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SEPTEMBER 11, 2000 VOL. 156 NO. 10

Students outside Telkom Indonesia's headquarters protest the rise in telephone call charges.
Crossed Connections
As the state-run phone company tangles with its foreign partners, Indonesia's recovery is on the line

Stephen Dowling is afraid to start his car these days. The director of AriaWest International has received death threats over a dispute between his company—35% owned by AT&T—and state-controlled Telkom Indonesia. As the quarrel heats up, Dowling, 44, is constantly watching his back. "Everywhere I go I'm on the lookout for bombs or suspicious characters in the crowd," he says. "Any threat in Indonesia is a real threat."

For Indonesia, too, the stakes are high. Of Telkom's five strategic partners, at least three of them—joint ventures led by AT&T, France Telecom and Australia's Telstra—are running out of patience with the way Telkom and the government have handled an ambitious venture, begun in 1996 at the height of Indonesia's economic boom, aimed at modernizing the country's telecom business with help from the private sector. More than two years after the 1997 economic crash, however, the scheme is teetering on the brink of collapse. AriaWest, which says Telkom breached its side of the contract "from day one," is poised to terminate its agreement and seek compensation. If all five partners go the way of litigation, AriaWest calculates, the bill could be more than $5 billion—crippling Telkom and further damaging Indonesia's reputation as a place to invest. Says Andrew Sriro, a lawyer for AriaWest in Jakarta: "Everything is pointing toward complete and total disaster."

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Under the original plan, the partners were required to lay a total of 2 million lines and then manage most of Indonesia's fixed-line network for 15 years. Telkom was to be paid 30% of net revenue plus a monthly fee for use of its existing infrastructure. The plan also envisioned granting the foreign-led consortia management control over Telkom personnel and operations. But AriaWest, which has responsibility under the scheme for West Java, claims that Telkom never relinquished authority over staff. "Risk is O.K., as long as you have control over the operation and management," says AT&T's John Vondras, president director of AriaWest. "Otherwise it's like trying to swim with a 10-pound weight on your feet, with your hands tied behind your back." Moreover, an audit by Arthur Andersen found that Telkom misappropriated revenue in excess of $40 million from accounts that should have been under AriaWest's control. Since April, Telkom has blocked AriaWest's access to project revenues. In consequence, AriaWest has stopped making payments on its $284-million loan portfolio. The 43 international lenders that are getting burned include Chase Manhattan Bank, Credit Lyonnais and Sanwa Bank—the kinds of institutions that Indonesia doesn't want to offend as it seeks help in restructuring and privatizing a host of debt-ridden state-owned industries.

Telkom, which is listed on the New York Stock Exchange, concedes that there have been "misunderstandings" but denies breaching the contract. It points out that big concessions have been made—including lowered line targets and reduced revenue requirements—to the venture partners to cope with the aftereffects of the 1997 crash. President director Mohammad Nazif says that, with good will on both sides, the differences can still be resolved. "The world has to understand that conditions in Indonesia are difficult," says Nazif. "Don't make things worse!" Yet AriaWest and others complain that Telkom has compounded their problems by repeatedly advising the government against raising Indonesia's call tariffs, which are among the lowest in the world.

While Telkom and its partners trade accusations, there has been no substantial investment in Indonesia's fixed-line telecommunications infrastructure for more than two years. The country is falling behind as its neighbors innovate and expand, and the quality of the existing network is deteriorating. The government, which was a signatory to the Joint Operating Scheme agreement and holds a 66% stake in Telkom, seems too preoccupied with political infighting and provincial insurrection to help solve the dispute. Because Telkom accounts for roughly 10% of Jakarta's stock market capitalization, a resort to litigation could tip investor sentiment—already finely balanced—against Indonesia. "If they're willing to destroy their own stock exchange and the image of the country as a place to invest, then Indonesia will end up as the Nigeria of Asia," says Frederic Thomas, head of research at ABN AMRO Securities in Jakarta.

To avoid that fate, there may be no choice but to divide Telkom into several joint-venture companies, says Munotoyo Hadisuwarno, a former Telkom executive. He predicts that the dispute will not go to international arbitration, but will be solved through high-level political intervention. For AT&T's Dowling, meanwhile, life at the center of the storm is beginning to take its toll. "It's stressful," he says. "I'm worried that things are going to get worse before they get better." If so, Indonesia's list of woes is about to get even longer.

With reporting by Zamira Loebis/Jakarta

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