Bad connections

AT&T invested $450 million in Indonesia's telecommunications network. Now, it is seeking $1.3 billion in damages. Paul Clement explains how things came to such a pass

A HONEYMOON IN the heart of the Middle Eastern intifada doesn't sound like most newlyweds' idea of a model start to married life. But, to Stephen Dowling, the Australian who runs United States telecommunications giant AT&T's troubled operation in Indonesia, a post-nuptial sojourn in the Palestinian uprising was a walk in the park compared to the past few years he's had in Jakarta. "As we were planning our honeymoon, my wife and I felt like we were going from one war zone to another," he muses.

It's easy to see why. Just start with Dowling's day in Jakarta. The first thing he does after dressing for work is check his car for hidden bombs, just in case the death threats he's received are followed up.

Jakarta has had its moments in recent years. But war zone? Bombs? Death threats against foreigners? As Dowling knows only too well, the problems facing AT&T and its erstwhile partner, Indonesia's biggest company, Telkom Indonesia, the government-controlled telecommunications operator, would tax even the most patient and experienced of diplomatic negotiators. He remembers well a recent spooky meeting with Muhammad Nazif, the chairman of PT Telkom. It took place as car bombs were exploding all over Jakarta, as Indonesians chose their own unique way of sorting out their political differences.

Dowling, too, had his differences, and was in the midst of difficult talks with Telkom over AT&T's Ariawest, where relations were going from bad to worse. He recalls a remark from the Indonesian side that suggested the bombers might also be sent round to his office. "They said it was a joke, but I never saw anyone laughing." he says.

Gallows humor is one thing but the debacle that Ariawest has become is no laughing matter. If ever a business deal went pear shaped, it's this one. And it is not just the everyday story of two partners falling out. The gulf separating AT&T and Telkom over their Ariawest joint venture is the same gap that separates Indonesia, even the Megawati Sukarnoputri version, from a bright future as a reliable home for foreign investment.

Only a few years ago, that future looked bright. Anxious to get its share of the Asia growth story and embrace the new wired world, AT&T was one of the seven willing foreign telco giants that in 1996 embarked on an ambitious nationwide restructuring of Indonesia's telco sector.

Known by its Bahasa Indonesia initials, the KSO plan was to be Indonesia's telco Big Bang, Asia's version of the pioneering break-up that AT&T itself went through in the US in the early 1980s. That had been a hugely successful deal, spawning giants such as SBC Communications, US West and Bell Atlantic, while AT&T itself had grown bigger after it was broken up.

It was hoped that Indonesia would enjoy the same boom. The KSO plan called for the regional break-up of the lumbering Telkom. Not only would it modernise Indonesian communication - where it infamously took as along as 18 months to get the phone connected - it would also showcase Indonesia to world investors. The World Bank got behind the plan and even convinced the pawing Suharto family to stay out of the break-up, no small thing in the latter years of the Suharto reign.

And the entrants weren't just any old telcos. Big foreign names such as France Telecom, Australia's Telstra, Japan's NTT and Britain's Cable and Wireless joined Singapore Telecommunications in the break-up. And, when everyone had got their piece, Telkom Indonesia was packaged and sent off to the New York Stock Exchange in a hugely successful float that, at one point, was worth $US18 billion.

Today, it's hard to find anyone in those foreign companies to say a good word about how the KSO scheme has panned out. Each of the partners, except SingTel, has either sold, is in litigation, or is actively seeking to exit. The amount invested and lost on the KSO scheme is estimated to be approaching $US10 billion. And, after having been the 1990's most glittering Asian float, Telkom Indonesia is now worth just $US2 billion. "It has been a massive destruction of shareholder value," says Dowling.

Dowling believes the collapse in the Indonesian economy is only partly to blame for the KSO debacle. He says the Telkom Indonesia bureaucracy was never keen on the KSO deal in the first place, saying that it had to have its arm twisted to go along with the break-up.
"'Obstructive' is a polite way of putting it," he says.

"I even had one senior guy at Telkom say to me: 'We don't have to follow the (joint venture) agreement all the time, do we?'" he recalls, with amazement.

Indonesia's arcane politics only made it worse. As one of Indonesia's cash cows, Telkom had been a tool despotic presidents had used to curry favor with political allies. And, as the government changed - and remember, Indonesia had four in three years - so did the Telkom bureaucracy, or at least those pulling the strings.

As far as AT&T was concerned, relations with its partner were cordial at best and, while the economy was motoring along and infrastructure being built, things were fine. Dowling says Ariawest invested $US450 million, doubling the network in West Java in three years. "It used to take 12 to 18 months to get a line in the old days. We had a system that ranked with the best in the West."

But, even beyond the political ups and downs, the collapse in the rupiah and an increasingly resistant partner, there were signs of trouble. On one occasion, Dowling says, his line managers noticed that two of the exchanges in West Java hadn't been metering as normal. A large number of lines were reading as if they were out of order, which of course meant no revenue was coming in. Technicians were dispatched, only to discover that at the consumer end the lines were working fine. "One customer even thanked us for such a good service," he says.

A puzzled Dowling wanted an internal audit. But there was resistance from within the Ariawest bureaucracy. So, he dispatched consultants from PricewaterhouseCoopers, arriving from outside Indonesia, to undertake a forensic audit. PwC discovered that as many as 30,000 lines weren't metering, suggesting that the calls - and the billings - were being channelled elsewhere.

Given the famously deep corruption that still exists in Indonesia - probably the new President's greatest challenge - it's easy to see how this happens. Indonesia has hundreds of telephone exchanges littered across the archipelago. When the KSOs got under way, Telkom wasn't able to bring much money or infrastructure to the table. The foreign telcos brought in staff to operate the KSOs, but most of the down-the-line workers in the regions were provided by Telkom.

In their towns and villages, the Telkom managers are leading figures. Naturally, they were courted by local officials, the military and politicians. And, in the graft-ridden culture nurtured by the Suharto years, it's a short step from influence-broking to corruption.

Says one Singapore-based foreign banker with intimate knowledge of the Ariawest dispute: "It's obvious Indonesia doesn't care about the law."

But it might have to start to care. Finger-pointing is going on all over the archipelago and Indonesia's already tarnished reputation is on the line. Ariawest and AT&T are seeking $US1.3 billion in damages from Telkom Indonesia in a Geneva court. Switzerland had been the mutually agreed forum of arbitration when the venture was founded.

Much of the new telephone system is still operating, but Dowling says it is in steady decay. Now, with the two sides barely talking to each other, and Ariawest more concerned with damage control than fixing lines, the system runs the risk of becoming as creaky as it used to be. And so does Indonesia's reputation if the whole nasty mess doesn't get fixed in a hurry.