Indonesia finds Temasek guilty of breaking competition law

Thomson Financial
19 Nov 07

The Indonesian anti-monopoly watchdog known as the KPPU ruled Monday that the Singapore government’s investment arm Temasek Holdings has violated Indonesia’s anti-monopoly laws because of its cross-ownership in the country’s two largest cellular carriers.

The KPPU also ruled that Temasek must divest its stake in one of the two cellular operators — PT Telkomsel and PT Indosat (NYSE:IIT) — to remove its cross-ownership within two years.

Temasek and its affiliates, or the so-called the Temasek Business Group, ‘are legally and convincingly proven to have violated Article 27 of the anti-monopoly law,’ Syamsul Maarif, chairman of the KPPU panel in charge of the case, told a press briefing.

The said provision bars business entities from owning majority shares in several companies in the same business in the same market, if it gives a single entity a greater than a 50 percent share of the market for a given product, or if it gives several entities more than a 75 percent market share.

Temasek’s 56 percent-owned unit Singapore Telecom, or SingTel, owns a 35 percent stake in Telkomsel, while its wholly-owned unit ST Telemedia and Qatar Telecom hold a combined 41.9 percent stake in Indosat.

The Temasek Business Group referred to by KPPU consists of Temasek Holdings Pte Ltd, Singapore Technologies Telemedia Pte Ltd, STT Communications Ltd, Asia Mobile Holding Co Pte Ltd, Asia Mobile Holding, Indonesia Communications Ltd, Indonesia Communications Pte Ltd, Singapore Telecommunications Ltd (OOTC:SGAPY) , and Singapore Telecom Mobile Pte Ltd.

Temasek has previously rejected the allegation, saying that the Temasek Business Group regarded as a single economic entity by the KPPU does not exist, and arguing that both ST Telemedia and Sing Tel do not control Indosat and Telkomsel because they do not have more than a 50 percent share in either Indonesian company nor do they hold special rights or privileges.

Although Temasek insists its ownership in both Telkomsel and Indosat is not subject to Indonesian regulations that apply to majority shareholders, KPPU has argued that ‘the law needs further interpretation’ in that regard.

Maarif said the panel also found that from 2003 to 2006, the Temasek Business Group’s cross ownership in Indosat and Telkomsel resulted in potential consumer losses of between 14.7 trillion and 30.8 trillion rupiah, but he acknowledged that KPPU does not have the authority to punish the group in this matter.

According to the KPPU, because of the cross-ownership in the Indosat and Telkomsel, the two operators enjoyed huge profits from the excessive tariffs they imposed while consumers suffered losses. The losses are potential and were calculated assuming competitive tariffs were in place.

‘Worrying decision’

On the order that Temasek must sell its stake in either Telkomsel or Indosat, Maarif said the KPPU panel requires that the buyers may not acquire more than a 5 percent holding each.

Moreover, the buyers should not have any affiliation with Temasek nor should they come from affiliated business groups.

The KPPU also ordered Temasek and each of its affiliates to pay a penalty of 25 billion rupiah to the state for violating the law.

‘This is a worrying decision. So many evidences and data that we submitted were not taken into account in the decision,’ said Ignatius Andi, a lawyer for ST Telemedia.

Temasek lawyer Todung Mulya Lubis said the KPPU ruling is not legally binding as yet because Temasek has 14 days within which to appeal to a district court.

‘If Temasek is really found guilty of violating Article 27, it will really make Indonesia an unsafe place for doing business,’ Lubis said while making note of the fact that the Indonesian government is desperately trying to bring in investors.

‘Who would be willing to invest here if by holding a 25 percent stake they can be charged of violating article 27?’ he said.

Moreover, Temasek was invited by the Indonesian government to buy stakes in Telkom and Indosat, and their purchase of the stakes was approved by the previous government and parliament, he said.

The KPPU panel also found Telkomsel guilty of violating Article 17 of the competition law, which bans a business entity from controlling production and marketing of a product or service that could result in the practicing of monopoly and unfair competition.

Maarif said Telkomsel has been ordered to stop implementing excessive cellular tariffs and must reduce its tariff rates by at least 15 percent.

Telkomsel is the biggest cellular operator in Indonesia with a market share of 68.1 percent in 2006. Its combined market share with Indosat stood at 89.6 percent in 2006.

The KPPU also ordered Telkomsel to pay a penalty of 25 billion rupiah.

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