The Wall Street Journal Interactive Edition -- September 7, 2000
Business and Finance - Asia
Indonesia's State Telecom Company
Faces Call to Solve Contract Dispute
By SIMON MONTLAKE
Dow Jones Newswires
JAKARTA, Indonesia -- State-owned PT Telekomunikasi
Indonesia is under increasing pressure to settle a longstanding
dispute with five foreign operating partners, at least one of which is
threatening a legal confrontation over alleged breaches of contract by the
telephone company.
Although the threat from Indonesia's PT AriaWest International -- which
is part-owned by a unit of U.S.-based AT&T
Corp. -- to Telkom isn't new, industry analysts say Indonesia's decision to
phase out Telkom's domestic fixed-line monopoly is forcing the pace of
negotiations.
The spat between Telkom and the five partners, known as KSOs, comes as
Indonesia prepares to open up its telecom sector this month to competition
in a bid to lure more foreign capital. Indonesia's new telecommunications
law is scheduled to take effect Friday, and will set the stage for the end
of a duopoly of Telkom and sister company PT Indosat in the next couple of
years.
But the KSO row is overshadowing this process, as angry partners charge
that Telkom -- and indirectly the Indonesian government -- has breached its
contractual obligations.
These include failing to increase telephone tariffs in line with an
agreed formula, ceding management control and maintaining exclusive rights
to develop and operate services in five designated KSO regions.
Failure to defuse the row could further damage Indonesia's debt rating
if those KSOs with political risk insurance coverage use those policies by
claiming that Indonesia's actions amount to expropriation.
AriaWest, for example, says 40% of its $284 million loan to its
partnership with Telkom comes from a syndicate of foreign banks and is
covered by the Multilateral Insurance Guarantee Agency, an arm of the World
Bank. And International Finance Corp., another World Bank unit, is both an
investor and creditor of another Telkom partner, PT Pramindo, which is
part-owned by France Telecom SA.
AriaWest last month wrote a formal letter to the government, which owns
66% of Telkom, protesting multiple breaches of its contract. Both sides
have 90 days to resolve the dispute before seeking arbitration. But
prospects for a settlement look dim, according to Steve Dowling, a
director of AriaWest. He accuses the government of having a "belligerent
attitude"
toward AriaWest's grievances. Andrew Sriro, a lawyer for AriaWest, said,
"If there's not resolution on the [90-day] workout, then we're going to
have to arbitrate."
Analysts say other KSOs, while taking a more cautious approach than
AriaWest, may be ready to ride on its coattails and opt for a legal
confrontation with Telkom.
Nippon Telegraph & Telephone
Corp., Australia's Telstra
Corp. and Cable & Wireless Communications PLC of the United Kingdom are
among the other
foreign investors in KSOs.
Telkom's head of investor relations, Setiawan Sulistyono, said the
company aims to resolve the KSO issue by year end, as agreed between
Indonesia and the International Monetary Fund. "The government is acting as
mediator in the talks ... we are trying to discuss everything," he
said.
But executives say talks are deadlocked as Telkom refuses to consider a
proposal to convert the revenue-sharing operations into joint-venture
companies. "Telkom prefers to maintain the original KSO structure, but I
don't believe that's possible," said Robin Russell, director of PT Mitra
Global Telekomunikasi, which is 20%-owned by Telstra and 15%-owned by
NTT.
Mr. Setiawan declined to comment on the plan to create a joint-venture
company, which analysts say could eventually be come an alternative service
provider when Telkom loses its monopoly status in a couple of years. Such a
plan could include giving Indosat a stake in a reconstituted KSO structure,
they say.
Shares in Telkom closed unchanged Wednesday at 3,030 rupiah (36 U.S.
cents).
The AriaWest-Telkom row echoes previous disputes between Indonesia's
state electricity utility, PT Perusahaan Listrik Negara, and U.S. companies
contracted to build power plants. PLN later refused to use the power
plants, citing excessive costs.
The U.S. ambassador to Indonesia, Robert Gelbard, recently threatened to
seize Indonesian assets in the U.S. if PLN fails to pay a $290 million
insurance claim for failure to honor a supply contract with Midamerican
Energy Holdings Co.
Such disputes are deterring foreign investors at a time when the country
is in desperate need of capital to nurture a nascent economic recovery.
"The threat is negative for Telkom and for the whole sector," said Fred
Thomas, head of research at ABN Amro.
Foreign investors set up the joint operating companies with Telkom in
1995 as a way of getting into the tightly controlled telecom market. The
companies agreed to pay Telkom 30% of their revenues for the right to
operate fixed-lines.
But the collapse of Indonesia's economy three years ago and the rupiah's
sharp depreciation halted the installation of new lines and caused revenues
to plunge. Still, not all the KSOs are in risk of default. And some foreign
telecom firms are reluctant to turn up the heat on Indonesia just as the
market is being deregulated. "In telecoms there are many prospects of
development, many other ways to spend our resources than moving into
arbitration," said Gil Vaillang, managing director of PT Pramindo.
Tjandra Kartika, regional telecom analyst for GK Goh in Singapore, plays
down fears of a protracted dispute and continues to recommend Telkom's
stock. Mr. Tjandra argues that raising telephone tariffs would help defuse
the row with the operating partners.
However, reform of Indonesia's tariff formula has been repeatedly
delayed. A proposed 21.6% increase in tariffs this year and further
increases over the next two years has been opposed by lawmakers.
Write to Simon Montlake at
simon.montlake@dowjones.com
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