Competition in Telecommunication Industry in Indonesia: Lesson Learnt from Temasek Case ACF, Singapore 21 May 2008

1. 1 Competition in Telecommunication Industry in Indonesia: Lesson Learnt from Temasek Case ACF, Singapore 21 May 2008 Ningrum Natasya Sirait University of North Sumatra, Medan, Indonesia

2. 2 Background: Telecommunication industry is regulated by Law No.36 Year 1999, where private sectors are allowed to enter the market, either independently or through joining/merging with the incumbents: Telkom or Indosat; Since then, telecommunication industry enter its transition period starting with de-regulation in 2002 to enter competitive, open market; Cellular telecommunication is regulated under Government Regulation (Article 27-28 Law No.36 year 1999); Other laws which relevant to the telecommunication industry are: Foreign Investment Law No.25 Year 2007, competition is regulated under Law No.5 Year 1999 Concerning Prohibition of Monopolistic Practices and Unfair Business Practice and supervised by the KPPU (Business Competition Supervisory Commission);

3. 3 Far before this period, the structure of telecommunication industry was duopoly with only Telkom and Indosat as the players; Due to its rapid expansion and development, the Government requested National Planning Agency (Bappenas) to conduct thorough research on telecommunication industry which was done by University of Gajah Mada & Bappenas, the result of the research presented to the government in mid 2007; Some findings in the research are: - policy: the government is in the process of preparing its blueprint on policy towards the development of telecommunication industry; - market: number of operators and players are increasing substantially; - cellular industry performance, increase in output, quality are improving but profitability is tend to decrease; - the industry is working to find its equilibrium;

4. 4 Although there are only two major players: Telkomsel and Indosat from beginning, cellular industry believed to be competitive; PT Telkom own �monopoly� right in the national level as operator in cable or without cable (flexi) in the telecommunication service provider which provides incumbents relevant market Incumbency advantage; At present, competition is rigorous in terms of price, products, services, promotion, close into �price war� where it is expected that at the end it will provide consumer welfare. Competition in this market believed to generate substantial state income, supporting the economy and other positive impacts; The government role as regulator is very critical in determining the policy on the (cellular) telecommunication industry including awareness that the market is already open to foreign investors;

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8. 8 In 19th November 2007, Commission for the Supervision of Business Competition (KPPU) deliver its Decision No.: 07/KPPU-L/2007 known as Temasek case; The decision concerns unilateral conduct exercised through cross share ownership. The Commission found Temasek and nine other Reported Parties guilty of (separately) violating Article 17 regarding monopolistic practices and Article 27 (a) regarding cross share ownership. The Commission found that Temasek Holding, through its shares in Singapore Technologies Telemedia Pte. Ltd., STT Communications Ltd., Asia Mobile Holding Company Pte. Ltd, Asia Mobile Holdings Pte. Ltd., Indonesia Communication Limited, Indonesia Communication Pte. Ltd., Singapore Telecommunications Ltd., and Singapore Telecom Mobile Pte. Ltd owned shares in PT.Indosat (35%) and PT.Telkomsel (41.6 %), has violated Article 27 (a) Law No.5 of 1999.

9. 9 Shares Ownership of Temasek Group Singapore Telecommunications Ltd

10. 10 PT.Telkomsel and PT.Indosat are two competing companies. Through the crossownership, Temasek was found guilty because Temasek was able to control competition between PT.Indosat and PT.Telkomsel, which also caused signigicant consumer harm; Although the share ownership was not more than 50%, the Commission determined a violation had occurred based on several arguments; The Commission utilized several approaches which were novel compared to its previous decision in Cinema 21 Case where the Commission determined what constitutes a majority share, and then proved that the Reported Party in Cinema 21 case had 50% of the shares in the company. The Reported Party in Cinema 21 case was ordered to divest and reduce their shares ownership in the company as to comply with Article 27 (a) Law No.5 of 1999; In Temasek case, the Commission introduced a new approach in determining what constitutes �majority share ownership� in one company. Article 27 may be understood as illegal per se, since the provision does not require that the cross ownership �may result in monopolistic practices or in unfair business competition�;

11. 11 In Temasek decision, the Commission applied minimalist and maximal approach in deciding whether to treat articles of the law as rule of reason or per se illegal. Minimalist approach applied if at least two circumstances exist: First, the existence of a business actor who owns a number of companies in the same market and is able to control that market; Second, control over the relevant market represents at least 50 % share of that market. Therefore, violation of the law existed if a company was shown to satisfy these elements. The Commission decided to apply the rule of reason approach since it concluded that the impact on market competition had also been established or verified in such a situation; Literal reading of Article 27 suggests that the prohibition that may be considered to be per se illegal; however, the text was followed by a condition that it must be proved that cross ownership control of the market share was in excess of 50 %;

12. 12 The additional element that must be proved is conduct which caused negative impact on competition. In this case, the Commission determined that the prohibited conduct was the misuse of market power which has caused negative impact on market competition in the telecommunications industry; In applying Article 27 using maximal approach, the Commision determined that five elements proved the violation: business actors, cross shares ownership, percentage of market shares, abuse of dominant position and the impact of the cross shares ownership on the market competition;

13. 13 There are few new approaches in Temasek decision such as single entity doctrine; Another is a test whether the law had extraterritorial jurisdiction and extended to foreign investor companies which indirectly conduct business in Indonesia in ways other than through share ownership. The Commission cited previous Supreme Court Pertamina decision, in which a company established outside Indonesian territory but conducting its business in Indonesia was determined to be doing business in Indonesia, without need to prove whether the said company is carrying on business directly or through an Indonesian legal entity; The Commission adopted the single economic entity doctrine developed in the European Union, which stipulated that a parent company and subsidiary or associated company will be treated as a single economic entity. This doctrine allowed the European Commission to have jurisdiction over a holding company which is not doing business directly in one country;

14. 14 The Commission (KPPU) adopted the doctrine that the two companies in fact form a single economic entity, if the following criteria are fulfilled: (i) the parent company has a representation of management in the subsidiary company; (ii) the parent company posses the ability to influence and to decide the policy of the subsidiary company; (iii) the parent company posseses access to secret or sensitive information in the subsidiary company.; If the three criteria have not been fulfilled, upto 50 % share ownership will be determined to be passive investment;

15. 15 However, if the three criteria have been proved, the Commission determined that the parent company possesses control over the subsidiary company and the purpose of its share ownership is to be an active participant, not a passive investor. Therefore, in this case, the Commission decided that the parent and the subsidiary company form a single economic entity; In the same case, the Commission found PT.Telkomsel (shares of which were partly owned by Temasek Holdings) to be one of the Reported Party and accused it of violating Article 17 based on several grounds such as: lessening competition through inhibiting development of Indosat as it�s competitor; excessive pricing; price leadership which caused huge consumer loss, and creating a uncompetitive market in telecom industry;

16. 16 However, surprisingly, although PT.Telkomsel was found to possess more than a 50 % market share, the decision did not conclude that Telkomsel violated Article 25 on Abuse of Dominant Position; The decision attracted debate when the Commission in one part of the decision ordered Telkomsel to lower its tariff by up to 15 %. The decision has also been challenged as to whether the KPPU�s jurisdiction allows itself to determine tariff as part of its decision; Since tariff is regulated under BRTI (Badan Regulasi Telekomunikasi Indonesia);

17. 17 On a related matter, the government has not issued a Regulation for merger and acquisition control and one in relation to liquidation as required by Article 29 (2) of Law No.5; Since Temasek decision, the need for these regulations has become crucial. The Temasek decision has caused foreign investors to question legal certainty in relation doing business in Indonesia; At the same time, the decision also challenged Sovereign Wealth Fund activities as well as the Commission�s equal treatment of Indonesian state owned companies and foreign invested companies;

18. 18 Temasek case decision provoked debate and challenged by many. The consequences of the decision raised the following issues: Foreign investors are questioning about certainty of their business in Indonesia; Foreign investors are concern about their shares ownership in the foreign investment companies; Some believe that the decision is an �alarm� to their behavior in doing business in Indonesia; Subsequent to the decision, class action have been filed in at least 2 District Court: Tangerang and Bekasi region at outskirt of Jakarta, claiming consumer loss quoted/stated from the decision;

19. 19 Few comments on the recent decision from Temasek Case on the following issues: due process of law � hearing and decision process; adoption of single entity doctrine under Indonesian law: extraterritorial jurisdiction under Indonesian Law No.5 year 1999; relevant market; dominant position; lesson learnt from Temasek case; after the appeal at the Central Court of Jakarta;

20. 20 a.Due process of law: Since the establishment of the Commision (KPPU) in 2000, the issue of due process of law in the case handling procedure has been questioned many times by both Reporting and Reported Party. It started from filing of the report, investigation, hearing process up to delivering the decision; The Commission responded by issuing Internal Regulation as stated in the Commission Decree or Keputusan KPPU No: 05/KPPU/KEP/IX/ 2000 on the Procedure of Report Submission and Case Handling Procedure in Law No.5 Year 1999. After several years of application, the Commission Decree revoked and improved by Commission Decree No.1/2006 in September 2006; There has been question on the power or jurisdiction of the Decree or Commission guidelines. If we refer to Article 35 and 36 of Law No.5 year 1999, the article stated that it granted power to KPPU to �oversight the implementation of the law�.; One of the power stated in Article 35 (f): �is to prepare and issue guidelines and or publication relevant to the law�. However, it is expected that any documentation or decree issued must comply with the existing law (not conflicting), such as Civil Procedure law as guidelines for the Commission internal procedure; The question of law is: which regulation should we comply with?, Civil Procedure Law or Commission Decree? Jurisdiction and power of the Commission Decree has been challenged by referring to Law No.10 Year 2004 Concerning Law and Regulation Making Process;

21. 21 Reporting Party who consent their right to the Commission should be granted information relate to status of their report, and should be well informed on the progress, whether the Commission decided to proceed with the investigation or dismissed it; Refer to Article 39 (1) Law No.5 Year 1999 stated that the time limitation to determine whether the Commission shall proceed with preliminary investigation is thirty (30 days) after filing of the Report; Article 43 Law No.5 Year: stated that completion of the follow up investigation is determine sixty (60) days after the follow up investigation as determine in Article 39 (1) and shall be extended for another thirty (30) more days; There has no description of �expired report� for Reporting Party; The statute of limitation for the report is determined by the law, therefore, Reporting Party has the right to know about the status of the report;

22. 22 The Commission argued that there is no recognition of revoking the Report by the Reporting party, therefore the status of the Report will remain open unlimitedly until the Commission decide otherwise; The Commission has not been transparent during the initial by not clear on how they decided that the case originally based on the report and later on changed to �initiative�. (Under Article 36 (b) the Commission may decide to proactively initiate the investigation or based on the complaint or report from Reporting Party; The mechanism of changing from status of a � report� to status of �initiative� has been vague from the beginning; The incosistent approach shown when the Commission stated that they have no obligation under the law to report to the Reporting Party about the status of the report, the Decree does not cover this issue; � this becomes partial interpretation of the Commision own Decree. It has been challenged because the Decree is self produced by the Commission it self, therefore, the due process of law has been questioned;

23. 23 b. Application of Single economic entity doctrine There are many ways of achieving efficiency, improving performance, increasing market share done by firms internally (through imcreasing capital, diversification or expansion of business); or externally ( through merger, aqcuistition consolidation); Merger, consolidation or acquisition may cause consequence in legal or economic relation between parent or mother company, child or sister company or subsidiary through vertical or horizontal relation (form holding company/concern group company); Law No.5 Year 1999 stated that merger, consolidation or acquisition are not it self perse illegal as long as it is not caused monopolisctic practices and or unfair business competition � apply rule of reason;

24. 24 The issue of holding company and majority shares were discussed since there is no firm defenition under Indonesian law of what constitute �group of business actors� to determine the ability to control the child or subsidiay company; If we determine that group company is merely having an organizational relation, therefore, the act of the child or company in the holding or group company will be an independent act. The question is whether they are also acting independently when they manage or making company decision; There are two important elements on that understanding: - companies are in fact acting independently; - there is a single economic entity of few companies which form single economic entity and lead by central management �in another word they are not acting independently;

25. 25 From competition view points, application of Article 27 (a) Law No.5 Year 1999 must satisfy few elements: business actor/gorup of business actors, majority shares, relevant market, same type of business in the relevant market, ownership of more than 50 % of shares and the impact of such ownership to market competition; Reading Article 27 is imperative prohibition or illegal perse. To provide consistent understanding, the interpretation should read that � the entire share ownership of every firm with 50 %or group of business actors with 75 % market shares determine as illegal�; However, the contradiction may apper if we understand Article 27 is illegal perse, the article will be conflicting to other articles of the law such as Artilce 4 (oligopoly), Article 13 (oligopsony), Article 17 (monopoly) aned Article 18 (monopsony) , where these articles are determine as rule of reason;

26. 26 The Commission decided to adopt what they called as �minimalist approach� for applying perse illegal and � maximalist approach� for applying rule of reason. In this case, the Commission interpreted that the character of Article 27 is rule of reason, especially when it comes to prohibition of abuse of dominant position under Article 25; Minimalist approach is established if the following elements are satisfied: business actor who is able to control few companies in the relevant market and the control shall resulted in more than 50 % of market share; Maximalist approach is established if the following elements are satisfied: business actors who is able to control few companies in the relevant market and the control resulted in more than 50 % of market share plus additional prove that the conduct is resulted in hampering competition;

27. 27 Business Actor: normatively business actor shall be any individual or business entity, either incorporated or not incorporated as legal entity, establish and domiciled or conducting activities within the jurisdiction of Republic of Indonesia, either independently or jointly based on agreement, conducting various business activities in the economic field (Article 1 (5) Law No. 5 of 1999); The elements of business actors according to Article 1 point 5 consist of: individual or business enterprise in the form of legal entity or a non legal entity, domiciled and conducting activities in the legal territory of Republic of Indonesia, and the activities conducted either individually or jointly through an agreement; Somehow, Temasek Holdings did not fulfill the elements since Temasek represented by its subsidiaries in PT Indosat through Indonesia Communication Limited (ICL) and in Telkomsel through Singapore Telecommunication (Singtel); The Commission decided that Temasek Holdings Group is a single economic entity, even though it does not act business activities in Indonesia;

28. 28 The Commission adopted the doctrine of single economic entity which stated from EU Competition Commission decision: two or more separate legal undertakings can be treated as one undertaking if the undertakings �form an economic unit within which the subsidiary has no real freedom to determine its course of action on the market, and if the agreements or practices are concerned merely with the internal allocation of tasks as between the undertakings� (Case 30/87, Corinne Bodson); The rationale of this single economic entity are a) no freedom to take decisions regarding the market conduct; regarded as unilateral conduct, and may be caught by article 82 EC Treaty if the undertaking has a dominant market position; b) internal allocation of functions; On the other hand, if a subsidiary engages in anti competitive agreements the mother company will also be regarded as part of the agreement. That is why, the test is actually needed to know if a parent company can control either legally or de facto its subsidiary;

29. 29 The test of control, whether Holdings company can control its subsidiaries, are: If a parent company owns more than 50% of the shares in a subsidiary then interdependency is presumably existed; Minority share holder may be able to control if combined with specific rights attached to the rights; If there is one large shareholder and others are small ones; Joint control companies must belong to a single group of companies to be regarded as part of one economic unit; Holding Company (parent company) can control its subsidiaries if the Holding Company has shares more than 50% in its subsidiary;

30. 30 The Commission concluded that Temasek did own shares and control in Telkomsel and Indosat; The Commission argued that Temasek Holdings owns 100% share of Singapore Technologies Telemedia Pte. Ltd (STT) and 54% share of Singapore Telecommunication (Singtel); Singtel owns 100% share of Singtel Mobile which has 35% share of Telkomsel. STT has 100% share of STT;Communication. STT Communications owns 100% share of Singapore Mobile Holdings Company; Asia Mobile Holdings Company has 75% share of Indonesia Communication Limited and 100% share of Indonesia Communications Pte. Limited. Indonesia Communication Limited owns 39,96% share of PT Indosat Tbk and Indonesia Communication Pte. Limited owns 0.86% share of PT Indosat Tbk;

31. 31 The Commission is incosistent in their approach when interpreting the meaning of majority shares stated in Article 27 Law No.5 year 1999 and argued that the literal meaning of this article does not intend to have the same purpose with other regulations; Other regulations which mentioned about majority shares found in: Law No. 19 Year 2000 Concerning Amendment of of Law No.19 Year 1997 on Tax Claim with Forced Order, Stock Exchange Regulation No. IX.H.1 Concerning Take Over of the Public Company, Bank of Indonesia Regulation No. 8/16/PBI/2006 Concerning Single Ownership on Indonesian Bank and Law No. 19 Year 2003 Concerning State Owned Enterprises and Law No. 8 Year 1995 Concerning Stock Exchange were all refused by the Commission; The Commission argued that the intention of Article 27 is soley focus on economic power of a company which may resulted in concentration of economic power and unfair competition;

32. 32 Single Economic Entity doctrine is newly adopted in the Commission decision. The question remain is whether the adoption of such doctrine relevant with reference to the Indonesian law system or Indonesian Competition law?; Whether the Commission in their power to interpret the article of the law according to Article 35& 36 Law No.5 Year 1999 is actually granted power to do � law finding� or inventing a new law (like a judge) � if there is no other law to regulate the issue;

33. 33 c. Extraterritorial Jurisdiction: Juridical power which extends beyond the physical limits of a particular state or country or beyond the physical and juridical boundaries of a particular state or country; the extraterritorial operations of laws, their operation upon persons, rights, or jural relations, existing beyond the limits of the enacting state or nation, but still amenable to its laws; In Temasek Decision as a consequences of single economic entity doctrine, the Commission also applied extraterritorial jurisdiction where Law No.5 Year 1999 shall apply to business actor/group of business actor who do not domicile in Indonesia but conduct their business in the Indonesian territory; Law No.5 Year 1999 does not explicitly stated that it recognized extraterritorial jurisdiction, unlike Singapore with Article 33 (1) Competition Act 2004 Singapore or the US with Foreign Frame Antitrust Improvement Act 1982 (FTAIA) with the notes of: the prohibited conduct shall direct affectedly to the US economy; The Commission stated that they recognized this doctrines but only applied partially where they determined that that part is relevant to their decision;

34. 34 d. Relevant market The Commission decided that the relevant market in this case is the cellular telecommunication and the market is the national market based on the argument of product market (substitutability, use and geographical area) (refer to Article 7 to Article 9 UU Law No. 36 Year 1999 on Telecommunication, Article 9 (2) Government Regulation No. 52 Year 2000 On Regulation on the Telecommunication Operator, KM. No.35 Year 2004 on Implementation of Fixed Network without Cable with Limited Mobility; The argument on national geographical market was in question since for telecommunication industry, the unique characters of each region are different from region to region. Telecommunication industry is vary from one to another with different need of infrastructure or coverage. Therefore, the capital or cost needed expectedly to be different as well;

35. 35 e. Dominant Position (Article 25 (a); In Temasek decision, Telkomsel concluded that Telkomsel is Dominant but did not exercising its Dominant Position � therefore there is no violation existed in this part; However, Telkomsel did violate Article 17 on Monopoly where it stated that business actor shall be prohibited from controlling the production and or marketing of goods and or services which may result in monopolistic practices and or unfair business competition; Telkomsel accused by putting barrier in interconnection among operators and maintaining high price which inhibit competition in telecommunication service market in Indonesia; The Commission apply incosistent assumption where Telkomsel proved that it is not abusing its dominant position however accused by exercising its monopoly power based on evidence that Telkomsel control 50 % (55,79 % market share) more of the market share as stated in Article 25 (2) Law No.5 Year 1999;

36. 36 f. Lessons from Temasek decision It is argued that the Commission decision is lack of clear legal reasoning; The Commission decided that Temasek Holding must divest its shares and in ICL in Indosat and Singtel in Telkomsel with maximum of 5 %; This is clearly against the market mechanism of demand and supply, while government regulation concerning merger, consolidation or acquisition is still underway; The Commission also ruled that Telkomsel must lower its tariff at least 15 % (fifteen percent) starting from the announcement of the decision. This area is clearly a BRTI or jurisdiction of tariff regulatory body; The decision has impacted in many ways: consumers reaction to statement of consumer loss, investment climate, further execution of the decisions etc:

37. 37 The Commission did improve however, in applying its economic assessment or analysis of the case with calculation of consumer loss. In its former decisions, the Commission was lack of economic analysis or economic reasoning; As consequences, advocate of consumer protection group has launch class action in Tangerang dan Bekasi District Court seeking damages from Telkomsel from their excessive pricing; The process of divestiture in two years time set some limitations: Each buyer shall be limited to maximum of 5% from the divest shares; Buyer shall not be, in any form affiliated with any of Temasek holdings; There are questions raised on how this can be implemented? Through stock exchange? No clear answer yet;

38. 38 Question of due process of law still remain in the Commission case handling procedure, need to be improve; Adoption of many new doctrine in to the Commission decision, is this an improvement or not? Still debatable whether the Commission is actually able to cite any given cases from other countries in their decision; Reported parties may seek other recourse such as looking at Center for Settlement of Investment Dispute (ICSID di Washington DC) � if the agreement did have a clause on this; Media expose has been very extra ordinary for this case; Decision will certainly affected the reading of the articles of the law, business actors must learn that the Commission is more likely to interpret the article on case basis; Test to the Commission decision consistency onwards � by literal reading of the law or simply leave it to Commission to decide?;

39. 39 g. After the appeal at the Central Court of Jakarta Verdict delivered on May 9th, 2008 where the Court affirmed the Commission with decision some amendment in the decision): The first time that the Judge at the District Court �revising� the Commission decision; Panel of the judges instructing that divestiture of the shares should be 10 % instead of 5 % and should be executed within 1 (one) year after the decision; Is this possible to do?, what happen if the time deadline does not meet the verdict?, would there be forced sale at the price determined of the buyer or does the Court would take the role, the Commission?; Based on former case decision taken to the Court for appeal, the Court has never done that except simply reversed or affirmed KPPU decision. Therefore the question of whether the Central Court is acted ultravires of its power will be the challange and shall be decide by the SC; The next step for the loosing party would essentially be cassation (appeal) to the Supreme Court within 14 days after acceptance of the court verdict; Despite the concern of legal uncertainty, the Supreme Court will be the ultimate opportunity for the final decision;

40. 40 Terima Kasih ningrum@indosat.net.id