Rajat Kathuria Leased Line Prices in India and Indonesia

Comparing the Impact of Decline in Leased Line Prices

in India and Indonesia: Lessons for Latin America
Prof. Rajat Kathuria
ICRIER
rkathuria@icrier.res.in
Abstract
Telecommunications provide access and backbone services which affect efficiency and growth across a
wide range of industries. The quality and price of such key services shape overall economic performance,
as they affect the capacity of businesses to compete in foreign and domestic markets. Reflecting the rapid
pace of innovation in information and communications technologies (IT!, competitive market forces are
becoming increasingly important in the provision of telecommunication and networking services, definitely
moving the sector away from the ""natural monopoly## market model ($orld %ank, &''&!. International
evidence suggests that market openness in telecommunications services and the quality of the regulatory
regime are drivers of IT sector development (()*, &'''!. This study attempts to assess the impact of
decline of leased line prices in Indonesia. It tries to capture this impact through qualitative as well as
quantitative impacts. +ince the decline in prices occurred recently,
,
the period post the decline is not large
enough to do a meaningful time series analysis. -owever, qualitative assessment is made and the impact is
compared with India, where decline in leased line prices led to substantial benefits to user industries. (f
particular significance is the trigger to the price decline in Indonesia. The process was set in motion by a
presentation of research results by .IR/)asia in 0akarta in (ctober &''1 and culminated with the
incumbent operator 2T Telkom and others reporting a 34567 per cent reduction in leased line prices in
8pril &''6
&
. 8nne9 I provides a chronology of the sequence and section : in the paper draws interesting
comparisons with a similar process in India.
Keywords:
I. IMPACT OF TELECOM ON ECONOMIC DEVELOPMENT
%efore dealing with the specific situation in Indonesia it will be useful to briefly e9amine why modern
telecommunications is so important for economic development. ;ost studies by economists conclude that a
modern telecommunications infrastructure has a substantial impact on economic growth. %ased on samples
1
Press release of No. 32/DJPT1/KOMINFO/4/2008 showing e!line in "he "ariff of Ne"wor# $en"
"owars "he e!line in "he "ariff of In"erne" %!!ess in Inonesia & a!!esse a"
h""'(//www.'os"el.go.i/)'a"e/i/*a!a+info.as',i+info-.4/
&
Op cit
of :< and ,&: countries, /orton (,44&! concludes that in economic development ""a telecommunications
infrastructure must be viewed as at least as important as conventional economic forces such as stable
money growth, low inflation and an open economy.## Roller and $averman (&'',! found that one5third of
the economic growth in a group of &, ()* countries over the &'5year period ,4<'=,44' could be
attributed to the direct and indirect impact of the telecommunications sector. 0ames %urnham has studied
the ama>ing economic transformation of Ireland in the ,44's, which owed much of its momentum to timely
investment in a modern telecommunications system (&''7!. The background note of the $T( +ecretariat
describes telecommunications as essential to the facilitation of international trade, economic development
and the enrichment of citi>en#s life#s ($T(,446!. Innovation in telecom has also been linked to growth in
electronic commerce and increased accessibility of telecom services are accepted as the foundation of
successful national and global society initiatives and the social benefits these initiatives will bestow. 8nd
finally, ?aroudakis, et. al demonstrate that improving the quality and lowering the cost of
telecommunications services holds a key role in improving overall economic performance, especially in
developing countries as a result of@
%etter and low5cost telecom services bolster internal efficiency, competitiveness and
strengthen the links of developing economies with global markets.
;ore competitive telecom markets improve the investment climate, and greatly enhance the
attractiveness of liberali>ing countries to A*I.
8 low access cost and high5quality telecommunications infrastructure also facilitates the
diffusion of the internet and IT applications. 8nd the spread of the internet holds great
promise in helping developing countries catch up more rapidly with the e9panding pool of
global knowledge
*eveloping countries may also be able to successfully position themselves in the global IT
market by nurturing competitive advantage in specific nichesBas suggested, for e9ample, by
the booming e9ports of IT business services and software in countries like India, Israel and
;alaysia.
It is well known that telecommunications can create direct as well as indirect benefits. *irect benefits
include revenue and employment generation. 8s with any other form of development, the presence and
growth of industries producing telecommunications goods and services is clearly important to the growth of
real C*2. Crowth results in Dobs and revenue. The si>e of the benefits will of course depend upon the
contribution of the sector to C*2 and the speed of sector growth. 8n important indirect benefit through
the use of telecom user services is the (impact! increase in productivity. Induced changes result in economic
growth and an increase in productivity for businesses and individuals.
8t a firm level, it would seem that large firms can afford to invest in telecom infrastructure, but it is also
reasonable to assume that such investment would improve efficiency, reduce cost and increase si>e. This is
however an empirical question and would therefore require more micro level indicators and data to
understand the underlying factors. The issue is that telecom infrastructure such as leased circuits are
"enabling# or general purpose technologies which implies that their use is ubiquitous yet difficult to
measure because they are dominantly indirect. In addition it has been argued that it is not Dust deployment
of infrastructure or technology that matter, but how the technology is used to transform organi>ations,
processes and behavior that is important (0ohn ?an Reenen et al. &''1!. The push to liberali>e leased
circuits in the early days of the C8T+ negotiations was based on the conviction that maDor benefits could be
generated through competitive provision of telecommunications infrastructure, especially leased circuits.
These benefits included economic and social and are summari>ed in Aigure , below.
Figure 1: Spill!er be"e#its # e$pa"%i"g telecmmu"icati"s ser!ices a"% "et&r's
&

Source: Positive network effects of expanding telecommunications services and networks: economic
opportunity growth and social !enefits accessed at
http:""www#wto#org"english"tratop$e"serv$e"telecom$e"sym$fe!%&$e"sym$fe!%&$e#htm
$hile the government of Indonesia has frequently declared the importance of developing the country#s
telecommunications sector, typically in statements by the ;inistry of ommunications and Information
(;oI!, the actual priority given to this effort is questionable. 8s will be shown in this paper, many policy
decisions have had the effect of limiting competition thereby restricting the possibility of e9ploiting the
sector as an engine for economic growth. The study offers an assessment of this unreali>ed potential, and
reviews the scope for medium term telecom sector growth. It also offers some estimates of the likely impact
of telecommunications liberali>ation on user sectors and on broader economic performance. +ection & gives
an overview of the telecom sector in Indonesia, including the changes that have recently occurred in the
sector. +ections 7 and : focus on the leased circuit market in Indonesia and India respectively and
compares the two markets especially with regard to pace and sequencing of "liberali>ation# in this category.
+ection 1 e9amines the empirical linkages between the market for leased circuits and certain user groups
and estimates the unreali>ed growth potential. +ection 3 evaluates the benefits from inDecting more
competition into the market. +ection < offers some lessons for .atin 8merican telecommunications markets
based on the results for India and Indonesia while +ection 6 concludes and draws the policy implications of
the analysis.
II. INDONESIA(S TELECOMM)NICATIONS MA*+ET
Entil &''', telecommunications services in Indonesia were provided by a succession of state owned
enterprises reflecting, in part, the natural monopoly characteristics of the service. In part it also reflected the
government#s reluctance to involve private participation fully in a sector that provided it with control and
cash. It is also possible that complete appreciation of the benefits of competition had not been understood.
Thus, since early ,46's, the telecom sector was dominated by two state owned operators, 2T Indosat, the
e9clusive provider of international services and 2T 2erumtel which operated fi9ed local and long distance
services. In ,44,, the latter was partially privati>ed and reconstituted as 2T Telkom. The government
created 2T +atelindo in ,447 to be the second provider of international service. -owever, competition was
limited since 2T Indosat owned <.1 percent of its shares and 2T Telkom &1 percent. Aurthermore, 2T
+atelindo and 2T Indosat were required to charge identical tariffs for international service (Coswami,
&''3,!. In ,44:, 2T +atelindo and 2T Telkomsel were granted a C+; license. )9celcomindo, a company
that the government did not hold shares in, was also given a mobile license in ,443.
The financial crisis of ,44< provided the impetus to reform the sector. The overall programme of telecom
sector deregulation was closely linked to the national economic recovery programme supported by the I;A.
The telecom reform policy, contained in the ;oIs "%lueprint# dated 0uly &', ,444 sought to@
Increase the sector performance in the era of globali>ation
7
.iberalise the sector with a competitive structure by removing monopolistic controls
Increase transparency and predictability of the regulatory framework
reate opportunities for national telecommunications operators to form strategic alliances with
foreign partners
reate business opportunities for small and medium enterprises
Aacilitate new Dob opportunities
7
.
Recent regulatory reforms in Indonesia have their basis in the Telecommunications .aw /o. 73 of ,444.
The law provides key guidelines for industry reforms, including industry liberali>ation, facilitation of new
entrants and enhanced transparency and competition (2T Telkom, 8nnual Report &''3, submitted to +),
E+8!. Ender the Indonesian regulatory framework, the Telecommunications .aw only outlines substantive
principles of the subDect matter. *etailed implementation of the law is done, interestingly, by Covernment
regulations, ministerial decrees and decrees of the *C2T. The "independent# regulatory 8uthority
(Indonesian Telecommunications Regulatory %ody, %RTI! created on 0uly ,,, &''7, has been given only an
advisory role and is dependent on *C2T for budgetary support, resulting in a confusing, multilayered
regulatory structure, not conducive to efficient decision making. %y the governments own admission Fto
date, it G%RTIH has been largely inactive and the ;inistry of ommunication and Information has been
more effective in pushing through sector reforms# (Indonesian Trade 2olicy Review &''<, $T(!. 2art of
the reason for the unreali>ed potential of telecom in Indonesia must squarely be attributed to the confusing
and multilayered regulatory structure. This is discussed later in +ection 1.
The telecommunications law classifies telecommunications providers into three categories (%RTI, &'':!@
,. Telecommunications /etwork 2rovidersI
&. Telecommunications +ervices 2rovidersI and
7. +pecial Telecommunications providers
Telecommunications /etwork 2roviders are the only ones allowed to put up infrastructure. $ith a /etwork
2rovider license, it is possible to provide services for@
(a! Ai9ed /etwork@ local, long distance, international, and closed user network
(b! ;obile /etwork@ terrestrial, cellular, and satellite
8s will be argued later the institutional framework does not promote network development. )9cept mobile
telephony, competition is less than adequate in other segments, including in network roll out and
development creating a situation of substantial unreali>ed benefits. This seems surprising since Indonesia
is a late starter in telecommunications reform and therefore had the benefit of both technology and policy
options to introduce pro competitive regulation in the sector drawing from the e9perience of already
successful markets.
Crowth of the Indonesian Telecom market has been uneven. $hile the mobile market has shown
considerable e9pansion, fi9ed lines have stagnated in the last two years. It is estimated that fi9ed linesJ,''
will decline marginally from 3 to 1.4 in &''6. (n the other hand, mobile telephony has grown and
surpassed fi9ed5line penetration since it does not need the same substantial investment in infrastructure. 8s
a result the number of mobile subscribers has increased strongly, rising from 7&.6 million in &'': to an
estimated 4& million in &''<, equivalent to access pathsJ,'' of around 7< (Table I!.
Table 1: Telecm sectr, -../0.1
3
This paper shows that while the policy says the right things, the conditions on the ground even after ,<
years deviate significantly from the stated obDectives in many respects
:
!!" !!# !!$ !!%
!!&
'est.(
Telephone main lines (K'''! ,',&'& ,&,<&' ,:,&41 ,:,6,, ,:,4'6
Telephone main lines (per ,''
population!
:.7 1.7 1.6 3.' 1.4
;obile subscribers (K'''! 7&,6<7 31,''' 61,''' 4&,''' 46,'''
;obile subscribers (per ,''
population!
,7.6 &3.4 7:.3 7<.' 76.6
Internet users (K'''! 6,16< 4,661 ,&,''' ,:,''' ,1,1''
Internet users (per ,'' population! 7.3 :., :.4 1.3 3.,
%roadband subscriber lines (K'''! ,7& 7&1 :1' 1<1 34'
%roadband subscriber lines (per ,''
people!
' ' ' ' '
2ersonal computers (stock per ,,'''
population!
,, ,& ,7 ,: ,1
+ource@ T2R, &''< accessed at www.wto.org
(n the other hand internet has not shown e9traordinary growth witnessed in mobile. )ven if one looks at
user numbers, these aggregate between ,:5,1 million currently, resulting in penetration levels of 35<L, far
below its regional neighbors ;alaysia (:1L! and Thailand (,1L!. Eser numbers, however, present an
inflated picture of the reality since users are estimated as a multiple of subscriber numbers. Table &
presents user and subscriber numbers for Internet since ,446. Two issues are conspicuous in the numbers,
one the high multiple of users compared to subscribers
:
and two the relatively low internet subscriber
penetration, estimated at a little in e9cess of ,L for &''6. %roadband penetration is negligible. Reasons
for the relatively low internet penetration and negligible broadband penetration are e9plored later.
Table -: I"ter"et Subscribers i" ...s
)ear *u+scri+ers ,sers
,446 ,7: 1,&
,444 &13 ,'''
&''' :'' ,4''
&'', 16, :&''
&''& 33< :1''
&''7 631 6'6'
&'': ,'6< 616<
&''1M ,1'' 4661
&''3 ,6&, ,&'''
&''< &,&: ,:'''
&''6 &71& ,11''
Source: 'P(II site and updated !y author from )rade Policy Review
onscious of the patchy development of the sector, the government has undertaken important reform of its
telecom policy. (ver the past decade, a set of first generation reforms allowed private sector and foreign
participation, but it was half hearted. The government retained 31L and ,3L stake respectively in the
countryKs two main carriers = 2T Telkom and 2T Indosat, while a license was issued to )9celindo for C+;
service. ompetition in the market remained inadequate and competition for the market non e9istent. The
,444 Telecommunications .aw (/o. 73J,444!, motivated largely by the financial crisis of ,44<, created the
enabling environment for second generation reforms, which envisages full competition in all market
segments. $hile the second generation reforms have successfully introduced competition in mobile, other
sectors remain insulated, with incumbents retaining significant market power. The CovernmentKs priorities
:
The multiple is inflated according to Coswami (&''3!
1
over the ne9t few years include implementing the provisions of the ,444 law, in particular the development
of the regulatory framework that is crucial for the success of the sector liberali>ation programme.
In &''&, the Covernment ended the e9clusive rights of 2T Telkom for domestic long5distance service and
local fi9ed5line service in 8ugust &''
1
and of 2T Indosat and +atelindo for international calling service in
&''7. 2T Telkom and 2T Indosat were established as IndonesiaKs only full service providers, a move that
ensured 2T TelkomKs survival in the face of increasing competition from ?oice5Internet 2rotocol (?oI2!
services. +ince &''&, however, 2T Telkom has focused most investment in the value5added cellular market
and has added few new fi9ed lines. The provisions of IndonesiaKs Telecommunications .aw have steered
reforms to end monopolies and open basic telecommunications services to maDority foreign ownership.
Thus, TelkomKs and IndosatKs respective monopolies on domestic and international services were ended in
&''& as a first step towards introduction of full competition. ompetition in fi9ed5line services has emerged
from companies using ?oice over Internet 2rotocol (?oI2! technology. -owever, the Covernment has
chosen to restrict entry into this new market segment to five companies@ Telkom, Indosat, +atelindo, and
two independent operators. In terms of number of operators, competition is well5advanced in the provision
of mobile services. Telkomsel, Dointly owned by 2T Telkom and the +ingaporean carrier +ingTel, is the
largest mobile operator, with a market share of over 1'L. Its two main competitors are +atelindo, fully
owned by Indosat, and )9celcomindo, partly owned by T;I ?eri>on (Table 7!.
The reality as it e9ists today (see Table 7! however does not suggest any degree of success in meeting the
declared obDective of introducing "effective# competition in the sector. In each of the 7 categories (fi9ed,
cellular and international!, the -erfindahl -irschman Inde9 (--I! e9ceeds ,6''
3
, implying, according to
the E+ applied benchmark that the market is "presumptively anti competitive#. )ven if a lower benchmark
is applied, say &1'' (the --I that would obtain with : operators of equal si>e in the relevant market!, it
would still "raise serious doubts# in regard to the e9tent of competition in the market. 8n alternative
analysis using the R: ratio i.e. the sum of the market shares of the top : firms produces poorer results
with respect to competition in the Indonesian telecom market. .
Table 2: Telecmmu"icati"s mar'et s3ares i" -..4 5Per ce"t6
Type (perator +hare --I R:
Ai9ed phone Telkom 4' &-&.%# -!!
Indosat &
%akrieTel 1
%% Tel &
;obile Telkomsel 1: .$#! /$
Indosat &3
)9celcom ,:
;obile56 :
/T+ N,
;andara N,
-utchinson N,
2rimasel N,
International Telkom 1& "-"& /!
Indosat 76
Source: )PR *%%+ and author calculations
1
,efore *%%* P) )elkom operated as the exclusive provider of fixed-line local long-distance and leased-
line telecommunications services# 't the same time in .//0 )elkom awarded .0-year so-called 1KS21
concessions to private consortia to operate fixed line services on a monopoly !asis in five of seven regional
districts 3P) )elkom retained control of 4reater (akarta and 5ast (ava6# )he concessions attracted
su!stantial foreign investment from large international operators including 7rance )elecom 8edia 2ne
)elstra 9)) :a!le ; <ireless and Singapore )elecom# Su!se=uently )elkom decided to !uy out two of
the regional operators although disputes still exist with two other regional carriers#
3
>>I is the sum of s=uares of market shares of all providers in the relevant market#
3
There are no limitations on entry for the provision of Internet services. +o far, the Covernment has licensed
,4' Internet service providers (I+2s!, of which only 71 are active (T2R &''<!. 2rovider specific data is not
available, however both 2T Telkom, through Telkom/et, and 2T Indosat, through Indosat/et, are strong
players in the market for Internet services suggesting a concentrated market in the provision of Internet
services as well. In addition, I+2s are not allowed to operate their own international Internet gateways, but
are required to use the facilities of Indosat or +atelindo.
The Indonesian Telecommunications Regulatory 8gency (%RTI!, an independent telecommunications
regulatory body, was formed in 0uly &'': to improve transparency in regulation, development and dispute
resolution. Interviews with stakeholders in 0akarta revealed that %RTI at the present time is functioning as
an advisory body to *C2T, which in turn performs, inter alia the task of economic regulation. The
problems associated with such a structure are discussed in a subsequent section.
Indonesia, like many developing and developed countries, has chosen a gradual approach to reform of
telecommunications services. 2artial privati>ation, the opening of selected service segments to competition
(provision of mobile and internet services! and the phasing in of individual regulations has been preferred
to a strategy of radical sector liberali>ation with the immediate adoption of comprehensive pro5competitive
regulations. This paper argues that as a result of this approach, a number of benefits that could have been
reali>ed especially by introducing competition in the provision of leased circuits have been delayed or
denied to the Indonesian economy. The opportunity loss for the economy has therefore been considerable.
8 comparison is made with the benefits secured by India as a result of inducing decline in the prices of
leased circuits through a combination of regulatory intervention and pro competitive policy.
III. T7E LEASED0LINE ST)D8 OF -..4 AND ITS IMPACT
It is now commonly accepted that availability of leased circuits in a timely and cost effective manner can
have significant spillover benefits to user groups
<
. It was this premise that motivated a study of leased line
prices and its impact on the internet market in Indonesia. The findings of that study e9pectedly sparked
considerable interest and media coverage
6
#
4
.
The study showed that inadequate supply of backbone and leased line infrastructure and the corresponding
high prices far e9ceeding benchmark prices in other countries by as much as :6 times forced I+2s to use
$i5Ai as low5capacity backhaul networks to carry Internet traffic. The price disparity was much higher for
international leased circuits compared to domestic leased circuits (+ee Tables : and 1!. The consequence of
the high prices was along familiar lines. It forced Internet access prices to be high and compelled I+2s to
innovate, thus substituting away from high priced leased circuits to $i5Ai solutions to deliver such services,
albeit illegal at times, to customers.
Table /: Cmparis" # A""ual Dmestic Lease% Li"e Prices: I"%"esia, I"%ia, a"% E) 9e"c3mar'
5-..:6
& ;bps .ink
& km &'' km
Indonesia E+* ,6,''' E+* :1,'''
India E+* 7<3 E+* <,3'7
)E benchmark E+* :,6'& E+* 4,&,4
Ratio of Indonesian to Indian price :6@, 3@,
Ratio of Indonesian to )E benchmark price ::@, 1@,
Source@ Coswami and 2urbo (&''3!
<
<orld )elecommunications ?evelopment Report I)@ *%%A
6
<i-7i BInnovationC in Indonesia: <orking around >ostile 8arket and Regulatory :onditionsby *ivakar
Coswami O (nno 2urbo, accessed at http@JJwww.lirneasia.netJproDectsJcompleted5proDectsJindonesia5wifiJ
4
8edia coverage accessed at http:""www#lirneasia#net"*%%0".%"findings-from-lirneasia-project-covered-!y-
indonesian-papers"
<
Table :: Cmparis" # A""ual I"ter"ati"al Full0Circuit Prices t )S ;est Cast i" I"%ia a"%
I"%"esia: Prices 5)SD6 a"% Price *atis
Aull ircuit
& ;bps
2T Indosat (Indonesian incumbent! E+* ,'6,1&6
*T 2utra(Indonesian satellite provider! E+* ,:3,:''
India E+* 7<,&''
Ratio of 2T Indosat to India price 7@,
Ratio of *T 2utra to India price :@,
Source@ Coswami and 2urbo (&''3!

8ccording to the study, non5independent regulation coupled with a non5competitive market environment
for telecommunication services were among the primary reasons for for high leased line prices and
consequently of low penetration of Internet in Indonesia. The policy recommendations that followed
revolved around introducing credible regulatory reform and price control in the markert for leased circuits.
The recommendations however, must be seen not merely in terms of the benefits of introduction of
competition in the sector, but also in terms of their impact on economic prosperity and thus quality of life
by enabling people to cooperate, transact and communicate locally and long distance. 8 closer look at
Indonesia reveals striking disparities in access and connectivity between cities and rural areas, some of
which remain deprived of any telecommunication infrastructure.
IV. LEASED LINE P*ICES IN INDIA AND T7EI* IMPACT
%efore going on to assess the impact of leased line prices in Indonesia, it may be useful to draw some
lessons from the Indian e9perience in this regard. The reasons for benchmarking with India are two fold.
(ne, the Coswami and 2urbo (&''3! study referred to earlier also benchmarked Indonesian leased line
prices with those prevailing in India, and two, the Indian e9perience suggests that prices can be regulated
(reduced! even with si>eable political economy constraints.
In the monopoly regime of the ,44's, leased circuit prices in India were singularly high and there was no
attempt to rationali>e these since supply was controlled by the *epartment of Telecommunications (*oT!,
who in addition performed the role of licensor and regulator. The creation of the regulator, Telecom
Regulatory 8uthority of India (TR8I! in ,446 and the introduction of competition in the sector reflected a
new beginning for telecom in India. (ne of the first markets subDect to regulatory intervention was the
market for leased circuits because of the envisaged pro5competitive impact such regulation could have on
the sector and beyond. Thus, TR8I stated "leased line tariffs should be cost oriented in order to stimulate
economic activity and efficiency, competition and quality of serviceP (TR8I, ,446!. Interestingly, the need
to rationali>e leased circuit prices the first time round was driven by an enlightened TR8I, rather than
industry which however participated vigorously in the second round of price cuts of leased circuits in
&''1
,'
.
TR8I initiated a onsultation process with a view to fi9ing the price ceiling for *omestic .eased ircuits
(*.!. The downward revision was based on the rationale that the high prices i! discourage other operator
to lease lines ii! imply a loss in revenue for the incumbent iii! result in over investment in the network and
most importantly iv! constrain economic activity that relies on or is linked to the use of leased lines. The
reduction proposed in ,444 was massive and ranged between 3< to 41 per cent depending upon capacity
,'
Support for reducing leased circuit prices from Industry !odies like Internet Service Providers
'ssociation of India 3ISP'I6 and 9'SS:28 figured prominently in *%%D-%0 presuma!ly after gaining an
appreciation of the consultative process of tariff formulation# See for instance )R'I :onsultation Paper E
Revision of :eiling )ariff for ?omestic Leased :ircuits **
nd
(une *%%D and )R'I :onsultation Paper E
:onsultation Paper to promote competition in IPL: in India A(une *%%0#
6
and distance. Table 3 shows that price ceiling for leased circuit was set at E+ dollar &,&'< for a 3:kbps
circuit for more than 1'' km, reflecting a 47 per cent decline from the prevailing levels. +imilar reductions
were made for leased lines across different capacities and over various distance slabs. The two most vocal
opponents to the price revision were the incumbent and the ?+8T association representing the interests of
the ?+8T industry. The incumbent opposed the decline fearing erosion of profit as a result of allowing
cost based access to its network by competitors of downstream services. Revenue from leased circuits
itself comprised less than & per cent of the incumbent#s revenues, so the direct impact of the reduction
could not have been a reason for the reluctance to reduce prices. It was therefore only attempting to create
an entry barrier for new players. %ut it is to the credit of TR8I the revision was effective and implemented
in ;arch ,444. The opposition from ?+8T owners stemmed from diametrically opposite reasons. They
pled that reduction of the magnitude proposed by TR8I would render their industry unviable, since,
according to them demand for ?+8T was due to "high# leased line prices. .owering prices would
encourage users to shift to leased circuits, thereby destroying the ?+8T industry. /ot only did the ?+8T
industry "survive# the first round of price cuts, it is prospering even after a second round of price cuts
implemented by TR8I in /ovember &''1. There are 6 ?+8T service providers and more than <','''
?+8T subscribers in India currently and the rate of growth of the industry quarter on quarter since &''& has
been respectable (+ee hart ,!. The lesson from this e9perience is for regulators to eschew intervention that
artificially promotes any technology or platform. The telecom industry is highly capital intensive and its
returns highly sensitive to regulation. The cost of bad regulatory decisions has to ultimately be borne by
consumers in terms of high prices or poor quality of service or both. In case ?+8Ts were to become
"e9tinct# in India as the industry lobby forecast in the face of falling leased circuit prices, so be it. 8s it
happened it was not to be, and one can only assume that either the industry association got it wrong or that
it was a deliberate ploy to mislead the regulator into garnering advantage for itselfQ
C3art 1: *ate # <r&t3 # VSAT Subscribers 1
st
=uarter -..- t /
t3
=uarter -..>
The benefits of affording access to competitors to an essential facility (leased circuit! derive not only from
regulation induced price declines but also from competition in the supply of services to final users and the
stimulus to dynamic efficiency that is provided by the competition. This was the basis of the TR8I proposal
and it withstood pressure from the incumbent as well as the ?+8T association to implement its agenda for
reform.
Table 4: Tre"%s i" Dmestic Lease% li"e tari##s
4
5#r 3ig3est %ista"ce slab i.e. ? :.. 'm6 #r t3e I"cumbe"t
,* Dollars per annum -//&0!!#
)ear Capacity
$"K+ps 1+ps'E-( D*0. *210-
,446 77,':7 ,1<,661 7,7,1,16& 4,4:3,<:1
,444M &,&'< 1',163 ,,'3&,7,7 7,,63,4:'
&''' &,'17 :<,'14 466,&71 &,43:,<'3
&'', &,''7 7&,,7< 3<:,6<1 &,'&:,3&:
&''& ,,44: 7,,44' 3<,,<4, &,',1,7<&
&''7 &,,'3 77,<<4 3'6,'&6 ,,6&:,'6:
&'': &,,67 &',''4 :&',,4, ,,&3',1<7
&''1 &,,'7 ,4,&6, :':,4'6 ,,&,:,<&:
/ovember
&''1 M
463 ,4,':, ,7<,4<' 7<','<&
FRegulatory price revision implemented
The tariffs specified by TR8I were in the nature of caps and operators were free to offer discounts to their
customers on a non5discriminatory basis. The price changes however were few as Table < shows, since
%+/. was the dominant supplier and although competition in terms of suppliers e9isted, it was not
effective. ;oreover, the incumbent retained Fnear monopoly powerP in the local segment due to the
greater coverage of its network compared to new entrants, who generally had to rely on slower wireless
transmission to provide local connectivity (TR8I &'':!. This prompted a second review of leased line
prices, initiated by TR8I in &'': and implemented in /ovember &''1.
,,
The announcement of the review
provoked the incumbent into cutting prices in &'':, with the highest reduction coming in the circuits for
which demand was strongest (),!. Ainally the second (and last! revision of the ceiling was implemented in
/ovember &''1 across various capacities and over distance slabs. Table < shows that significant reductions
were made e9cept for ), which was subDect to greater competitive pressure. Table 6 shows that competition
in the *. market in India has now materiali>ed, obviating the need for further intervention by TR8I in
price setting. In fact interviews with service providers and )R'I officials reveal considera!le excess supply
of domestic leased circuits with operators willing to provide such circuits at aggressive prices#
Table >: Perce"tage c3a"ge 5@6 i" Dmestic Lease% li"e tari##s
)ear Capacity
$"K+ps 1+ps'E-( D*0. *210-
,444 547L 53<L 53<L 53<L
&''' 'L 'L 'L 'L
&'', 'L 57'L 57'L 57'L
&''& 'L 'L 'L 'L
&''7 'L 'L 5,:L 5,:L
&'': 'L 5:7L 577L 577L
&''1 'L 'L 'L 'L
/ovember
&''1
51:L 57L 53<L 5<'L
Table 1: Number # Ser!ice Pr!i%ers 5SP6 i" Dmestic Lease% Li"e
)ear 3o. of *Ps 3ame of *er4ice Pro4iders
,446544 (ne %+/.
,,
)R'I :onsultation Paper E Revision of :eiling )ariff for ?omestic Leased :ircuits **
nd
(une *%%D#
,'
&'''5&''6 )ight
2lus I25II
%+/., Tata , %harti, -ughes, Reliance,
+hyam Telelink, -A. and I25II +ervice
2roviders.
IP- Infrastructure Providers such as Railways Power @tilities and 4as @tilities
The other market which is complementary to the *. market and has an equally fundamental impact on
downstream services such as Internet and Information Technology enabled services (IT)+! is the market
for International 2rivate .eased ircuits (I2.!. It is a dedicated point to point connection providing a
non5switched, fi9ed and assured bandwidth between two points, one being in the home country and the
second in a foreign country. I2. services in India are available for speeds ranging from 3: kbps to ,11
mbps. %roadly speaking, the I2. is divided into far end and near end termed as half circuit. The tariff for
the far end is dependent upon mutual negotiations between the foreign carriers with their Indian
counterparts. Entil &''1, the tariff for near5end half circuit I2. was forborne.
Through a review conducted, TR8I determined that effective competition had not emerged in the I2.
business segment until &'':, even after 3 years of sector liberalisation. The reasons were not difficult to
fathom. %harti Telesonic .td. was the only other provider of I2. in addition to ?idesh +anchar /igam
.td. (?+/.!, the incumbent operator. TR8I, consequently, received a number of submissions by
stakeholders that adequate capacity of bandwidth was not being provided and the capacity being provided
was e9tremely high5priced (TR8I, &'':!. In their representation they stated that bandwidth prices in India
were not competitive and the prices for a &;bps link were higher than international norms and that this
differential increased significantly for higher capacities (:1 ;bps (*+7! and ,11 ;bps (+T;,!!. This can
Table A: IPLC 57al# Circuit6 Tari## #r )S #rm -... t -..1
5)S %llar per a""um6
)ear Capacity
E- D*. *21-
,446 :,7,37,.'& 5 0
,444 :':,34'.<7 5 0
&''' 7:&,&:1.44 3,&'7,&'6.13 ,<,43<,4,:.::
&'', 777,664.6& 3,&'7,&'6.13 ,<,1&4,&,1.73
&''& 1:,''4.,: 4<4,',4.17 &,671,:<4.61
&''7 3<,116.36 ,,'77,<<4.7: &,44:,'<<.31
&'': 17,666.,7 ,,',,,6&7.13 &,6'6,'4:.14
&''1 ::,74'.64 <4',<17.<& &,,4,,<,<.<4
/ov5'1 &6,:67.<4 &&<,6<'.&4 311,,&<.'6
&''3 &3,&'4.36 &'4,3<<.:& 3'&,146.1<
&''< &1,,16.,4 &',,733.<: 1<6,6:'.6'
Source: )R'I and author calculations !ased on prevailing market exchange rate
be seen from Table 4. The data also shows that prices for I2.s in &'', and earlier were astronomical by
any standard and the ratio of prices for ),@*+7@+T;, defied the principle of economies of scale. (ne can
only attribute the level of prices to the e9istence of an unfettered monopoly. The first signs of tariff
reduction came in &''&, after Tata acquired the incumbent ?+/.. *uring this time the global leased line
market was also e9periencing e9cess capacity, intense competition and technological development. Table
,' shows that prices fell by 6:L across the boardI however they still remained significantly above
international benchmarks (TR8I &'':!.
Intervention therefore became necessary not only for rationali>ing the tariff structure but to also ensure that
Indian growing prowess in the Information Technology enabled services (IT)+! was not constrained.
+oftware e9porters, %2( industries, banks and other financial services companies are key users of I2.s
and the competitiveness of these industries in the global market is dependent to a large e9tent on the price
,,
they pay for I2.. In addition, Internet +ervice 2roviders (I+2! also use I2. for their upstream
connectivity abroad and high cost of I2.#s get reflected into the Internet access tariff which could
adversely affect Internet growth in the country.

Table 1.: Perce"tage %ecli"e i" IPLC prices
Rear apacity
E- D*. *21-
,444 5&L 5 5
&''' 5,1L 5 5
&'', 5&L 5 5
&''& 56:L 56:L 56:L
&''7 &1L 3L 564L
&'': 5&'L 5&L 53L
&''1 5,6L 5&&L 5&&L
/ov5'1 573L 5<,L 5<'L
&''3 56L 56L 56L
&''< 5:L 5:L 5:L
Source: )R'I and author calculation
The prevailing I2. prices in India are e9tremely competitive and compare favorably with )E benchmarks
(+ee harts &, 7 and :!. 8lthough there are only three providers, TR8I has recommended introduction of
re5selling in the I2. market (TR8I &''3!. Resale is Fthe sale or lease on a commercial basis, with or
without adding value of telecommunication services from a telecommunication carrierP. Resale is the
modality for optimi>ing the resources in the sector by facilitating make or buy decisions. It is an important
strategy for many new entrants, especially in the short term when they are building their own facilities.
Resellers or non facility based service providers are introduced to enhance competition. In the conte9t of
resale in I2. segment, the reseller would provide International bandwidth on demand and could
disaggregate higher capacity into smaller denominations, thus concentrating on their ability to reach out to
new customers.
C3art -: Price cmparis" #r I"%ia a"% Eurpe C3art 2: Price cmparis" #r I"%ia a"% Eurpe
-mbps /:mbps

C3art /: Price cmparis" #r I"%ia a"% Eurpe 1:: mbps
,&
+ome e9perts question the efficacy of reselling since it detracts from facilities based competition. Ideally,
competitors would put an end to the incumbentsK monopoly by building their own networks. %ut building a
competing network with the same reach is hugely e9pensive and time5consuming. %y allowing competitors
to lease or resell lines, regulators have been able to foster competition in the market. -owever, obDections
stem from the fact that it may inhibit investments that competitors might otherwise have made. In the
debate between reselling and facilities based competition, the Indian e9perience suggests that reselling is
likely to have the most impact after sufficient network capacity has been created by supply side
competition.
Table 11: Number # Ser!ice Pr!i%ers i" IPLC
,446 to &''7 (ne ?+/.
&'': Two ?+/. and %harti
&''1 Three ?+/., %harti and Reliance
Table 1-: 7ig3lig3ts # t3e IT09PO sectr per#rma"ce i" F8 -..>0.1
IT I"%ustrB0Sectr0&ise brea'0up
,*D +illion 5)!!" 5)!!#5)!!$5)!!%5)!!& E
I2 *er4ices ,'.: ,7.1 ,<.6 &7.1 7,.'
0E6ports <.7 ,'.' ,7.7 ,6.' &7.,
0Domestic 7., 7.1 :.1 1.1 <.4
7P8 7.: 1.& <.& 4.1 ,&.1
0E6ports 7., :.3 3.7 6.: ,'.4
0Domestic '.7 '.3 '.4 ,., ,.3
Engineering *er4ices and R9D: *oftware Products &.4 7.6 1.7 3.1 6.1
0E6ports &.1 7., :.' :.4 3.7
0Domestic '.: '.< ,.7 ,.3 &.&
2otal *oftware and *er4ices Re4enues
8f which: e6ports are
,3.< &&.1 7'.7 74.1 1&.'
,&.4 ,<.< &7.3 7,.7 :'.7
;ardware 1.' 1.3 <., 6.1 ,&.'
0E6ports n.a. '.1 '.3 '.1 '.1
0Domestic n.a. 1., 3.1 6.' ,,.1
2otal I2 Industry 'including ;ardware( &,.3 &6.& 7<.: :6.' 3:.'
9#'#: 9ot availa!le 9ote: 7igures may not add up due to rounding off# Source: 9'SS:28
*. and I2. markets in India have e9perienced astonishing price decreases and the prevailing tariffs
have been cited as benchmarks in comparative tariff studies (Coswami, &''3!. $hat is instructive is the
,7
manner in which the price decline occurred. In both markets, regulatory intervention was necessary to
start with but competition was as much necessary to ensure that cost reductions through technical progress
were passed on to the customer. TR8I also overcame the incumbents# procedural, legal and technical
reasons for tardiness
,&
. 8 lack of competition5boosting oversight is one reason for the poor record of
Indonesia in this regard (see below!. ;ost Indian companies using *. and I2.s, including I+2+ have a
choice of at least three International bandwidth providers and many more domestic leased line providers.
ompetition therefore ensures that providers race to offer their customers better and faster access at
increasingly attractive prices.
The benefits of lowered leased line prices have been felt in other industries, especially IT)+. IT5IT)+
comprises 1.& per cent of C*2 (see hart &! and is e9pected to grow to 3: billion dollars in &''6 (+ee
Table ,&!.
C3art :: S3are # IT0ITES i" <DP
%o9 , highlights the many drivers for the good performance of IT in India, and importantly credits cost
effective availability of telecom infrastructure as a key reason. This has been supported by other evidence
available from %anking Ainance and 8ccounting (AO8!, ustomer Interaction +ervices (I+!, -uman
Resource 8dministration and niche business services. 8ccording to /8++(;,..Pwith significant
bandwidth capacity lying unutili>ed and the steady advancement in technology making access faster and
less e9pensive than before, it is likely that the share of telecommunications in the cost structure of an IT5
%2( firm may further decline. Airms are also managing to lower their facilities costs by e9panding into
other tier5II locationsP
,7
. In addition, (utput and )mployment ;ultipliers for *isaggregated +ervices
+ectors estimated by E/T8* show that among ,1 services sectors the output multiplier is highest for
software services, i.e. :.73 (Table ,7!. This implies that for every increase in sectoral output by '., million
rupees there will be an increase in total output by '.:7 million rupees. This is followed by medical and
health services (7.64!I hotels and restaurants (7.61!I communication services have an output multiplier of
7.,1 and an employment multiplier of &.37. This implies that the aggregate direct and indirect employment
change, in absolute number, resulting from the increase in demand worth , million rupees of output of the
sector will be &.37 million. )mployment multipliers are found to be greater than 7 for public
administration, education and research and wholesale and retail trade.
Table 12 Output a"% EmplBme"t Multipliers #r Ser!ices Sectrs i" I"%ia
+ /o +ectors (utput ;ultipliers )mployment
,&
+ee Sathuria (&''<!
,7
Indian IT)+5%2( Industry @ /8++(; 8nalysis, &''<
,:
multipliers
, -otels and restaurants 7.61 :.&<
& 2ublic administration 7.1& 7.1'
7 )ducation and research 7.1, 7.:&
: Trade 7.,4 7.,7
1 +torage and warehousing 7.3: &.61
3 Railway transport services 7.6 &.34
< ;edical and health 7.64 &.31
6 ommunication 7.,1 &.37
4 Tourism 7.<: &.1<
,' (ther services 7.7 &.:<
,, (wnership of dwellings &.4, &.76
,& (ther transport services 7.7< &.7<
,7 %anking 7.,4 &.77
,: Insurance 7.'6 &.,:
,1 +oftware :.73 ,.&<
Source: @9:)'? *%%&
)vidence for India demonstrates the importance of credible regulatory intervention and competition in
driving prices of *.s and I2.s to reflect their true cost. In doing so, substantial benefit has been reaped
by user industries such as IT and %2(s. In addition, analysis by the onfederation of Indian Industry
/ational %roadband )conomy ommittee shows that the total present value (&'':! of benefit to the Indian
economy due to growth from broadband is e9pected to be E+T4' billion for the years &',' = &'&', with an
,,L additional growth in labor productivity. %roadband growth is, inter alia, contingent upon availability
and price of infrastructure. 8ccording to II this activity is e9pected to launch new business lines and
increased efficiency in e9isting businesses, leading to direct employment of ,.6 million and total
employment of 3& million by &'&'.


,1
7o6 -: Key <rowth Dri4ers of Indian I2E*07P8 E6ports
=+undant 2alent5 India#s young demographic profile is an inherent advantage complemented by an
academic infrastructure that generates a large pool of )nglish speaking talent. Talent suitability
concerns are being addressed through a combination of government, academia and industry led
initiatives. These initiatives include national rollout of skill certification through /8 (/8++(;
8ssessment of ompetence!, setting up finishing schools in association ;-R* to supplement
graduate education with training in specific technology areas and soft skills and ;oE#s with education
agencies like EC and 8IT) to facilitate industry inputs on curriculum and teaching and develop
faculty development programme.
*ustained cost competiti4eness5 India has a strong track record of delivering a significant cost
advantage, with clients regularly reporting savings of &151' percent over the original cost base. The
ability to achieve such high levels of cost advantage by sourcing services from India is driven
primarily by the ability to access highly skilled talent at significantly lower wage costs and the
resultant productivity gains derived from having a very competent employee base. )his is further
complemented !y relative advantages in other elements of the cost structure 3e#g# telecom6 that
contri!ute to IndiaGs cost competitiveness E even when compared to other low-cost destinations.
Continued focus on >uality5 *emonstrated process quality and e9pertise in service delivery has been
a key factor driving India#s sustained leadership in global service delivery. +ince the inception of the
industry in India, players within the country have been focusing on quality initiatives, to align
themselves with international standards. (ver the years, the industry has built robust processes and
procedures to offer world class IT software and technology related services.
?orld class information security en4ironment5 +takeholders of Indian %2( recognise fool proof
security as an indispensable element of global service delivery. Individual firm level efforts are
complemented by a comprehensive policy framework established by Indian authorities, which has built
a strong foundation for an "info5secure# environment in the country. These include strengthening the
regulatory framework through proposed amendments to further strengthen the IT 8ct &''', scaling up
the cyber lab initiative, scaling up the /ational +kills Registry (/+R! and establishing a self regulatory
organisation.
Rapid growth in @ey +usiness infrastructure5 Rapid growth in key business infrastructure has
ensured unhindered growth and e9pansion of this sector. )he ,P2 sector has !een a key !eneficiary
with the cost of international connectivity declining rapidly and service level improving significantly#
)he growth is taking place not only in existing ur!an centres !ut increasingly in satellite towns and
smaller cities# :ritical !usiness infrastructure such as telecom and commercial real estate is well in
placeH improving other supporting infrastructure a key priority for the government# S)PI infrastructure
availa!le across the country and magnitude of investments shows government support to the industry#
Ena+ling 7usiness policy and Regulatory en4ironment5 The enabling policy environment in India
was instrumental in cataly>ing the early phases of growth in this sector. 2olicy makers in India have
laid special emphasis on encouraging foreign participation in most sectors of the economy, recognising
its importance not only as a source of financial capital but also as a facilitator of knowledge and
technology transfer. The Indian IT)+5%2( sector has benefited from this approach, with participating
firms enDoying minimal regulatory and policy restrictions along with a broad range of fiscal and
procedural incentives.
+ource@ /asscom &''< Indian ITES-BPO Industry Fact Sheet (5mphases added6



,3
V. Lease% Li"e Prices i" I"%"esia
The foregoing analysis has shown the positive impact of telecom sector development, especially leased line
price decline in India. 8 combination of regulatory intervention and competition were identified as the key
instruments to have made it possible. This section attempts to capture the impact, or lack thereof, for
Indonesia.
Table 1/: <DP AT C)**ENT MA*+ET P*ICES 5i" billi" rupia36
R)8R C*2 ommunications L
&''7 &,',7,3<:.3' 7476'.4 ,.43L
&'': &,&41,6&3.&' 1746,.< &.71L
&''1 &,<6:,43'.:' <'34<.1 &.1:L
&''3 7,776,,41.<' 6<4:,.3 &.37L
Source: 9ational Income for Indonesia *%%I-*%%A ,adan Pustak Statistik
The communications sector in Indonesia accounted for &.37L pf C*2 in &''3, while telecommunications
is estimated to be about <1L of that (the rest attributable to post and telegraph!, making it roughly about
&L of C*2. The governments target for telecom sector revenue for &''4 is ,'' trillion rupiah, and if C*2
continues to grow at the current rate of 3.7 per cent in real terms, telecom sector share in C*2 will remain
stagnant at about &L. This is considerably below the world average of 7., per cent
,:
, demonstrating
significant potential for the sector. If sector contribution can rise to 1L (Thailand, ?ietnam and ;alaysia
are close to achieving 1L, see Table ,1!, at current levels of C*2 this would imply sector revenue of &''
trillion rupiah, roughly double the forecasted amount for &''4. 8lthough this may sound implausible at
this stage, given that large parts of Indonesia are unconnected and most of the telecom infrastructure is
concentrated in 0ava and +umatra, appropriate regulatory intervention and institutional design could go a
long way towards bridging the gap. This report argues that tariff rationali>ation and credible regulation will
be a maDor determinant in this regard. 8nd if successful, substantial multiplier effects as in the case of India
can be reali>ed
,1
.
8nother distinctive feature that emerges from Table ,1 is the poor diffusion of internet and broadband in
Indonesia, even when compared with the low penetration rates of India. Indonesia out performs India by a
wide margin in fi9ed and mobile telephony and prima facie one would e9pect it to perform better in internet
and broadband as well. It is therefore somewhat surprising that Indonesia fares worse in broadband and
internet. Inevitably, the reasons for this poorer performance must be due to the high prices of leased
circuits which translate into high prices for internet and broadband, thereby affecting demand. This was
e9plored in the Coswami &''3 study which found Indonesian leased line prices to be much higher than
Indian and )uropean prices (see Tables : and 1 above!. Innovative solutions were adopted by
entrepreneurs such as $i5Ai for access and back haul, but these were limited in their geographical coverage
,:
<orld )elecommunication ?evelopment Report *%%A International )elecommunication @nion 3I)@6

,1
Jast stretches of India have !een deprived of telecoms infrastructure a fact acknowledged !y )R'I in its
:onsultation Paper on Infrastructure sharing resulting in a digital divide# <hile telecoms share in 4?P
for India is lower than in Indonesia the share of I) I)5S is disproportionately high# Some !enefits of
telecom li!eraliKation in India have therefore accrued further up in the value chain in I)-I)5S sectors
which now accounts for more than 0L of 4?P# )he rapid rise of the Indian I)-I)5S sector over the past
decade has contri!uted to the revenue aggregate of this sector growing !y nearly ten-fold and has also
catalysed a wider socio-economic transformation in the country E through strong linkages with other
sectors of the economy# )hese include !ackward linkages with sectors that support and feed into the I)-
I)5S sector such as telecommunications and forward linkages with sectors that use I) and I)5S# 7or
example consumption spending on housing food items dura!le goods and holidays etc# generated
additional output of Rs */% !illion 3a!out @S MA#0 !illion6 in *%%A-%+# <hile the I)-I)5S sector provides
direct employment to .#I million people it creates additional employment for 0#* million people 39asscom
*%%&6# See :hart 0 and ,ox . a!ove as well#
,<
to high density neighborhoods in urban areas and could not be relied on to solve the internet pu>>le for the
country. The authors themselves assert $i5Ai adoption in Indonesia to be a temporary and suboptimal
solution to increasing internet diffusion. This is because $i5Ai is prone to interference and does not provide
carrier class reliability. I+2s adoption of $i5Ai was forced due to the high cost of backbone infrastructure.
,3
-igh prices for infrastructure, such as leased circuits, are a symptom of a known problem i.e. market
failure. The source of the market failure was, and continues to be the domination of the incumbent, 2T
Telkom in the market. Table ,3 provides evidence for this. In &''7 the share of 2T Telkom in telecom
sector revenue was 4&L and although it has declined to <6L in &''3, it needs to fall much more to reduce
its domination in the market. 8t the current rate of decline, 2T Telkom#s share will fall to <7L by &''4I
nowhere near the share needed to achieve a competitive market in telecom. %y contrast the corresponding
figure for the Indian incumbent %+/. is 74 per cent. The decline in %+/.#s share in total sector revenue
has been swift due to the fact that once private sector entry was allowed into the telecom sector, the
incumbent had to contend with stiff competition in all sub sectors. The last source of %+/.#s monopoly,
domestic long distance (*.*! was removed in &''&. In contrast, Indonesian reforms have been tentative at
best and 2T Telkom retains market power in all segments that it operates
,<
.
Table 1:: SummarB I"%icatrs i" Select Cu"tries
ountry
Internet
subscribers
per ,''
inhabitants,
&''<
C*2 per
capita E+
T, &''3
C*2 per capita,
222 (current
international T!,
&''1
%roadband
as a L of
Internet
subscribers,
&''<
Tele5density
Ai9ed (.ines
per ,''!,
&''<
;obile
tele5
density
(+I;s
per ,''!,
&''<
Tele
RevJC*2,
&''1
hina ,,.7, &'43 3<1< :: &<.1 :,.& 3.3
India ,.,1 6,7 7:1& &7 7.: ,4.46 ,.4
Indonesia ,.,7 ,3,3 76:7 4 <.< 71.77 &.&
;alaysia ,6.13 3'1, ,'66& &<.< ,3.: 6<.4 :.6
2hilippines &.7< ,74& 1,7< :6.: :.7 1'.6 :.:
ThailandM nJa 7,61 63<< nJa ,, 6'.: 7.,
?ietnam 3 3&< 7'<, &:.: 7&.< &<.& :.<
M data on internet subscriber for Thailand is not available
*ata +ource@ http@JJwww.itu.intJITE5*JIT)R)JIndicatorsJIndicators.asp9U, and $orld *evelopment
Indicators, &''< and <?R: *%%& 'griculture for ?evelopment <orld ,ank <)?R *%%A and individual
regulator we! sites
8nother reason for the high leased5line prices found in the Coswami study owe to the small share of
revenue contributed by leased circuits to 2T Telkom#s bottom5line. In &''3, the share of leased5line
revenue in 2T Telkom#s total revenue was a meager ,.:L. )ven in the preceding years for which data is
available the ratio is very small (+ee Table ,<!. The fact that leased circuits contribute a miniscule portion
of the revenue coupled with the perception that leasing lines to other telecommunications operators
facilitates competition in downstream markets against itself, may have led to 2T Telkom being
unaccommodating to other providers# requests. In fact an interview with 2T Telkom revealed as much, and
also the fact that their own requirement for building infrastructure precluded leasing to others.
This situation should have made for an irrefutable case for regulatory intervention to break the stranglehold
of the incumbent in the leased circuit business. Instead it took an inspired piece of research from
.IR/)asia and continuous pressure from stakeholders such as ;8+T). and the media to show the
unreasonableness of leased line prices in Indonesia. $hen the findings were made public, it Dolted the
institutional machinery into reviewing prices and subsequently ;oI decided that regulatory intervention
was necessary for leased circuits.
,3
See page .0* 4oswami <i-7i the 9etwork 7ix
,<
I!id
,6
Table 14: S3are # t3e I"%"esia" I"cumbe"t i" ttal sectr re!e"ue 59illi" *upia36
Rear 2elecom *ector Re4enue 8perating Re4enue *hare of P2 2el@om in *ector Re4enue
&''7 &4171.3<1 &<,,3 4&L
&'': :':63.&<1 774:6 6:L
&''1 17'&7.,&1 :,6'< <4L
&''3 31413.& 1,&4: <6L
+ource@ 9ational Income for Indonesia *%%I-*%%A ,adan Pustak Statistik and P) )elkom 'nnual Report
*%%A
The process was set in motion and a cost5based model for leased lines was developed by %RTI and notified
by the ;inistry in ;arch &''<
,6
. %ased on the cost model, service providers need to submit their tariff
proposals to %RTI for regulatory approval which are then notified by the *irector Ceneral of 2ost and
Telecommunications (*02T!. The dominant provider, 2T Telkom#s approved tariffs are available on *02Ts
website. Table
Table 1>: PT Tel'm re!e"ue 59illi" *upia36
!! !!. !!" !!# !!$
3etwor@ Re4enue 7,3 1,6 31: 16< <,4
2otal Re4enue &'6'7 &<,,3 774:6 :,6'< 1,&4:
3etwor@ Re4enue as a A of
2otal Re4enue ,.1&L ,.4,L ,.47L ,.:'L ,.:'L
,6 compares the new reduced ), tariff with the old higher tariffs for ),s while Table ,4 compares the new
), tariffs with the prevailing tariffs in India, +ingapore and Thailand. +everal features of the new tariff are
noteworthy. (ne, the decline ranges between 34 to 67 per cent for ),s and compares favorably with the
percentage reduction introduced by TR8I for India in ,444. The e9tent of the decline itself speaks of the
high prices that were being charged for leased circuits. Two, the implementation of the reduction had been
delayed considerably and has cost the Indonesian economy in terms of lost opportunity. +ince the tariff
reduction has been implemented in 8pril &''6, it will be several months before their impact is felt on
internet tariffs and enterprises that use such circuits. )stimate of the cost is however attempted by
benchmarking with India (see below!. 8nd finally, as table ,4 and hart 7 show the tariff for the circuits is
still higher than the price of comparable circuits in India (e9cept for distance V 1'' kms!, although it is less
than prices prevailing in Thailand, +ingapore and 8ustralia
,4
.
Table 11: PT Tel'ms l% a"% "e& Tari## #r E1 Cmpare% 5i" )S %llar6
Distance E6isting 2ariff for P2 2el@om 7ased P2 2el@om 2ariff for Ba4a 7ased on A
,6
8inister1s Regulation of 9o# I"P5R8#K28I972"."*%%+ a!out 9etwork Rent
,4
See 'nnex . for a chronology of the major events leading to the price decline and the corresponding
references# Interestingly while the trigger for the decline of leased circuit prices was the *%%0 LIR95asia
study demonstrating the unreasona!ly high prices in Indonesia the actual decline in leased circuit tariff
occurred only in *%%&# In the interim periodic ministerial announcements of the impending rationaliKation
of leased circuit pricing appeared in the media and some tariff reductions occurred for internet access#
Such announcements typically =uoted the LIR95asia study as well as appealed to the economic !enefits of
the tariff drop# In fact as recently as /
th
(uly *%%& the internet service provider association 'P(II
announced that the decline in the Internet tariff Nstill was difficult to !e realiKed#G3see www#apjii#or#id6#
,4
8n K1 -C/% P1 .C!!%( Change
1 5
,' 5 &31
,1 ,,:,3 &31 56,
&' ,,:,3 &31 56,
&1 ,,:,3 <:1 5:<
7' :,:41 <:1 567
71 :,:41 <:1 567
:' :,:41 <:1 567
:1 :,:41 <:1 567
1' :,:41 <:1 567
,'' :,:41 <:1 567
,1' :,67< 4&: 56,
&'' :,67< 4&: 56,
&1' 1,&&& ,,,'& 5<4
7'' 1,&&& ,,,'& 5<4
71' 1,&&& ,,37< 534
:'' 1,&&& ,,37< 534
:1' 1,&&& ,,37< 534
1'' 1,&&& ,,37< 534
V1'' 1,&&& ,,37< 534
Source: ?(P) we!site
The appraisal of the Indonesian prices with the corresponding Indian prices needs to be done carefully
before drawing conclusions from such a comparison. *ata available from 2T Telkom#s site for leased
circuits shows that prices have been reduced for all categories of circuits (+ee 8nne9 III!. -owever a
careful reading brings out several features of the Indonesian market that are important for rendering policy
advice. Airst, the prices shown in Table ,6 taken from *02Ts website are prices applicable for 0ava Island
only. Tariffs for other Islands and between islands are different, in fact significantly higher. Aor e9ample, a
circuit in +umatra costs 7' per cent more than the same circuit in 0ava (+ee Table &'!. .ikewise other island
prices are higher than the prevailing prices in +umatra. +econd, inter island prices are substantially higher
than intra island prices, the premium for inter island ranges from &&57' per cent. 8s opposed to this,
ceiling prices set by TR8I for India are the same across the country and while the delivered prices could
differ the ceiling cannot be breached. 8nd finally, more than 3' per cent of the circuits owned by 2T
Telkom are in 0ava, the pricing of the circuits further reinforcing the divide between 0ava and the other
islands
&'
.
Table 1A: Tari## #r E1 acrss Curis%icti"s )S %llar per 'ilmeter
Distance Indonesia
'P2 2el@om(
India '7*3L( 2hailand
'Comm.
=uthority(
*ingapore
'*ingtel(
=ustralia
'2elstra(
&'
Discussions with the incumbent, PT Telkom and PSN Networks, a satellite operator in
Indonesia revealed that infrastructure roll out has been concentrated in affluent islands such as
Java. oreover, network providers sell onl! e"cess capacit! in the market after havin# met their
own needs. $nd #iven Indonesia%s uni&ue topo#raph!, satellite provision remains a realistic
thou#h e"pensive option.
&'
1 &31 73 ,,1'7 &,6&, ,,46&
,' &31 17 ,,1'7 &,6&, &,7:6
,1 &31 <' ,,1'7 &,6&, &,<,:
&' &31 6< ,,1'7 &,6&, &,41&
&1 <:1 ,'1 ,,1'7 &,6&, 7,,4'
7' <:1 ,&& ,,1'7 &,6&, 7,:&6
71 <:1 ,74 ,,1'7 &,6&, 7,333
:' <:1 ,13 ,,1'7 &,6&, 7,4':
:1 <:1 ,<7 ,,1'7 &,6&, :,,:7
1' <:1 ,41 ,,1'7 &,6&, :,76,
,'' <:1 7<& ,,1'7 &,6&, 1,&&4
,1' 4&: 1:6 ,,1'7 &,6&, 1,&&4
&'' 4&: <&1 &,1,1 &,6&, 3,:,:
&1' ,,,'& 4', &,1,1 &,6&, 6,'6,
7'' ,,,'& ,,'<6 &,1,1 &,6&, 6,'6,
71' ,,37< ,,&1: 7,6'7 &,6&, 6,'6,
:'' ,,37< ,,:7, 7,6'7 &,6&, 4,111
:1' ,,37< ,,3'6 7,6'7 &,6&, 4,111
1'' ,,37< ,,<6: 7,6'7 &,6&, ,,,:,<
V1'' ,,37< ,,<4' 7,6'7 &,6&, ,,,:,<
*ate <58pr5'6 ,5/ov5'< ,5(ct544 ,5/ov5'3 ,5/ov5'<
+ource Telkom Teligen Teligen Teligen Teligen
Source: 's reported !y ?(P) accessed from www#dgpostel#id
Thus, while prices of leased circuits in Indonesia have fallen, these are still higher when compared with
Indian prices. Table &, shows the lower bound of this ratio to vary between ,.73 and ,.6< when estimated
using prices within 0ava. This is a lower bound because of two reasons. (ne, as stated earlier, prices for
islands other than 0ava are higher and two because Indian prices have fallen by an estimated &157'
&,
per
cent below the ceiling specified by TR8I in &''1 due to competition. Therefore a more accurate estimate
of the ratio of prevailing prices in Indonesia compared with India would be in the range &.1 57.1
Table -.: Cmparis" # Tari## i" Da!a a"% Sumatra
Distance in
Kms
Intra Island Ba4a ,*
dollars per month
Intra Island *umatra
,* dollars per month
Difference
'*umatra Premium(
Local ,64 &31 &4L
# 0-!! 3'1 6<' 7'L
-!!0!! <67 ,,&: 7'L
!!0.!! 43, ,767 7'L
.!!0$!! ,:43 &,1' 7'L
$!!0-!!! &&'4 7,<, 7'L
-!!!0.!!! 1<<: 6&4& 7'L
Source: P) )elkom we!site and author calculation
*02Ts website provides an e9planation of why Indonesian prices are still higher. This is due to the fact that
FIndia used the <':: level 3<eighted 'verage :ost of :apital6 that was more low and constructed his
network !y using the ca!le of optic fi!re in the land and not su!marine 7i!er 2ptic :a!le making the
investment cost lowerC (www.dgpostel.id!.
C3art 4
&,
%ased on interviews with service providers and TR8I officials
&,
Source: www#dgpostel#id
Table -1: Cmparis" # Lease% circuits tari##s i" )S E per m"t3
#r ? :.. 'm %ista"ce
Indonesia 'P2
2el@om( Ba4a
India '7*3L(
Ratio
E- &&:<.&1 ,<&<.3: ,.7'
D*. &7,4&.7, ,&1,6.&4 ,.61
*21- 3&4&7.'6 771<<.&: ,.6<
8dmittedly the geography of Indonesia is difficult for deploying terrestrial and submarine fiber optic cable
networks. Indonesia is the worldKs largest archipelagic state with more than ,<,''' islands that stretch from
the Indian (cean to the 2acific (cean spanning 1,,1' kilometers. 8mong the maDor inhabited islands are
0ava, where 3'L of Indonesians live, +umatra, Salimantan, +ulawesi and 2apua. (ut of a total area of 4.6
million square kilometers, 6, per cent is sea. 8ccordingly these unique features imply that satellite based
leased circuits will always be in demand. In meetings with %RTI and a satellite based service provider it
became apparent that satellites are deployed as a substitute for terrestrial or submarine cablesI once the
latter become available at a given location, satellites are shifted to an unserved or underserved areas where
there is demand. In this way, satellite continues to remain relevant even at the high price it commands.
The price for satellite based leased circuits remain prohibitively high and can cost anywhere between 3'''5
4''' E+ dollars per month for & ;bps. +;, a satellite based provider charges 63 million rupiah per
month for one ), (Tariff reported to %RTI!, slightly above 4''' E+ dollars at the current e9change rate.
Civen the importance of satellite based provision in Indonesia and the time required to deploy fibre optics,
it might be worthwhile for %RTI to consider a cost based pricing scheme for satellite based provision. If it
costs :51 times as much for satellite provision, so be it. %ut if prices do not reflect the underlying cost and
are high, temporary regulatory intervention in this realm, though a rarity, may be a solution to the
problem
&&
.
8nother area of concern that emerged during meetings with stakeholders is the dominance of 2T Telkom in
the last mile. There are 7' odd network licensees who can potentially provide leased circuits in Indonesia.
8ccording to %RTI, therefore, backbone infrastructure is unlikely to be a problemI it is the last mile
&&
In markets where satellite competes with fi!er"microwave regulation of land-!ased !ackhaul will
indirectly regulate satellite# It is only where satellite is the only option that regulation would !e needed.
&&
dominance of 2T Telkom that needs to be addressed. -istory of telecom liberali>ation across the world has
demonstrated the difficulty of making incumbents offer fair terms to potential rivals, unless forced by tough
regulatory measures. )vidence from (fcom and %ritain may provide a pointer for the ne9t step necessary
in Indonesia in this regard G+ee %o9 &H. There is agreement across the industry that Finfrastructure5based
competitionPBin other words, more network providers is the way forward. Indonesia has that part in place.
%RTI should now get 2T Telkom to adopt Flocal loop unbundlingP (..E! to open up the last mile at fair
and reasonable terms. Rival I+2 operators can thereby install or lease equipment for backbone and lease
2T Telkom#s lines for the Flast mileP to the subscriber at cost based rates to be determined by the
regulator.
&7
)9perience across the world however shows conditions for successfully introducing ..E are
e9acting and are unlikely to be met in Indonesia.
7o6 : ?hy 72 has suddenly decided to cut its wholesale prices
-as (A(;, %ritainKs new communications regulator, won its first victory over %T, by scaring it into
making huge price cutsW It certainly looks that way. (n ;ay ,<th, %T announced dramatic reductionsBof
up to <'LBin the prices it charges rival operators that offer high5speed (broadband! internet links over its
network. The announcement came days after (A(; unveiled the first of several reports into the state of
%ritainKs telecoms market, in which it criticised %TKs high wholesale prices and alluded to the possibility of
breaking the company up. Is that what prompted %T to cut its pricesW
ertainly not, sniffs %T. $hile its actions might appear to have been prompted by fear of break5up, it says
it was responding not to (A(;Ks stick, but to its carrot. 8t the moment, %T shares its network with rival
broadband providers in three ways. Airst, it offers them its own broadband services on a wholesale basis,
for resale under their own brands. %T makes a good margin, and the rival operator does not have to build
anything. (f the &m or so broadband connections delivered over telephone lines in %ritain, %T retails
around half of them itself, and acts as a wholesaler for the rest in this way. +econd, under a scheme called
Flocal loop unbundlingP (..E!, the rival operator can install its own equipment in local e9changes and
&7
@n!undling has !een made to work in a num!er of countries with relatively dense and
well developed traditional copper networks# >owever the conditions have !een exacting re=uiring:
customisation for the national market alternative operators to enter the market mediumterm legal
certainty for those operator the incum!ent operator to !e sufficiently restrained a powerful regulator to
monitor progress and pu!lish statistics a rapid appeals process to avoid lengthy delays and a continuing
refinement of the regulations# )he greatest risk has !een in the nightmare of regulatory gamesmanship
played !y certain incum!ent operators# See @n!undling local loops: glo!al experiences 5wan Sutherland
Link :entre *%%+ accessed from http:""link#wits#ac#Ka"papers"LI9K#pdf
.
&7
lease %TKs lines for the Flast mileP from the e9change to the subscriber. This involves a lot more investment
Brival operators need their own high5speed FbackbonesP to link up the e9changesBbut allows them to
differentiate themselves from %T. Eptake of ..E has, however, been slow@ fewer than ,',''' lines have
been unbundled. .ast week, %T said it would reduce the prices of unbundled loops by around 71L from
0une ,st, with further cuts to come. %ut while the monthly cost per unbundled loop has fallen, the set5up
charge for each one is still 1'L above the )uropean average, says +erafino 8bate of (vum, a consultancy.
+o there is room for more cuts. 8nd while revenue per loop will fall, %T should benefit as the overall
market grows. %TKs aim is to encourage rival operators to pursue ..E and not its third broadband service,
called *ata+tream. This is a halfway house between the first two options, forced on %T by regulators, in
which rival operators use %TKs backbone as well as their own infrastructure, providing some scope for
differentiation. %T says this is unfair, since it allows its rivals to piggyback on the whi>>y new backbone it
is now building. It would much rather its rivals simply resold its broadband products, or built their own
backbones and used ..E. $ith its new ..E prices, says 8ndrew *arley of I/C, an investment bank, %T
has now made ..E cheaper than *ata+tream. It has done so because (fcom has said that if ..E takes off,
it might rela9 the regulatory requirements around *ata+tream. It is this carrot, rather than the stick of
break5up, that has prompted %T to act. $hat is striking is that there is suddenly agreement across the
industry that Finfrastructure5based competitionPBin other words, more ..EBis the way forward. %T has
historically been reluctant to push ..E, but has now decided that doing so is in its best interests.
onveniently, many of the rival firms that hoped to e9ploit ..E have gone bust (thanks, in part, to %TKs
previous delaying tactics!.
;ay &'th &'': The 5conomist
DI. Impact on Internet
The primary reason for intervention in the leased circuit market by the Indonesian government was to
promote usage of internet. The rate of growth of internet subscribers has in fact declined in &''<5'6 to ,,
per cent (+ee Table & above!. It is possible that the effect of the decline in leased line prices will be pass5
through to internet tariff later and only thereafter affect the subscriber base. 8n announcement by the
Internet 8ssociation on its website states that I+2s in Indonesia are likely to reduce tariffs from &' = :'L
beginning 0une &''6, following reduction in leased line prices announced by the incumbent 2T Telkom by
:3 to 6, per cent in 8pril &''6.
&:
(ther network providers are likely to follow suit, given that new entrants
who provide backbone services will keep leased line prices aligned with 2T Telkom due to pressure from
the ministry
&1
. The decline in tariff for leased circuits is based on the *ecision of the *irector Ceneral of
post and telecommunications /o.,,1J&''6 (*02T!. 8ccording to the hairman of 820II +ylvia $.
+umarlin, I+2s will reduce the internet tariff when most contracts with network providers are renewed in
0une &''6. The association confirmed the decline would be Ffully implemented by ne9t year in view of the
fact that all contracts of the memberKs business with the provider of the network will be finished this
yearP
&3
. $hile tariffs for the internet will fall, these will still remain substantially higher than the Indian
prices. )ven if one assumes that tariffs will decline by up to :' L to about E+ T 1' per month, these will
still remain about double the Indian price (+ee Table &&!.
Table --: Cmparis" # I"ter"et Tari##, April -..1
8*+. Enlimited Esage
Indonesia E+* 67
India E+* &1
&:
www.apDii.or.id
&1
Coswami &''3
&3
I!id
&:
Ratio of Indonesian to Indian price 7.7@,
Source: 'uthor !ased on data provided !y ,S9L and P) )elkom
The reason for this is that the decline in network rent for I+2s does not include the international
componentI the :3 to 6, per cent decline in domestic leased line tariff covers about :' per cent of the total
production cost for I+2s. The policy implication of this is that I2. tariffs also need to be reduced to make
a further impact on Internet prices. %RTI therefore should consider bringing I2. tariffs under the ambit
of regulation, similar to what TR8I did in the case of India.
This paper has documented the enormous impact price reduction of leased circuits have had in India on
other business users. +ince leased lines are a critical producer good for I+2s, high leased line prices
naturally result in high retail price for Internet services. They also Dack up the cost for businesses using
leased circuits adversely affecting their competitiveness. The high prices of leased circuits have also
prevented the economy from reali>ing the multiplier effects of communications technology.

In addition to the benefits to the economy, lower leased circuit process could also have a substantial impact
on the service provider bottom line due to elasticity effects. 8s stated above, 2T Telkom#s share of network
revenue in total revenue is roughly ,.: L. If one includes infrastructure and support provided for enterprise
solutions, the share Dumps to 7'L
&<
. 8ssuming a conservative elasticity of & for leased circuits, the
unreali>ed benefits to 2T Telkom from a :' per cent reduction in leased line tariffs are estimated to be in
the range of 3' billion to ,.& trillion rupiah
&6
. To reali>e these benefits 2T Telkom has to eschew thinking of
other telecom providers purchasing circuits from them as competitors, but as customers
&4
. %ritish Telecom#s
largest source of revenue today is from wholesale rather than retail customers
7'
. If the output multiplier for
communications for Indonesia is the same as that for India (7.,!, the unreali>ed potential for the Indonesian
economy ranges between '.&<L 51.&1L of entire telecommunications sector revenue in &''<.
.ike in India, the IT market in Indonesia is also e9pected to bring opportunities for local and foreign
vendors, as the country strives to embrace and deploy technologies in the hope to compete with countries in
the 8+)8/ region. I* forecasts that the IT market in Indonesia will reach E+T,.4 billion in &''< with
annual growth rate of ,'L in &''<. IT is one of IndonesiaKs fastest growing markets with an annual growth
of ,&.&L on average (hart <!. It however accounts for less than half per cent of C*2 today as opposed to
India, where it accounts for 1.&L. The increasing needs for computeri>ation in both private and public
sectors make Indonesia a market with huge potential for software development, outsourcing and security
services, essential for economic growth and national security.
Chart %: =4erage <rowth IC2 1ar@et
&<
Interview with 2T Telkom
&6
This is a conservative assumption for elasticity. )conomic theory tells us that elasticity tends to be
higher at higher prices. Civen the high prevailing leased circuit prices, the quantity response is therefore
more than likely to offset the price reduction.
&4
This impression was given to the author in an interview.
7'
http@JJwww.btplc.comJ+haresandperformanceJXuarterlyresultsJXuarterlyresults.htm
&1
+ource@ ;inistry of Industry
The main challenges facing Indonesian IT industry include low internet penetration that stems from high
leased5line prices. It is therefore crucial that appropriate regulatory mechanisms are put in place for the
economy to reali>e these benefits. It is not that the government has not recognised the benefits of telecom
infrastructureI in fact the envisaged 2alapa Ring 2roDect aims to build a 73,''' kilometer fiber optic
network connecting some :'' maDor spots in the country. It is e9pected to create a wireless network for
telephone and broadband Internet. %ut it will be long before the 2alapa Ring proDect materiali>es, in the
interim the Indonesian government needs to be serious about implementing good policy to ensure that
benefits of the telecom revolution do not bypass the Indonesian economy. The delay in lowering leased
circuit prices in Indonesia has cost the economy in terms of revenue and efficiency. -owever, lowering
leased line prices, albeit still high solving one part of the Digsaw pu>>le i.e. lowering domestic leased circuit
prices is clearly not enough. In the recommendations section, it is argued that several other things need to
be done for Indonesia to truly benefit from an efficient telecommunications sector.
DII Lessons for Latin =merica 'L=(
;ost telecom markets in .atin 8merica have been both privatised and liberalised. 2rivatisation however,
has met with considerable opposition in a number of countries. $hile private investment has contributed to
rapid growth in the non5basic services, such as mobile and long distance telephony, fi9ed lines have
virtually ceased to grow, despite a low ,6L teledensity
7,
. ountries with poor infrastructure have
leapfrogged into new applications such as ?oI2 and $i;8Y. %ut telecoms laws lag behind technological
advances, leaving numerous grey areas that have resulted in acrimonious legal battles among companies,
regulators, and governments. The drive to privatise the telecom industry was seen as a step toward
economic policy reform. The sale of state5owned telecom companies throughout the region and the
resulting infusion of private sector investment contributed to rapid growth particularly in the non5basic
services, such as cellular networks and satellite systems. 2rivatised carriers have usually been far more
active in upgrading their equipment than their state5owned counterparts. ;ost .8 countries are
characteri>ed by e9treme disparity in economic classes, Dust like India and Indonesia. 8 decade after the
countries# telecom assets were sold off to private businesses, telecom infrastructure is still insufficient,
paving the way for renationalisation of the incumbent telecom companies in %olivia and ?ene>uela. The
question on many people#s mind is whether renationalisation is likely to spread to the rest of the region.
7,
2aul %udde ommunication &''6Z .atin 8merica 5 Telecom ;arket, Regulatory (verview O
Infrastructure
&3
$hile there may be valid arguments for the renationalisation of the incumbents, the analysis in this paper
has shown that competition along with strong and robust regulation can serve the interests of stakeholders
in the telecommunications sector. Telecommunication has significant spillover benefits that nations will do
well to capture. The reduction in investment levels in ;e9ico is attributed to the limited competition in the
sector, a situation that could discourage investment in new enterprises.
7&

VIII CONCL)SIONS AND *ECOMMENDATIONS
%enefits of the telecommunications sector are no longer thought to be confined to the sector itself. The role
of telecommunications as essential to the facilitation of international trade, economic development, and the
enrichment of citi>ensK lives has become widely accepted.
77
;any emerging economy governments have
come to view inadequate telecommunications networks and services as an impediment to achieving their
full economic potential. )asy access to cheap, fast internet services has become a facilitator of economic
growth and a measure of economic performance. +tatistics show a surge in broadband use, especially in
places that are already prosperous. The ()*, a rich5country club, had &&,m subscribers in 0une &''<Ba
&:L leap over a year earlier. %ut it is not always the most powerful economies that are most wired. In
*enmark, the /etherlands and +wit>erland, over 7'L of inhabitants have broadband. In 8merica, by
contrast, the proportion is &&L, only slightly above the ()* average of Dust under &'L. $hat accounts
for the differences among rich countriesW 8 few years ago demography was often cited@ small, densely
populated countries, such as Sorea were easier to wire up than big, sparsely inhabited ones. %ut the leaders
in broadband usage include anada, where a tiny population is spread over a vast area. The best
explanation, in fact, is that broadband thrives on a ix of copetition and active re!ulation, to ensure
an open contest.
7:
It is not only broadband that thrives on a Dudicious mi9 of competition and regulatory intervention, other
telecom services also vitally depend on it. 8 lack of competition5boosting oversight is one reason for the
poor record of the Enited +tates in broadband. If one were to ask what is pulling Indonesia back in telecom
sector in general and internet in particular, the two prime candidates would inevitably be inactive regulation
and lack of competition. This has suited the incumbent service provider 2T Telkom in that it neither raced
to offer its customers faster access nor priced its leased lines competitively. India#s %+/. was in a similar
situation in ,444, when TR8I forced it to rationali>e leased circuit prices. %y itself the price reduction was
not enough, it had to be complemented by alternative service, including infrastructure providers to boost
supply and open the market to "infrastructure based competitionP. )ven then TR8I had to intervene a
second time in &''1 to further align prices with cost for leased circuits. Indonesia has reduced leased circuit
prices by :356, per cent, but the recommendation of this paper is to complement this achievement by
competition boosting regulation for full e9ploitation of benefits.
The author was informed that there are 7' network providers in Indonesia, but effective competition is yet
to emerge in this segment. %y any economic measure, 2T Telkom is dominant, and its dominance is
obstructive in the last mile. 8 structural remedy such as breaking up the incumbent is economically
undesirable today and politically na[ve. 8 workable option is to force 2T Telkom to rent out its last mile or
unbundle the local loop. In Arance, one small start5up firm rented out Arance Telkom#s local loop and then
installed technology that was much faster than any of its rivals. It won so many customers that other
operators had to follow suit. In anada, too, the regulator mandated line5sharing, and provinces subsidised
trunk lines from which smaller operators could lease capacity to provide service.
71
In +outh Sorea, where
half the population lives in flats, each block owns its own internal cabling and allows rival operators to put
their equipment in the basementI each tenant then chooses which to use. 8ll these e9amples highlight the
benefit of competition, a creature that has been absent in the Indonesian leased5line and Internet market.
The second policy recommendation is for %RTI to intervene in the I2. market as well and specify the
cost model. TR8I implemented this in India in &''1 and substantial benefits have accrued since to
7&
;e9ico Trade 2olicy Review, &''6 accessed from www.wto.org
77
$T(, %ackground /ote by the +ecretariat, ,446
7:
)conomist, 0an ,<, &''6
71
Ibid
&<
software e9porters and IT firms, besides making internet more accessible and affordable. +ince %RTI
already has a cost based model for *.s in place, it should be a short step to include I2.s as part of
regulatory oversight.
Civen the nature of Indonesia#s geography a third recommendation is to cap satellite prices as well. This
might be politically more difficult due to vested interests and reluctance of service providers to disclose
costs. The paper has argued that satellite based circuits will always be in demandI the current price seems
to be based on e9tracting consumer surplus, rather than on leveraging e9ternalities associated with such
provision. In case the regulator (ministry! is reluctant to specify tariffs for satellite provision, morally
persuading the operators to lower prices is an alternative.
It is not the intention of this paper to propose "over regulation# of the sector. The dangers of that are well
known and add to the regulatory risk in operations. ;arket failures however need to be addressed by
independent and competent regulators. $hile %RTI has five carefully chosen members, it does not have
the power to unilaterally pass decisions. Its budget is allocated by the ministry *C2T and it is only an
advisor to *C2T. 8lthough *C2T is required to consult %RTI on regulatory matters, it is not obliged to
follow %RTIKs recommendations. %RTIKs decisions should be final but, in practice, they are revised by
*C2T.
73
Therefore the final recommendation of this paper is to create a regulatory and institutional
mechanism whereby the regulator, %RTI becomes a truly professional body, accountable for its decisions
but independent of the ministry. It should be funded as per international best practice by a proportion of
sector revenue and be able to take decisions in the interest of the sector rather than in the narrow interest of
the incumbent operator. Enless that is done, the full benefits of telecom and technology would remain
elusive for Indonesia and more importantly, Indonesians.
=nne6 I
Chronology of e4ents Date Remar@s
73
Coswami &''3
&6
.IR/)asia +tudyI Indonesia $i5Ai Innovation
by *ivakar Coswami O (nno 2urbo
&''1
Indonesian leased line prices are up to :6 times
more than Indian prices. 2aper recommends
lowering prices so as to promote internet
development and push economic development
.IR/)asia /etworking ;eetingI 0akarta
-ilton, Indonesia *irector Ceneral 2resent
(ctober
&, &''1
.IR/)asia researchers presented findings from
the $iAi study ;inister promises actionI
generated enormous press coverage.
2ress overage@
.IR/)asia#s $iAi +tudy in Indonesia
Influences 2olicy 2rocessI %usiness
/ews (ctober ,:, &''1
Innovative approach promotes use of
$iAi in IndonesiaI %usiness /ews,
/ovember ,:, &''1
The Covernment +tudies ;ethod of
.owering %roadband TariffI 8chmad
Rou>ni /oor Ii = detikInet 0akarta,
;arch ,:, &''3
Esable Snowledge for Crowing the +ector@
IT 2olicy O Regulation Research from
.IR/)asiaI The 2ark -otel, /ew *elhi, India
;arch
3, &''3
Research results presented in India
oncluding remarks at .eased .ines +eminar at
the 77rd 82) T). meeting in algary,
anada
8pr
il
&''
3
Research results presented in anada
2rocess of Reduction of .eased .ine prices
begins@ ;inister of ommunication and
information stipulation number@
('7J2)R;.S(;I/A(J,J&''<!
&''
<
2ublishes methodology for revision in .eased
.ine Tariff
;odel provided by %RTI
&''
<
Regarding network rent belonging to 2T.
TeleSom as the organi>er
/otification of Tariff *ecline by *02T
8pr
il
&''
6
The press release /o.
7&J*02T.,JS(;I/A(J:J&''6 regarding the
decline in /etwork Rent towards the *ecline in
the tariff of Internet 8ccess
2ress Release /o.
:&J*02T.,JS(;I/A(J:J&''6
Implementation of the Covernment Information
8bout /ew Retail Tariff 2+T/, ;obile, A$8,
Rental /etwork for Internet access and tariff
ampaign Issues
8pr
il
&''
6
*irector Ceneral of 2ost %asuki Rusuf Iskandar
on ,< 8pril &''6 has a press conference related,
inter alia to the implementation of the new tariff
to access networks.
=nne6 II: 2rends in Domestic Leased line tariffs 'for highest distance sla+(
&4
',* dollars per annum: con4erted from rupees at pre4ailing e6change rates a4aila+le at
www.r+i.go4.in(
Pre0228 Ceiling tariff as
per 2280//
1ar@et price as
of Dec0!"
Re4ised 2ariff
'!!#(
E- -#%:&&# #!:#&$ !:!!/ -&:$"
D*. .:.-#:#& -:!$:.-. "!:$"$ -.":/"%
*21- /:/"$:%"# .:-&$:/"! -:#/:$$. .$-:/$.
$" K+ps ..:!". :!% :-&. /$"
2ariffs for $" @+ps is for ser4ices through classical method
2rends in Domestic Leased line tariffs 'for distance of #! Kms(
',* dollars per annum: con4erted from rupees at pre4ailing e6change rates a4aila+le at
www.r+i.go4.in(
Pre0228 Ceiling
tariff as per
2280//
1ar@et price
as of Dec0!"
Re4ised
2ariff
'!!#(
E- .#:#. &:!# .:-$- :!.&
D*. %"!:.!$ -$&:..& $$:#%$ -#:#.#
*21- :!:/-% #!#:!.$ -//:%%. "-:$#
$" K+ps ":./# %& %%. &#
2rends in Domestic Leased line tariffs 'for distance of -!! Kms(
',* dollars per annum: con4erted from rupees at pre4ailing e6change rates a4aila+le at
www.r+i.go4.in(
Pre0228 Ceiling tariff
as per 2280
//
1ar@et price as
of Dec0!"
Re4ised 2ariff
'!!#(
E- "%:!!" -:.%- ":&&/ .:&#$
D*. /&%:!%" #/://- -!:&" &:&-
*21- :/$-: %&!:!-& .!&:#% %%:.#
$" K+ps #:&& /". /. .#-
2rends in Domestic Leased line tariffs 'for distance of !! Kms(
7'
',* dollars per annum: con4erted from rupees at pre4ailing e6change rates a4aila+le at
www.r+i.go4.in(
Pre0228 Ceiling tariff as
per 2280//
1ar@et price as of
Dec0!"
Re4ised 2ariff
'!!#(
E- %!:#!# -:&$% &:$$. %:#.%
D*. -:"&!:$-- -:!#%:$"# "-&:."/ -.":/$
*21- ":""-:&.. -:.%&:"& #"#:-#% -"&:.%/
$" K+ps &:!&# -:" -:& #!"
2rends in Domestic Leased line tariffs 'for distance of #!! Kms(
',* dollars per annum: con4erted from rupees at pre4ailing e6change rates a4aila+le at
www.r+i.go4.in(
Pre0228 Ceiling tariff as per
2280//
1ar@et price as
of Dec0!"
Re4ised 2ariff
'!!#(
E- &&:-. #!:.#$ -/:/-& -&:##&
D*. -:.$:./ -:!#%:$"# "-&:."/ -.":/$
*21- .:/%/:-#" .:-%:/& -:##:!"& .$-:&#"
$" K+ps -.:!& :!% :-&. /"
7,
2rends in IPLC ';alf Circuit( Lease rentals
',* dollars per annum: con4erted from rupees at pre4ailing e6change rates a4aila+le at
www.r+i.go4.in(
Capacity )ear wise tariff for IPLC 'Per annum(
!!E !!.F -.-.!" F -.".!"F !!#F Re4ised
2ariff '!!#(
E- #":!
!/
$%:#
#/
#.:&
&&
"&:"
.-
"":#
/
&:"
&"
'1+ps(
D*. /%&:.
/$
-:!..:-
-
-:!--:&
"
/--:%
%&
%/!:/%
.
%:&
%!
'"#1+ps(
*21- :&.#:"
&!
://":!
%&
:&!&:!
/#
:#&:"

:-/-:!$
!
$##:-
%
'-##1+ps(
E 2ariff for IPLC ser4ices irrespecti4e of the destination
F 2ariff applica+le for restora+le Category and for the farthest destination from India
7&
=nne6 III
P2 2el@om Leased Circuit 2ariff +y Island and Distance in Indonesian Rupiah
77
7:
71
73
*i"g 1.
*i"g 11
Tail Li"'
MATARAM
RABA
WAINGAPU
ENDE
MAUMERE
KUPANG
MAKASSAR BULUKUMBA
WATAMPONE
KOLAKA
KENDARI AMBON
PARIGI PALU
GORONTALO
MANADO
TERNATE
SORONG
FAKFAK
MANOKWARI
BIAK
SARMI
JAYAPURA
TIMIKA
MERAUKE
BONEPUTE
PALOPO
RANTEPAO
SIDENRENG
PARE-PARE
=nne6 . : Palapa Ring 5i+er08ptical 3etwor@
BITUNG
OBA/SOFIFI
7<
AC+NO;LDE<MENTS
I would like to e9press the deepest appreciation to .IR/)asia, in particular to Rohan +amaraDiva and
-elani Calpaya who continually and convincingly augmented the research and scholarship of this paper.
$ithout their persistent help this paper would not have been possible. I would also like to thank I*R and
.irne8sia for funding the research, including a field visit to Indonesia. In Indonesia my debt e9tends to
many. 0uni +oehardDo of ;8+T). was a pillar of support and tirelessly coordinated meetings in busy
0akarta. 8ccordingly I had engaging and fruitful discussions with Soesmarihati, ;ember, %RTI, /ies
2urwati and Retno $idiastuti of 2T )9celcomindo, -arsya *enny +uryo of Telkom Indonesia, %ana %odri
of %adan 2ustak +tatistik and +ukarno 8bdulrachman of 2asifik +atelit /usantara. I also benefited from a
conference organi>ed by ;8+T). for stakeholders on 1
th
;arch &''6. Ainally I wish to record my
admiration for *ivakar Coswami formerly of .IR/)asia, who generously shared his knowledge about
Indonesia and whose own meticulous research paved the way for the line of enquiry in this paper. Aor Indu
+harma, my able secretary, I remain truly indebted. The usual disclaimer applies.
76
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