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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

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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.

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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).

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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

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(“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.

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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).

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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).

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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.

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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

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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

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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.

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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.

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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).

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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.

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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.

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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.

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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.

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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.