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.

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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.

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Is central bank really monitoring foreign exchange?

Friday, March 23, 2007 Vincent Lingga, The Jakarta Post, Jakarta

We now worryingly doubt Bank Indonesia's capability to monitor foreign exchange (forex) flows to and from the country.

This doubt arose after the recent disclosure of state-owned Bank Negara Indonesia (BNI)'s failure to report to the central bank the transfer of over US$10 million of Hutomo "Tommy" Mandala Putra Soeharto's money from the London branch of BNP Paribas to Indonesia through the BNI Tebet, South Jakarta, branch office, in June, 2005.

Yet more confusing are the remarks made by Bank Indonesia's executives about the transaction, as quoted by Koran Tempo in its March 21 issue.

Bank Indonesia spokesperson Filianingsih Hendarta was quoted as saying that Bank BNI might consider it unnecessary to report the money transfer to the central bank because there might have been nothing suspicious about the transaction.

One found it too flabbergasting that Filianingsih seemed entirely unaware of a ruling issued by Bank Indonesia in March 2000 that required bank customers in Indonesia, including foreigners holding stay permits and Indonesians residing overseas, to submit to the central bank, through their banks, detailed reports on every foreign exchange transaction in excess of US$10,000.

The Bank Indonesia ruling, which enforces the 1999 Foreign Exchange Flow Law, also requires that such reports disclose the remitter and recipient of funds, the type and purpose of the transaction and financial relationships between the transactors.

The explanation given by Wimboh Santoso of Bank Indonesia's directorate for banking development to the same newspaper is even more dumbfounding.

Santoso said banks were not required to report any financial transactions to the central bank but should report suspicious transactions to Indonesia's financial intelligence unit or the Financial Transaction and Report Analysis Center (PPATK).

The compulsory reporting on forex transactions was designed to keep Bank Indonesia apprised of capital flow to and from the country and to enable it to implement a more effective monetary policy.

Banks are obliged to keep detailed accounts of forex transactions they conclude for themselves and their customers because they have to submit a monthly report on their forex deals to the central bank.

Indonesia has held firmly to the regime of open capital account that allows free flow of foreign exchange to and into the country.

However, the financial crisis that set off massive runs on the rupiah and a massive capital flight out of the country between mid-1997 and 1998 made the government suddenly aware of the need to make sure the monetary authority was kept posted on foreign exchange flows.

During that crisis the central bank was completely in the dark about foreign exchange flows.
Hence, the birth of the 1999 foreign exchange flow Law. Up-to-date reporting provides the central bank with accurate, comprehensive and timely data on forex deals to enable it to have a better view of the position of the external balance and to anticipate speculative attacks on the rupiah.

The March 2000 ruling was supplemented with another Bank Indonesia regulation in July 2005, which limits foreign exchange derivative transactions with foreign counterparts against the rupiah to a maximum $1 million, down from a previous total of $3 million, and caps dollar purchases in outright forward transactions and swaps at $1 million.

The foreign exchange policy measure also imposes a three-month minimum investment hedging period on foreign exchange transactions. This means that investors with underlying investments in Indonesia must keep their funds in the country for at least three months.

The question is, though, how could Bank Indonesia ensure the proper implementation of the latter ruling on such complex forex deals if it miserably failed to detect even such a simple transaction as the $10 million transfer through the Bank BNI Tebet branch?

The central bank also seemed unable to properly enforce a regulation that requires commercial banks to know their customers with regards to detecting suspicious transactions.

The fact that Tommy's money was transferred not to his own account, nor to the account of a company he owned, but to an account in the name of a directorate general at the Justice and Human Rights Ministry meant that BNI completely ignored the "know-your customer" regulation. This also violated the provisions of the 2002 Anti Money Laundering Law that called for tough scrutiny of suspicious transactions.

The BNI should have been suspicious about the transfer and should have reported it to the PPATK because the transfer "looked strange" and was not supported by any underlying transactions.

The transfer should have caused BNI executives to ask what was the business of the Justice and Human Rights Ministry with the BNP Paribas branch in London.

The BNI cannot hide behind the banking secrecy clause for its failure to report to Bank Indonesia the transfer of Tommy's money and to inform the Indonesian financial intelligence unit of that suspicious transaction for further analysis.

If the conduct of BNI, a state-owned bank that is listed on the Jakarta stock exchange, is any guide, then we should really be worried how hopelessly feeble our anti-money laundering efforts have been.

Indonesia could face the bigger risk of being internationally blacklisted again as a haven for dirty money and a high-risk country for financial transactions.

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