Damaging allegations and Indosat's beating

Friday, June 08, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The logic of sound financial management dictates that a company whose long-term debts and capital expenditures are denominated mostly in U.S. dollars but whose revenues are mostly in rupiah should hedge a good portion of its foreign currency exposure to minimize losses from exchange rate fluctuations.

But what should have otherwise been regarded as simply normal derivative transactions have turned into another wave of utterly bad publicity against PT Indosat and caused negative market sentiment for the country's second largest telecommunications company, with US$3.8 billion in assets and $585 million in foreign debts.

The headline stories of several major newspapers on Tuesday -- the day Indosat held its annual shareholders meeting -- screamed as if "financial scandals" related to hedging transactions had occurred within Indosat between 2004 and 2006, allegedly causing cumulative losses of Rp 653 billion (US$72.5 million).

The front-page stories were based on statements made by Dradjad H.Wibowo, a member of the House of Representatives finance commission, at a working session with the government on Monday.

The meeting was also attended by Finance Minister Sri Mulyani Indrawati, Bank Indonesia senior deputy governor Miranda Goeltom and chairman of the capital market watchdog Fuad Rahmany.

Even though what Wibowo referred to as potentially scandalous hedging transactions had been fully disclosed in Indosat's semester and annual financial statements over the past three years, many reporters still snapped at the statement as completely hot "revelations".

Given his integrity, Wibowo's remarks might have simply been motivated by his great concern for the good of Indosat. He might have simply been exercising his right to scrutinize the company.

After all, the government holds about 14 percent of Indosat, with Singapore's Temasek owning through its subsidiary Singapore Technologies Telemedia almost 42 percent and the investing public the remaining 44 percent.

But in light of the string of bad publicity against Indosat and Temasek over the past few months and the rumors about a conspiracy between national vested interests and a Russian company planning to take over Singapore's shareholding in Indosat, one cannot help but wonder why Wibowo made a big issue out of the derivative transactions only now.

The details of the derivative transactions (cross currency and interest rate swap contracts) have always been fully disclosed in the company's financial statements since 2004, which are audited by a local affiliate of Ernst & Young.

Why did Wibowo not first thoroughly analyze Indosat's annual reports and, if necessary, check the documents of the company's derivative transactions before he blew the matter out of proportion?

Given his position and since Indosat is listed on the Jakarta and New York stock exchanges and is thus subject to tough disclosure requirements and auditing standards, Wibowo could have easily obtained all the necessary information from Indosat's investor relations department to verify the transactions.

Certainly, all officials, including tax director general Darmin Nasution and chief of the capital market watchdog Fuad Rahmany and government representative in the Indosat board of commissioners Roes Aryawijaya, when asked to comment on Wibowo's allegations, said they would look into the issue.

Their replies might have been made simply to appease the inquisitive mass media. But even if they went ahead with special investigations and eventually found nothing legally wrong with the transactions, the damage had been done to Indosat and its management.

On Tuesday, for example, the price of Indosat shares fell almost 3 percent.

The news stories on the alleged derivative transaction "scandal" simply added to the seemingly endless string of bad publicity and public-opinion harassment of Indosat.

The anti-monopoly watchdog (the Business Competition Supervisory Commission or KPPU) is now investigating Indosat for monopoly practices it allegedly committed in collusion with Telkomsel in cellular services.

Temasek owns 56 percent of the SingTel Group, which in turn holds a 35 percent equity stake in the government-controlled Telkomsel, the country's largest mobile phone operator.

Late last month, the University of Indonesia's Institute for Economic and Social Research announced the findings of its study on cellular services in Indonesia, which essentially said that the market mechanism had not optimally functioned in the cellular business.

This industry has been dominated by Telkomsel and Indosat.

Even though the institute asserted that none if its findings had solidly proved any collusion between the two mobile operators, the Post and Telecommunications Directorate General seemed to have joined the fray.

Earlier, in April, political analyst Mochtar Pabottingi came out with a 29-page analysis concluding that Temasek's acquisition of Indosat's shares caused the government billions of dollars in losses and jeopardized the secrecy of the country's defense and security sectors.

What a crowd of investigators Indosat is now dealing with: The anti-monopoly watchdog, the telecommunications regulatory body, the Tax Directorate General, the capital market watchdog and a special audit committee.

Now that all the allegations have been made public, the controversy cannot simply be allowed to die down and quietly disappear by itself from the mass media agenda.

The capital market watchdog should see to it that all investigations now underway on Indosat be conducted properly according to schedules and their conclusions -- whatever the findings may be -- should be immediately announced. Otherwise the devastating allegations will continue to linger on and loom over Indosat, damaging its corporate image, credibility and the trust of the investing public.

Letting the controversy linger on without any final clarification once and for all for those allegations would also erode the public's trust in the integrity of the Jakarta stock exchange, the Indonesian Business Competition Supervisory Commission and even Ernst & Young, one of the world's major accountancy firms.

The investing public would be worried that if all those bad things alleged to have been committed by Indosat did really occur at such a blue-chip company, which is subject to such tough disclosure requirements and auditing standards, what would then be the quality of corporate governance at other listed companies?

Managing the problems of surging capital inflows

Monday, May 14, 2007 Vincent Lingga, The Jakarta Post, Jakarta

President Susilo Bambang Yudhoyono, Vice President Jusuf Kalla, chief economics minister Boediono and Bank Indonesia Governor Burhanuddin Abdullah asserted Friday the economy is resilient enough to weather any sudden decline in the risk appetite of foreign portfolio investors, as the rupiah fell almost 1.5 percent after a few months of steady appreciation.

Yudhoyono summoned his economics ministers for a special briefing Friday afternoon, Kalla convened a special news conference after Friday's Islamic prayer services and Boediono, Burhanuddin, Finance Minister Sri Mulyani Indrawati and other economics ministers held a breakfast meeting earlier Friday, all to discuss the same issue: the problems of burgeoning capital inflows.

They all played down the risks of sudden reversals of foreign portfolio (hot) capital inflows, citing the country's foreign reserves of US$49.2 billion, strong economic fundamentals, expanding exports, a higher pace of investment and low inflation.

The rupiah gained a lot in recent months on the back of short-term capital inflows into local stocks, bonds and money market instruments, pushing the local unit to a one-year high last Thursday, while the Jakarta Stock Exchange boomed to an all-time high of over 2,000.

So, why the sudden uproar among the top economic policy-makers and economic management team?

It seems to have been set off by Sri Mulyani's statement Thursday, which was headlined by several newspapers Friday. The finance minister, who had just returned from a May 5 meeting of East Asian finance ministers and central bank governors in Kyoto, Japan, said the surge in capital inflows to Asia in recent months was similar to those that caused the financial crisis that started in Thailand in mid-1997.

What Sri Mulyani told the press was, by and large, the concerns of the Kyoto meeting, which consequently adopted a basic agreement to pool almost $3 trillion in foreign reserves to prevent the kind of currency runs that led to the Asian financial crisis a decade ago.

Many seemed to read too deeply into those remarks, apprehensive that the current situation was as vulnerable to speculative attacks on the rupiah as that in mid-1997. Hence, the 1.5 percent decline in the rupiah on Friday.

Many in the government appeared shocked by Sri Mulyani's remarks, criticizing what they saw as an exaggeration of the dangers of capital inflows.

True, the condition of Indonesia's economy and the capacity of the country's state and economic institutions are now much stronger than in 1997, but that does not negate the threat of a sudden change in the sentiment of foreign portfolio investors.

Bank Indonesia, like the central banks in most other Asian countries, has been struggling with the problem of steadily surging short-term capital inflows, wondering what to do with these reserves.

The accumulation of reserves, derived from hot money rather than foreign direct investment, is not an inherent sign of strength, but actually represent deep-seated structural imbalances, which policy makers need to address.

This is the message Sri Mulyani wanted to convey. Under the surging capital inflows and rising foreign trade surplus, Bank Indonesia, in a bid to keep the rupiah rate competitive, must buy up dollars, thereby fueling money supply growth. This loose liquidity is driving up asset prices and potentially stoking inflationary pressures.

As Frederic Neumann, an economist at HSBC bank in Hong Kong, recently observed, "by most yardsticks Asian central banks have long surpassed the levels of reserve holdings deemed sufficient to counter a potential external payments crisis".

Indeed, as Sri Mulyani noted last week, the main macroeconomic risks facing the region, including Indonesia, at present are the consequences of unmanageable balance of payments surpluses, which might spread Asian crisis-style through the region.

What the government is encountering now is excess financial market liquidity, not economic liquidity.

Yet, making Indonesia more vulnerable to currency speculators is that while most of the foreign hot money flowing into other East Asian countries is parked in stocks, the bulk of recent inflows to Indonesia went mostly into fixed income and money market instruments.

The excess liquidity Bank Indonesia is now coping with is tremendously huge. As of last month there was more than Rp 250 trillion ($27.8 billion) of private funds, including Rp 45 trillion of foreign hot money, invested in central bank debt instruments (SBI).

In addition, another Rp 77 billion of foreign money was parked in government bonds and billions more in stocks. This is quite a mountain of ammunition that could immediately be used to attack the rupiah anytime the risk appetite of foreign portfolio investors falls.

The central bank has said it has the leverage to intervene in the market to prevent too much market volatility, pointing out that prudent banking regulations and economic reforms over the past few years would minimize the impact of sudden reversals of capital inflows.

However, such assurances are meaningless unless the real business climate is conducive for attracting new investment, particularly foreign direct investment, allowing for a high rate of bank lending expansion.

Pressure mounts for Temasek to divest stake in Indosat

Friday, May 11, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Remember Mexico's Cemex, the world's third largest cement group, which sold its 25 percent equity stake in PT Semen Gresik, Indonesia's largest cement company, to local conglomerate Rajawali in mid-2006 when Indonesia's cement market was enjoying robust growth?

Cemex, a financially strong company with operations in almost 50 countries, felt compelled to divest itself of Semen Gresik after suffering through more than five years of smear campaigns, a string of lawsuits and worker demonstrations orchestrated by renegade management at Semen Gresik's units, in collusion with politicians and senior officials.

The whole experience was quite disheartening for Cemex because it acquired, through an international competitive bid, the Semen Gresik shares by paying a premium price of more than 125 percent in October 1998, when Indonesia was still mired in political and economic crisis and shunned by most foreign investors.

A similar campaign seems to have been mounted over the last few months to discredit Singapore's government-owned Temasek, which acquired, through its subsidiary ST Telemedia, 42 percent of PT Indosat, Indonesia's second largest mobile phone operator.

Temasek won that stake through an international competitive bid in late 2002 by paying a premium price of more than 50 percent.

No one is sure who is behind the escalation of the negative information campaign against Temasek, but the bad publicity has increased, especially since October 2006, a few weeks before Russia's Altimo telecommunications investment company opened an office in Jakarta.

Altimo's representative in Jakarta, Soeharto, has repeatedly denied his company would resort to such dirty tactics, but he did confirm Altimo's commitment to investing up to US$2 billion in Indonesia's mobile telephone market.

Last October, the federation of trade unions at Indonesia's state companies lodged a complaint against Temasek with the Business Competition Supervisory Commission, accusing the Singapore company of violating the anti-trust law by dominating the market and engaging in price-fixing practices in collusion with PT Telkomsel.

Temasek also owns 35 percent of state-controlled Telkomsel, the largest mobile phone operator in Indonesia, through its subsidiary Singapore Telecommunications Ltd.

Copies of confidential documents profiling Temasek, its operations and investment strategy overseas, and providing technical briefings on the alleged monopolistic practices by Indosat, were circulated to trade union leaders and several analysts and newspaper editors critical of the Singapore firm.

Several local media ran news stories quoting analysts and politicians denouncing what they called Temasek's control of Indonesia's mobile phone market. In essence, they argued that foreign ownership of such a strategic company as Indosat was a threat to Indonesia's security and defense and the safety of databases.

Political analyst Mochtar Pabottingi came out with a 29-page analysis last month concluding that Temasek's acquisition of Indosat's shares caused the government billions of dollars in losses and jeopardized the country's defense and security sectors.

Pabottingi urged the government to buy back the Indosat shares from Temasek.
However, only one week after the release of his analysis, the country's largest telecom company -- state-controlled PT Telkom -- disclosed that its subsidiary, Telkom International, would team up with Singapore Telecommunication Ltd. (Singtel) to expand operations overseas, notably in data communications in Asia.

Metro TV ran a discussion program with three observers, all critical of Temasek's shareholding in Indosat, on Tuesday evening. Their message was similar to Pabottingi's views.

Curiously though, a counter-campaign suddenly sprang up against Altimo. Copies of documents allegedly linked to Altimo and reprints of Russian Tribuna newspaper stories circulated in Jakarta last month.

They revealed what was alleged to have been a conspiracy involving Indonesian senior officials and politicians, public relations consultants and several senior editors to discredit Temasek and force it to sell its Indosat shares.

Then in early April, in a new twist in favor of Temasek, the federation of unions at state companies withdrew its complaint against Temasek over the alleged monopoly and abuse of market power, due to what federation chairman Arief Poyuono called a lack of legal evidence.
"In addition, we felt that some people had taken advantage of the issue to make Temasek ... uncomfortable and sell its shares," Arief told weekly news magazine Tempo.

The complaint by the trade unions did seem weak, given the wide range of technology available and the number of players in Indonesia's cellular market. Besides Indosat and Telkomsel, there are a number of other mobile and fixed wireless, 3G and CDMA operators, including Telkom, Bakrie Telecom, Excelcomindo, Mobile 8, Lippo Telecom, Mobisel, Primasel, Mandara, Hutchison CP, Bimantara Citra and Batam Bintan Telecom.

And there is still room for more players because Indonesia's cellular phone market, though the fastest growing segment of the telecommunications industry, is still very young. Only about 25 percent of the country's 230 million population have cell phones.

The Business Competition Supervisory Commission, however, should go ahead with an investigation of the federation's allegation of a monopoly and abuse of market dominance to resolve once and for all the controversy.

The smear campaign is not likely to prompt Temasek to follow Cemex's exit from the country, as long as it remains clean with regard to all the allegations used by the "conspirators" as ammunition to attack it. After all, telecommunications is one of the most promising industries in the country.

However, if such public-opinion "harassment" continues, the Singapore company may eventually get tired and call it a day.

Such subterfuge to discredit foreign investors may be deployed again in the future by vested interests conspiring to buy corporate shares below market price. There are still many politicians in the country who tend to exploit nationalist sentiments as a means to advance their hidden agendas.

Vietnam's economy soars as capital inflow surges

Thursday, May 03, 2007, The Jakarta Post

The Vietnam News Agency and Asia News Network organized an international conference on regionalism and modernization of Vietnam in Ho Chi Minh City on April 23 and 24. Vincent Lingga represented The Jakarta Post, a member of ANN, at the meeting. The following are his reports.

Almost 20 years after abandoning its collectivist economic strategy to implement market-based reforms, Vietnam has become one of the best-performing developing economies in the world with an annual growth of 7 to 8 percent over the past eight years.

Although not a complete picture of success - as it is still a poor country with a per capita income of US$700 - Vietnam has, to some extent, achieved economic development.
Vietnam's economy is on a roll and the outlook is quite promising.

It is amazing to see how a country ravaged by war for decades has been able to catch up so fast. Vietnam has now become one of Asia's most open economies, with two-way trade totaling US$85 billion last year and accounting for more than 60 percent of its economy.

Vietnam is now the world's biggest pepper exporter, second largest rice exporter after Thailand and a leading exporter of coffee, tea and shrimp.

Remarkably, Vietnam's high economic growth has not impacted on income inequality. The poverty rate has decreased from 60 percent in 1990 to around 15 percent. More than 90 percent of rural households now have electricity.

Where did Vietnam go right and where does Indonesia lag?

Foreign analysts, investors, businesspeople and Vietnam's senior officials, who declared Vietnam an economic success story at an international seminar last week, gave credit to consistent reform, strong government leadership and industrious citizens with great entrepreneurial spirit as the key factors.

Strong leadership succeeded in reducing animosity toward the United States, an enemy until the war ended in 1975; the French, the country's former colonialists; and China.

"This is by no means a small achievement, because almost every family has had a relative killed in the war. However, we decided to bury hatred in the past and turn our attention and energy to providing employment and creating prosperity," said Dao Duy Chu, senior economist and former chief executive officer of state-owned PetroVietnam.

Vietnam watches China carefully to learn from its neighbor's mistakes. Duy focussed particularly on income inequality between people in rural and urban areas.

Vietnam has not been suspicious of the Washington-based World Bank and International Monetary Fund, even though many other developing countries consider these an extension of U.S. foreign policy. Vietnam rejoined both institutions in 1993 and has since benefited greatly from intensive policy discussions with seasoned economists and technical assistants.

Even though Vietnam has never been heavily dependent on foreign aid (it accounts for less than 15 percent of public-sector spending), 30 donors are now actively engaged in extensive policy reform under the coordination of the World Bank.

Like many other developing countries, reform in Vietnam initially occurred in a haphazard manner, but as success eventually bred success, confidence rose and encouraged even bolder reforms.

An egalitarian redistribution of farmland early on, coupled with free trade in agricultural products and better agricultural support services at the local level, led to a boom in exports and a dramatic reduction in rural poverty.

"I think reform (doi moi) in Vietnam was successful because it started in the agricultural sector and created a basis for a stronger national market," said Pietro P. Masina, a senior economist from the University of Naples, who has long studied Vietnam's development strategies.

The egalitarian redistribution of land to rural households allowed for a strong recovery of the agriculture sector, which became a safety net for many people when the economic crisis hit East Asia in 1997, Masina said.

Foreign investment grew as domestic entrepreneurial spirit was unleashed. Urban residents moved into paid employment, further reducing the number of rural poor and spurting economic expansion.

Vietnam permitted 7,067 foreign direct-investment projects worth US$63.55 billion between 1988 and March, 2007, according to the ministry of planning and investment.

"In the last five years our National Assembly enacted 84 laws, 60 of which are related to rules of the game in a market-based economy," said Vu Khoan, representing the prime minister.

Included among the new laws are the unified Investment Law, which provides equal status to both domestic and foreign investors, and legislation regarding the securities market, real estate market, credit organizations, science and technology transfer from foreign to domestic companies.

Vietnam avoided the economic crisis of 1997-1998 that devastated other Asian economies, including Indonesia. Vietnam's economic growth rate has exceeded 8 percent in the last two years and the government has increased reforms, now aiming for middle-income country status by 2010.

Vietnam's communist regime has another track record to be proud of. While Indonesia's reform of its state enterprises has been bogged down in narrow-minded nationalist sentiments and vested-interest capitalists, Vietnam has recorded impressive progress in the reform and privatization of state companies.

Figures presented at the seminar showed that state companies have performed reasonably well over the past few years, with more than 75 percent profiting with rates of return on equity (ROA) of 7-8 percent a year. ROA of most state companies in Indonesia, a market economy, was only between 2 and 4 percent over the same period.

Massive privatization halved the number of state firms to around 3,000 over the past five years.

"We will privatize 600 more state companies this year, including those operating in power, post, telecommunications, aviation, maritime, oil and gas, finance, insurance and banking," said Deputy Minister of Planning and Investment Nguyen Bich Dat.

Privatization has created space for the expansion of private firms. As the private sector expands rapidly, both domestic and foreign-invested firms have connected well with global markets.
Private firms now contribute 65 percent of manufactured products and over 70 percent of non-oil exports. Vietnam is progressively becoming an integral link in international production and distribution chains.

Vietnam's geographical location is also a great advantage. Vietnam is strategically located in the Greater Mekong Sub-region (GMS), comprising Cambodia, Laos, Myanmar, Thailand and two provinces of southern China. Vietnam will play a major role as a regional economic hub.

The tremendous growth of tens of thousands of family firms, resulting from a bold government move in 2001 to ease restrictions on small businesses, is quite impressive.

Vietnam's accession to the World Trade Organization (WTO) in January has exposed its agriculture sector and companies to new competition and will accelerate the modernization of the legal system.

Vietnam should be proud of the high-quality, egalitarian growth that has been the key to maintaining social cohesion.

The biggest challenge facing the ruling communists is how to continue delivering jobs, public services and prosperity.

Official statistics show that one million young Vietnamese join the labor force each year and another one million rural people migrate to the cities annually.

"Social cohesion will continue as long as the economy expands steadily with an equitable distribution of income," noted Nguyen Van Tan, chief executive officer of T&T, a service and consulting company.

Moreover, Tan added, the Communist Party will continue to gain respect from the people because it has ruled the Vietnam since 1930 and successfully led its citizens through a succession of wars against foreign colonialists.

But as Vietnam's economy becomes more sophisticated, new challenges emerge and the need arises for better feedback mechanisms from its citizens on the quality of public policy and higher standards of transparency and accountability.

Like China and India, Vietnam has benefited enormously from the return of citizens who had fled the country. Thousands of Vietnamese have returned from overseas after learning English, gaining entrepreneurial experience and acquiring technical skills.

However, as the Vietnamese enjoy more economic freedom and as more of their countrymen and women return, bringing foreign ideas of pluralism and free speech, expectations of political liberty and free expression of opinion will grow.

The Vietnamese government appears to realize the challenges and consequences of this economic development.

"Many issues, such as the inadequate and inconsistent legal system, complex administrative procedures, overlapping departments and ambiguous responsibilities of state institutions and incompetent and corrupt civil servants have yet to be resolved," Khoan said.

A businessman from Europe expressed great concern, particularly over high-level corruption related to big government projects or business deals with state companies but "they are taking serious steps to tackle this problem."

The businessman, who insisted on anonymity, welcomed a government decision to gradually open a mechanism for expressing grievances.

"The government has previously allowed street protest demonstrations, though only a very small number of people joined," he said.

Wooing investors through industrial parks

Thursday, May 03, 2007, The Jakarta Post

The Vietnamese government has, since the launch of its market-based reform in 1986, tried to woo foreign investment mostly through industrial parks, which in Indonesia are known as industrial estates.

The biggest advantage of such an approach is that industrial zones can be well planned and designed according to the spatial plan of each of the 64 provinces and cities across Vietnam.

But what makes these facilities exceptionally attractive to investors, especially those from overseas, is that a developed industrial park already has all the basic infrastructure in place.

Most helpful is that the licensing authority is centralized in the management board of each

industrial park, thereby making it virtually a one-stop licensing center for an investment venture, except for investment projects in "sensitive sectors" that have to obtain approval from the prime minister.

No wonder many foreign investors, including those from Singapore, Thailand and Taiwan, have been putting money into industrial park development.

It's different to Indonesia, where numerous infrastructure development projects are held up by land acquisition problems. The construction of industrial parks in Vietnam, with sizes ranging from 300 to 1,000 hectares, runs smoothly it is the local administration that is responsible for land acquisition.

Investment projects in industrial parks also are entitled to various forms of tax incentives and import duty relief for capital goods and materials, depending on the categories of industries in which they operate.

With lower minimum wages (US$45-55 a month) but higher productivity and a more expedient business licensing system than Indonesia, Vietnam ranked 98th out of 175 countries surveyed by the World Bank last year in terms of ease of doing business. Indonesia ranked 135th.

There are now more than 135 industrial parks in various stages of development across Vietnam, of which 15 are located around Ho Chi Minh City alone. No wonder this vibrant city accounts for almost 30 percent of FDI flows to Vietnam.

Take for example, the Vietnam-Singapore Industrial Park (VSIP) in Binh Duong province near Ho Chi Minh City, a joint venture between a consortium of five companies from Singapore led by SembCorp Industries and state-owned Becamex IDC Corp.

Less than ten years after its launch in 1996, the 500-hectare industrial park has been completely sold or rented to industrial investors, so that VSIP 2e with 345 ha is being developed to meet the increasing demand from new investors.

"About 300 foreign investors from 22 countries have or are establishing plants in our industrial parks with a total investment of $1.5 billion, generating more than 40,000 jobs," said Huynh Quang Hai, VSIP vice president.

Likewise, the Amata Group from Thailand has been developing a 700-ha industrial park in Bien Hoa in a joint venture with state-owned Sonadezi Bien Hoa. More than 90 investors have leased industrial plots in the park.

"We were attracted to this country 16 years ago by the policy consistency and decisive leadership of the government," noted Vikrom Kromadit, chairman of the Amata Group.

The CT & D Group from Taiwan entered Vietnam even earlier, in 1990, opening the first industrial park in Vietnam, which also serves as an export processing zone. It now hosts hundreds of industrial factories with a total investment of some $1 billion, creating more than 60,000 jobs.

"You should choose the market with the highest growth potential and the most understanding government to invest in," said Arthur King, chairman of the CT & D Group in reply to a question asking why his company had invested almost $1 billion in Vietnam in industrial parks, power plants and urban development centers.

King added he did encounter problems in Vietnam as investors did in most other developing countries. "But in my own experience, every time a difficulty arises, I have always found a helping hand here to guide us through the process."

-- JP/Vincent Lingga

Telecom industry needs more foreign players

Thursday, April 5, 2007 Vincent Lingga, The Jakarta Post, Jakarta 

Five years after the conclusion of what was then dubbed a strategic deal that would help restore foreign investor confidence in Indonesia, the almost 42 percent Singapore shareholding in PT Indosat is still being whipped up by narrow-minded nationalists as a subterfuge to advance the vested interests of several businesspeople.

The issue of foreign ownership in Indonesian companies such as PT Indosat, PT Telkomsel and PT Excelcomindo surfaced again at a seminar on the future of the Indonesian telecommunications industry at the Centre for Strategic and International Studies (CSIS) here last week.

Last year, several trade unions at state companies issued a demand urging the government to buy back Indosat shares from Singapore Technologies Telemedia Pte (STT), expressing fears that Singapore interests would control the country's telecommunications industry, notably its mobile phone business.

There had reportedly been a tacit agreement between the government and the House of Representatives that the government would buy back STT's shares in Indosat.

However, several analysts suspected it was in the vested interests of several national businesspeople who had been eyeing the STT stake in Indosat.

Some misguided politicians at the House have naively trumpeted the fear that Singapore's presence at Indosat could threaten Indonesia's security as the island republic could easily access various data banks and the information system in the country.

Whipping up such an inordinate fear shows either a total misunderstanding about the telecommunications industry or is simply a blatant subterfuge to mislead the general public into an emotional opposition to foreign ownership of telecommunications companies.

Questioning the business and economic rationale of the STT-Indosat deal that was concluded in late 2002 is nothing but simply an attempt to whip up narrow-minded nationalist sentiments at the expense of our telecommunications industry.

Just a flashback to the STT-Indosat share transaction in 2002:

When the then cash-strapped government offered the then debt-ridden, state-owned Indosat to buyers through an international competitive bid, the mobile phone business of Indosat subsidiary PT Satelindo had been steadily losing its market share to PT Telkomsel, a subsidiary of state-owned PT Telkom.

Indosat's former core business as the mandated monopoly provider of international call services had increasingly been taken away by other much cheaper alternative communications means such as chatting facilities and Voice Over Internet Protocol. Worse still, the market share of Indosat's satellite service had been eroded by other satellites orbiting in Asia's outer space.

On the other hand, STT has been advancing as a global communications service provider, which offers a wide variety of services including fixed and mobile telephony, e-commerce solutions and services, paging, mobile-data communications, digital mobile communications network, satellite services.

It was then crystal clear that business and macroeconomic wise, STT's entry to Indosat as a major shareholder would ensure Indosat's survival in the highly-competitive and capital and technology-intensive telecommunications industry.

Put another way, STT brought a strong synergy to Indosat.

Indosat has since 2002 had a wide access to STT expertise and modern technology that is quite vital for the further development and competitiveness of Indonesia's telecommunications services. All this can now be seen in the dramatic growth Indosat has made over the past four years.

Yet most important, STT's presence at Indosat not only jump-started the modernization of Indonesia's telecommunications industry but also injected keener market competition to state-controlled PT Telkom, the country's largest telecommunications company.

True, the Singapore government-owned Temasek controls both STT and SingTel, which owns 35 percent of PT Telkomsel, the cellular phone subsidiary of Telkom. Indosat in turn controls PT Satelindo, the second largest mobile phone company after Telkomsel.

But it is inordinately irrational to allege that the STT-Indosat alliance would lead to a monopoly of the cellular phone business. There are too many players and too many choices of technology in this business to allow for a monopoly now.

There is enough room for many players because the cellular phone market, though the fastest growing segment of the industry, is still very young in Indonesia.
An efficient telecommunications industry is key to economic development and a vital infrastructure, especially in a vast archipelago country as Indonesia.

Instead of buying back shares from foreign investors -- which means capital flight -- the government should invest in other basic infrastructures, which are less attractive to private investors such as water, ports, airports and roads.

Certainly, there is not any ban on Indonesian private investors buying Indosat shares or other telecommunications companies. They are free to buy the stocks, but at market prices. Both Indosat and Telkom are listed in Jakarta, New York and London.

But the blunt fact is Indonesia's telecommunications industry is still much less developed than those in other Southeast Asian countries. We therefore need easy access to foreign expertise, capital and technology to make the industry competitive and to expand telecommunications networks throughout the country.

Centralizing investment licensing a bad idea

Monday, April 02, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Then president Megawati Soekarnoputri tried to centralize the licensing of foreign and domestic investment in the Investment Coordinating Board (BKPM) in 2004, but failed because of the strong bureaucratic jealousy between government institutions.

Going off in a strikingly different direction, President Susilo Bambang Yudhoyono announced plans in May 2005 to dilute the function of the BKPM into simply a promotion and company registry office, and to decentralize investment licensing in the spirit of local autonomy.

But except for putting the BKPM under the jurisdiction of the Trade Ministry, no other concrete measures have been taken to follow up on that idea.

The new investment law that was enacted by the House of Representatives on Thursday seeks not only to upgrade and strengthen the status of the BKPM, but also to centralize investment licensing at this agency under the concept of a one-stop investment licensing and service center.

However, the articles in the new law regarding the delegation to the BKPM of licensing authority by the various ministries and regional administrations are so ambiguous that past mistakes could be repeated, with investors again finding themselves stuck in a bureaucratic maze.

The law stipulates that the investment board shall be led by an official with ministerial status who is responsible directly to the president. This is, to a certain extent, similar to the BKPM's status under Soeharto's authoritarian administration. During the New Order, the investment board was considered a non-ministerial government institution under the oversight of the President's Operation Offices (State Secretariat).

However, the law also states in another article that the BKPM, in executing its function as a one-stop licensing and service center, shall involve direct representatives from related ministries and regional administrations.

This means that all ministries, government agencies and regional administrations related to the licenses/permits and services/facilities needed by investors should assign representatives to the BKPM.

Hence, the investment board will have officials from Manpower and Transmigration Ministry for processing work permits for expatriates, from the Justice and Human Rights Ministry for residency permits and entry visas, the Finance Ministry for granting tax and import duty incentives, etc., etc.

This could be the trap that makes the concept of the one-stop licensing and service center unworkable, because the law does not explicitly require the various ministries and regional administrations to transfer their licensing authority fully to the BKPM.

The new provisions will only spare investors the arduous procedures that require them to go from one ministry to another, from one regional administration to another, to obtain the various permits or facilities needed for their investment projects. Investors need only to file their applications with the BKPM, which is responsible, on behalf of the investors, for obtaining the necessary permits or facilities from the relevant ministries.

But inter-ministerial coordination has always been the weakest point of the government. Even the authoritarian, centralized administration of Soeharto took almost 15 years to make the BKPM a one-stop administrative center for investors. But this facility broke down soon after Soeharto's fall.

The reason behind the extreme difficulties in inter-ministerial coordination is not only the pervasive bureaucratic jealousy. From the perspective of public administration, seen as one of the most corrupt in the world, licensing authority means money for officials.

Centralizing investment licensing at the BKPM could also generate a hostile bureaucratic climate for investment ventures in the regions, and this will sabotage one of the primary objectives of local autonomy -- to encourage regional administrations to compete for investment.

The central government should instead delegate most of its licensing authority to regional administrations, with the BKPM retaining authority only for those requirements that need national standards, such as the environmental impact analysis, tax incentives, etc.

Instead of centralizing the overall investment licensing in Jakarta, which is after all contrary to the spirit of local autonomy, the government should help empower regional investment offices -- Provincial Investment Coordinating Offices (BKPMD) -- to enable them to better serve businesses and woo new investors through business-friendly policies.

Many local administrations still don't fully realize the great contribution of investment to their local economies through job creation and the injection of purchasing power to fuel consumer demand, thereby generating growth in the manufacturing industry.

Investors need expedient procedures for obtaining all the permits and facilities needed for their ventures, but the method of addressing this need should not kill the incentive for regional administrations to compete with each other in wooing domestic and foreign investment.

However, there are still escape clauses in the law that can help the government avoid past mistakes regarding the BKPM and the bureaucratic machinery for investment licensing.

The new investment law, which will replace the 1967 Foreign Investment Law and the 1968 Domestic Investment Law, stipulates that technical details on the implementation of the one-stop licensing and service center for investors, and on the division of public administration authority in the management of investment, shall be governed by presidential regulations.

Hence, like most other laws in the country, the key to the efficacy of the new investment law will depend on the provisions in the presidential regulations which, according to Trade Minister Mari Elka Pangestu, will be issued.