[A-List] Indonesia: privatisation woes

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Jakarta turns deaf ear to privatization nay-sayers
By Bill Guerin
Asia Times, March 29, 2002

JAKARTA - State Minister of State Enterprises Laksamana Sukardi told the
Indonesian House of Representatives (DPR) on Wednesday that he expects
the planned sale of a 45 percent stake in publicly listed state-owned
telecommunications company PT Indonesian Satellite Corp (Indosat) to
raise between Rp4 trillion and Rp5.1 trillion (US$409 million to $522
million).

Laksamana was updating legislators on his crucial privatization program,
which he said would generate between Rp7.2 trillion and Rp9.25 trillion
this year from the sale of six state-owned enterprises (SOEs). The
government has listed some 24 SOEs for going under the hammer this year
and also plans to divest its stakes in several nationalized banks, but
the giant international call operator is almost certain to be the major
proving ground for a long-brewing battle between the government and
those who oppose privatization.

The stakes are high indeed, with the government badly needing the
proceeds to recover from the massive amounts spent to bail out ailing
banks, and the resultant gaping deficit in the state budget.

The government, which owns a 65 percent stake in Indosat, plans to sell
a 45 percent stake in the company over two stages. A 15 percent stake
will be offered on the Jakarta Stock Exchange in June for about Rp1.7
trillion and another 30 percent stake will be offloaded in October to a
strategic investor.

There is, of course, a massive amount of interest. At least seven
international telecommunications companies are lining up, including
Australia's Telstra Corp, British Telecommunications PLC, Singapore
Telecommunications Ltd, Telekom Malaysia Bhd, Hutchison Whampoa Ltd and
even Vodafone Airtouch PLC and France Telecom's mobile unit Orange SA.

Indosat is the primary provider of international telecommunications
services in Indonesia, implementing international switched
telecommunications services, telephone, telex, telegram, packet switched
data networks, facsimile services and services for mobile
communications. The company also provides a range of non-switched
international telecommunication services, such as low- and high-speed
leased lines, video conferencing, telecast services and other services
that transmit data or video rather than voice traffic. Switched services
are routed through the domestic telephone system, and non-switched
service customers connect directly to Indosat.

It was established in 1967 as a wholly owned subsidiary of the foreign
International Telephone and Telegraph Corp (ITT) and began commercial
operations in September 1969. A complete ban on foreign ownership of
telecommunications facilities was in place in those days and Indosat was
nationalized in 1980 after the government bought the whole Indosat stake
from ITT for about $43.8 million.

Indosat then started operating its first submarine cable link connecting
Indonesia with Singapore, and transferred its ownership in the project
to Perusahaan Umum Telekomunikasi (Perumtel), the forerunner to
Indonesia's current provider of domestic telecommunications services, PT
(Persero) Telekomunikasi Indonesia Tbk (Telkom). Two years later, in
1982, the government transferred its ownership of Indosat's facilities
to the current Indosat and separated domestic and international
telecommunications networks in a complex series of asset and rights
transfers between Indosat and Perumtel.

In 1993, Indosat started its international direct dialing (IDD) service
via a series of domestic gateways that route international traffic to
and from Indonesia using satellite, submarine cable and microwave links.
Indosat went public in 1994 when the government sold 35 percent of its
stake, leaving it with today's 64 percent stake in the company.

Last year's accounts show that Indosat's operating revenue grew 71.7
percent but operating expenses increased by a massive 113.2 percent. The
2001 consolidated net income dropped by 10.8 percent to Rp1.46 trillion
from Rp1.64 trillion in 2000, but the company claimed that higher growth
in operating expenses was driven mainly by depreciation, maintenance and
miscellaneous expenses. These "other expenses" were mainly incurred by
elimination of cross-ownership deals in line with the government's
breakup of the two monopolies enjoyed by Indosat and Telkom.

Aside from IDD operations, which contributed 41.8 percent of revenue,
Indosat's growth in income was driven by its cellular business, which
brought in 36.4 percent. Multimedia, datacom and Internet (MIDI)
services accounted for some 19.9 percent of total revenue. Indosat,
which, with Telkom, monopolizes the international phone service, plans
to invest Rp322.1 billion this year to develop its voice over Internet
protocol (VoIP) business and backbone, data communications and
multimedia infrastructure.

Laksmana's new estimate of the proceeds is almost twice as high as the
assumed values in this year's budget, which calculated a total figure of
Rp3.952 trillion from privatization.

Those lined up against Laksamana's optimistic plan are politicians,
employees and their unions and some members of the public. Only last
week 300 Indosat workers fired off the first warning shot when
protesting the plan by urging Laksamana to resign. "Selling state assets
will bring misery to the people" was the general message for the
minister.

Labor experts have advised the government to intensify public awareness
of the privatization policy so as to gain more support from the people
and workers of the enterprises. They have warned Laksamana not to press
ahead with his selloff program without support from employees of the
SOEs and other stakeholders. One economist, Mubyarto, with no apparent
ax to grind, speaking at a seminar on Wednesday, advised, "The
government has to be patient and must talk with all stakeholders. Don't
force it, because it's very dangerous." He also warned that selling
state assets to foreigners would make the country's economy vulnerable
to foreign interests.

Bambang Sudibyo, a previous minister of finance, took up the baton of
protest when saying that the government had often neglected
stakeholders. "The voice of the employees and the public in general must
be heard," he said. He urged the government not to sell a controlling
stake in Indosat to foreigners in the interests of national security.

Another legislator, Sri Bintang Pamungkas, pointed out that SOEs had
long been treated as cash cows by the government. There had been no
consideration of the hardship endured by the underpaid employees who had
fattened up these cows ready for milking.

The 2002 state budget deficit is estimated, depending on who issues the
figures, at 2.5 percent of gross domestic product.

Telecommunications and postal workers have threatened to go on strike
over the plan with employees from the labor union of state-owned postal
and telecommunications firms (ISP Postel) forcing the pace by giving the
government until the end of this week to agree to their demands. The
union is setting up a master plan to stage a strike that could cripple
telecommunication services unless the government backs off the planned
sale of Indosat. The employees fear they would lose their jobs if
Indosat falls into foreign control.

Laksamana said on Wednesday that he planned to hold talks with
stakeholders, including employees, and legislators to gain support for
his privatization program but declined to comment further.

"If no agreement is reached, then we will call an all-out strike," said
the union's head, Abu Syukur. The strike could begin as early as next
week, with services cut off gradually until they reach the point of an
all-out strike.

ISP Postel includes all Indosat and PT Telkom employees, as well as
their subsidiaries, cellular-phone operators PT Telkomsel and PT
Satelindo, and workers of the country's postal company, PT Pos
Indonesia. The union claims nationwide support for the strike and,
although local and international telephone services function
automatically, a moratorium on maintenance work would quickly cause
major disruptions. Postal workers may also refuse to deliver mail.

A spokesman for the Office of the State Minister of Communications and
Information, Gatot S Dewa Broto, said the office would also hold talks
with the management of the companies about preventing the workers from
calling an all-out strike. "There is a consumer-protection law that bans
full-scale strikes by public-utility employees, like the one they
[workers] are planning," he said.

Ismail said the union wants the resignation of Laksamana, otherwise some
100,000 workers from ISP Postel were ready to take to the streets of
Jakarta to protest the privatization of Indosat. "We aren't fighting for
higher salaries or to save our jobs. We are just speaking out against
the [privatization] plan to protect state assets from falling into the
hands of foreigners," the statement from the union said.
Anti-privatization protesters claim that selling off state assets to
foreigners means reverting back to colonial rule.

ISP Postel head Abu Syukur Nasution said that the 100,000-member union
would seek the support of legislators and even factions within DPR to
block the planned sale of Indosat, which he described as one of the
country's most valuable assets that must not be sold to foreigners. "We
need to convince the parliament that the divestment is not suitable
under the current strained business climate," he said.

Laksamana reaffirmed this week that he would press ahead with the
privatization program, including the sale of its Indosat shares despite
the union protest. He admitted the protest could slow the sale but said
it would not be significant.

Last year, Laksamana failed to complete plans to sell a majority stake
in cement maker PT Semen Gresik to Mexico's Cemex SA de CV because of
opposition from various quarters, including the company's union. Semen
Gresik employees, with the backing of many politicians, denounced the
planned sale, saying it would deal a serious blow to the country's
pride.

A major benefit if Laksmana were to succeed would be a newfound
credibility in the global investor community and international creditors
in the Paris Club, who could be expected to get the message that the
Megawati administration really was committed to fighting for economic
reform. But the threat from ISP Postel indicates opposition from labor
unions to the government's privatization and asset-sale program. Last
year's failed sale of Semen Gresik was because of similar opposition
from company employees backed by regional politicians and community
leaders.

A massive protest by the Bank Central Asia employees almost killed the
recent sale of Indonesia's prize retail bank, which eventually went at a
knock-down price to a consortium led by US investment firm Farallon
Capital. The government's 51 percent stake was officially sold but
analysts believe that the bank's thousands of workers, fearing job
losses, are likely to cause continued problems.

The BCA sale was seen as crucial for the government to win support for
rescheduling of more than $5 billion in sovereign debt maturing in 2002
and 2003.

ISP Postel planned to upgrade the scale of protest on Thursday,
threatening to mobilize some 10,000 members to warn Laksamana to back
off.

Full article at:
http://www.atimes.com/se-asia/DC29Ae01.html

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney@xxxxxx