GATS –Liberalization of Life

ByLutfiyah Hanim, The Institute for Global Justice1

Yanuar Nugroho, The Business Watch Indonesia2

Supported by the field researchers:Dominika Oktavira ArumdatiTima Santita Ngesti Rahayu

Jakarta, September 2003

1 Program Officer and Researcher for The Institute for Global Justice, Address jalan Diponegoro no. 9 Menteng Jakarta 10310 Indonesia ph. 62 –21 3193 1153 fax. 391 3956 e-mail hanim@globaljust.org 2 PhD Student PREST - Institute for Policy Research in Engineering, Science & Technology The University of Manchester. The Business Watch Indonesia – address Kompleks Anggrek Krisan no.11A Rt.04 Rw.09 Desa Jayan, Blulukan, Colomadu Karanganyar Central Java Indonesia Phone: (62-271) 702 3310 e-mail yanuar-n@unisosdem.org

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THE CONTENT

Prologue: A story of Indonesian Shipping – A leaky ship sailing in the free market ocean1. About GATS (General Agreements on Trade in Services)

1.1. GATS: The result of agreement ?1.2. GATS – One rule for all nations

1.2.1. The scope of GATS1.2.2. General Obligations in GATS1.2.3. Liberalization in Stages1.2.4. Specific Commitment1.2.5. An exception of general obligations

2. GATS and Indonesia2.1. Trade in Services in Indonesia2.2. An overview of five sectors in Indonesian Schedule of Specific Commitment

2.2.1. Services in Telecommunication2.2.2. Services in Maritime Transportation2.2.3. Services in Finance2.2.4. Services in Tourism2.2.5. Services in Industries

3. The Implications of GATS for Indonesia3.1. In Telecommunication Sector3.2. In Maritime Transportation Sector3.3. In Financial Services Sector

3.3.1. Banking Sector3.3.2. Taxation Sector

3.4. In Tourism Sector4. GATS and developing countries

Behind GATSEpilogue: What Indonesia should do?BibliographyAppendix: Case Study on GATS and Indonesia: Divestment of PT Indosat Tbk – Privatization of Telecommunication Services in Indonesia

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Prologue: A Story of Indonesian Maritime – A Leaky Ship sailing in the Ocean of Free Market

The success of traditional ships ‘Phinisi’ and ‘ Borobudur’ sailing around the world were quite old stories. Indonesia with the thousands islands and as a maritime country, does not have a strong maritime any longer. Now, to transport goods from one island to other islands in Indonesia by the sea, local ships can only transport less than 50 percent of 170 millions tons of goods, oil, and others per year,3while the others are transported by foreign shipping companies. For Export – Import, the condition of Indonesian maritime looks really bad as well. Indonesian ships can only transport 3.5 percent to 4 percent out of 360 millions tons of goods, while the other 96 percent is transported, again, by foreign shipping companies.

Barens TH Saragih, the head of INSA (Indonesian National Shipowners Association) said that the number of national shipping companies is still limited. Even to export the Pertamina oil, it is only a small part that has been performed by the national shipping. Indonesian ships which sail abroad, only go as far as ASEAN countries, East Asia and Australia.

The maritime transport is really important for Indonesia to support the export and import sectors. The data of the Central Bank of Indonesia has shown that every year Indonesia must pay a lot of money. In 1997, the transportation fee was 4.6 billion dollars, the following year it was 3 billion dollars.

The government is forced to use tankers owned by foreign companies for exporting as well as importing oil. As the result, the national tankers can only gain some 10 percent of the total order from the total expense for oil shipment service worth 10 trillion rupiah2.

3 An interview with Barens Saragih2 Kompas, August 7, 2003

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Source: interview with Barens Saragih Indonesian shipowner Foreign shipowner

The lacking number of fleet owned by Indonesian maritime service companies makes exporters depend on foreign maritime fleet –even over these past two years, both Indonesian exporters and importers have been inflicted in loss by international maritime service companies imposing Terminal Handling Cost (THC). The THC, which is totally about 676 million US dollars or 6.08 trillion rupiah is imposed on the exporters and importers which are to send goods through the agents of foreign maritime service companies. But strangely, it is only the shipment of goods from and to Indonesia, which is imposed of the cost, while from and to China and Vietnam such practice is not found. The imposition has been of detriments for exporters because the price of goods becomes higher. Even the export of furniture and handicraft product is forced to be delayed due to the higher freight cost and THC than the price of goods3.

As a maritime country, profession in the maritime field is actually not a brand new thing. But, why is not this sector flourishing considering that there is market potency and opportunity for export-import is still widely open?

It seems to us that the maritime transportation sector in Indonesia is facing several serious obstacles. First, due to the funding for business. Banks in Indonesia are still reluctant to give a loan to finance the ship manufacturing. In case loan is available, the entrepreneur has to pay the money for collateral around as much as 150 percent of the price of ship. This is impossible to do because the collateral may not be provided, even when manufacturing the ship, the loan has still to be looked for. That is why the growth in number of ship in Indonesia is still low. In point of fact, according to Barens, Indonesia can and has a right to apply a principle of sabotage, which means that the domestic shipment of goods is only allowed to be organized by ships from origin country. However, the principle is still hard to do because the number of ship cannot accommodate that principle.

Second, the problem in taxation. Decree of Director General of Taxation number 370/PJ/2002 establishes that the freight cost of domestic shipment and maritime, exclusive of containers, is

3 See INSA Journal no. 56, 2002

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Non oil and gas

imposed of 10 percent tax including for, among others, the service of ship maintenance, port service, and ship purchasing. The tax imposition will burden entrepreneurs of domestic maritime service because such imposition is not given to foreign maritime service companies running the same kind of business in Indonesia. Besides, the amount of money that the government will receive will not be sufficiently much because the number of Indonesian ships is less than one owned by foreign companies.

Meanwhile, the impacts which will come up will inhibit the competitive power of national maritime field. International agreement on tax relief (Tax Treaty), which eliminates certain tax when a ship enters a territorial waters of another country, is regarded as unhelpful to make the condition better4.

The third, what has a role in the bankruptcy of Indonesian shipping sector is called fiscal policy, Free on Board (FOB), in which goods from Indonesia are exported and the price is paid only until an Indonesian port of entry. So, the cost of ship and insurance is born by the buyers. It seems to give an advantage to the exporter, but the result is that the foreign buyers can choose which shipment and insurance company they will use, and most probably not Indonesian companies5. On the other hand, when importing, foreign buyers use the pattern of CIF (Cost Insurance and Freight), in which the sellers bear the cost of freight and insurance. As a result, there is only few Indonesian ships serving export-import activities because most of Indonesian ships do not gain the allotment of load.

Minister of Transportation, Agum Gumelar says that one of the contributing factors to the recession of maritime business is Presidential Instruction number 9 year 1985. The main goal of this Presidential Instruction is to increase the earning of foreign exchange out of non oil and gas export by giving foreign ships a release to drop their anchor in all Indonesian seaports as long as they help export activities run well. Consequently, Indonesian maritime business cannot be the master in its own country. The Director General of Sea Transportation, Tjuk Sukardiman also admits that due to the mastery of foreign maritime business doers on Indonesian national maritime sector, the deficit in shipment sector ever reached up to 9.6 billion dollars6.

The existence of regulation obliging foreign ships to cooperate with Indonesian companies does not help national maritime transportation arise either, because the joint venture that foreign maritime companies have done is a mere falsehood. In its practice, those foreign maritime companies only register to the government on the basis of the identity card of the driver, which they claim as the ‘local owner’. Those foreign companies also have most of the ownership shares, frequently up to 95 percent, and their local partners only have 5 percent. In such a ‘joint venture’ the foreign company will then be treated equally to the local company, for instance, in serving inter-insular shipment.

4 For instance, Indonesia ships entering the territorial waters of Denmark needn’t pay the freight tax as much as 2.64% of the total amount of load and vice versa. The regulation seems to be fair but actually it inflicts Indonesia in a loss because Danish ships can enter Indonesian territorial waters more often (let’s say 3 times a week) than Indonesian ships entering Danish territorial waters, which is very seldom, probably even only once in 10 years.

5 The percentage of Indonesian export bought with FOB price reaches 90% (INSA Journal, no. 56, 2002)6 Ibid

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Just like a ship, Indonesian maritime transportation sector goes through a leakage in many parts. But before the leakage is patched, ships from other countries come along, compelling the leaky ship to be sailed on the ocean of free market.

1. ABOUT GATS (General Agreement On Trade In Services)

In the economic and political perspective of global trade, the tragic story of Indonesian maritime mentioned above cannot be released from its relation to GATS. What is GATS, in fact?

GATS (General Agreement on Trade in Services) is one part of world’s trade agreement in WTO, which has been applied since January 1995. WTO, as an organization, has a strictly different character from GATT (General Agreement on Trade and Tariffs), its predecessor. GATT only regulated the international trade of goods by decreasing tariff barrier to make the flow of export-import run smoothly, while WTO does not only regulate the traffic of trade of goods, but also establishes the rules for the trade in services (GATS) and the protection of Trade Related Intellectual Property Rights (TRIPs). The ratification of GATS has become the new episode-in the internationalization and institutionalization of service provision.

Before the item ‘services’ was negotiated and then became a part of WTO, the production, provision, and trade of service have been widely carried out in every country. Service being put into the framework of GATS has production, distribution, and trade done in accordance with the principal framework and rules of WTO, such as the existence of a comprehensive conflict resolution system and an obligatory agreement.

‘Services’ in a broad sense is defined as, “The product of human intangible activities done by human needs”7. Many of service products ‘adhere to’ goods in such a way they are intangible8, e.g. the provision of electrical services, water, gases and beauty parlour. A few service products are related to the provision of service after the goods is manufactured from the factory, such as the service of car repair, computer reparation, goods distribution and retail service. Some other kinds of services belong to the intangible ones, like banking services, nurse’s services, insurance services, doctor’s services, and radio broadcasting services. Some other service products are related to the public services, such as fire extinction, police, provision of basic health, drinking water, and education. Just like products of goods, everyone from their birth to death needs service products.

Thus, the market potency for trade of service all over the world is 6 billion lives, which is the total population of the world. In Indonesia itself, the market potency for service products is 200 million people.

1.1 GATS: The result of agreement?

The derivation of agreement on trade in services was in a meeting of ministers of GATT’s contracting party in 1982. Then, in the 1986, the issue on trade in services was officially put into

7 IBON Facts & Figures, vol. 24 no. 2, February 28, 20018 It’s not easy to define the concept of ‘service’, even the American delegation that pushed the establishment of service issue

in Uruguay Round negotiation meets difficulties in defining it (Halida Miljani’s interview).

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Uruguay Round. An observer of negotiation, Charkaravary Raghavan9 judges that the success of negotiation on service sector becoming GATS in 1994 was affected by many factors. A few to mention, minimum available information caused less awareness amongst many politicians, the parliament and people of developing countries, while information are influential on the negotiated subject and the implication which will come up. Only very few people are directly involved in quite intensive debate about negotiation on service.

Besides, the un-transparent negotiation, which is only done by a few countries to be the fundament for ‘common decision’, becomes frequently-happening phenomena. The negotiation also uses the system of single undertaking, in which each country cannot disagree one of the issues but agrees another issue. An Indonesian diplomat10 says, “That comes all in a package. The negotiators are faced with a choice. Take it or leave it.”

Some Indonesian diplomats ever took part in the negotiation on service in Uruguay Round say that a few developing countries were basically in the position of refusing the negotiation on service, Intellectual Property Rights, and investment. Even generally, the negotiator of developing countries, inclusive of Indonesia, did not have sufficient comprehension of Intellectual Property Rights and service. But on the other side, developing countries was very much concerned with market access for their agricultural products and textile negotiation amongst developed countries. Therefore, in the beginning developing countries hoped that there would be ‘an exchange of interest’ in which developing countries ‘submitted’ the issue of service and Intellectual Property Rights to come to accord, and on the other hand, developed countries open their market for agricultural and textile products from developing countries. Would this hope come true?

The former Indian ambassador for GATT, Baghirath Lal Das says that the signing of GATS and TRIPs is a defeat for developing countries because they do not gain the expansion of market for their two products of excellence; textile and agricultural products. The market for agricultural products of developing countries is even still closed now, while they have to sign two agreements of which their content and implication are unknown.

What Das says seems to be reasonable. The data issued by WTO in the trade of commercial service in 1999 shows that exporters of the trade in services are the developed countries. The United States of America exports 251.7 billion dollars every year or it means that the country dominates 18.8 percent and England gains 7.6 percent or 101.4 billion dollars. On the other hand, most of developing countries and all least developed countries are the importers of service. Developing countries and least developed countries do not have capacity to produce service for their own people, so that they have to import it 12.7 billion dollars.

In a much different condition in which a negotiation is done by some net importers and the minority is exporters who wants to expand the market, the issue of service is put in. The result is predictable that the negotiation does not go in balance. In addition, big countries have economic and political power to impose a pressure on their counterparts. A country with severe debt like Indonesia meets difficulties to have a maneuver in negotiation11. There are only two choices; We will say yes or we’ll find another way to say yes.9 Raghavan, C. Developing Countries and Services Trade Chasing a Black Cat in a Dark Room , blindfolded. TWN. Penang.

2002.1 0 For the sake of this research writing and in order to protect the data provider, the names of informants are not mentioned.

The researcher (IGJ and BWI) is responsible for this purpose.

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Another Indonesian diplomat12 interviewed in this research has also taken part in such negotiation. According to him, the logic of trade should be a reciprocal sale and purchase. But in the case of service trade, Indonesia does not have any producing capacity at all. Indonesia is even a net importer. So, Indonesia is indeed in a weak position and what Indonesia often does in such a negotiation is to defend itself while attempting to make the domestic situation better.

GATS, which should be a general agreement on the trade in services, if we consider what it stands for, is in point of fact a false agreement.

1.2. GATS- One Size Fits All

GATS consists of three frameworks of general obligations and regulations, enclosed list of a few specific sectors, such as the liberalization of financial services, telecommunication, air transportation, manpower flow, and the exception of MFN (Most Favoured Nations), and enclosed scheduled of specific commitment of each country.

There are 32 articles in GATS, which are divided into 6 parts. Part I is concerned with the scope and the definition of services. Part II contains, among others, the rules of MFN principles, transparency, promotion of developing countries’ participation, domestic regulations, and provision of services for government. Part III regulates market access, national treatment, and additional commitment. Part IV is concerned with step-by-step liberalization. And part V is concerned with the rules of institution while part VI is a closing rule.

1.2.1. The Scope of GATS

In the preamble of GATS, it is mentioned that the aim of establishing the framework of multilateral trade in services is the transparent extension of trade in service through a progressive liberalization in order to improve the development in developing countries and to help promote developing countries’ participation in the international trade in services, which is among others, by strengthening domestic capacity, efficiency, and competitive value in the field of services.

In Article I, it is stated that this agreement is valid for all countries of member from central government all the way down to local government, including non-governmental organizations gaining the delegation of authority. The scope of this negotiation includes all services, except those, which can only be provided by the government, such as, central bank, policy, and military services.

The concept of ‘service’ in the first article covers wide and limitless economic activities. The secretariat of WTO divides them into 12 sectors and 155 subsectors13. The division of sectors is on the basis of Central Product Classification (CPC) established by UNO. These divisions keep changing and developing in line with the will of countries of member. Furthermore, this system allows all sectors of service to give their mechanism up to the market. Even the currently 1 1 An Indonesian negotiator even says, “It gets worse if since the beginning, the negotiation runs like a feather-weight boxer

fighting against a heavy-weight one”12 For the sake of the same concern, this research doesn’t mention the name of that person. 1 In the publication of International Trade Centre/UNCTAD and Commonwealth Secretariat titled of Business Guide to the

World Trading System, the second edition 1999, 12 sectors are mentioned, sector 1 to 11 belong to the same category, while sector 12 belongs to ‘other services not yet mentioned in sector 11 above.’

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unimaginable sector is very much likely to be liberalized because at the end of each sector, it is always written ‘other sub-sectors not yet mentioned above’ (see Box 1).

Box-1

The Scope of GATSThe services covered in GATS are based on the UNO’s CPC including 12 sectors, they are:

1. Business (including professional services and computer services)2. Telecommunication Services3. Construction Services4. Distribution Services5. Education Services6. Environmental Services7. Financial Services (including banking and non banking, such as insurance, leasing)8. Health Services 9. Tour and Tourism Services10. Recreational, cultural, and sport services11. Transportation Services12. Other services not yet to mention above

Those sectors are divided into 155 subsectors indicated by the number of code:1. Elementary Education Services – number CPC 9212. Intermediate Education Services – number CPC 9223. High-Level Education Services – number CPC 9234. Education Services for Adults – number CPC 924

Other Education Services – number CPC 929

In Article I above mentioned, the term ‘trade in services’ is regulated as well as ‘services’. The trade in services is defined as the provision of services through 4 models of supply (see Box 2) through transition from one country area to another or called cross border supply, the provider of service within the area of one member country serves incoming consumers of services from other countries of member or called consumption abroad, the provider of service from one country is present through a company in another country or called commercial presence, the transition of manpower of service provision to another country or called presence of natural persons. The mode of foreign manpower is regulated in an exclusive enclosure.

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Box-2Four Modes of Service Supply (Mode of Supply) in GATS

Mode 1. Cross Border SupplyThe services supplied by the supplier coming from a country (still within his area/country) to the consumer in another country. For example: international postal services, telecommunication, distance learning services, and telemedicine.

Such services has the sign of 1) or mode 1 in the modes of supply in terminology used in the Schedule of Specific Commitment and the discussion of the liberalization of service sectors.

Mode 2. Consumption AbroadThe services supplied by the supplier in a country to the consumer outside of the area of the consumer’s country (the consumer coming to the services supplier in the supplier’s country). For example: tourism, studying abroad, and having a treatment abroad.Such services have the sign of 2) or mode 2 in the modes of supply in terminology used in Schedule of Specific Commitment and the discussion of the liberalization of service sectors.

Mode 3. Commercial PresenceThe services supplied by the supplier coming from a certain country through the physical presence of enterprise in another country. For example: foreign hospital, foreign university, and foreign bank.Such services have the sign of 3) or mode 3 in the modes of supply in terminology used in Schedule of Specific Commitment and the discussion of the liberalization of service sectors.

Mode 4. Presence of Natural PersonsThe services done by the supplier coming from a certain country to another country through his professional presence a country area. For example: foreign doctor expatriates working as hotel managers or consultants.Such services have the sign of 4) or mode 4 in the modes of supply in terminology used in Schedule of Specific Commitment and the discussion of liberalization of service sectors.

1.2.2. General Obligations in GATSWithin GATS, there are many obligations all its members have to obey, including three general obligations which are taken as strong compulsories: The first one is Most Favoured Nations (MFN) (Article II). It is mentioned there that each country, obligatorily immediate and unconditional, gives an equal treatment to services and service provider from another country as well as from other countries of member. This treatment is given within the general obligations applicable for all sectors and applied in the specific obligation of each sector, which becomes the commitment of each country of member.

The second one is Transparency (Article III). Each country of member must publish all the laws, rules of execution, and all generally applicable resolutions issued both by central and local government, which have impacts on the practices of GATS. Every change in laws and the addition of new rules must be reported to The Council of the Trade of Service (CTS). The countries must also comply with the demand of specific information from other countries of member about many generally applicable rules. Therefore, the countries have to find one information centre, or more, to provide all the information needed and demanded.

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The third one, National Treatment (Article XVII). Within this principle, each country is not allowed to give a stronger protection on its domestic industries. So, the foreign businessmen have to be treated as equally as the domestic ones.

1.2.3. Liberalization in StagesProgressive Liberalization in GATS is regulated in Article XIX. The article covers several items, such as, that each country has to have a series of negotiations in order to achieve the step-by-step liberalization – those negotiations are directed to increase the market access (article XIX; 1). That liberalization process itself has to be carried out by keeping on respecting national interests and the development stage of each country (article XIX; 2). Meanwhile, the obligation of CTS to give an assessment to both the sectoral and general practices of trade in services with reference to what this agreement is carried out for. (Article IV on the promotion of developing countries participation in the trade of service) (Article XIX; 3). The process of liberalization in stages has to be continued in every negotiation, either bilateral, plurilateral, or multilateral, which is aimed at promoting specific commitment that each member country takes.

1.2.4. Specific CommitmentThe establishment of specific commitment is a part, which cannot be detached from the whole, in which each country is obliged to set up a list of liberalized sectors along with the time schedule. The commitment will be an integral part of the agreement and it has to become an integral appendix.

In the specific commitment, each country has to list the condition, limitation, and requirement upon the market access (Article XVI); the condition and qualification upon national treatment (Article XVIII) and the date of the commitment’s validity, should that be taken necessarily to be listed.

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Box-3THE TERMS IN GATS

Request : asking another member country of WTO for opening the market in many sectors in the forum of WTO.

Offer : submitting an offer in the forum of WTO either asked (to respond the request) or not by another member country of WTO.

Schedule of Specific Commitment : a list of sectors committed by every member country.

Horizontal Measures Commitment : requirements or commitments given by a member country applicable for all sectors covered in Schedule of Specific Commitment.

Sectoral Measures Commitment : requirements or commitments given by a member country applicable for one certain covered in Schedule of Specific Commitment

Central Product Classification (CPC) : the classification of sectors/subsectors into numbers which have the relatively same function with the numbers of harmonized system (HS) in the trade of goods.

Market Access (MA) : a market access to a service providing company and or the professionals of the service sector into the area of certain countries with serving methods regulated in Article I of GATS (Scope and Definition), in which each country has to give an equal treatment to every service and service supply coming from another country.

National Treatment (NT) : a principle requiring the member countries to treat service and service supplier coming from another country equal to those coming from the same service (Article XVII of GATS).

Most Favoured Nation (MFN) : requirements which require each member country to immediately and unconditionally give no less favourable treatment to service or service supplier from another country than the one given to service supplier from certain countries (Article II of GATS).

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Box-4

The Limitation on Market Access (Article XVI)

To limit the market access in Schedule of Specific Commitment, these following things are formulated:a. The limitation on the number of service supplier, such as foreign banks, is only applicable

to the service supplier operating in certain citiesb. The limitation on the value of transaction or assetc. The limitation on the number of services or the quantity or service output stated in the

number quota or economic need assessmentd. The limitation on the number of persons employed in certain sectors of service, for

example: foreign employees are allowed to work only up to the middle level of managerThe limitation of foreign capital ownership, for example: the limitation, such as the limitation on share ownership percentage

The change of commitment is also enabled in Article XXI, although with a very long and hard-to-do requirement. For instance, the notification must be done three months before to CTS, then the country proposing change has to negotiate in order to achieve an agreement on Compensatory Adjustment. Next, a few hard-to-get-through processes are still waiting. Shortly, the established commitment is very hard to be withdrawn.

Now, how to set up a specific commitment? An example of schedule of specific commitment is tabulated as follow:

Commitment Mode of supply Conditions and Limitation on Market Access

Conditions and Qualifications on National

Treatment

Horizontal commitment (this commitment includes all sectors)

Mode 1(usually only the number is written). Look at the explanation in the previous box

None (there is no full limitation or commitment)

As listed in the specific sector

Mode 2 None (there is no full limitation or commitment)

As listed in the specific sector

Mode 3 Commercial presence is enabled in the form of joint venture (JV). In JV, share ownership by foreign partner is 49 percents at most

According to Agrarian Law, all foreigners are not allowed for land ownership

Mode 4 Managers and expert technician are only allowed after economic need test is carried out

All incoming foreigners have to comply with the applicable procedure of immigration. All

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working foreigners have to comply with the rules of Labor Law, in which working license is issued by minister of labor

Sectoral commitment, such as industrial services, advisory and consultative. The number CPC is always mentioned in order to explain about what sector or subsector is aimedFor instance, CPC 86721

1Nonobligatory for projects funded by government

Nonobligatory

2Nonobligatory for projects funded by government

Nonobligatory

3Cooperative operation through the establishment of representative in Indonesia

Indonesian partner must be a member of Indonesian association of consultants

4 Nonobligatory except for directors

As listed in horizontal commitment

Box-5

The forms of commitment in Mode of SupplyNONE or No Limitation,which means a full commitment. The state do not impose any limitation on market access and national treatment at all.

Commitment with Limitation. This is done by an explanation of the limitation imposed inconsistent with the rules of market access or national treatment.

UNBOUND or No Commitment, which means without any commitment. A country can still freely establish inconsistent measures with the rules of market access or national treatment. Besides, it may also be steps taken not to give any commitment in Schedule of Specific Commitment in certain sectors/subsectors considering that the sector/subsector is not ready yet to compete globally or because it is taken as a sensitive sector so that it needs a nurturing and governmental policies to facilitate the sector/subsector.

No Commitments technically feasible. If this cannot be put into practice, another certain form of service is applied.

1.2.5. An Exception of General Obligations

In the rules of GATS Articles, there is an exception for the practices of agreement, if a loss in domestic industry and balance of payment occurs. The exception that can be accepted in a few special conditions, such as Article XIV on general exception, is set up in order to protect the general morality or to defend public interests. This action is enabled if there is a real and serious threat against one of public underlying interests due to existence of a service supplier from another country.

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Another example is Article X, which states that a multilateral negotiation on Effective Safeguard Measures on the basis of nondiscriminatory principles is necessary. The result of negotiation has to be applied not later than three years after GATS is applied. The other example is Article XII verse 1, which states that if there is a serious difficulty against balance of payment and foreign finance, a member country is allowed to make or keep a limitation of its the trade in services, which has been stated, in the specific commitment.

As for the subsidy, Article XV verse 1 on subsidy states that for the sake of negotiation, member countries have to exchange information on all of subsidy forms, which is in relation to the trade in services provided for domestic service suppliers. A country, which gets an impact on subsidy given by another country, may ask for a consultation with the country applying the subsidy.

However, all the special exceptions are still hard to be carried out because the rules of execution are not finished yet in the negotiation and they have many complex requirements. That is why until now, negotiations on subsidy, balance of payment, and effective safeguard measures are still being carried out, although they have met a deadlock because of an extreme difference amongst the group of developing countries and that of developed countries.14

2. GATS AND INDONESIA2.1. Trade in Services in IndonesiaAccording to Bank of Indonesia, within the period of 33 years since 1970 until 2001, Indonesia balance of service always suffered a deficit. It means that the imported services are always in greater number than the exported services.The following table illustrates the expense for services since the issue of service began to be put in GATT until the end of Uruguay Round negotiation. It seems that Indonesia’s expenses for services tend to increase, specifically for the balance of non oil and gas services. This might be caused by the payment of quite a great number of debt’s interest. While for the balance of oil and gas, the deficit of Indonesia’s services tend to fluctuate.

14 See www.twnside.org.sg

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The deficit in balance of services is caused by two factors, the expenses for oil and gas and non-oil and gas. For oil, the deficit is due to the government being obliged to pay expenses for production-sharing contract to foreign contractors, such as Total and Exxon. In the sale and distribution of oil, Pertamina also depends on foreign tankers. While, as for the expenses for non oil and gas, quite a great deal of expense lies in the post of foreign debt’s interest payment and the use of foreign ships to transport the export and import of goods.

On the side of non-oil and gas sector, there is also a post of revenue, which is received from, for example, the use of Indonesian airline services by non-residents/other countries’ citizens. The post of revenue, which also contributes quite a great deal of revenue, comes from tourism and money sent by Indonesian people working abroad.

The deficit of Indonesia’s balance of services occurring consistently for more than 30 years, also affects the export of goods, especially the value of exported oil. Below is the table of exported and imported oil and natural gas15.

From the table, it can be seen that the increasing in imported goods and services follows the increasing value of Indonesia’s oil production. The same thing occurred in 1986/1987 when the payable amount of imported goods and services decreased. So, the green line that indicates the total revenue also fluctuates in line with the movement of red and blue lines.

1 5 The red line illustrates the value of Indonesia’s oil and gas sale, the blue line shows the value of imported goods and services in relation to the production and sale of oil and natural gas, such as the payment for production-sharing contracts, consultants, and the cost of shipment. While the green line indicates the value of revenue calculated from the export value subtracted by the value of imported goods and services in petroleum affairs.

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Oil services Non-oil services

The table also indicates the dependence of Indonesia’s export of oil on the import. It means that the increasing in oil production or oil price is, in point of fact, unequal to the significant increasing in revenue. Why? Because the increasing price of goods and services needed in the production and sale of oil follows the increasing production, such as, freight cost in importing all that is needed in the production of oil and gas, consultant cost, and many others.

What about the record of other services? The followings are a few sectors of service of which record can be detected (See also below the box).

Statistical data record Recorded by- Goods (merchandise) Department of Industry and Trade

The Central Bureau of Statistic- Indonesia’s worker abroad Department of Manpower

The Central Bureau of Statistic- Finance (banking) Bank of Indonesia- Tourism Immigration Bureau - Ministry of Culture and

Tourism – The Central Bureau of Statistic- Telecommunication Not yet recorded - Construction – Industry Services Not yet recorded

As for other services, due to a varied number and type, they are not recorded yet. In case it is recorded, the record is not in order according to each department, association and company.

Box-6Calculating the Trade of Intangible Products

Since they are intangible, the calculation of their export-import values is more complicated than the one of the export-import of goods.

The record of the export-import of goods in Indonesia is done by the Central Bureau of Statistic (CBS).

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The statistical calculation of goods is based on the documents used by the exporters when exporting goods (EDF =Export Declaration Form) and the importers when importing goods (IDF=Import Declaration Form). The filling of the form includes the kind of goods, the destination country, the number of goods, the value of goods, and the loading ship. On the basis of EDF and IDF, the data processing is then done by CBS. After the total export and import are calculated, CBS will send the calculation regularly to the departments which need it, inclusive of the Indonesian Bank which has a duty to set up the balance of payment.

The calculation made on the balance of the export-import of services is more complicated because of their intangibility, their variable kinds, and their variety of products. According to CBS, the data of the export-import of services, which is clear enough, is the one of tourism and manpower. The data calculation begins from the General Director of Immigration (calculating the incoming and outgoing people, their length of stay in Indonesia, how much dollars spent, where they stay, what they are here for, etc.)

The data is obtained on the basis of the survey annually done by CBS and the Department of Culture and Tourism) at every exit of airports, asking foreigners going out of Indonesia and Indonesians coming in from abroad. In these data, there is no exact number because all of them are assumptions and estimations. The number of foreigners coming in is multiplied by their expenditure based on the survey. So, the revenue is obtained. It is just the same with Indonesians going back from abroad. The number is multiplied by the number of their expenditure, then the number of expenditure is brought about.

As for the data calculation of manpower, compared to the one of tourism, uses more estimation. There is not any number that is exact enough yet. It is just a raw estimation since there are still unknown data, such as the amount of money sent, the number of Indonesian manpower still working aboard, the leakage in foreign exchange amount used to pay foreigners working here since many of them misuse their passports (for example, tourist visa valid for 3 months is used to work here, etc).

The data is collected by the Department of Manpower on the basis of the number of monthly job placement abroad. The change in the number of Indonesian workers abroad is unknown, so is the number as they go back to Indonesia. The amount of the money sent is set up on the basis of an estimation. Then, it is multiplied by the estimated number of Indonesian manpower still working abroad. For example, for the first six months, the number of one outside of Indonesia is estimated to be 100% of them. Then, for the first year it is 90 or 95% them. The second year can be less than that and so on.

Therefore, according to Rusman Heriawan of CBS, the amount brought about from Indonesians workers working abroad, is around 2-3 billion dollars for each year. This should be subtracted by the amount of foreign exchange spent to pay foreign workers working in Indonesia. But, since the number of foreign workers is not yet recorded well, it looks as though Indonesia has a surplus.

2.2. GATS AND INDONESIA16

In every GATS negotiation, Indonesia gives a commitment in five sectors; financial service,, tourism service, construction service, maritime transportation service, and telecommunication service. Why those five sectors?

This is not a question with the simple answer. As previously mentioned, in general, Indonesia does not have enough capacity to become a service producer as reflected in the deficit balance of payment. More than that, Indonesia does not have an analysis or initial study on the readiness of each above mentioned sector before signing GATS17.

1 This part will specifically discuss on Indonesia’s Schedule of Specific Commitment, GATS/SC/43, April 15, 1994 1 Even until now, there has been only few researches still attempting to make ‘an analysis on cost and benefit’ or ‘cost-benefit

analysis’ in the liberalization of service sectors. The Central Bureau of Statistic itself states that the statistical computation in this sector is still unable to do due to methodology, human resources, and financial factors that are not contributive.

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Therefore, in the negotiation process, the position of Indonesia and other developing countries are much weaker than developed countries. So, it seems that there is no basic economic analysis underlying why there are five sectors chosen for liberalization18.

The table below is a horizontal commitment applicable for all sectors.

Sector or Subsector

LIMITATION ON MARKET ACCESS

LIMITATION ON NATIONAL TREATMENT

Additional Commitments

ALL SECTORS INCLUDED IN THIS SCHEDULE

1), 2) As specified in each sector

3) Commercial Presence of the foreign service provider(s) may be in the form of koint venture and/or representative office, unless mentioned otherwise.

Joint venture should meet the following requirements :i) should be in the form of

Limited Liability Enterprise ( Perseroan Terbatas/PT),

ii) not more than 40 percent of the capital share of the Limited Liability Enterprise (Perseroan Terbatas/PT), may be owned by foreign patner(s)

1), 2) As specified in each sector

3) The Income Tax Law provides that non resident taxpayer will be subject to withholding tax of 20 percent if they derive the following income from Indonesian source :

a) interestb) royaltiesc) dividendd) fee from service performed in

Indonesia

Land Acquisition Undang-Undang Pokok Agraria (Land Law) No 5 of 1960 stipulates that no foreigners (judicial and natural persons) are allowed to own land. However, a joint venture enterprise could hold the right for land use (Hak Guna Usaha) and building rights (Hak Guna Bangunan), and they may rent/lease land property.

Any juridicial and natural persons should meet professional and qualification requirements.

4) Subject to Indonesia Labour and Immigration Laws and Regulations, only directors, managers and technical experts/advisors, unless mentioned otherwise, are allowed with maximum stay of two years subject to one year extension.

4) Expatriate ChargesAny foreign natural persons supplying services are subject to charges levied by National, Provincial and Municipal Governments.

Labour Laws and Regulations.Any expatriate employed by a joint-

18 Almost all-governmental informants also admit this problem stating that Indonesia is not the principal proponent of trade in services. It might be only tourism service, which brings money for Indonesia, while other services are economically hard to explain as for why they are put as a commitment. Except that it is due to the request of the service-proponent countries.

19 Schedule of Specific Commitment mentioned above is complemented with Schedule of Specific Commitment 2 GATS/SC/43, April 11, 1997.

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Manager and technical experts (intra corporate transfer) are allowed based on an economic needs test

venture enterprose, representative office, an/or other types of juridicial person and/or an individual services provider must hold a valid working permit issued by Ministry of Manpower.

Immigration Laws and Regulations.Any expatriate must meet immigration requirements and procedures to enter the territory of the Republic of Indonesia

2.1. A Overview of Five Sectors in Indonesian Schedule of Specific Commitment

2.1.1. Services in Telecommunication19

In 1997, Indonesia signed World Trade Organization (WTO) Agreement on Basic Telecommunication. Generally, this commitment is aimed to put an end to the monopoly of Telkom Ltd. Co. and Indosat Ltd. Co. because both of the telecommunication service providers were owned by Indonesian government.

How is the portrait of Indonesian telecommunication nowadays?

Telkom Ltd. Co exclusively organizes National Long Distance Connection service until 2005, while International Connection service is in the duopoly of Indosat Ltd. Co. and Satelindo Ltd. Co. until 2004. Telkom Ltd. Co. exclusively organizes local Connection service until 2010. A provider competitively organizes cellular mobile telecommunication service with shares owned by foreign investor up to 35 percent. In the Additional Commitments, it is stated that at the end of exclusive period or duopoly period mentioned above, Indonesia will review the possibility of new emission.

Besides, it is necessary to include Reference Paper of WTO to guarantee a fair competition. Indonesia should sign its commitment to include this regulation in the framework of telecommunication regulation in each country. The regulation in Reference Paper of WTO which needs to be included in the national regulation of each member country that has given their own commitment covers:a. Prevention against anti-competition practices in telecommunication

Preventing action against anti-competition practices by the dominant provider toward the new provider has to be applied.

b. InterconnectionThe requirements for all networks of new provider in order to get connected with the dominant provider should be equal and applied without any discrimination.

c. USO (Universal Service Obligation)The processes of practicing and duty imposition of the universal service organization must be transparent, without any discrimination and neutral from competition.

d. Giving license

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The criteria of giving license which has to be announced has to be done through a transparent process.

e. Independent regulatorAn independent regulator has to be free from its dependency on the provider of telecommunication service.

f. Allocation of scarce resourcesThe allocation of scarce resources, such as frequency, orbit of satellite, number, state-owned land, has to be carried out through a fair and transparent process without any discrimination.

2.2.2. Services in Maritime TransportationIndonesia is committed in two categories of maritime transportation service; passenger transportation (International Passenger Transport CPC 721) and freight transportation (International Freight Transport CPC 7212). The commitment given to those two sub-sectors includes:

A foreign maritime service company can find a representative in Indonesia, one of which duties is to oversee its ships during their operation within the Indonesian areas and ports.

The foreign company is also obliged to appoint an Indonesian maritime service company as a general agent.

As for joint venture, just as stated in the horizontal commitment, at most 40 percent of the share is owned by the foreign partner and must be a limited company.

2.1.3. Services in Finance20

The commitment in financial service is divided into two fields; banking sector and non-banking sector. For banking services, the commitment given covers among others,

Banking sector includes saving service (saving, deposit), loan, assurance, traveler cheque, debt card, banker drafts, foreign exchange, instruments of money market (certificate of deposit) etc.

All limitations of market access and national treatment in banking sector will be eliminated in 2020.

The acquisition of a local bank (which is listed in stock exchange) done by foreign bank is allowed as long as the maximal limit of share ownership by the foreign partner is 49 percent of the total shares.

Foreign banks and joint venture banks are allowed to establish their offices in the cities of Jakarta, Surabaya, Semarang, Bandung, Medan, Ujung Pandang, Denpasar, and Batam Island.

The national treatment limitation in taxation imposed in the horizontal commitment is not applicable in the banking sector.

Meanwhile, in the transactions of non-banking sector, the commitment given includes: Non banking financial services, inclusive of insurance services (life insurance and

non life insurance); reinsurance services, leasing services, services of insurance broker and reinsurance broker, consumer financing services, factoring services, issuing services of credit card and credit card agent, security services (share, obligation),

2 0 Schedule of Specific Commitment mentioned above is complemented with Schedule of Specific Commitment Supplement 3 GATS/SC/43. February 26, 1998

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underwriting services, portfolio management services, financial consultation services for capital market etc.

All limitations to market access and national treatment in banking sector will be eliminated in 2020.

Foreign investor may own up to 100 percent of share ownership in a non-banking financial company listed in stock exchange.

The limitation of national treatment in taxation imposed in the horizontal commitment is not applicable in the banking sector.

All joint venture companies must provide trainings for their own employees.

2.1.4. Services in TourismIn tourism sector, Indonesian government puts 3 sub sectors in the commitment of tourism service, which include:

As for hotel and tourist resort (hotel, marina, golf courses, and other sport facilities) in East Indonesia, that is in Borneo, Bengkulu, Jambi, and Celebes, foreign investor may own their shares even up to 100 percent. The hotel category is limited to three, four, and five-star hotel.

For building hotel and tourist resort, the capital adequacy deposited by foreign investor is higher than one deposited by local investor, but this limitation will be eliminated in 2020.

For movement of natural persons (mode 4) in the field of hotel affairs, the commitment made is unbound except for top level managers and highly skilled professionals in the hotel business, they are general manager, resort manager, food and beverage manager, resident manager, controller, marketing director, executive chef, sous chef and specialty chef.

The allocated number for Travel Agent and Tour Operator (CPC 74710) is limited to at most 30.

The tour operator must be a travel agent which operates in Jakarta and Bali.

2.1.5. Services in IndustriesIndonesia puts 19 subsectors in Schedule of Specific Commitment. The rules included in the commitment covers:

Consultant services (CPC 86721), management project services, software implementation services, R&D services for industrial activities, architect’s services, urban planning services, construction services, etc.

As for foreign capital investment (mode 3), the cooperation is carried out through founding a representative in Indonesia.

The Indonesian partner, which becomes the partner in the cooperation has to become a member of Indonesian Consultant Association.

There are several sub-sectors (architect’s services, engineering services, urban planning services), which oblige the payment of registration fee. The license for their representative must be extended every three years.

In founding a joint venture company, it is obliged to meet all requirements as listed in the horizontal commitment and The Law of Foreign Capital Investment.

3. THE IMPLICATIONS OF GATS FOR INDONESIA

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As mentioned above, it is not easy to immediately indicate the measurable implications of GATS for Indonesia, be it a surplus or a deficit, an increasing or decreasing in the balance of payment for service21. Unlike the balance of payment for goods, which can be more accurately calculated, the contribution of service sector is hard to qualify likewise. The implications of GATS or the liberalization of trade in services can be more clearly seen from the policy point of view (the Law and its all derivative rules) than by other measurable indicators.

3.1. In Telecommunication SectorThe Law no. 36/1999 on Telecommunication which replaces the Law no. 3/1989 bears a spirit to immediately end the era of cross ownership22 (not to regard it as a monopoly) which Telkom and Indosat23 have enjoyed all this time and opens an opportunity widely for other business doers24. The regulatory function formally held by the government is still maintained in the new the Law despite of no guarantee that in the future this function will still be in the hand of the government25.

It seems that The Law no. 36/1999 is indeed design and created to adopt GATS and WTO Agreement on Basic Telecommunication in which Indonesia was one of the signing countries. One of the items in the agreement is related to the concept of IRB (Independent Regulatory Body), which each of the signing countries has to establish in order to assure a fair competition. Even though The Law no. 36/1999 has not touched the IRB establishment in Indonesia, there is a spirit clearly felt to open this telecommunication sector up to a private involvement26.

The Law no. 36/1999 as the continuation of deregulation and privatization in telecommunication sector causes the order of Indonesian telecommunication business to change drastically by eroding the structure of monopolistic market27. This step seems to be ably trusted to push the efficiency in the related industries. Therefore, the step taken by the government to open a duopoly last August,

2 1 See Box “Measuring Intangible Goods”2 2 Cross ownership between Telkom and Indosat occur in several companies. In Satelindo, Telkom has 22.5% share and

Indosat has 7.5% share. Telkom is also in control of 42.72% of all shares of Telkomsel, the biggest cellular phone operator in Indonesia, while Indosat 35%. In Lintas Arta, a company in data communication business, Telkom is in control of 37.66% of its shares and its other 32.64% share is owned by Indosat. Then in Patrakom, Telkom has 30% share and Indosat 10%. The Indosat’s share ownership in Telkom’s partner in the cooperation scheme is recorded as much as 30.55% in Mitra Global Telekomunikasi Indonesia (MGTI) and 13% in Pramindo. Accordingly, the telecommunication business in Indonesia is generally dominated by Telkom and Indosat, either in the scheme of full or cross ownership or joint venture.

2 3 Currently, Telkom has 8.8 million units of telephone connection with 7.2 million customers, while Indosat only has 20,000

units of telephone connection in Jakarta, Surabaya, Medan, and Batam.2 4 In its development, related to the business demand, the rule cannot be wholly put into practice. In the international market

the government applies duopoly system, that is to allow Satelindo to have 008 access code, which is owned by Telkom-Indosat-private companies to compete with Indosat that has previously come to presence with 001 access code. In the domestic market, Telkom involves a partnership in its operation through the scheme of cooperation. There are two partners of cooperation in which Indosat owns some of the shares. The first one is Pramindo, which operates the Regional Division I Sumatra. And the second one is MGTI, which manages Regional Division IV Central Java/Yogyakart Special Region.

2 5 InArticle 4 verse 1 of the Law no. 36/1999: Telecommunication sector is in the control of the government and its nurturing is done by the government as well. What the nurturing means is listed in Article 2 which includes the policy establishment, regulation, supervision, and controlling. So, according to the Law, the government still fully holds the regulatory function along with the function of establishing telecommunication policy. But one thing to remember, that the explanation of The Law no. 36/1999 Article 4 verse 2 mentioned above implies that the currently regulatory function held by the government can be delegated to a regulatory board according to the development of condition. It means that there is no binding power to keep the government’s position as a regulator

2 6 In the nurturing of telecommunication sector, for instance, the involvement is regulated through an independent institute like what Article 5 verse 1-5 of The Law no. 36/1999 and the Governmental Regulation no. 52 year 2002 verse 90-94 say. The independent institute mentioned above means an umbrella board to accommodate the aspiration of operators, vendors, users,and professionals to be conveyed as an input for the government.

2 7 In addition, since 2000 The Law no. 5/1999 on the prohibition of Monopoly Practice and Unfair Business Competition.

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2002, which was taken as an attempt to create a competition in the telecommunication sector was a logical consequence of such setting of policy28.

The main argument is that the competition going to happen will give an alternative for customers to get a better service and tariff. Besides, by opening opportunity for a competition widely, it is expected that the Indonesian telecommunication industry will prepare itself to improve its competitive power and the customers will get the even distribution of benefit out of the competition in accessing the telecommunication services without having to depend on their location. The public will benefit as the customer is protected of their importance in getting the qualified services, affordable price, and the variety of choices. But, is this claim true? Considering that telephone services belong to the domain of public services, is such a Law with the spirit of free competition really on the side of customers’ importance? Or on the other hand, is it powerless to prevent the exploitation by the telecommunication industry against consumers?

3.2. Services in Maritime TransportationThe agreement signed in GATS seems to affect the emergence of a new regulation plan. It is for the first time that the Department of Transportation holds a public test toward the Bill of Maritime Transportation to replace The Law no. 21 year 1992 on the Maritime Transportation to dig out and get a constructive and reasonable input and advice to set the new the Law on Maritime Transportation in order to anticipate globalization, and that means confirming all aspects demanded in GATS.

The public test of the Bill of Maritime Transportation is an attempt of the government to elaborate the new Law on Maritime Transportation. This public test will be followed by the discussion by the team of Transportation Department, interdependent team, by the end of September 2003, the bill will then be submitted to the president, then to the House of Representatives to be discussed.

Before the bill is launched, after the agreement of GATS, the Governmental Regulation no. 82 year 1999 obliges companies of agency also to have their own ship with the least net weight of 5,000 GT. One used ship with such a weight costs 7 million US dollars and that is certainly beyond the affordability of small scale maritime transportation business. The implication is there will be no local investment. According to Indonesia Shipping Agency Association (ISAA), this governmental regulation has brought about casualties. The General Directorate of Maritime Transportation imposes a sanction on 975 domestic maritime transportation companies which do not have any ship of such requirement by prohibiting them from operating any commercial ship either foreign ship or one with national flag. This includes operating prohibition imposed on maritime transportation companies, which only act as the agent of the ship because they cannot comply with the requirements to have their own ship until the established time, that is 200329.

2 8 Compare this with Schedule of Commitment of GATS in the telecommunication sector.2 9 Operating prohibition for maritime transportation companies that do not have such a ship has been valid since

2001 but because the Decree of Transportation and Telecommunication Minister (KM no. 33/200) which gives a chance for the maritime transportation companies to have such a ship within two years has been issued, the sanction is postponed to the year of 2003. The company imposed by this sanction has all this time preferred running a ship agency business, because this kind of business needs less capital than one for buying a ship. Even any company which has such a ship is only authorized by the foreign owner completely with the ship documents, but the status of the ship is still a foreign-flagged. Consequently, the status is unpaid or purchase lease. While the rule is the flag of the ship which has been owned has to be replaced with red and white.

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It seems that these many post-GATS regulations exactly contribute to the recession in the national maritime transportation industry and that is a wrong way, because the severe condition of the order of this industry is, among others, due to no clear regulation and concern from the government even though in fact it needs so much30. Certainly beside that, the professionalism of national maritime transportation business doers belongs to one of the determining factors.

3.3. In Financial Services Sector3.3.1. Banking SectorAfter the commitment made by the Indonesian government in the agreement of GATS, The Law no. 10 year 1998 on banking sector was born. This banking law, in point of fact, does not take side with the importance of small and medium scale business and even make difficult for small and medium scale business to get a loan from the bank because they must have collateral, many kinds of permission and they also have to pay quite a high rate of interest, all of which are just the same with requirements for big companies. Small and medium scale business31 cannot comply with those requirements. Meanwhile, currently in the banking sector, there is still a loan fund for small and medium scale business around 487 trillion rupiah. The loan for small and medium scale business budgeted by the government as much as 796.8 trillion rupiah, only 312 trillion rupiah has been distributed. In other words, the law on banking makes the loan fund for small and medium scale business still available in the bank but difficult to distribute.

What is the implication of this banking law? In the year of 2002, even though the loan growth for cooperatives and small and medium scale business tends to increase (35.1 percent) of the total growth for banking loan, but the percentage of loan for cooperatives and small and medium scale business is still lower than one for consumption loan. For instance, the percentage of loan for consumption and credit card given by the bank grows up to 38.7 percent. It is interesting to pay close attention to the fact that so far there are just 54 banks registering their loan allocation for cooperatives and small and medium scale business in their annual budget plan. This is what reality speaks. The law on banking possibly needs an amendment with the spirit yelling out “Don’t treat small and medium scale business equally to big companies in accessing business loan.”

Why the law on banking is set up with such a direction? There seems a worry that the loan for small and medium scale business will not be performing. But according to The Department of Small and Medium Scale Business Development of Indonesian Chamber of Commerce, this is just blown up because the proof of non performing loan for small and medium scale business up to now is not more than 1 percent. Even it is big companies which bring about more non performing loan.

The treatment that the bank gives to both of micro business doers and small and medium scale business should be different from one to the doers of corporate business and should also be simplified in the technical banking requirements for loans. For example, by simplifying the 3 0 For instance, Vietnam is presently more developed than thirty three years ago because its government has deep

concerns one of which is manifested by giving a bank loan almost without any interest to the business of maritime transportation. While in Indonesia, the maritime transportation sector is imposed of interest above 15% so that there is no local investment in the maritime transportation.

3 1 There are some aspects in the Law no. 10/1998 on the banking sector considered as burdening the doers of such business, specifically in the permission and collateral aspects. For an instance in the permission aspect, small and medium scale business doers should merely have a letter of business permission without being burdened to have other kinds of permission. Then, as for the collateral, small and medium scale business must meet all technical requirements of the bank which is considered as very hard for the small and medium scale business themselves.

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process of getting permission and imposing much less rate of interest. These can be done by, such as, asking the government to give a special treatment in establishing rate of interest to micro business doers and small and medium scale business32.

3.3.2. Taxation SectorAlthough there are many laws born after the commitment that Indonesia made under the clause of Financial Services in GATS33, generally all of the laws are, in point of fact, still on the side of the idea that tax is an income for the state and an investment control for business revenue as well. However, the Indonesian Department of Financial Affairs itself seems to support the input from IMF34 to have an amendment on many of the laws, specifically the Law on Principal Rules for Taxation before the end of Megawati’s government on the basis of a reason that the currently applicable law is felt to burden the business people.One of the verses going to be amended is one on the tariff of income tax and the value-added tax of business which is regarded as still high35.

The argument is: the decreasing in Value-Added Tax tariff and Income Tax will improve the state revenue from taxation sector and increase the target of tax ratio of 2003 as much as 12.6 percent. On the basis of the race-to-the-bottom policy, investment is expected to come in because Indonesian taxation becomes competitive. So, the revenue from tax can be increased although the tariff is lowered. The problem is why this item becomes the focus of the reform in the taxation regulation, instead of trying to catch the unembraced tax subjects and all of them are high-class tax debtor.

3.4. In Tourism FieldGATS agreement in the tourism sector will affect the hue in tourism sector which all this time has become the second most contributor to foreign exchange after non oil and gas sector. GATS implies the mandate to change the Law no. 9 year 1990 on the tourism sector which is regarded as still centralistic. Indonesian Association of Hotels and Restaurants itself judges that the revision of the law is very important to do in the era of regional autonomy currently going on because the doers of tourism business will have a kind of umbrella in the development of tourism sector in each region which has extremely different potency one another.

Therefore, a bill on the tourism sector is proposed by the Department of Culture and Tourism to replace the currently existing law. The difference is that in the bill it is stated that the role of government shifts to becoming a facilitator and put the public and business people in the position as the front-liners of this tourism business. Along with the commitment which has been committed to GATS in the sector of tourism, Article IV part 5 specifically regulates the public role. In verse

3 2 According to Indonesian Chamber of Commerce, the ideal rate of interest for small and medium scale business is under 10% each year. In the developed countries, including in ASEAN countries like Malaysia, Thailand, etc. the applied rate of interest for such a business is under 10% as well.

3 3 The law no 16 year 2000 on the General Rules for Taxation, the law no. 17 year 2000 on the Income Tax, the law no. 18 year 2000 on the Value-Added Tax of Goods and Services and the Tax on Luxury Goods Sale, the law no. 19 year 2000 on the Collection of Tax with Compulsory Letter, the law no. 20 year 2000 on Right Procurement Duty of Land and Building and the law no. 14 year 2002 on the Court of Tax

3 4 According to the Minister of Financial Affairs, IMF suggests that Indonesia applies a single tariff, specially for the Income Tax.

3 5 According to the Minister of Financial Affairs, the plan on amendment is done by considering the aspects of efficiency and competitive power toward ASEAN countries (Singapore, Malaysia, Thailand).

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13, it is stated that the public has the same and wide opportunity to take part in the development of tourism.Compared to the law no. 9 year 1990, this bill is openly said to accommodate the development of political economy of modern tourism such as in its relation to regional autonomy, liberalization, code of conduct in the world’s tourism and various international agreements36. One of the implications, like the businessmen in tourism services should be given a freedom in establishing the tariff of service produced as the quality standard.

The commitment, which has been made in GATS, beckons the radical opening of tourism sector for foreign private business doers either in the tourist resort management, the establishment of tourist facilities, and tourism and travel agent.

Concisely, in those five sector in which Indonesia has been committed, GATS and all of its supporting instruments seem to have been a main factor in considering the making of many regulating instruments directing to liberalization in all those sectors and will still be. The a result of these regulations is not felt too much nowadays, although there is one in fact. But within the forthcoming five up to ten years, the situation will be different in which the foreign private doers will dominate and put the local doers aside. Although speculative, this pattern seems to be repeated in other sectors which seems to be liberalized in the future no matter we like it or not.

4. GATS AND DEVELOPING COUNTRIESA question whether the above phenomena only happen in Indonesia comes up. It does not seem so. Such a pattern also happens in other developing countries. If we look at the past a little bit, the birth of GATS is a compromise amongst USA and G-10 out of the worries of developing countries about the inclusion of services into GATT due to many reasons37. But finally, the final consensus on GATS was strictly limited to the ‘GATT-type’ rules (the rules similar with GATT) prevailing in services and liberalization and certain sectors with many advanced negotiations.

According to Dobson and Jacquest (1998), the separation of this talk from Uruguay Round negotiation mean several things. One of them was to ‘calm down’ the ‘nervous’ developing countries as the opening of service sector would affect the real sector (goods). Another one was to assure the Minister of Financial Affairs of the developed countries who were reluctant to treat financial services equal to any other commodities. When the Uruguay Round was in December 1993, although the negotiation on service sector ran through another lane, the negotiators succeeded in making GATS one of the integral parts of the Uruguay Round package. The implication now is that all WTO member countries become bound to GATS. In other words, the developing countries seems not to have any other choice but taking part in this system.

In addition, there are several underlying problems bearing direct implications on the developing countries (Dunkley, 2000). First is a matter of information. Services are frequently related to the

3 6 The bill on Tourism also refers to the law related to tourism, such as the law no. 5 year 1992 about Culturally Conserved Artifacts, the law no. 9 year 1992 on immigration and et cetera

3 7 Look at (Braithwaite & Drahos, 2000). Initially, USA insisted on the full inclusion of service issue into the GATT negotiation, but this idea was rejected by the developing countries, many of which were service importers. Led by India and Brazil, the developing countries argued that investment policy was related to the rights, sovereignty, and the elements of economic policy. GATT was made for the trade of goods instead of for managing the trade of service. Besides, the developing countries were also afraid of corruption, which might occur in many multinational companies and of their authority to control their own national development to lose if the investment policies were to liberalized. See also (Burt, 1997)

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production process. That is why services are not well and accurately recorded in the balance of national payment and their capacity cannot be separated from the balance of trade either. During the Uruguay Round, a few developing countries demanded for more researches on the implications of trade in services before they signed it. But, WTO’s high rank officials insisted that the GATS negotiation finished just at the same time with the completion of Uruguay Round, disregarding such a demand of the developing countries.

The second problem is the oligopolistic characteristics of the market for services. There are many proofs that the service sector has been dominated by oligopolistic market in the hand of a minor number of transnational companies which have previously set aside the provider of small scale services, like small and medium scale businesses or individuals. This specifically occurs in essential service sectors, like water, health, education and electricity. This situation brings about scepticism whether many countries especially the developing ones will take an advantage on such a liberalization of service. Then, a matter of development. Although some economists argue that the developing countries have comparative excellence in service sector38, we should also see the differences in skill and ability between the developing countries and the developed ones which brings about much more benefits for the developed countries than for the developing ones. All problems mentioned above affect the developing countries specifically in these essential factors, (1) national sovereignty, (2) people/community and (3) culture.

In the matter of national sovereignty, it seems clearly that the sovereignty will be affected by all international regulations of services. There are frequently-occurring proof that a poor country without any experience, was blamed because it was regarded unfair in giving the treatment to this service sector. Kenya, for example, was fined by an English service company requiring this African country to pay fivefold higher tariff than the normal one.

In the matters related to people/community, it is clearly seen that the argument of the free trade proponents stating that “…services, just like goods, can be separated from many norms” does not find the essence. Many services , like telecommunication, mass media, health, and education will be best offered in the context of people/community. And the implications will much affect the essential values in the community itself. The practice of education service, for instance, which should conceive many ideas and goodness on the basis of social values and has an important role to keep those values under the scheme of privatization and liberalization is forced to adopt the industrial interests which are much limited in scope.

Then in the matter of culture, there is a fundamental influence when such services as education, mass media, entertainment, computer software, and many other industries of life style invade the developing countries and crush many cultural values and symbols completely. What is meant by ‘McDonalization’ is a tendency to homogenize a great deal of cultures and social values for the sake of a cheap production cost for the services.

According to Sinclair (2000), it seems that GATS has significantly affected many public policies in the developing countries. An example which happened in Cochabamba, Bolivia with what is called as ‘Waterwar’39 when its people had to choose between water or food after the privatizing process

3 8 One of them is Prof. Jagdish Bhagwati. Bhagwati (1984) and Sampson and Snape (1985) are the people who develop fours typologies which is then adopted by GATS as four modes of supply. See ESCAP, 2000.

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of water running so brutally that multiplied the water tariff, is one of the reasons why the developing countries should be worried about the existence of GATS.

Many other examples in the developing countries indicate that the liberalization of service sector, specifically the essential services (electricity, health, education, water), has inflicted many people in loss, especially those who are poor. After the 1997 monetary crises which hit Asia, instead of trying to step over the crisis, IMF and the World Bank even cornered many developing countries to immediately run the liberalization agenda (including the liberalization of services having been signed in GATS) through what is called as SAP (Structural Adjustment Program).

This SAP has caused many developing countries to decrease the allocation of public expenditure by applying the strategy of ‘cost recovery’ or compensated cost for providing services for public. In the health sector, for instance, it is introduced what is called as userfee, even for the very basic health maintenance which can actually be provided for free40. Such application of cost is a very clear proof how the poor is getting less and less access to services. In the health sector, the results are very clear; the increasing number of infant mortality, the high raise of the number of sexually transmitted diseases, tuberculosis, the poor sanitation quality, and access to water. Sexton (2001) even states that many people died due to diseases, which should have been easily cured but unfortunately, they can not afford to buy the medicine41.

Since GATS was signed, many changes in public policy of services have occurred in the developing countries. But that is not enough. Therefore, Article XIX concerning the Negotiation of Specific Commitment in part IV of GATS under the title of Progressive Liberalization also includes the mandate of advanced negotiation round (in 2000) which is meant to achieve progressively higher liberalization stage. Hall (2001) formulates simply and frankly that it means a broader scope of privatization and deregulation.

4.1. Behind GATSUp to this point, Indonesia may direct some following questions: why does GATS become so strong? What kind of logic is used? What interest/Whom does it represent? Paying close attention to the following table may help disclose a little bit of the lid of the mistery:

Country 1992 2000Expor Import Expor Import

EU-154 148,7 (28,0%) 140.8 (26,1%) 291,1 (24,3%) 286,1 (23,8%)USA5 126,4 (23.8%) 79,6 (14.8%) 297,8 (24,9%) 215,7 (17,9%)Japan 38,1 ( 7,2%) 75,1 (13,9%) 74,1 ( 6,2%) 125,5 (10,4%)Canada 15,4 ( 2,9%) 23,2 ( 4,3%) 40,3 ( 3,4%) 45,4 ( 3,8%)

3 9 See Jim Shultz’s report from The Democracy Centre, and also Shultz (2000), which describes ‘Bolivian Waterwar’. Those two can be accessed in URL http://www.democracyctr.org/watewar/index.htm

4 0 In its 1998 report, the World Bank records that “…around 40% of its portfolio projects in the health sector, nutrition, and demography and almost 75% of Sub-Sahara projects in Africa covers the establishment or expansion of userfee. See in (Sexton, 2001)

4 1 See (Sexton, 2001)4 EU-internal transaction was not included. EU-15 internal transaction in commercial services has reached 710,8 billion EUR in

2000. In these services, EU-15 has contributed in about 42 percent in export and 41 percent in import for total world transaction.

5 Repair services and the expenditure of foreign government and international organization in US, not included mail and courier services.

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China 7,0 ( 1,3%) 7,1 ( 1,3%) 32,7 ( 2,7%) 38,9 ( 3,2%)Other countries 195,2 (36,8%) 212,9 (39,6%) 457,7 (38,3%) 489,5 (40,8%)Total 530,8 ( 100%) 538,7 ( 100%) 1.193,8 ( 100%) 1.201,2 ( 100%)

Table : The World’s Export-Import of Commercial Services42

(in millions of Euro and the world’s total percentage)

What is seen there? This table clearly indicates that service is empirically is a matter of area and market commodity. What is the implication of such a point of view?

The most fundamental one is that the service provision must be managed in accordance with the market mechanism. That the provision of several service like transportation, tourism, banking, and insurance is carried out in the market condition is understandable, but if such essential services like water, health, and electric power have to give their provision up to the market mechanism, then it means fundamentally eliminating the character of public accessibility to the service. Only those who have an access to money (who can pay) can get such an access.

GATS considers that the process of providing services as an economic process involving the practice of many companies in the world. The service sector covers about two third of all production sector and global manpower and almost one fifth of the value of world’s trade. The trade of service has increased so rapidly since 1970’s and it is closely related to the economic globalization because it is influential to the performance of multinational companies and the market structure in the spectrum of agricultural sector, manufacture, and the service itself.

In the water sector, for instance, after GATS, it can be seen that many foreign private companies operating in the developing countries like Vivendi, Suez-Lyonnnaise, Biwater, British Thames, Cascal BV and WM Drenthe have privatized the water in those such countries. Such practice seems to be going on and it will keep on getting legitimation not only from the recipe of the imperative of IMF and the World Bank in its SAP, but also from the formal policy in their own national government’s management with many of their rules.

In the health sector, many foreign doers like GlenEagles, Pfizer, Bayer begins to plunder the provision of the medicine provision in the developing countries in Asia and Africa. Meanwhile, in the industrial service sector, specifically electric power, many state-owned electrical companies in the developing countries begin to get unbundled. Many companies belonging to Power Producer begins to expand their own business to many developing countries like Indonesia, Vietnam, Thailand, Myanmar. Those companies are Siemens, General Electric, Californian Energy, Edison Mission Energy, Mitsui & Co,, Black & Veath International, Duke Energy, Mitsubishi, Hopewell Holdings, and Unocal operating in generating electric power-a leverage point in setting the price of electricity that the people have to pay, although the distribution and transmission are held by the state.

What is going to be said?

4 2 The table is taken from Eurostat News Release 117/2001, November 8, 2001, “The EU Figures for the Doha Conference.” Source of data: IMF. The data does not include the internal transaction of EU. The commercial service doesn’t include the services provided by the government.

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In one short expression, there is a systematical attempt done by the business and corporation sector supported by the mechanism in GATS and WTO to marginalize the governmental function in providing services and causing many basic services which contribute much to life to be as mere commodities. For the business and corporation sector – it is for the sake of and on behalf of their interest – all agreements on the trade of service mentioned above are made.

All this time, it is the state (government) that takes the role in providing many services, specifically the essential, such as water, health, electric power, and education for the people and the private sector makes services in other fields (banking, insurance, tourism, etc.). But the implications of GATS mentioned above are the imperative process so as to make the government go back and hand over the management of essential services for public to the private sector with the excuse of efficiency and effectiveness in the provision for many people43.

EPILOGUE: WHAT SHOULD INDONESIA DO?

The agreements in GATS seems to be on the basis of (1) competitive efficiency and effectiveness of the private sector faced with (2) a slow-moving bureaucracy out of the management model by monopolistic state. In this case, the market principles are put in practice at random for the sake of chasing for the aspect of competitiveness.

As a result, the role of the government (the state) is deregulated so as to hold the highest policy no longer in the market mechanism. And liberalization then becomes widely phenomenal – which ends in the process of privatizing service sector. Policies pivoting on the crisis settlement in accordance with the model of IMF always end up in a precondition demanding the government to decline from its previously main function to manage the public service sector. The declining of governmental role and the incoming of private sector is expected to be able to decrease the price so that it becomes more competitive. As a matter of fact, it is not. Instead of behaving as a competitor one another, some of the private sectors working on one certain aspect/sector even build a cartel or oligopoly to set the price according to their own standard.

All these sequences seem to be a brutally social engineering process. Many practices of services liberalization driven by the agreements of GATS bring about not only economical impacts, but also social and cultural impacts. Along with the value that the globalization brings in, which is the worshipping money and growth as the highest value in life, the liberalization of service puts that to the extremity and creates what is called as acces-divided society, the public of which accessibilites are split into many kinds of service all of which should be accessed by everyone with an equal opportunity as well.

In short, the liberalization of service by GATS which only takes side on the interest of business and private corporation has marginalized the function of the government (the state) and caused many services (including the essential services contributing much to life) to be mere commodities.

4 3 In the developing countries, specially those who follow the formula of IMF, the problem of providing basic services for public moves in accordance with the deregulation-liberalization-privatization pattern. Perhaps, with the different names or terminologies, but the essence is just the same: involving the private sector (specially the international private sector) systematically and the process of providing services for public. And certainly, Indonesia belongs to the developing countries obeying the formula of IMF.

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The negotiation on service was an irony. Why? Because the developing countries, including Indonesia, are forced to busy themselves preparing many kinds of regulation, infrastructure exhausting mind, time, and money so that the market access of those multinational companies to such countries easily opens wide and free. However, the advantage of openin market will only be taken by the countries or companies whose big producing capacity which the developing countries do not have, but the multinational businesses and industrialized countries do. In other words, the developing countries have been forced to pay ‘down payment’ through the provision of infrastructures, regulations, etc. for the advantage of market access of the developed countries and multinational companies. On the other hand, the advantages previously promised such as consumers having many choices, getting a good price, more competitiveness are not sure yet to come44.]

However, although some say it is not entirely true that all service sectors have been liberalized, many things have indicated the ongoing process. Under the danger that the existence of ‘citizens’ will be immediately replaced by ‘consumers’, all things about the political economy of liberalization can be summarized in one word; the side taking. When the side-taking tends to swing to the capital accumulation and profit, then all theories and ideas will be established in such a way that the swing of pendulum will head for the speed of capital growth performance. But, as the pendulum of side-taking swings to the social values, the problem lies on an attempt to save and secure the lives of many people.

Certainly, there is a compromise alternative between those two poles of the pendulum swing and it is not impossible to be used, such as the accountable collaboration or attachment of private sectors to the public sectors. But, just like the law of indolence, many fundamental assumptions to understand the direction tendency of the pendulum in the future are needed. Service is a wide arena for the swinging of the side-taking pendulum. In the capital pole, it is so promising. In the social pole, it is needed by many people.

Therefore, the developing countries which do not take much advantage on GATS need to build a firm attitude, such as rejecting the liberalization of public service provision like, health and education because the trade of essential service will violate the right of citizen to get such services. The new commitments should also be rejected (or at least be given time for assessment).

Conceptually, the Request and Offer negotiation model seems to be extremely disadvantages for the developing countries as it will break up the position of developing countries themselves in the negotiation and open an opportunity for economic and political pressure bilaterally.

As a pendulum which does not reflect a static condition, this pendulum is also a paradox. When it is in the capital pole, it searches for a direction to the social support. But, when it is in the social pole, it tends to accumulate capital. Perhaps this is just where the problem lies. That is why something must be collectively done because GATS has a potency, has changed, and is changing the notation of ‘citizen’ to become a mere ‘consumer’ – and this happens in almost all countries.

4 4 So is as stated in the first draft of the 5th WTO Ministerial Meeting in Cancun (September 9-14, 2003). What is stressed there is that the member countries should immediately open domestic market for services through the request and offer mechanism and the implementation of mode 3 through the presence of commercial service company. While the issue and will of the developing countries such as to set ‘safety networks’, the balancing of producing capacity, and the implementation of mode 4 to liberalize the migration of manpower are neglected.

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***BIBLIOGRAPHY

- Braithwaite, John and Drahos, Peter. Global Business Regulation, Cambridge University Press, Cambridge, 2000.

- Burt, Eric M. Developing Countries and the Framework for Negotiations on Foreign Direct Investment in the World Trade Organization. Int’l& Poly 1015, 1997.

- Dunkley, Graham. The Free Trade Adventure: the WTO, the Uruguay Round and Globalism – A Critique, Zed Books, London, 2002.

- ESCAP, Implications of General Agreements on Trade in Services (GATS) for Asia – Pacific Economics, United Nations, New York, 2000.

- Hall, David. Globalization, Privatization and Healthcare – A Preliminary Report, PSIRU, Greenwich, 2001. Also accessible online in URL , http://www.psiru.org

- Mashayekhi, Mina. GATS 2000 Negotiations Options for Developing Countries, South Centre, Jenewa, 2000.

- Raghavan, Chakravarthi, Developing Countries and Services Trade Chasing A Black Cat in a Dark Room, blindfolded, TWN, Penang, 2002.

- Sinclair, Scott. GATS: How the World Trade Organization’new “Services’ Negotiation Threaten Democracy, Canadian Centre for Policy Alternative, 2000.

- Sexton, Sarah. Trading Health Care Away? GATS, Public Services and Privatization, The Corner House, Briefing Paper, July 23, 2001.

- International Trade Centre/UNCTAD and Commonwealth Secretariat, 1999. Business Guide to the World’s Trading System, second edition, 1999.

- Bank of Indonesia, 1980, the Annual Financial Statement of Bank of Indonesia.- Bank of Indonesia, 1985, the Annual Financial Statement of Bank of Indonesia.- Bank of Indonesia, 1990, the Annual Financial Statement of Bank of Indonesia.- Bank of Indonesia, 1995, the Annual Financial Statement of Bank of Indonesia- www.bi.go.id (the website of Bank of Indonesia)- www.bps.go.id (the website of the Central Bureau for Statistic)- www.ictsd.org- www.twnside.org.sg (the website of Third World Network)- www.southcentre.org (the website of South Centre)- www.wto.org (the website of the World Trade Organization)

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Appendix:CASE STUDY ON GATS AND INDONESIA: DIVESTMENT OF PT INDOSAT Tbk, PRIVATIZATION OF TELECOMMUNICATION SERVICES IN INDONESIA

Privatizing and divesting processes of state-owned companies in Indonesia have been incessantly done in Indonesia over the past two years. There are many driving factors that may contribute to them. The first one is the commitment of Indonesia in the Letter of Intent (LoI) of IMF demanding the sale of state-owned assets in order to patch the deficit in the National Budget of Revenue and Expenditure. The second one is the commitment of Indonesia in liberalizing the telecommunication sector in GATS (General Agreement of Trade in Services). And the third one is the pressure of liberalization wave in all sectors, goods, services, and money all over the world.

One of many state-owned companies privatized is PT Indosat Tbk., which is one of the telecommunication service providers in Indonesia besides PT Telkom Tbk. Theo two companies have previously been owned by the Indonesian government. PT Indosat Tbk was in 2000 the third world’s biggest telecommunication operator in the term of profit margin, while PT Telkom Tbk was in the fifth position. Previously, Indosat had been in the second position and Telkom was in the fourth.45

For the aspect of annual revenue growth, Indosat is in the38th position (30.78 percent), while Telkom is in the 60th position. However, for the aspect of market capitalization, Telkom occupies the 64th position with the amount of 2.7 billion US dollars and Indosat with the amount of 990.2 US million dollars. By the aspect of EPS growth, Indosat goes into the 7th position and Telkom is in the 14th position. Meanwhile, SingTel, which has 40 percent shares in PT Bukaka SingTel Internasional, which is the operation partner of Telkom for the East Indonesian region is in the 18 th

position for the aspect of net profit growth. For the growth aspect, its profit margin occupies the 130th position and the 47th position by the aspect of market capitalization and the 19th position by the EPS growth.

As a state-owned company bought from ITT (International Telephone and Telegraph) in 1980 by the then Minister of Financial Affairs, JB Sumarlin and Muchtarudin Siregar, who then became its high commissioners, the performance of Indosat was highly maintained in its professionalism and business cleanliness. That is why Indosat smoothly went public in the year of 2004 because the sale of its shares into the stock exchange was successfully done without the intervention of any other party.

But that was a story from the past. Through the privatizing project of state-owned companies, Singapore Technologies Telemedia Pte. Ltd. (STT) has won the divestment of 41.94 percent Indosat share as much as 5.62 trillion rupiah. The purchasing price was 12,950.00 rupiah for each share, which was 50.6 percent higher than the closing price at Jakarta Stock Exchange last December 2002 which was 8,600 rupiah for each share. The price was also above the bookvalue of Indosat shares as much as 10,400 rupiah. The brave action of STT in purchasing Indosat’s share with the price of 12,950 rupiah had certainly been taken into account.

4 5 According to the analysis result issued by Business.com, the prominent directory site in USA of which shares are owned by Financial Times. In its report, Business.com analyzes all telecommunication operators listed in the stock exchange, specially in USA and Nasdaq, on the basis of the financial statement of the third quarter of 2000 and the financial statement of 1999 and 2000 (see Basins Indonesia, February 26, 2001).

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Generally, the report of Financial Market Trends from the privatizing activates in OECD and Non OECD states that the telecommunication sector is still the biggest segment of the privatization program, both in Indonesia and in the world. Although the interests of telecommunication sector in the world has relatively and critically declined following the bubble burst hitting the telecommunication sector after the Worldcomgate46.

Concisely, there are several things that can be observed out of the divestment result. Firstly, STT, which dominates 41.94 percent of Indosat’s shares along with SingTel, which dominates 35 percent share of PT Telkomsel (a cellular phone operator) is the subsidiaries of a company owned by the Singaporean government, Temasek Holdings Pte. Ltd. SingTel provides broadband services, multimedia services, and telephone services. Its business networks exist in many countries, like China, the Phillipines, Hongkong, Macau, Malaysia, and Taiwan. Through the ownership, the telecommunication industry in Indonesia is dominated by Temasek Holdings. The great dominance of Temasek Holdings can cause the company to be the monopolizing company in Indonesian telecommunication. It is something to note that Indosat is currently estimated to have 2.8 million customers and Telkomsel to have 4.5 million customers47. By such a monopoly, then the company is the determiner of price of the product.

Secondly, Indonesia has enacted the Law no. 5 year 1999 on Anti-Monopoly. As the monopoly of telecommunication service in the hand of Indosat and Telkom ended through the divestment, it does not mean that there is no longer monopoly. The monopoly still exists. This divestment scheme moves the monopoly into a foreign company that is Temasek Holdings.

Thirdly, telecommunication service business is generally divided into three parts: local connection, long distance connection, and international connection. Out of those three parts, the local connection service is an intensive capital business because it has to build networks. This provokes a question whether the new owner has a commitment to install a fixed connection considering that to install a fixed connection needs the investment of 800 dollars, while for cellular business, it is only 300 dollars. There is an anxiety that the new owner will be more attracted to cellular business rather than to the fixed connection. Furthermore, if we see that the Singaporean market, which is relatively stagnant with 68 percent of its population, has cellular telephone while in Indonesia only about 4 percent. The fixed connection installment business will be subcontracted to another party so that the cost can be higher and it may cost the consumers/the people higher to get a fixed connection service. Therefore, the aim of privatization and divestment that is always based on an argument to make companies more efficient, competitive, and that it can offer a cheaper price, is questionable.

The fourth one, the privatization program in many cases will be followed by the employee rationalization. This will clearly adds the number of unemployed people, which is now about 50 million.

The acquisition from the Indonesian government to the Singaporean government will change the map of Indonesian telecommunication business. Out of this, critical questions come up.

46 See the analysis of Lin Che Wei on Kompas of November 8, 200247 See the analysis of Nur Feriyanto on Kompas of January 15, 2003

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If the aim of privatization is to improve the condition of state-owned companies, isn’t Indosat a company with good condition? Why the ownership of a telecommunication company which is influential to the life of many people and which becomes a standard of the national development is shifted to a private company?

What is behind the divestment and why has it to be Indosat? How it is related to the existing rules, such as the Law no. 36 year 1997 on telecommunication, the investment law, the Law no.5 year 1999 on Anti-Monopoly, and such other rules – do they go in line with each other? Will the process improve the prosperity of the people, specifically in getting the telecommunication services, like the instalment, tariff, and quality improved?

Such questions are likely not to be responded in the middle of service liberalization wave, in which telecommunication service is one of the targeted fields of the big capital owners as it is prospective in bringing about break even point and profit. Furthermore, the divesting process has just been going for less than one year. But one thing clearly seen in the process is the attempt of big capital owners to dominate the market and to secure the future market. On behalf of transparency, private involvements, effectiveness, consumers’ interests, and other claims of benefit, in the end, the divesting process has only shown us clearly a legalized forcing of acquisition and a new model of monopoly.

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