Indonesia limits foreign ownership in the telecommunication sector to a maximum of 65 percent for mobile phone operators and 49 percent for fixed-line operators.

Two tender offers would begin concurrently in Indonesia and the United States at 7,388 rupiahs ($0.661) per share and would expire on Feb. 18, Qtel said.

“The Indonesian government has determined that Qtel’s total ownership will be limited to 65 percent of Indosat,” Qtel said in a statement.

“Guided by this ruling, Qtel is thus offering to acquire an additional stake of up to approximately 24.19 percent of Indosat, after taking into account its existing 40.81 percent indirect stake in Indosat,” Qtel said.

Qtel bought a stake in Indosat, the country’s second largest mobile phone operator, from Singapore Technology Telemedia for $1.35 billion in June, increasing its ownership of the company to 40.81 percent from around 10 percent.

Indonesia’s communications minister specified last year Qtel should not control more than 65 percent of Indosat and that it had to separate its mobile and fixed-line business in two years.

Read the full story in Reuters here.

As part of the U.S. effort, in December 2006, NOAA experts and Thai government officials put a deep-ocean assessment and reporting of tsunamis (DART) station in the Indian Ocean, halfway between Thailand and Sri Lanka. (See related article.)DART systems provide real-time tsunami detection as waves travel across open waters, and each station is linked to a satellite for real-time data transmission on global networks.

In September, under an agreement with the Indonesian government, NOAA will put a DART tsunameter at 0 degrees north, 89 degrees east, near Sumatra, and Indonesia will maintain the device. The U.S. State Department is providing nearly $1 million for DART training there.

But DARTs are only part of an all-hazards warning system. A complete end-to-end system includes tide gauges, communications systems, inundation (flooding) modeling, warning dissemination systems, and especially outreach and education to local communities — what experts call “the last kilometer” — about what to do in an emergency.

On the ocean side of the U.S. effort, NOAA, with WMO, outlined a detailed architecture for regional and national warning systems, and plans regional and national workshops in September and October.

NOAA upgraded six coastal sea-level gauges in Sri Lanka, Indonesia and the Maldives and contributed seven more gauges. The stations, which are integrated into the Global Sea-Level Observing System network, transmit data at one-minute intervals via satellite.

NOAA also upgraded Global Telecommunication System connections for the Maldives and Sri Lanka, helping those nations share critical data with other Indian Ocean countries and NOAA’s Pacific Tsunami Warning Center (PTWC) and receive such data from them.

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The Indonesian Communication and Information Minister, Sofyan Djalil, said, “As we know, foreign investors can control up to 95 percent of businesses in all the telecoms sectors, but we have decided that foreign investment in jut a few telecommunications sub-sectors should be limited and left to local entrepreneurs.” Read more.

President SB Yudhoyono’s government came to power on the promise of eradicating corruption and the “deal culture” that has plagued Indonesia throughout much of its existence. Initially the government promised leased-cost subsidy auction and other open transparent methods for rolling out backbone infrastructure in the country. Now a sudden announcement in the media informs us that licenses for the Palapa Ring project have been granted.

The Palapa Ring has been a “dream” project of the Indonesian government even before the financial crisis of 1997. Before the crisis it was planning on funding it with government funds. Post the financial crisis and faced with empty coffers, the Government has been pressuring telecom operators in Indonesia to use their resources to realize the Government’s dream. The enthusiasm of PT Telkom to participate in the Palapa Ring Project (in news story below) is ironic considering that it had decades to build backbone infrastructure in the country when it was the monopoly provider of domestic fixed line services and it built little. I wouldn’t be surprised if the threat of regulatory retribution hung like Damocles’s sword over Indonesian operators when they decided to participate in the Palapa Ring consortium.

Least-cost subsidy auction would have been a more transparent way of eliciting participation of Indonesian operators in the Palapa Ring Project. In those islands/regions that are commercially viable, backbones would be deployed by private  sector without any government support. In islands/regions that are sparsely populated and where landing submarine cable may not be commercially viable,least cost subsidy auction would have provided the necessary subsidy to make it worthwhile for private sector to participate in infrastructure roll-out.

Although the sum of $1.5 billion is being bandied around as the total cost of the project the consortium has yet to commit to the backbone map that DGPOSTEL and the Indonesian government has been promoting. The map as can be seen below has submarine cables landing every few kilometers as they garland the various islands. The highest cost-component of a submarine cable system are the cable landing stations.The proposed design is not cost-efficient. It would make more sense to land a submarine cable at couple of points in an island and use terrestrial fiber optic or microwave to connect the rest of the island.

Indonesian group will build US$1.5 billion Palapa network

JAKARTA, May 10 (Reuters) – Seven Indonesian companies will join forces to build a $1.5-billion 34,000 km (21,100 mile) fibre optic cable network in the country aimed at improving telecommunication infrastructure, a government official said.

Indonesia’s director general for post and telecommunication at the communication and information ministry, Basuki Yusuf Iskandar, said the group will meet next Wednesday to discuss how to implement and finance the Palapa Ring Project.

“Seven companies have obtained the licence for the Palapa Ring,” Iskandar told reporters late on Wednesday. He said PT Telekomuniasi Indonesia Tbk, PT Indosat Tbk, PT Excelcomindo Pratama Tbk, and PT Bakrie Telecom Tbk were among the seven in the consortium.

The Palapa Ring is part of the government’s effort to refurbish the country’s ailing infrastructure to spur economic growth in the world’s fourth most populous nation. Its completion will open up telecommunication access to eastern
part of Indonesia, the less developed area of the sprawling tropical nation.

Telkom’s president director, Rinaldi Firmansyah, said the company will become the majority contributor to the project and lead the group as it would use most of the telecommunication traffic through the network.

“We are still calculating the numbers, but all this time we are accounted for about 50 percent of the country’s
telecommunication traffic, so we are likely to invest about 50 percent of the project (cost),” Firmansyah told reporters.

“Financially we are ready,” he said, adding that the company’s involvement was aimed at strengthening its network in the eastern part of Indonesia.

Separately, Excelcom’s president director, Hasnul Suhaimi, said the company’s contribution to the project would be around 10 percent of the total value of the investment. He said the fibre optic network could help lower the telecommunication costs from the current system that incorporates satellites.

On March 16, the Director General of DGPOSTEL conceded that requiring new international operator to build 10 new gateways was a heavy burden on the new entrant especially when the two existing operators in total had six.

The tender for the telephone fixed line is postponed till June
March 16, 2007(Translated from Bisnis Indonesia, March 16, 2007)
Jakarta:[...] The director general of the Post and the Telecommunications, Basuki Yusuf Iskandar added that the government will lessen the requirements for the IDD tender by reducing the number of international gateways that must be built. “Before, one of the conditions followed the IDD tender was to have the commitment to be able to provide 10 units IDD Gateways. But afterwards the government reconsidered this obligation and it was reduced to five ,” he said.

According to the Director General of post and telecommunications, the decline in the obligation is because the provision of 10 IDD Gateways will be too heavy a burden for the operator since the existing operators currently only have approximately six units.

LIRNEasia‘s input to the White Paper issued by the Indonesian government on introducing a new license for local, long distance and international telecom is available here.

The tender for the telephone fixed line is postponed till June
March 16, 2007(Translated from Bisnis Indonesia, March 16, 2007)
Jakarta:The Government will postpone the tender schedule for fixed line telephone to June which was earlier expected to be issued this month. The postponment is due to legal delays and readiness of operators to participate in the tender.

The director general of the Post and the Telecommunications, Basuki Yusuf Iskandar, said the government hoped the tender will go well and successfully. The legal instrument will take the form of a Ministerial
Decree. There is a “big possibility” that the “tender would be carried out this coming June although in principle the government will try to do that as soon as possible,” he stated to the reporter, yesterday.

The Tender for the provision of fixed local, long distance and international was originally scheduled for March 2007. At this time the government is carrying out the finalisation of the new licensing of the three services. Depkominfo (DGPOSTEL) is currently drafting the Ministerial Decree regarding the opening of new opportunity
to provide the Local, IDD & DLD services.

Basuki added that the government will lessen the requirements for the IDD tender by reducing the number of international gateways that must be built. “Before, one of the conditions followed the IDD tender was to have the commitment to be able to provide 10 units IDD Gateways. But afterwards the government reconsidered this obligation and it was reduced to five ,” he said.

According to the Director General of post and telecommunications, the decline in the obligation is because the provision of 10 IDD Gateways will be too heavy a burden for the operator since the existing operators currently only have approximately six units.

For international connectivity, Telkom and Indosat are the incumbent operators. Telkom has Internet hubs in Malaysia, Batam, and Hong Kong, while Indosat had optic fibre links between Jakarta-Japan, Jakarta-Australia,
Jakarta-the Middle East, and Europe.

Although the International Gateway market is not yet opened officially, there are several companies that have expressed interest in the tender. The interested companies are PT Excelcomindo Pratama Tbk and Telematika
Indonesia. The chairman of the Association of the Cellular Telecommunications Indonesian, Johnny Swandi Sjam considered the government should NOT open the new opportunity for providing Fixed telephony services (IDD, DLD & Local) since currently the service are still under “duopoly” status (ie. PT Telkom and Indosat).

LIRNEasia researcher, Divakar Goswami, was also interviewed. The interview is featured in the online edition here. The interview is in bahasa. The English text of the interview is below:
1. How’s the growth of ICT in Indonesia for along 2006 (as we see from regulations, infrastructure development (hardware and software), human being, ICT industry etc)?

Information and Communication Technology sector (ICT) in Indonesia is one of the most dynamic sectors of the economy contributing most to GDP growth rate (around 16%) than any other sector. The ICT sector in Indonesia is dynamic, growing and profitable. Compared to the past, the regulatory environment is more transparent, pro-market, pro-growth and therefore pro-poor.

ICT Sector

Wherever competition has been introduced, growth has been spectacular; those sectors lacking competition have grown more slowly. Take the example of the mobile sector that has added 6.6 million subscribers during the first half of the year and where operators have aggressively invested in infrastructure. For the year 2006, we may see an investment of more than $2.5 billion dollars made in the mobile infrastructure as the existing operators gear up to face the challenge from Hutch and Maxis who are rapidly rolling out their infrastructure. The mobile operators have been expanding their network at a frenetic pace: Since the end of 2005, Telkomsel has increased its number of base stations from 7,741 to 12,156 a growth of 57 percent; Excelcomindo’s base stations during that same period have grown from 3,620 to 6,052, a growth of 67 percent. Despite making substantial investments, mobile companies continue to be profitable. Excelcom and Bakrie Telecom that had losses in 2005 have made profits this year.

The fixed sector’s performance on the other hand is poor. The growth of fixed line phones per 100 inhabitants will probably be negative this year as the number of fixed phones remain stagnant and the population increases. Because of Telkom’s de facto monopoly in the fixed line market it is unlikely that the company has any incentives to invest in this sector and nor can investment come in from other operators if the sector is not fully opened up to competition.

Many have argued that why bother with fixed if mobile is doing so well. Since most of Internet service provision is currently relying on fixed infrastructure, the lack of fixed line growth means that there is also no growth in Internet subscribers. According to BPS’ survey from 2005, there are an estimated 10.3 million Internet users who access the Internet from home, office, warnets etc. For a country of 222 million that is less than 0.05 percent of the total population that use the Internet. If one looks at Telkom’s broadband subscribers, it stands at a pathetic 35,000. What are the reasons for this and how can we bridge this digital divide?

The significant cost components of an Internet Service Provider (ISP) in Indonesia are its leased line and international bandwidth costs. As my WiFi study on Indonesia (available on www.lirneasia.net/projects) has shown, leased line prices in Indonesia are around 48 time the price in India for a comparable link. International bandwidth costs are also a couple of times higher compared to countries in the region. Both the domestic and international leased lines have limited competition and hence the prices tend to be high. This translates to nearly $4000 in monthly leased line and internet connectivity costs (512 Kbps) for an ISP. Taking into consideration the average income of an Indonesian, it is astronomical sum! No wonder Internet access in Indonesia is unaffordable to the vast majority and will continue to be so unless competition is introduced in the “big pipes”—in the domestic and international backbone infrastructure markets.

Broadband penetration will continue to be low as long as there is only one provider of ADSL. Hopefully, in the future, competition from wireless broadband providers will lower the prices and make it more affordable for Indonesian people.

ICT Regulation

The Ministry and BRTI have undertaken a number of pro-growth initiatives in the last year or two. It has successfully conducted 3G auction that has been widely perceived as the most transparent licensing in Indonesia’s history. Two new mobile operators have been introduced and the increased competition will hopefully drive down mobile retail prices and make them more affordable for those in the “bottom of the pyramid.” A new cost-based interconnection regime has been introduced, which mandates cost-oriented interconnection and provides enforcement “teeth” to the regulators. When implemented from 2007, it will hopefully promote fixed-line competition and ensure greater transparency in this contentious area.

BRTI’s regulation to implement a phased reduction of leased line prices based on cost calculations may help lower Internet retail prices and help diffusion of Internet connectivity.

However, there are a number of regulatory barriers that are preventing faster growth of the sector. Indonesia has an archaic licensing framework that may have been relevant 10 years ago, but not anymore. Converged services where voice, data, video may be combined blurs the boundary between traditional fixed and mobile services. Indonesia’s regulatory environment is simply not relevant to converged IP-based networks like the New Generation Network (NGN) that are being ushered in all across the globe. The current licensing framework is not technology neutral and has different rules and licensing requirements based on a particular technology. This has resulted, for example, in a situation where the regulator is trying to prevent Bakrie Telecom and Telkom Flexi from providing full mobility services because their license treats them as fixed operators although the CDMA technology can be used to provide full mobile services that will significantly enhance the utility of the service to customers.

Why Bakrie Telecom is licensed to provide service in only two regions is beyond my understanding. When a country does not have enough telecom infrastructure I would think it is in the interest of the Government and the public if an operator is allowed to build a network throughout the country. There are many other serious problems with the licensing framework which I will not get into, but this by far remains an area where more of the Government’s energies should be focussed.

Most of the operators I have spoken to, with the exception of Telkom, feel that although the current regulatory structure is better than what existed previously, it is still not independent in its decision-making. If you look at the structure of the organization it is apparent that BRTI is embedded within the Government that also controls two of the largest telecom operators in the country, Telkom and Indosat. The credibility of BRTI’s decisions will be considerably enhanced among the operators and other stakeholders if it were reformed and given more independent powers and separated from DGPT. The small degree of independence for BRTI has shown impressive results in terms of investment that has come into the sector. Imagine the investor confidence if a fully independent regulator can be put in place?

2. Is there any progress in 2006 than 2005? If yes, what is the indicator?

The following graph indicates quite clearly the progress of the ICT sector from 2005 till half of 2006:
The number of mobile phones in Indonesia per 100 inhabitants has increased quite significantly from 21.6 in the end of 2005 to 24.32 in the middle of this year. The number will probably go up by the end of the year, although growth from 2005 to 2006 may not be as rapid as from 2004 to 2005. However, with the introduction of Hutch and Maxis in the mobile sector, we should see more rapid growth in the number of mobile subscribers who are added to the network at the end of 2007. More competition in the mobile sector will lower mobile retail prices that are quite high compared to the region and make it more affordable to those on the “bottom of the pyramid.”

Although the penetration of fixed wireless access (FWA: CDMA) seems to grow slowly from 2005 to 2006, it does not reflect the impressive performance of Bakrie Telecom that has grown its network from 0.3 million to 1.3 million in less than a year. The slowing growth of FWA is primarily because Telkom Flexi shed a significant number of non-revenue generating subscribers from its network.

3. If no progress or stagnant, would you please to explain it?

Fixed wireline penetration has been negative because of a lack of competition in that sector. In a country with such low penetration one does not expect to see negative growth rates. Telkom, the monopoly provider, has no incentive to invest in fixed line infrastructure in the absence of competition.

Internet penetration numbers from 2006 are not available although growth in the number of Internet subscribers will continue to remain low because Internet prices remain unaffordable to a vast majority of Indonesian. Furthermore, only 3.74 people out of 100 own a PC in Indonesia. Of those PC owners only 27 percent use their PCs to access the Internet. Low PC ownership and low Internet use even among those who own PCs are also other factors that are contributing to stagnant Internet growth.

4. What do you think about the commitment of Indonesia’s government or Information Communication Department (Depkominfo)?

In view of the past year’s performance, I believe that the Minister Sofyan Djalil is someone who would like to reform the ICT sector and bring more competition to develop ICT infrastructure and lower prices. However, as an outsider, one gets the impression that not everyone in the Depkominfo is on the same page as the Minister. Furthermore, since the Indonesian government is dependent on dividends it receives from Telkom, it is probably hard to take decisions that may affect the profitability of the company. It is therefore crucial to separate the policy and regulatory functions. Let the Depkominfo develop policy and leave the day to day business of regulating the ICT sector to the BRTI.

5. What is the important think in this year that must be done by the government but not yet finished?

The Government has been collecting Universal Service Obligation (USO) funds from operators to roll out basic telephone service to 40,000 villages in Indonesia that do not have any connectivity. A least-cost subsidy auction was supposed to be held this year to disburse the USO funds in a transparent manner. However, a Ministerial decree is awaited to launch this very critical program to extend access to the digital “have-nots.” It is hoped that the auction will be held soon and will be open to all network operators (fixed and mobile).

6. What do you think about Dewan Teknologi Informasi (Information and Technology Council) formed by The President SBY? Are you optimist or pessimist with this council?

The formation of the National Information and Communication Technology Council (NICTC) by the President Susilo Bambang Yudhoyono, is a very important development for Indonesia’s ICT sector. It signals the recognition at the highest level of government that the ICT sector is important for Indonesia’s development and growth. Since the lapse of the 1999 Blueprint, the ICT sector in Indonesia is rudderless. Although the Government has good intentions, many of the policy/regulatory actions have been taken on an ad hoc basis without the guidance of a coherent vision. So a number of decrees have been issued that are overlapping and licensing is being done on an ad hoc basis. For infrastructure sectors with high sunk costs and long gestation periods, like for telecoms, there must be continuity and coherence in the Government’s policies.

Clear vision informed by the views of the various stakeholders can make the Council a guiding hand that can lead the sector to a higher trajectory of growth. The leadership can remove many hurdles imposed by bureaucracy and narrow vested interests.

The first meeting of the Council will be key in defining the objectives that the Government and other stakeholders aim to achieve for the ICT sector. The success of the Council will depend on it developing a time-bound road map or action plan that lays out what the Government would like to see achieved and in what time frame. When the Technical Coordination meeting is held every three months, they would be in a position to evaluate the implementation of the action plans. The biannual Council meeting led by the President would ideally evaluate progress of the action plans, make changes when required and bring to task parties that are responsible for delays in implementation. If that happens, watch the Indonesian ICT sector take-off like a rocket!

8. According to you, what must they do to make a good ICT implementation? And what improvement we can do next?

Good implementation of ICT projects must take into consideration sustainability of the projects when funding stops. For example, it is laudable that Qualcomm has provided wireless access to high schools in Way Kanan in Lampung and plans to connect 59 villages with “warcells,” cellular kiosks. However, the key to success to these projects is to develop a financially viable model to sustain this initiative when Qualcomm stops funding this program. As Grameen in Bangladesh has shown with the Village Phone Program, it is possible for a company to provide connectivity to rural villages in a profitable manner. Because Grameen is making profits from providing telephone connectivity to villages it is in its own interest to expand the service to more villages and in turn help bridge the digital divide.

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

2004 December 26th

2005 March 28th

2006 July 17th

Three tsunamis within less than two years; and the clueless Indonesian government can’t still get its act together.

And faraway India is supposed to have issued a warning when there was no chance of a tsunami hitting India. CYA bureaucrat, I guess. A different error.

Sri Lanka radios are supposed to have carried the story within about 30 mts. If true, this is very good.

AP Report
Science and Technology Minister Kusmayanto Kadiman said Indonesia received the bulletins 45 minutes before the tsunami hit but did not announce them because they did not want to cause unnecessary alarm.

\”If it (the tsunami) did not occur, what would have happened?\” he told reporters in Jakarta, noting that there was no effective way to spread a warning without a system of sirens or alarms in place.

He said Indonesia now planned to speed up plans for a nationwide warning system.

Indonesia was hardest hit by a 2004 tsunami that killed at least 216,000 people in a dozen Indian Ocean nations _ with more than half the deaths occurring in Sumatra island\’s Aceh province.

Though the country started to install a warning system after that disaster, it is still in the early stages. The government had been planning to extend the alert system to Java _ which was hit by a quake in May that killed more than 5,800 people _ in 2007.

Answering reporters\’ questions as to why no warning was issued on Monday, Vice President Jusuf Kalla claimed there was no need because most people had fled inland after the earthquake, fearing a tsunami.

\”After the quake occurred, people ran to the hills … so in actual fact there was a kind of natural early warning system,\” he said. However, of dozens of people interviewed by The Associated Press in Pangandaran on Tuesday, only one person said he felt a slight tremor. None said there was a mass movement of people to higher ground before the tsunami, though some residents recognized the danger when they saw the wall of water approaching.

By Divakar Goswami & Onno Purbo, March 2006
LIRNEasia’s latest research paper is available for comment. The paper looks at the deployment of Wi-Fi in Indonesia, under the 2005 WDR theme, ‘Diversifying Participation in Network Development.’

Download paper: indonesia wi-fi study 2.0 [PDF]

Please post your comments below.

Executive Summary
With their low-cost and quick deployment time, wireless Internet technologies like Wi-Fi offer last-mile access network solutions to developing countries with limited network infrastructure. Among developing countries, Indonesia is unique for the extent of Wi-Fi that has been deployed by Internet Service Providers (ISPs) and private entrepreneurs in more than 40 towns and cities across the archipelagic nation. However, the findings from the current study finds that Wi-Fi “innovations” in Indonesia are not a result of enlightened policy designed to extend communication infrastructure to unserved areas but rather a workaround solution to hostile market and regulatory conditions.

The research objectives were to determine the conditions that gave rise to Wi-Fi becoming an access technology of choice for Indonesian ISPs; the lessons that can be abstracted from Indonesian Wi-Fi innovations; and the steps that must be taken for the next stage of Internet growth in Indonesia. Despite having two regulatory bodies, DG Postel and BRTI, the Indonesian telecommunication sector lacks credible, independent regulation. DG Postel is embedded within the Ministry of Communication & IT and BRTI is nominally independent being understaffed, lacking teeth and being chaired by a DG POSTEL representative. A poor regulatory environment is compounded by a non-competitive telecommunication sector dominated by PT Telkom and Indosat who were given exclusive licenses by the Indonesian government for fixed telephony and international gateways, respectively. In the absence of regulatory requirement to unbundle the local loop, PT Telkom’s monopoly over the last mile facilities that are critical to all local telecommunications services especially Internet service means that Internet Service Providers (ISPs) needed to build their own last mile infrastructure to reach customers. However, license conditions for Network Service Providers, the category that ISPs fall into, forbid them from building their own infrastructure—last mile or backbone. The ISPs used Wi-Fi in the access network as a workaround solution for their inability to build or buy last-mile infrastructure. Until recently (January 2005), the unlicensed use of 2.4 Ghz for Wi-Fi was illegal and the use of 5.8 Ghz continues to be. However, that has not prevented ISPs from using those parts of the frequency because Wi-Fi is cheaper and easier to deploy compared to wired infrastructure and has lower sunk costs at risk if caught by the authorities.

As is well documented in the literature of economics, monopolists do not invest the full amounts required for economic efficiency when they are provided with monopoly returns on their investments. This is the case in Indonesia with backbone infrastructure that is scarce outside the islands of Java and Sumatra and unevenly deployed even in those two islands. The inadequate supply of backbone and lease line infrastructure and the high monopoly prices for leased lines that exceed benchmark prices in other countries by as much as 48 times, has forced ISPs to use Wi-Fi as low-capacity backhaul networks to carry Internet traffic. These cost saving strategies by ISPs have not been able to keep retail Internet prices from being three or four times the price in benchmarked countries. This has resulted in a multi-tiered retailing of Internet service, where large customers like schools act like ISPs using Wi-Fi to connect to neighbourhood networks, other schools and businesses to recover high Internet costs that can be as much as US$4000 per month for a 2Mb link. It is evident from the research findings that ISPs in Indonesia have used Wi-Fi “innovations” to circumvent market & regulatory barriers. Until credible regulatory reform is carried and the telecom market is liberalized, the gains in the telecom sector generally and Internet specifically will be limited and unsustainable. For quickest results for high Internet growth in Indonesia, the regulator must reduce leased line prices as a number of studies in different countries have shown.

The silver lining for Indonesia is the inherently lower costs of Wi-Fi compared to wired last-mile access technologies, providing the country with potentially explosive Internet growth if conducive regulatory and market conditions are created.

Wi-Fi “Innovation” in Indonesia – Final Report Version 2.0

Wi-Fi “Innovation” in Indonesia – Draft Report Version 1.2