapore Technologies Telemedia (STT) explicitly expressed its commitment to install 759,000 fixed telephone lines in Jakarta and Surabaya by 2010.

²¹ Although STT's shareholding in Indosat does not exceed 50%, STT is by far the largest single shareholder and thus is able to control the company's operations. This status has been acknowledged by the US Federal Communications Commission (FCC) in a separate market position assessment concerning STT. See FCC, ‘Order and Authorization in the Matter of Global Crossing Ltd. and GC Acquisition Ltd Applications for Consent to Transfer Control, File No. DA 03-3121, at 7′; available at <hraunfoss.fcc.gov/edocs_public/attachmatch/DA-03-3121A1.pdf> (viewed 9/8/2005).

²² ‘Dwiwarna’ (two colours) is the term commonly used to denote the Indonesian national flag.

²³ Of note is that the British government relinquished its golden share in British Telecom in 1997. Furthermore, the European Court of Justice (ECJ, Case C463/00 and C-98/01) ruled in 2003 that any special share held by the government in public utilities without objective criteria for the exercise of the veto power is in violation of the free movement of capital principle stipulated in the Treaty Establishing the European Community (the EC Treaty).

²⁴ The combined market share (as a percentage of total subscriptions) of Telkomsel (Telkom majority owned), Satelindo (Indosat 100% owned) and IM3 (Indosat 100% owned) reached 81.7% at the end of 2003 (DG PosTel 2004b).

²⁵ Instead of initially refusing interconnection, which would be difficult to justify, one strategy Telkom used to delay interconnection was to require access seekers to go though a complex and lengthy negotiation process. For instance, Telkom applies a three-step procedure for Indosat's interconnection requests. The first step is to request a technical compatibility test, which is followed by negotiations with Telkom's head office regarding the tariff and technical specifications. After obtaining in-principle approval from the head office, Indosat needs to negotiate again with the Telkom regional office (or KSO partner) in the area where actual physical interconnections are taking place. Indosat reports that the first interconnection negotiation took 24 months to complete (Indosat 2005).

²⁶ Parikesit et al. (2004) report that the 2003 development target for Telkom set by DG Pos-Tel was to provide telephone access to 7,500 rural villages. In the end less than half (3,010) of the target was met.