Wednesday, November 21, 2007

Are Indonesia’s capricious policies going to cost them their transoceanic investors?

Singapore investment company, Temasek Holdings is required to sell its indirect stake in either PT Telekomunikasi Selular (Telkomsel), or PT Indosat Tbk (Indosat) within two years. Telkomsel and Indosat are the leading and second ranking cellular operators in Indonesia, with subscriber market shares of 56% and 26% respectively at end-June 2007. Singapore Telecommunications (Singtel) is 56.1% owned by Temasek, and which in turn holds a 35% stake in Telkomsel. Temasek's stake in Indosat is held through its wholly-owned subsidiary ST Telemedia, which holds 75% in Asia Mobile Holdings, which in turn holds 40.8% in Indosat.

On November 20, 2007, the Komisi Pengawas Persaingan Usaha (KPPU) ruled that Temasek had breached anti-trust regulations, specifically Article 27(a) of Law No.5/1999 of Indonesia, on the grounds of its ownership in two companies that control over 50% of their market segment. The ruling also implied allegations of price-fixing, stating that Telkomsel had abused its dominant market position by charging excessively high tariffs. A fine of IDR25 billion or around USD2.7 million each has been levied on Temasek and Telkomsel, as well as eight Temasek affiliates named in the case. In addition, Telkomsel has been ordered to reduce cellular tariffs by 15%.

The aforementioned ruling and associated penalties are not legally binding until endorsed and upheld by a superior court in Indonesia. Temasek and other named parties has seeked for an appeal against the ruling, and in this regard, there is a precedent of Indonesian courts moving to invalidate KPPU decisions. For example, in March 2006, the KPPU charged PT Semen Gresik (Persero) with violation under the same law, levying a fine of IDR1.0bn. The company subsequently filed an appeal in the Surabaya District Court, which accepted the objection and ruled to cancel the KPPU's decision. As the matter stands, the case is pending judgment on a counter-appeal filed by the KPPU in the Supreme Court of Indonesia.

Moreover, and as the above example illustrates, the legal process tends to be protracted in Indonesia, and it could take a year or more before a final and binding decision is reached. In the interim, a negative reaction to the KPPU's ruling by the Indonesian financial and/or political community, reflecting concerns over the potential impairment of foreign direct investment flows into the country, could influence the outcome of the process in a more positive direction for the various companies affected by the ruling.

However, if under any circumstances Temasek is required to divest its stake in the telecommunications companies, it would more likely to sell its stake in Indosat, given its weaker market position compared with Telkomsel. If Temasek were to divest its Telkomsel stakes, negative pressures would be inflicted on the outlook of Telkomsel and Singtel. In Telkomsel's case, Singtel's strategic shareholding and influence has provided comfort in rating the company above the sovereign local currency rating. Conversely, Telkomsel is a star performer and key growth driver in Singtel's overseas asset portfolio.

Other conditions within the KPPU ruling appear unusually onerous for both Temasek and Telkomsel. The requirement that the forced divestment by Temasek would allow no buyer of the divested business to acquire more than 5% of the entire divested stake means that the shares must be placed with at least 20 different investors. This is extremely likely to be challenged by Temasek.

Is there an autonomous driving force being KPPU’s wheel of action?