A telecom takedown in the Far East

(Fortune Magazine) -- It was a hot, sticky day in Jakarta, especially for visiting officials of Singapore's state-owned Temasek Holdings. They sweated for nearly four hours on Nov. 19, as Indonesia's competition commission completed its six-month probe into the country's mobile-phone sector, where Singapore companies own major stakes in two operators that between them control 85 percent of a $6 billion market.

When it was over, the sweltering Singaporeans found the ruling as dark as the monsoon storms gathering outside. "The Temasek Business Group is legally and convincingly proven to have violated Article 27 of the antimonopoly law," Syamsul Maarif, chairman of the Business Competition Supervisory Commission, pronounced.

Maarif ruled that the two Indonesian telecoms part-owned by Singaporean companies - which are in turn controlled by government-owned Temasek - had colluded to make Indonesia's mobile phone rates the most expensive in the region. He fined Temasek $3 million and gave it two years to sell either SingTel's 35 percent stake in market leader Telkomsel or ST Telemedia's 30 percent of Indosat, the No. 2 wireless carrier. (He also told Fortune that consumers had been overcharged by as much as $3.2 billion and noted that his commission had no power to punish the Singaporeans further.)

Temasek, which controls $120 billion in assets, insists that its myriad subsidiaries operate independently of each other and of Singapore's government. It says its two telco stakes are minority holdings with control vested in Indonesians, and that the ruling, which it is appealing, raises questions about the viability of Indonesia as an investment destination.

"We will rebut these allegations in the strongest of terms," says Tan Guong Ching, chairman of Asia Mobile Holdings, the ST Telemedia subsidiary that owns the Indosat stake.

The case threatens to further poison relations between the two neighbors, who are already fighting over an extradition treaty. And it comes on the heels of another cross-border imbroglio involving Temasek's purchase last year of Shin Corp. from former Thai Prime Minister Thaksin Shinawatra - a deal that led to Thaksin's downfall and to a paper loss of more than $1 billion.

The drama in Jakarta also raises questions about how developing democracies like Indonesia's will balance rising nationalism with the need for foreign investment from sovereign-wealth funds like Temasek or from China, where state-owned Shenhua Energy is eyeing a $4 billion coal play in Indonesia. (Temasek seems to be getting the message. After the Indonesia ruling, chairman Suppiah Dhanabalan said the fund will avoid deals "that arouse all kinds of emotional sentiments." A week later Temasek reduced two controversial bank stakes in China.)

Indonesia might have been more grateful. Singapore was almost alone in propping up the train wreck that was Indonesia's economy after the 1997 financial crisis, when it was beset by terrorism, corruption, and dysfunctional government. The country has since stabilized, and Temasek's investments have done well. Analysts estimate that the telecom stakes are worth four or five times the $1 billion they cost.

It's easy to understand why Singapore is flummoxed that Jakarta is now crying foul. But in insisting its state companies are managed independently, Singapore Inc. does little to allay Indonesian suspicions that government and its businesses are linked. One lawyer engaged by Temasek in Jakarta is a director of another Temasek company and a member of Parliament tied to the party that has long ruled Singapore. Asia Mobile's Tan served simultaneously as a senior civil servant and on the board of several Temasek companies. And Temasek CEO Ho Ching is married to Singapore's Prime Minister, Lee Hsien Loong.

Ironically, Indonesia's competition commission was founded in 2000 to satisfy foreign investors that Jakarta was doing something to counter the corruption and cronyism that marked Suharto's 31-year reign. The country is now enjoying its highest level of foreign direct investment since the financial crisis, mostly in the resources sector. So far this year a record $37 billion in foreign investment has flooded in, nearly triple the $13 billion during the same period last year.

Most foreign investors see the Temasek contretemps as a bilateral fuss that won't derail further investment. But a nasty propaganda war has erupted over the affair. Fortune was handed a document by a Singapore lobbyist that purports to be a brief for a Russian company's plan to take over Temasek's Indosat share. The document, whose bona fides could not be verified, names several Indonesian government officials as participants.

Meanwhile, politicians are hovering. Vice president Jusuf Kalla, who has a family telecom business that once partnered with SingTel, has told Temasek to "respect" the monopoly commission's independence. But respect is something in short supply in this nasty neighbors' spat.