Global Insight Perspective | |
Significance | The Indonesian competition authority, the KPPU, has ruled against Temasek, which in response will contest the decision. |
Implications | The ruling has raised concerns among foreign investors about the credibility of the country's legal system and may serve as a disincentive to foreign investment. |
Outlook | Temasek and the KPPU are set to go through a lengthy legal process before a financial decision is reached. |
The Indonesia competition watchdog, the KPPU, ruled yesterday that Temasek Holdings had breached Indonesia's anti-monopoly law by having cross-shareholdings in the nation's two largest mobile service operators—Telkomsel and Indosat—the AFX financial news provider reports. The KPPU ordered Temasek to sell its indirect holdings in one of the two mobile companies to remove its cross-ownership within two years. "The cross-ownership has created a highly concentrated industry structure and market power and has resulted in a decline in the degree of competition," a KPPU release indicated.
Temasek's holdings in the Indonesian mobile companies are held by its subsidiaries. Temasek owns 56% of SingTel, which in turn has a 35% stake in Telkomsel, the country's leading mobile operator. ST Telemedia, a wholly owned unit of Temasek, together with Qatar Telecom, holds a combined 41.9% stake in Indosat, the second-largest mobile operator in the country. In 2006, Telkomsel held approximately 56% of the mobile subscribers in the country, while Indosat had a 27% market share. The smallest among the top three mobile operators in the country, Excelmindo, which is 67%-owned by Telekom Malaysia, held an approximate 17% market share. The Indonesian government holds 51% of PT Telkom, which owns 65% of Telkomsel and also owns a 14% stake in Indosat.
In response to the ruling, Temasek and ST Telemedia have denied any wrongdoing and have vowed to contest the decision. Temasek's executive director, Simon Israel, issued a statement, saying the charge against Temasek is groundless, as the Singaporean company does not own direct shares in Indosat and Telkomsel, and it has played no role in their business decisions and operations. In response to the KPPU's accusation of price fixing on the part of Indosat and Telkomsel, Israel argues that it is inconceivable that the Indonesian government and the telecommunications regulator would allow the prices to be fixed or cause a loss to the consumer, adding that Indonesia's telecoms sector is regulated and that the Indonesian government itself controls Telkomsel. SingTel also said it will review the KPPU report and take the necessary steps to protect its interests. The Singapore-based mobile group said that it is only a minority shareholder of Telkomsel and that its runs its operations independently of Temasek.
Outlook and Implications
As Temasek will appeal the ruling by the KPPU and the dispute will possibly reach international arbitration, the two parties are set to go through a lengthy legal process before a final decision is reached. If Temasek is eventually forced to divest from one of the two Indonesian mobile firms, the Singaporean company is most likely sell its stake in Indosat, as its investment in industry leader Telkomsel is far more valuable. Nevertheless, the ruling against Temasek has raised concerns among foreign investors about the credibility of the country's legal system and served as a disincentive to foreign investment. The country's earlier move to cut the foreign investment limit in numerous strategic sectors had already been met with criticism among foreign investors at a time when the government of President Susilo Bambang Yudhoyono is keen to attract foreign investment into Indonesia to push economic growth (see Indonesia: 5 July 2007: Government in Indonesia Cuts Foreign Ownership Limit for Telecoms Companies).