Indonesian Minister Proposes Auction for Backbone Rollout


Posted by on September 1, 2006  /  14 Comments

Inadequate backbone infrastructure in Indonesia has been widely regarded as crippling its telecom sector. Uneven development of the backbone has meant that much of the East of the country has no fiber-optic based backbone network and those islands have to rely on more expensive satellite links. Poor long-haul domestic infrastructure has meant that many parts of the country do not have access to basic communication and those that are connected have some of the world’s highest leased line and Internet prices as my earlier study shows.

The Indonesian government’s ambitious Palapa Ring project to create a fiber ring connecting the major islands had been shelved post the 1997 Asian financial crisis. Recently, however, efforts have been made to revive a modified version of the earlier vision. In an earlier discussion on LIRNEasia (click here), we described as unviable the Indonesian regulator’s proposal to build backbone infrastructure funded primarily from government coffers: “From the outset, this proposal seems doomed. Although the intention is a noble one (to reduce Internet prices) the means are neither the most efficient nor feasible. For one thing, there is no budgetary support for this and under the tight financial constraints that the Indonesian govt is in, it seems unlikely that it will be supported.”

Hence, it is heartening to note that a few days ago (August 28, 2006), the Indonesian Communication Minister, Sofyan Djalil, has announced a proposal to open up the backbone market to private investment. The Ministry plans to use the mechanism of least-cost subsidy auction to encourage potential investors to roll-out backbone infrastructure throughout the country. LIRNEasian researchers have been involved in designing a similar auction for the eSri Lanka project to extend backbone in provinces of Sri Lanka that currently lack such infrastructure. A number of pitfalls and challenges of least-cost subsidy auction have been identified in earlier studies conducted by LIRNEasia researchers in India and Nepal. Generally, when necessary regulatory reforms have not been carried in a country, the auction results in sub-optimal outcomes that benefit the incumbent and other parties rather than the unconnected.

Although it is too much to hope for regulatory reforms to take place in Indonesia before auctions are held, incorporating certain safeguards in the auction design may mitigate some potential ill-effects. We would strongly recommend to have an access regime in place that specifies modailities for access to the new backbone infrastructure that would be rolled out. The license should also specify conditions and procedures for raising backbone access fees.
For news story, see below.

Indonesia to Ask Investors to Bid on Building Fiber-Optic Links

By Wahyudi Soeriaatmadja
Aug. 28 (Bloomberg) — Indonesia will ask investors to bid to lay fiber-optic cables in the world’s largest archipelago and
help reduce the cost of high-speed Internet connections, Communications Minister Sofyan Djalil said. The government is preparing tender papers and will ask companies to bid for the project in two months. Phone companies interested in bidding will be given incentives, including licenses for overseas calls, Djalil said. The government won’t charge any fee for allowing companies to lay the network.

“Information technology dominates almost all economic activities as it boosts productivity, improves education process,” Djalil told reporters in Jakarta today. “This project will help in reducing Internet and information
technology costs.”

The government is trying to bring down Internet and phone costs for companies and individuals, which are among the highest in Southeast Asia. The fee for a high-speed Internet connection using cable television lines in Jakarta starts at about $55 a month, or 27 percent costlier than in Thailand. There were 1.5 million Internet users in Indonesia in 2005, according to the Indonesian Internet Service Provider Association.

“Those that offer the cheapest rates will win the tender,” Djalil said. “The cheaper, the better for Indonesian
people.”

–Editor: S. Collins

14 Comments


  1. As being a submarine cable manufacturer ,we are interested in the project.Could you be kind and inform us what global players or consortiums are interested in this project .
    thanks
    ZAK ASCI
    hesfibel/turkey

  2. At the Infrastructure Summit held in Jakarta in November, the Indonesian govt presented the Palapa Ring project to investors. I understand that some interests have been expressed by potential investors but not sure if a consortium has been formed. If you email me I can put you in touch with relevant people in the government who can tell you more about the status of this project. My email: goswami at lirne.net

  3. Is the project still open for bidding?

  4. Tender has not been issued yet for this project.

  5. When private investment is forthcoming for building backbone it is preferable to Govt spending scarce development funds on Palapa Ring project as the Indonesian govt was proposing earlier. Hence, it is a positive sign that five Indonesian companies have expressed interest to form a consortium to implement this highly ambitious infrastructure project. However, there is a long way to go to translate this interest into investments and backbone deployment.

    Five companies interested in Palapa Ring mega-project
    http://www.antara.co.id/en/seenws/?id=26431
    Jakarta (ANTARA News) – The number of companies interested in taking part in a US$1.517-million broadband fiber optic mega-project bid has increased to 5, an official said here Tuesday.

    “The five companies have already met requirements for participation in the tender on the Palapa Ring mega-project,” Yusuf Iskandar, director general of post and telecommunication affairs, said on the sidelines of an Information Communication and Telecommunication Summit 2007.

    The five firms that had expressed interest in the bid were PT Aqela, PT Potensi Bumi Sakti, PT Telecommunication Indonesia, Bakrie Telecom and PT Wireless Indonesia (WIN), a telecommunication subsidiary of diversified business company Sinar Mas Group.

    The Palapa Ring would be a broadband fiber optic network which can carry high speed and huge capacity data. The network would consist of seven fiber optic rings connecting Sumatra, Java, Kalimantan, Nusatenggara, Sulawesi, Maluku and Papua as well as eight back hauls.

    The 30,000-km-long ring would hopefully link 33 provinces and 440 cities/districts throughout the country.

    “The network project is aimed at developing the telecommunication sector, encouraging economic growth and reducing the digital gap,” Iskandar said, adding that the government would surely facilitate the network project.

    In view of the huge amount of investment involved, the government would give the five companies a chance to set up a consortium, he said.

    “The five firms have generally agreed to form a consortium and none of them has said it is ready to finance the mega-project by itself,” he said.

    A source at the post and telecommunication directorate general, however, said PT Aqela and PT Potensi Bumi Sakti were prepared to fund the project by themselves in cooperation with foreign investors.(*)

  6. Tenders for the Palapa Ring project will be issued in October 2007. In the meantime, the consortium along with the DGPT will explore the role of the govt in the project along with possible business models to fund this very ambitious project. The consortium that has been formed will conduct a feasibility study and develop the design of the fiber optic network.
    ——————-
    http://www.antara.co.id/en/seenws/?id=26578

    Government to form team for intensifying talks on Papala Ring

    Jakarta (ANTARA News) – The government is to set up a team to intensify a discussion about a concept on Palapa Ring`s broad band fibre optic project worth US$1.517 billion, which would go to a tender in October, 2007.

    “The team will be formed late January, 2007, with the early task in February, 2007, to study the Palapa Ring`s business model,” spokesman for the Post and Telecommunications Directorate General, Gatot S. Dewa Broto, said here Friday.

    Gatot said the team was expected to intensify a discussion about the substance of the concept on the Palapa Ring project, namely, a business model, formation of a consortium, incentives and the government`s authority in the concept.

    After the formation of the team, the government would hold inter sectoral meetings in March, 2007, formation of a consortium in May, 2007 and draw up a fibre optic network design in detail in June, 2007, he said.

    The Palapa Ring project was designed based on a feasibility study to decide an optimum design in anticipation of the telecommunication traffic development in the future, he said.

    The total length of the submarine fibre optic cable is 35,280 kilometers and the inland one is 20,737 kilometers.

    About 15,000 kilometers of the existing fibre optic cables have been established by some operators (telecommunication company PT Telkom, PT Excelcomindo, PT Indosat and PT Comnet Plus) and they were expected to be integrated with the Palapa Ring project.

    “The need of long fibre optic cables demands a comprehensive concept on national broad band network to lower the cost per Mbps. It is expected to become a national network integrated to the existing one,” he said.

    The companies interested to take part in the tender of the mega project are PT Telecomunikasi Indonesia, Bakrie Telecom, and PT Wireless Indonesia (WIN), Aqela and PT Potensi Bumi Sakti. (*)

    Copyright © 2006 ANTARA

    January 26, 2007

  7. The Palapa Ring Project is fine to bring down the currently exorbitant local access prices. Hopefully the usage volume will bring down the price to an acceptable level.

    However, is anyone addressing the backhaul issue i.e. international connectivity? Does anyone know that out of 100% of the price of an International Private Leased Circuit (IPLC) going out of Indonesia, 85% of the total cost is charged by the Indonesian telco? The other “half” circuit costs only 15% of the total cost. Imagine if the Indonesian “half” costs 15% as well… hmmmm…

  8. International bandwidth prices in Indonesia remain high although they have come down somewhat since Telkom was given the second international gateway license. The Taiwan earthquake demonstrated clearly that Indonesia does not have enough redundant routing options for international traffic. They are over reliant on submarine cable going the Pacific route and have one old cable going the other way via South Asia and North Africa. The Palapa ring project will not address high international bandwidth prices per se. Opening up the International gateway market to full competition and allowing resellers to do sell international bandwidth will probably bring down international prices and concomitantly, Internet tariffs.

    However, in today’s Bisnis Indonesia article (Feb 9, 2007) Basuki the DG from the DGPT mentions how international bandwidth prices are high in Indonesia which will come down thanks to the Palapa project.

    There is one domestic company called Group Agela who want to build the whole $1.5 billion project by themselves! Nobody seems to have heard of this company before and I don’t think they have demonstrated capacity for laying submarine cables and building cable landing stations. I would advise the Govt to be transparent in the manner that the auctions are held. The restriction on foreign participation (to 35%) also seems contrary to the objective of this exercise; to get as much investment, foreign and local to build necessary communication infrastructure in Indonesia that it is currently lacking.

    Here’s a rough translation from the news story:

    The govt plans to establish Palapa Ring Consortium by end of the month
    however there are still no firm mechanism & no fixed members.

    The Minister Sofyan Djalil indicated that the consortium might not be established if
    there is a confirmed readiness from a group (Grup Agela) to build the
    whole 35.000 km FO network connecting 33 provinces and 440 kabupaten.
    However, no firm confirmation from this group as of yesterday.

    Some operators have already shown interest to join the consortium (telkom,
    Indosat). Other companies who have shown interest in joining the tender for
    Palapa Ring are Bakrie Tel, WIN, Potensi Bumi Sakti and Agela

    The tender for Palapa Ring (7 FO rings) (US$1.52 billion) will be
    performed in October 2007, there is a restriction on foreign ownership
    max of 35% (the DG mention before that this is for non Asean investors)
    Sofyan mention that most likely any incentive being offered to build
    the eastern section of the Indo FO will be in form of new license and other “facilitations”.

    The FO build expected to be started in early 2008 and expected to be
    completed in 3 years. The Minister mentioned the IRR will be 21%.
    DG mentioned that Palapa Ring project is trigered by the high bandwidth
    price which trigger high telecommunication tariff for internet tariff.

  9. Since the period when Telkom was given the second international gateway license, was another international gateway license given to another telco? If I am not mistaken, Excelcomindo (XL) has international connectivity to Malaysia since Telekom Malaysia now has around 60% equity in XL. Does this constitute an “international gateway licence”? Can XL actually sell its international connectivity services to the Indonesian market and thus provide more competition in this area of business?

  10. Very good point Irwan. True, TM has a cable landing in Indonesia (Dumai Melaka). However, XL is not allowed to access the cable directly. Since it still doesn’t have an international gateway (IGW) license, it has to go via PT Telkom’s leased line to connect to it. XL is not allowed to terminate voice traffic on the TM cable, only data, and only for closed user group (international leaseline). TM is also not allowed to terminate voice traffic on XL’s network using that cable. Wouldn’t you say the situation is a bit ludicrous?!

    KOMINFO had a consultation paper out on licensing a third IGW provider. In all probability it will go to XL. I had submitted comments on the white paper and had pressed for full liberalization of the international gateway instead of piecemeal (ad hoc) licensing that is currently in fashion.

  11. From the story i heard, Indosat is controlling price of international internet traffic which is coming thru SEAMEWE network. if this is the case, why Indosat can’t lower the charges so the indonesian can access so-called affordable internet charges ?

  12. SMW3 is not an exclusive asset of IndoSat – it is just a member if the consortium that built the cable system. The problem lies in the fact that non-Indonesia consortium members have no say whatsoever in the end-user pricing since they do not have the necessary “ijin” or permit to conduct this kind of transaction in Indonesia.

    Generally, only carriers (IndoSat, Telkom, XL) can buy circuits from international carriers / global networks e.g. Verizon. And only carriers can sell to the next tier down of the “value chain”, which are Network Access Providers (NAPs) who resell to ISPs/corporates. IndoSat can mark-up the price of the circuits sold to NAPs who will add another mark-up to ISPs/corporates.

    So where does it start? We know the answer to that, but the question is where does it end? Isn’t this the same as adding ‘tax’ on information? If the winner of this game is IndoSat, who do you think is the loser?

  13. where can I find information about PALAPA ring infrastructure/technology that wil be implemented?