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Pt Telkom Hangs Up On The Party Line

Pt Telkom Hangs Up On The Party Line

For a state-owned monopoly, Indonesia's PT Telkom picked an unconventional way of awarding five contracts to install and operate 2 million new phone lines: None of the five contracts went to companies owned by President Suharto's children, who have often used their connections to build multibillion-dollar empires. Instead, rights to install and operate the lines were doled out through open and apparently fair competition to private consortiums involving such proven outfits as U S West, France Telecom, and Australia's Telstra Corp.

Breaking with Indonesia's tradition of crony politics is just one part of PT Telkom's efforts to convince the world it aims to become a serious player in Asia. As it prepares to raise $2 billion by yearend through stock offerings in Jakarta, London, New York, and Tokyo, the company is sprucing up its image and balance sheet by boosting revenue, slashing costs, and restructuring itself. Says Trisno Limanto, head of research at Nomura Indonesia in Jakarta: "PT Telkom has put a lot of effort into presenting itself as professional."

RICHES IN STORE. The goal is to create a bigger, more efficient company that relies heavily on the private sector to provide urgently needed telephone service to the 182 million people living in Indonesia's far-flung archipelago. PT Telkom will focus on major cities but will depend on private companies to develop service in rural areas. While the government will sell some PT Telkom stock to the public, it's likely to retain majority control.

In the process, the company may well get very rich. The five private consortiums, which are expected to close their contracts in September, will not only foot the $2.4 billion investment for new rural lines but also pay PT Telkom some $6 billion over 15 years to operate the networks. After that, ownership will be transferred back to PT Telkom. But in the meantime, the revenue is expected to be enough to provide "a quite satisfactory long-term strategic return" to the foreign providers, says Ross Abbott, general manager of Telstra's Jakarta office.

What's more, judging from the enthusiastic reception given such issues as last October's $800 million Wall Street listing of PT Indosat, the state-owned international telephone company, analysts figure that PT Telkom, its domestic counterpart, will have no trouble raising the $2 billion it seeks in its upcoming stock offerings. They will be underwritten by Merrill Lynch, Goldman Sachs, Lehman Brothers, and S.G. Warburg.

For Indonesia, which now has only one phone line for every 160 people, the big payoff will be a workable phone system. PT Telkom, which will continue to provide service in big cities, will use most of its windfall to add 3 million lines in Jakarta and Surabaya by 2010. Meanwhile, Telkom engineers will receive valuable training from the foreign-led consortiums.

MEDIA GLARE. Perhaps the most remarkable aspect of the shakeup in Indonesian telecommunications, however, is that for the first time in memory, a multibillion-dollar infrastructure deal does not directly involve the Suharto family. Three of the President's six children have built fortunes based on government-awarded contracts or franchises--often without bidding. Eldest daughter Siti Hardiyanti Rukmana, 47, builds toll roads. Son Bambang Trihatmodjo, 42, has interests in cellular networks and long-distance service. Another son, Hutomo Mandala Putra, 33, controls the state-sanctioned monopoly for cloves, a key ingredient in Indonesia's popular kretek cigarettes.

The family wasn't excluded without a fight. In June, Telecommunications Minister Joop Ave made a last-ditch effort to force the winning consortiums to merge with two companies linked to the Suharto family. Only intense media attention on the backroom maneuvering, which risked damaging foreign interest in the initial public offering, forced the minister to drop the plan.

Now, even some of the losing contenders admit that the process generally met international standards. Says Gerald Rossi, managing director of Nynex Network Systems Indonesia, which did not win a contract: "I think the bidding was fair." If this is the harbinger of a cleaner, more transparent business environment, foreign investors who have been turned off by the country's cronyism may soon be taking a hard, fresh look at Indonesia.