Indonesia Telecommunication Industry

As the fourth most populous country in the world with approximately 245 million people, Indonesia would be a great potential market for telecommunication industry. Before 1999, domestic services were monopolized by TELKOM, while INDOSAT control international service. Through Law No 36 1999[1], government abolished the exclusive rights for both operators, and has been trying to promote fair competition. Although operators were granted full service and network provider rights, it seemed to be a priority shift in telecommunication development from fixed to mobile.

During the golden age of economic growth in 1990s, Indonesian telecommunication industry was growing remarkably. Along with monopoly rights, PT Telkom was increasing its revenues due to the high usage growth. In 1995, the monopolist successfully floated 25 percent of its shares on the Jakarta Stock Exchange, where they rapidly became one of the exchange's blue-chip stocks which covered more than 50 percent of stock exchange capitalization. The Indonesian government (GOI) maintained its ownership of the remaining 75 percent of the shares.[2] In order to respond the huge demand, the company needed expand the fixed-line network to recruit foreign technical expertise and capital. The company established the joint operation scheme in 1994. The number of phone users jumped exponentially, a host of domestic companies was established, and dozens of foreign companies entered Indonesia to supply the country with equipment, technology, and services.

In the early of 1990s, the first Indonesian liberalization steps came into a partial privatization of the sector's two main state-owned enterprises (SOEs)—PT Telkom and PT INDOSAT. Between 2001 and 2002, the Government sold additional shares of PT Telkom to private investors, although strong resistance from their employees who request the state ownership at 51.2 percent. Conversely, the government sold a strategic 41.9 percent share of PT INDOSAT to Singapore Technologies Telemedia (STT) through an open competitive process, increasing INDOSAT's private ownership to a majority 76.9 percent share.[3]

The economic crisis 1998 hit the sector hardly, however. Many users found themselves unable to pay their phone bills. The telecommunication expansions in the 1990s were caught with un-hedged dollar-denominated loans that made their revenue streams fell in dollar terms when the Rupiah plummeted. The subscriber base dropped by approximately 15 percent, while uncollectible bills climbed by one-third or more. Since early 1998, most cellular companies had concentrated on maintaining the condition of their networks and trying to clean out and rebuild their customer bases.

Successive Indonesian administrations in 1998 had taken a common view that privatization was necessary, not only as part of revenue-generating efforts to bridge the state budget deficit but also to attract new portfolio investment, along with additional capital investment, management skills and corporate-governance practices to improve the poor performance of state companies. Private investors can turn these assets into profitable enterprises that create more jobs and pay more taxes to the state.

IBRA was set up to manage assets and loans it took over from the collapsed banking system after a $60 billion financial sector bailout following the 1997-1998 Asian financial crises.[4] In 2002, the government sold its majority stakes in two banks and in the international telecommunications company--INDOSAT. The sale of state-owned enterprises and assets aggravated the domestic debt burden. The privatization program targeted of Rp6.5 trillion, collecting Rp7.7 trillion. Conversely, according to INFID (2003), this divestment gained fewer revenues compared to the high costs of servicing the government bonds that had been issued to recapitalize those banks.

Following the privatization policy as generic subscription of IMF[5], government approved for investment proposals reached $14.6 billion in 2003, $9.8 billion in 2002, an adjusted $9 billion in 2001, and $16 billion in 2000. While the traditional large investor, such as Asia, North American and Europe declined, groups of investors from Tanzania and Mauritius was taking advantage of special bilateral tax treaties with Indonesia proposed a third of the $14.6 billion in approved investments purchasing mostly state-owned companies, which was INDOSAT became one of them. In fact, most of this investment was never realized.

In 2006, eight years after the financial crisis, the telecommunication industry was getting revived. Fixed line subscribed was growing to 30%, while mobile subscribed was dramatically increasing to 87.2%. There were new 45 Internet service providers (ISPs) came to Indonesia, which dominated by five providers with 10,000 subscribers of total 200,000 Internet subscribers and 670,000 total users in Indonesia. Approximately 75 percent of the telecommunication users were in Jakarta, 15 percent were in Surabaya, and 5 percent were in other Javanese cities, leaving roughly 5 percent in other provinces. Among the five telecommunication operators, 90% of the markets belonged to the big three, i.e. INDOSAT, Telkomsel, and Excel. Telkomsel admitted having 60 million customers. INDOSAT’s customers were around 24 million, while Excel’s customers were around 12 millions. At fixed line telecommunication, Telkom was the only one operator, with 100 million customers. With an average of only 4,500 dial-up subscribers per service provider, and the need to pay for bandwidth in US dollars while subscribers pay in rupiah, it was difficult for most of these ISPs to make money.[6]
[1] typeapproval.or.id/appforms/Law36.1999 _DGPT_.pdf
[2] en.wikipedia.org/wiki/Telkom_Indonesia see also
Susan Eick, A History of Indonesian Telecommunication Reform 1999-2006, Hawaii International Conference on System Science – 2007, csdl2.computer.org/comp/proceedings/hicss/2007/2755/00/27550067c.pdf
[3] “Telecommunications in Indonesia and Its commitment in WTO, Ministry of Industry and Trade and DG for Telecommunication RI in collaboration with ESCAP/ITU/WTO.
[4] Indonesia Bank Recovery Agency. One of the last remaining tasks for the Indonesian Bank Restructuring Agency (IBRA) before it is wound up at the end of next month is selling Bank Permata, the country's 10th-largest bank. For further discussion on IBRA, see faculty.insead.edu/lasserre/emdc/IBRA.pdf
[5] Trade Policy Review, 7 December 1998, www.wto.org/english/tratop_e/tpr_e/tp96_e.htm
[6] The Indonesian Telecom Industry at a Crossroad, www.usembassyjakarta.org/econ/Indo-Telecom.htm