State Control and the Privatisation of the Indonesian Telecommunications Industry: From Ownership to Regulation

Author:Atip Latipulhayat
Position:Senior Lecturer in International Law and Telecommunications Law Padjadjaran University Law School, Bandung - Indonesia atiphayat@yahoo.co.id
Pages:58-72

Page 58

1. Introduction

The telecommunications industry has always been given special treatment because of its great importance to society (Melody, 2001). In Canada, for example, this industry has legally been recognized for its significant role in the maintenance of Canada's identity and sovereignty. Traditionally, therefore, the telecommunications industry has been state-owned and subject to a complete monopoly, leaving the government with full control over this sector (Zhao, 1999). The Indonesian Telecommunications Act stipulates that the telecommunications sector is of national strategic importance and must therefore be controlled by the state. This provision is basically derived from Article 33 (2) of the Indonesian Constitution of 1945, which states: "Sectors of production that are important for the country and affect the life of the people shall be controlled by the state". This constitutional provision -particularly the words "shall be controlled by State" (state control) - indicates that Indonesia is properly characterized as an interventionist state. In other words, this is a constitutional justification for state intervention over strategic sector such as telecommunications.

Since the late 1980s, there has been a radical policy reversal whereby governments have progressively reduced their ownership and involvement in this sector by increasing private sector participation. Advances in telecommunications technology, the inefficiency of the state-owned enterprises (SOEs) and the changing market structure of the telecommunications industries are commonly seen as the three most important factors behind the movement (Wallstein, 1999). One country after another, including Indonesia, has reformed their telecommunications industry by privatizing this sector, as well as introducing other reforms (Cho and Lee, 1997).

As discussed by Noll (1999) and Wallsten (1999), privatization of the telecommunications sector signals a dramatic shift from state-dominated institutions to market institutions in many countries. The main aim is to dismantle a monopoly and to enhance competition over the sector by allowing private participation. One of the important implications of this is that governments become less able to carry out direct political control over the sector.

The privatization of the Indonesian telecommunications industry, therefore, raises a critical question; in what ways might the government maintain its control over the sector when privatization reduces state ownership in SOEs? This paper examines the privatization of the Indonesian telecommunications industry and its implication for the notion of state control over the sector. More specifically, it examines the method of state control after privatization of the Indonesian telecommunications industry. Finally, the paper will conclude by articulating new meanings of state control and advocate that Indonesia should give greater consideration to these post- privatization state controls. Page 59

2. The Meaning of Privatization

Privatization has become an icon of economic and political reform in both developed and developing countries (Hanke, 1987). In other words, the phenomenon of privatization is now truly global in nature (Moe, 1987). However, writers and researchers believe that the term and concept are still in need of academic refinement. They complain that the term privatization is indeed very omnibus and its concept is imprecise (Ghosh, 2000). In the words of Starr (1998), "privatization covers a great range of ideas and policies, varying from the eminently reasonable to the wildly impractical".

The ideological underpinning of privatization is based on minimum state intervention in economic and public affairs. This idea is built on the notion that state intervention produces inefficiency, and that furthermore, state intervention leads to decisions that are mostly politically motivated and either ignore or override factors which markets would recognize. It should, therefore, be minimized. It also believes that government, as Peter Drucker (1992) put it, is "a poor manager". Privatization, therefore, is intended to be an economic tool to solve this economic inefficiency.

Privatization is both an economic and political concept. Hence, privatization is actually a matter of the political economy. The political economy is concerned with the distribution of economic resources and products for both the people and the state (the sovereign). In other words, the purpose of the political economy is to guarantee the development of both the state and individuals in a proper, safe and fair way. Either the private or public sector, or a mixture of the two, can carry out the distribution. In this context, privatization and governmentalisation are viewed as two opposing extremes.

If the government chooses to have a more direct influence in business, it will direct companies to the government extreme. On the other hand, if it prefers to allow the private sector to play a greater role, the tendency will be toward privatization (Bastian, 1998). Privatization, therefore, pertains to the policy regarding the level of state intervention in the economy. Thus, privatization involves change only in the form of the state's economic role, rather the role itself. In other words, privatization is a policy of changing, not removing the state intervention in the economy. Privatization may reduce the state's ownership but at the same time increases the state regulatory function in the economy.

3. Traditional Telecommunications Regimes
3.1. Public and Private Monopoly

Telecommunications has been in state hands since the dawn of the electronics era in most developed countries, as well as in virtually all developing nations (Bortolotti et al, 2001). It was generally combined with postal services and, in most European countries, was provided within the framework of the national Post, Telegraph and Telephone Administration (the PTT model). This regime has traditionally been characterized by a high degree of government intervention (Klodt, 1997). State institutions such as ministries of post and communications controlled the PTT, holding monopoly over all mail and telecommunications services (Hulsink, 1999).

The classic argument dictating that the provision of these services should be reserved to a particular enterprise controlled by the state was that these were strategic industries, and that specific security concerns were involved. In addition, there are three main reasons justifying telecommunications monopolies. First, an economic argument has been put forth which states that telecommunications is a typical 'natural monopoly'. It was argued that the establishment of telecommunications networks involved large fixed costs1 and that a single enterprise would therefore be able to provide services at lower costs than would two or more different enterprises (Geradin and Kerf, 2003).

Secondly, telecommunications is a public utility - a service that is essential to the public, such as water, electricity and postal services, usually involving elements of natural monopoly. Thirdly, some have argued that network externalities justified organizing the telecommunications sector on a monopoly basis. Network externalities are present in the area of telecommunications since the value of a network increases, for each user, with the number of network subscribers. As a result, for a given total number of subscribers, the value of a single network is much greater than the total value of several smaller unconnected networks (Geradin and Kerf, 2003). Page 60

The major visible exception to these observations has been the case of the United States (US), where telecommunications was considered as a service to be supplied by private business in normal markets (Drake, 2001). Interestingly, however, the American Telephone and Telegraph Company (AT&T), a private telecommunication company, dominated the provision of telecommunications services (Hudson, 1997). The author argues, therefore, that both Europe and the United States essentially adopted the monopoly model in different forms; public monopoly and private monopoly respectively.

3.2. The PTT: An Etatist Telecommunications Regime

In most European countries the operation of the telecommunications system was exclusively assigned to a government department or a public enterprise, generally known as the PTT model, with responsibility for the postal, telegraph and telephone monopolies. These PTTs were part of the traditional public administration apparatus and as such were subject to strong government influence and regulation through the polity (Noam, 1992). The telecommunications administration of European colonies in Asia, Africa, and the Middle East generally were branches or affiliates of the European...

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