PT Ariawest International

cancelled

PT Aria West International was granted a 15-year concession agreement for the provision of fixed local phone services in West Java (division II) in 1995. The company was one of the five international consortiums that were granted such agreements for the provision of local phone services. The country was divided in seven regional areas for telecommunications in 1995. Those regions were Sumatra (division I), Jakarta and the surrounding area (division II), West Java (division III), Central Java (division IV), East Java including Surabaya (division V), Kalimantan (division VI), East Indonesia (division VII). The state-owned national operator PT Telkom kept the management and operators of the two most profitable regions (Jakarta and East Java). Each of the remaining five regions were awarded to one international consortia under joint operating scheme (Kerjasama Operasi or KSO) in 1995. Under the arrangement, each KSO was treated as a division of PT Telkom and was managed and operated by the KSO consortium on behalf of PT Telkom for 15 years staring in 1996. Collectively, the KSO investors were charged with the planning, engineering, financing, and construction of a minimum of 2 million lines by March 1999. Of that amount, PT Aria West International committed to install additional 500,000 lines. In addition, the company took over the management of 415,000 existing fixed lines from PT Telekom in West Java in January 1996. At the end of the 15-year period, all lines constructed had to be transferred to PT Telkom for a nominal payment. As part of the agreement, each KSO consortium had to give PT Telkom three principal types of payments during the term of the KSO. An up-front fee for joining the KSO scheme, which was US$30 million for PT Aria West International; a monthly payment for the annuity-like "Minimum Telkom Revenues"; and an annual "Distributable Telkom Revenues" (a percentage of the KSO's unit revenues after deducting certain allowable operating expenses). The average payment was estimated around 30% of the total revenues. PT Aria West International was as a joint venture between US West (35%), later known as Media One, Asian Infrastructure Fund (12.5%), and the private local PT Artimas Kencana (52.50%) by end 1998. Ariawest secured long-term financing of US$615 million from an international bank consortium and proceeds were to be used for expanding 500,000 new telephone lines by the end of the first quarter 1999 in regional division, West Java. The company installed around 290,000 new lines by December 1998 and the total number of lines operated by the company reached 705,000. Ariawest contracted US-based Lucent Technologies, Japan's NEC Corporation, Siemens, and Indonesia's PT Int. as equipment providers. In 1997, MIGA issued an US$5 million guarantee to a bank providing financing to this project. The company, similar to those in other KSO arrangements, had serious financial difficulty and was unable to meet the deadline of March 1999 to finish its build out commitments in 1998. The company was attempting to renegotiate its contract with the government and restructure its foreign debt by end of 1998. Finally in May 1999, the company was able to restructure US$284 million of their debt: $US212 million funded term facility and $US57 million in vendor obligations. This was the largest rescheduling of debt during the post financial crisis period and demonstrated growing investor confidence in Indonesia. PT Telkom terminated its contract with PT Aria West International in July 2001, after the joint operation (KSO) partner refused to pay its obligation in the form of Minimum Telkom Revenue amounting to Rp 509 billion. The two had failed to settle the long dispute over the continuation of the contract. By June 2002, the parties announced their intention to amicably resolve all their disputes. Telekom acquired and subsequently consolidated AriaWest in July 2003. The acquisition followed nearly two years of bickering which included a US$1.3 billion arbitration claim by AriaWest against Telkom with the International Chamber of Commerce (ICC). Telkom said it settled its ICC arbitration for US$58.67 million in cash (US$20 million of which had been paid at the time of the signing of the agreement for conditioned sales on May 8, 2002) and US$109.1 million in interest free promissory notes. Ariawest's debts of US$99.07 million had been repaid at the conclusion of this transaction, leaving another US$196.97 million to be repaid by Telkom through a new debt facility with a term of four years.