Indonesia: Foreign Telcos Are Ringing Off

Frustrated mulitnationals are fleeing the country

The last seven years have been among the worst of John G. Vondras' 32-year career with AT&T (T ). To be blunt, he says, "there are days I think I wasted my time." Gazing out the window of his office on a gritty, noisy boulevard in Jakarta, the Indonesia managing director of AT&T Wireless Services Inc. (AWE ) reflects on how the $450 million deal he helped negotiate with state-run Telekomunikasi Indonesia (Telkom) in 1995 went from bad to worse to impossible. "It was not a match made in heaven," says Vondras.

So Vondras, 54, is preparing to leave. In early April, AT&T said it had reached an agreement in an arbitration court in Geneva to sell its 35% stake in Aria West to joint-venture partner Telkom for $300 million, according to local press estimates. The venture has a franchise to build and operate 530,000 phone lines in West Java as well as a cellular license, but fell far short of its aims.

Virtually every other foreign investor in Indonesia's once-glittering telecom sector is joining the exodus. Telstra Global Ltd. and Nippon Telegraph & Telephone Corp. (NTT ) have offered to sell Telkom their stakes in their Central Java venture, in which they invested $580 million. Last year, Cable & Wireless (CWP ) sold its 90% stake in a fixed-line operator in Borneo; France Télécom unit France Cables et Radio expects to close the sale of its phone-venture stake to Telkom "in the coming days," says Jean-Marie Gauthier, its Indonesia managing director. In wireless, Royal PTT Netherlands unloaded its interests in December, while two other multinationals are following suit.

Why the stampede? Foreign telecom companies, which have invested an estimated $2.7 billion in the country since the sector was opened to outsiders in the mid-1990s, accuse the Indonesians of making it impossible to earn a profit. Among the complaints: The Communications Ministry rebuffed pleas to raise rates, while Telkom vetoed attempts to cut costs, in response to the 1998 recession and currency crash. Multinationals also say Telkom reneged on contract terms giving them management control, while the government broke its promise to give their fixed-line ventures 15-year monopolies.

Telkom denies it refused to cede management control to investors or did anything to hurt profitability. Setiawan Sulistyono, head of investor relations, says the joint ventures simply "lost their economic viability" because of the 75% crash in Indonesia's rupiah since 1998. While most of the ventures' capital investments require U.S. dollars, their revenues are in depreciated rupiah. A two- to three-minute call billed at 4.5 U.S. cents in 1997 now costs 1.5 cents. Sulistyono confirms Telkom kept investors from firing workers, but says technically they were Telkom employees--so it broke no contracts.

Whoever is to blame, the withdrawal of the world's premier telecom companies is another black eye for Indonesia's investment climate. When Indonesia liberalized telecom in 1995, ventures headed by Cable & Wireless, France Télécom, NTT, Singapore Telecommunications, Telstra, and US West--whose interest was acquired by AT&T--won contracts to operate a total of 2.5 million new phone lines. Telkom didn't own equity in the ventures, but got a share of profits and collected bills.

But strains grew after the financial crisis. Telkom vetoed AT&T's plan to cut half of its 3,000 employees in West Java. Mitra Global Telekomunikasi Indonesia, the venture with Japan's NTT and Australia's Telstra, says Telkom raised wages. The lack of control "impacts our yearly expenses, which is very disturbing," says Mitra Global President-Director Sutrisman. And while Jakarta has hiked rates three times, by a total of 45%, investors say inflation-adjusted fees must return to 1997 levels for their ventures to survive. SingTel, the only investor willing to discuss its venture's finances, says its lost $17 million in 2000, the most recent figure available.

The final straw came when Indonesia's Parliament ruled in 2000 that the foreign ventures' monopolies would end in 2003. Their original contracts said 2010. AT&T, NTT, and Telstra, figuring it would take two decades to break even, began negotiating to sell.

The only big foreign player left will be SingTel. Although it's divesting from fixed-line service, it paid $600 million for Royal Netherlands' 22% stake in a Telkom cellular unit--and another $430 million to boost its share to 35%. SingTel says as rivals flee, Indonesia's cellular market still has potential.

One never knows. But as for Vondras, he sees "little light at the end of the tunnel" for telecom investors in Indonesia.

By Michael Shari in Jakarta

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