Date: 12/27/2007 11:29:16 AM

JAKARTA The recent decision of Indonesias antimonopoly watchdog to sanction and fine Singapore stateowned investment vehicle Temasek Holdings for breaking local competition laws has sparked new foreign investor concerns and marks another setback for the Singaporean government’s regional investment drive.

The Business Competition Supervisory Commission (KPPU) on Monday ordered Temasek to sell off its stake in either of Indonesias two largest mobilephone companies Telkomsel and



Indosat claiming its crossownership in both had enabled it to fix prices and monopolize the market.

Telkomsel and Indosat together account for 75% of Indonesias 80 million mobile users, leaving eight other operators in the countrys fast growing telecoms sector battling for a mere 25% of the market. Apart from its role in formulating and implementing industry regulations, the KPPU investigates suspected violations of the competition law and can issue binding decisions and impose sanctions on ruled transgressions.

The regulatory body also said it would fine Temasek and its eight telecommunication units Rp25 billion (US$2.7 million) each for breaching the competition law, under which a foreign company or business group is barred from owning more than 50% of a local telecommunications operation. Temasek has moved to challenge the decision through an appeal, claiming that through complicated shareholdings its ownership does not transcend the law’s 50% limit.

Cashrich Singapore, looking to transcend the growth limitations of the island state by seeking opportunities elsewhere, particularly in Asian financial and service companies, has with various investments in recent years helped to pump up the Indonesian economy. The latest clash over foreign ownership of local assets casts a cloud over the future of Singaporean capital commitments to the country. Temasek warned before Mondays ruling that any "flawed decision" would severely tarnish Indonesias reputation as an investment destination.

Still, the decision marks the latest setback for Singapore’s regional "Look East" investment drive. Temasek became entangled in Thailand’s political conflicts when in 2006 it purchased a majority stake in then prime minister Thaksin Shinawatra’s familyowned Shin Corporation, a communications conglomerate. That investment experienced a severe share price decline after the military seized power later in the year and de facto nationalized one of Shin’s subsidiaries, iTV. The military government at one point threatened to revoke the operating concessions of Shin’s mobile telephone and satellite subsidiaries.
Temasek faced similar competition law troubles in Malaysia last year when it moved to purchase shares in a handful of Malaysian financial institutions. Singapore Prime Minister Lee Hsien Loong, the son of national founder Lee Kuan Yew, previously headed Temasek when he served as a deputy prime minister. The investment vehicle now controls over US$100 billion in state investments and is headed by the junior Lee’s wife, Ho Ching. Those holdings include a 67% stake in Singapore Telecommunications (SingTel) and 100% ownership of Singapore Technologies.

In January 2002, ST Telemedia, a subsidiary of Singapore Technologies, bought a 41.94% stake in Indosat, Indonesias satellitetelecommunications company, from the Indonesian government for US$650 million. In 2003, SingTel paid US$1billion for a 35% stake in Indonesias leading mobilephone operator, Telkomsel.

According to the latest shareholding structure, 40% of Indosat shares are held by Asia Mobile Holdings, which in turn is 75% owned by ST Telemedia and 25% by Qatar Telecom. So it would appear that ST Telemedia holds only 30% of Indosat’s shares, far from a majority. And even if Temaseks indirect 30.6% ownership of Indosat and its 18.9% stake in Telkomsel were combined, its total share ownership in the sector is less than 50% and hence apparently within the competition law’s limits.

Moving goalposts
Back in 2002, the Indosat sale was good news for Indonesia, representing at the time the biggest sale of a major stake in a stateowned company to a foreign investor since the 199798 Asian financial crisis. The government had invited more than 40 parties to bid on the stake, including Australias Telstra, British Telecom, France Telecoms mobile unit Orange SA, Hutchison Whampoa, Telekom Malaysia, as well as SingTel. Of those, 16 companies had expressed interest in the stake as of September 2002.

That was before the infamous Bali bombing, Indonesias biggest terrorist attack, which killed 202 people, mostly foreign tourists. By December 2002, only two foreign investors had submitted formal bids. In the end, Telekom Malaysia, which now holds almost 70% of Indonesias thirdlargest mobiletelecom operator, PT Excelcomindo Pratama, lost out to ST Telemedia. Against all market expectations, given Indonesia’s dismal economic and political outlook at the time, the Singaporean company paid a premium of more than 50% over the market value for the Indosat stake.

ST Telemedia clearly sensed an opportunity where others saw a black hole. In 2000, the enactment of Indonesia’s Law No 52 threw open the previously closed telecommunications sector to foreign investors by opening basic services to majority foreign ownership and ending the monopoly of stateowned telecom companies. It was reportedly Indosats controlling ownership of Satelindo, the mobilephone unit, that prompted ST Telemedia to pay the hefty premium price and it later motivated Indosat to buy back Deutsche Telekom AGs 25% stake in Indosat at US$325 million a year earlier.

Jakarta had hoped liberalization would help the country to develop a more efficient telecommunications industry and attract other strategic foreign investments that would have a positive knockon effect on the broad economy. Meanwhile, regional telecom companies from Singapore and Malaysia were attracted by the market’s high growth potential at a time when their respective domestic markets had approached saturation. Indonesia still has one of the lowest per capita ratios of mobilephone subscribers among Southeast Asian countries, although the sector is now growing rapidly and expected to reach 100 million users by 2010.

Singapores Media Corporation, 100 % owned by Temasek, described Mondays KPPU decision as a "foregone conclusion that had left political watchers, businessmen and international investors shaking their heads over the unpredictable nature of doing business in Indonesia".

The decision inconveniently comes as President Susilo Bambang Yudhoyono’s probusiness government’s foreign investment promotion drive was starting to pay dividends. Approved investment applications have so far this year approached record levels, soaring by 177% to a record US$36.75 billion during the first 10 months of this year, compared with US$13.29 billion over the same period last year. Domestic investment in the same period totaled US$19.51 billion, compared with US$15.96 billion for the same period in 2006.

Stateowned new agency Antara reported communications and information minister Muhammad Nuh saying just hours before the decision was announced that the government would not interfere in the Temasek case – and apparently it did not. Syamsul Maarif, chairman of the KPPU panel in charge of the case, during the three hour reading of the decision, said that "Temasek and its affiliates, or the socalled the Temasek Business Group, are legally and convincingly proven to have violated Article 27 of the antimonopoly law."

Temasek has already said it will appeal the ruling within 14 days through a district court in Jakarta, which by law will have 30 days to make a final ruling. The appeal will apparently be made on the legal argument that the KPPU has no jurisdiction over Temasek as the company is not based in Indonesia. The Singapore company has also countered that its ownership does not restrict competition because the Indonesian government has majority stakes in both companies and also that the Temasek Business Group referred to by the KPPU does not exist.

Meanwhile, Todung Mulya Lubis, Temaseks Jakartabased lawyer, has said that the KPPU had produced no evidence of any market distortions caused by the Temasekinvested telecom companies let alone any proof of anticompetitive conduct. Nor does Temasek have majority ownership of either of the two telecom concerns, lawyer Frans Winarta, a member of the National Legal Commission, pointed out while the KPPU’s probe was underway.

Yet earlier this year, Drajad Wibowo, a member of the parliamentary budget commission, warned that foreign dominance in the national telecommunication industry could have dangerous national security implications and urged the government to buy back Temaseks Indosat shares. Bakrie Telcom, the politically connected telecom concern owned by the family business group of Coordinating Minister for Welfare Aburizal Bakrie, would likely benefit from any forced sale that ensues from a final appeal ruling that goes against Temasek, industry analysts predict.

Earlier this year the government controversially granted Bakrie Telecom a license to operate nationally, expanding on an original concession that restricted it to the main island of Java. While a court ruling that forces Temasek to sell down its Indosat and Telkomsel stakes and allows Bakrie to buy in would help that company’s competitive prospects, it would also come at the expense of Indonesia’s only recently revived reputation as a safe foreign investment destination.

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Source: http://www.atimes.com/atimes/Southeast_Asia/IK22Ae01.html