Indonesia case study Giga in collaboration with Boston Consulting Group (BCG) - September 2021 - ITU
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Country profile | Indonesia • Population: 270 m • Total population under 18 years: 31.1% • GDP: $1139 B • Secondary completion rate: 87.9% • GDP per capita: $4,221 • Adult literacy rate: 95.7% • GDP growth: 7.6% • % of schools connected: 76.3% Key figures • Investments/GDP: 31.3% • Connectivity starting point: 76.84% • Urban population: 57% • Electricity penetration: 98.9% • # of schools in country: 218k The proportion of Low GDP per capita High • Average no. of students per unconnected school is Challenge: Large school: 198 much higher in the populations • Current % of schools with internet sparsely populated separated by connectivity: 81% islands, like Papua (lowest islands with Demography of population density). The significant socio- Ministry estimates 71% of schools schools in Papua are not demographic differences connected to the internet % GDP spent on education 7.7 • Government debt: 43.5% of GDP 6.1 6.3 • Government’s education budget on a per-student basis: 3.6 $87.6 3.1 • Broadband a universal service: No Government 0.4 • Operational USF available: Yes involvement • Total amount allocated: $ 228m annually Nigeria Rwanda Indonesia Honduras Brazil SL Source: UNICEF, ITU, government websites, BCG analysis www.gigaconnect.org | info@giga.partners 1
Indonesia’s geography forms a barrier to be able to connect all schools, different funding models apply for the less developed regions Context: The mobile segment in Indonesia plays a major role. Mobile internet is widespread and penetration is over 130%. However, only 14% of households are subscribed to the fixed segment, with the many islands being a major obstacle. ~19% of schools in Indonesia are not connected to the internet. 70% of these unconnected schools covered by a base transceiver station, while 12,600 (30%) schools are not, meaning the schools are completely removed from connectivity. Additionally, the unconnected school proportion is much higher in sparsely populated areas. A five-year plan made in 2019 aims to provide 20 Mbps service to 30% of the population, including 71% of urban households. Still, 13M people across 12,500 remote villages have no internet access Technology Cost structure Funding structure Operating model To connect schools in Indonesia, A total annualized investment of Different funding models are In terms of operating model, the funding is required on the four $168M is needed to fund school considered for the well-developed following is advised: technologies. Given low connectivity in Indonesia. versus less developed. For the • Private company/consortium penetration of fixed broadband in well-developed regions the for coverage as a service the country, WISP, 4G and satellite An additional $20 will have following models are considered: (revenue-sharing) are expected to hold higher to be spent per unconnected • Demand-side subsidy • State/gov't driven for the relevance. The share of funding is student on an annual basis to • Prerequisite in upcoming 5G gov't budget increase determined as follows: fund school connectivity. spectrum auction • Turnkey (+ Lease) for one-off • Fiber: 30% For an average school that is not • Build, Operate and Transfer gov't subsidies • WISP: 30% connected to electricity, $4,450 is by BAKTI • Cooperative and • 4G: 38% required on an annualized basis • Revenue-sharing Voluntary set-ups for • Satellite: 2% For the less developed regions: community contribution • Demand-side subsidy • USO financing • Regulated advertising model • Community contribution • Govt co-invest alongside SPs www.gigaconnect.org | info@giga.partners 2
Multiple funding models (private, PPP, state and community) can be used, thereby involving different stakeholders in the process of improving connectivity Funding model Explanation Operating model The revenue-sharing model falls within the commercial-provided archetype. It is guided by the private company/consortium operating model. This model is more relevant for well- Coverage as a service – Private company/ A revenue-sharing developed regions e.g., Java, Bali and Sumatra. Private individuals have already set up their consortium own networks covering ~20 households – a formal model connection local businesses and main operators must be established Falls within the government-contributed archetype and therefore the state/government Government increases driven operating model is advised. As no new infrastructure would be needed in this model, B school funding the operating model would be focused on optimal use of funding, rather than infrastructure State/government development. Spectrum auctions and USF financing are (implicit) one-off subsidies. USF financing is gov't- driven, however can be conducted in a wide variety of methods (e.g., BAKTI owns One-off infrastructure, or outsources to commercial parties). The spectrum auction is an implicit PPP C government subsidy model given the need for agreement both the gov't as well as commercial parties. Another Turnkey (+ Lease) subsidization model is Build-Operate-Transfer (BOT) where BAKTI licenses rights to operate in an auction, which includes a mandate subsidization of school connectivity The community contribution model builds on the community-based archetype. It is more appropriate for less-developed regions e.g., Kalimantan, Sulawesi, Nusa Tenggara and Papua. Cooperative D Community contribution Local ownership is based on supporting community-based micro-enterprises. Village and Voluntary ownership may be more successful, as the NPO or local gov't provides continuous guidance and training in addition to initial funding Source: BCG analysis www.gigaconnect.org | info@giga.partners 3
Country & school overview Connectivity status & developments Indonesia case study | Telco landscape Table of contents Recommendations Funding models Financial impact of funding models Short-term next steps www.gigaconnect.org | info@giga.partners 4
There are large socioeconomic differences Significant regional between islands differences in socioeconomic status Meaning that several in Indonesia lead to districts have weak ~20% of schools being or no mobile unconnected broadband signals Deep-dives on next pages With an estimated 19% of schools that are not connected to the internet yet www.gigaconnect.org | info@giga.partners 5
Indonesia Large populations separated by islands with significant socio-demographic differences Aceh 270m inhabitants North East Gorontalo Sumatera Kalimantan North West Central North Maluku Riau Kalimantan Sulawesi Sulawesi West West Central Bangka- Papua 74.0m total households Sumatera Jambi Kalimantan Belitung Southeast Kalimantan South Sulawesi Selatan Sumatera Maluku Papua Bengkulu Lampung Jakarta Raya West Sulawesi South Banten Sulawesi West Central Java Java East Java East Nusa Tenggara 514 cities and districts 1 City with pop. >10 m Bali Yogyakarta West Nusa Tenggara Kalimantan Sulawesi Papua & Maluku Population (%) 6.1 Population (%) 7.3 Population (%) 2.8 1,139 U$ Bn 2021 GDP GDP (%) 7.9 GDP (%) 6.7 GDP (%) 2.3 2021-24 + 3.2% y-o-y Pop. density (people/km2) 30 Pop. density (people/km2) 105 Pop. density (people/km2) 15 Sumatera Java Bali & Nusa Tenggara Population (%) 22.0 Population (%) 56.2 Population (%) 5.6 GDP (%) 21.4 GDP (%) 58.7 GDP (%) 2.9 Pop. density (people/km2) 123 Pop. density (people/km2) 1,172 Pop. density (people/km2) 207 1,916,907 km2 People/KM2 0-100 101-500 501-1,500 >1,500 Source: Statistics Indonesia, EIU, BCG Analysis www.gigaconnect.org | info@giga.partners 6
Indonesia is the world's largest island country, with significant variances in connectivity set up The world's largest island country, it consists over 17 … and significant variances in connectivity set up, with the thousand islands, with 4 distinct topographical regions… East being less connected One of the main challenges to developing ICT Infrastructure in Indonesia is Due to the limited funding capability of both the government and the its geography. This includes the number of islands, size of the territory to private sector, infrastructure development cannot fully meet the demand in cover, the numerous remote and difficult to reach areas, and the number of Indonesia. Thus, isolated and impoverished parts of the country low-income and uneducated inhabitants are unconnected Jakarta Indonesia Indonesia Fiber optic cable Submarine cable Lowlands Hills/Mountains Microwave Sources: World Atlas, ITU Broadband maps, ITU digital regulation platform, GSMA www.gigaconnect.org | info@giga.partners 7
Different economic set-ups of regions must be taken into consideration in rolling out school connectivity High labor force has made Java to be the epicenter of manufacturing … which leads to higher GDP & and economic development … spending per capita … … and lower poverty rates… Labor force (m), split formal/informal labor (%), GDP per capita (IDR m) and spending per Poor people to total population (%) and split labor force/total population (%) capita (IDR m) urban/rural(%) 52.4 50.6 51.9 50.3 50.5 54.1 Coal rich island with low pop. density 79.4 76 leads to higher GDP 77% per capita 61 42% 57 53 49 56% 34% 30.0 31 6% 38% 21% 20% 19% 58% 8.5 3.7 8% 9% 6% 12 11 11 10 10 12% 28% 43% 9.9 28% 8.2 8 62% 5% 21% 35% 72% 31% 13% 14% 11% 57% 65% 69% 7% Java Sumatra Kalimantan Sulawesi Papua & Bali & Java Sumatra Kalimantan Sulawesi Papua & Bali & Java Sumatra Kalimantan Sulawesi Papua & Bali & Maluku Nusa Maluku Nusa Maluku Nusa Tenggara Tenggara Tenggara Formal Informal GDP per capita Spending per capita Urban Rural Source: Statistics Indonesia, BCG Analysis www.gigaconnect.org | info@giga.partners 8
Differences in population density leads to variances in school set up Population is concentrated in two islands, with one …leads to higher number of schools in the two islands island having an extremely high population density despite little variability in students per school Total population (m), split urban/rural (%), and population density No. of schools per region ('000), split primary/secondary/high school (%) (people/km2) and students per school 1,172 123 30 105 15 201 252 200 163 153 153 185 151.7 97.2 14% Schools have less students on average per school in lower-density areas as there are 17% relatively more schools. Number of schools is a 67% key driver of costs. Therefore, logically, the low- 53.6 density areas are also those that have a higher 13% cost to serve 59.2 19% 69% 44% 23.6 17.9 11% 15.8 33% 19.8 68% 11% 20% 16.4 20% 10.2 12% 56% 41% 20% 46% 7.4 8.2 69% 13% 21% 33% 14% 69% 69% 54% 59% 67% 86% 66% Java Sumatra Kalimantan Sulawesi Papua & Maluku Bali & Nusa Java Sumatra Kalimantan Sulawesi Papua & Maluku Bali & Nusa Tenggara Tenggara Urban Rural High School Secondary Primary Source: Statistics Indonesia, BCG Analysis www.gigaconnect.org | info@giga.partners 9
Many students still have limited or no internet access, making it difficult to give online education Although Indonesia has relatively smaller proportion of … studying from home is difficult for many schools without connectivity … students across country … School connectivity distribution (%) More than a third of Indonesian students has Quoted from Education Ministry limited or no internet access [including at home] Ministry of Education, Culture, Research, 7% 4% 19% 23% 19% 10% and Technology 21% 43% 34% 16% 14% 72% 66% There are 42,159 or ~19% of schools in Indonesia 94% 66% 99% 52% 96% still without access to internet, even though 70% of 81% 34% 58% 66% 65% these schools under BTS coverage 23% 25% 28% 24% 34% Ministry of Education, Culture, Research, 6% 1% and Technology Mauritania Brazil Liberia Kazahkhstan Namibia Indonesia Rwanda Sierra Leone Philippines Zimbabwe Palestine Honduras When the school ordered us to study at home I was confused because we don’t have a signal at home No data Poor connectivity (5 Mbps) Central Java Source: Regulatory Reports, Press news, BCG Analysis www.gigaconnect.org | info@giga.partners 10
Indonesia has a 99% electrification rate with almost equal access for both urban & rural, however ~9,500 schools still operating with no electricity ~99% of the Indonesian population … with low variance between … however, electricity remains a has access to electricity … urban and rural … problem for ~9,500 schools Access to electricity (% of population) Access to electricity (% of population) Electricity rate 99.8 98.9 99.9 97.5 92.8 Bali 100% Java 100% Sumatra 96% National 95% Sulawesi 92% 37.9 Nusa Tenggara 89% 22.7 Kalimantan 88% Maluku 85% Papua 68% Brazil Indonesia Honduras Rwanda Sierra Urban Rural Leone Source: Giga school data, Worldbank, MECRT, Press search, BCG Analysis www.gigaconnect.org | info@giga.partners 11
Java, Bali & Sumatra also have the best 4G coverage in schools, and are relatively closer to nodes which would allow them to connect more easily The three well-developed islands have relatively better 4G And in Java and Bali nearly all schools are within coverage 25 km of a node, thus within easier connection reach 3G/4G coverage in schools Percentage of schools withing x distance to node 79% 100% Java 85% Java 4% 17% 1% 91% 100% 9% Bali 76% Bali 20% 70% 37% National 54% National 31% 12% 29% 56% Sumatra 35% Sumatra 25% 34% 12% 25% 51% 17% Kalimantan 31% Kalimantan 33% 25% 48% 35% Sulawesi Sulawesi 28% 28% To achieve meaningful 4% 20% 26% connectivity, a 4G 46% Nusa Tenggara Nusa Tenggara 29% 9% connection is required 9% 16% 25% 46% 9% Papua Papua 6% 24% 4% 32% 0% 22% Maluku Maluku 31% 6% 14% Strong 3G Signal Strong 4G Signal 0-25 km 25-50 km 50-100 km 100+ km Source: Giga school data; BCG Analysis www.gigaconnect.org | info@giga.partners 12
Increasing the school connectivity might face major structural challenges in the sparsely populated islands … while no connectivity is School connectivity varies between islands, it's estimated that ~19% schools more intense in the sparsely across Indonesia are not connected to internet … populated islands … • According to MECRT, there are ~42,000 or 19% schools across Indonesia that are not connected to internet • 70% of these unconnected schools covered by a base transceiver station, while the 12,600 (30%) schools are not, which means the schools are completely removed from connectivity • The unconnected school proportion is much higher in the sparsely populated School connectivity islands, like Papua where it has the percentile lowest population density, the Ministry 0.0 to 16.5 16.5 to 33.0 estimates 71% of schools in Papua are 33.0 to 49.5 not connected to the internet 49.5 to 66.0 • Moreover, in the sparsely populated 66.0 to 82.5 islands, where overall connectivity 82.5 to 99.0 coverage is low, schools have more structural challenges to connect and MECRT– Ministry of Education, Culture, Research and Technology higher cost to serve Schools – Include primary, secondary and high school Source: Unicef, Press search, BCG Analysis www.gigaconnect.org | info@giga.partners 13
Example | Inside Java, the most connected island, connectivity gap still exist in rural areas, with limited device available to connect Kenalan village, Central Java Students check for school assignments … while some students study on a smartphone, studying from from the side of a road in Kenalan home with limited devices available … village, due to weak signals at home Source: Press news, BCG Analysis www.gigaconnect.org | info@giga.partners 14
The multilayer administration structure with its own autonomy might bring more complexity for project coordination and funding set up • Since the early 2000s, Indonesia has implemented a decentralization policy by giving regional govt more power in determining the uses Central govt National • President and legislative of budget and agenda Central govt Central • However, the administration non-tax & tax Legislative members elected by open revenues budget Government Body election and fiscal viability of decentralized governance are Direct transfer; Funds to be restricted by its social capacity, managed by provincial govt resource base, investment and infrastructure Provincial govt Provincial • Province governor and Provincial govt Provincial • More autonomy also brings non-tax & tax Legislative legislative members elected revenues budget Government Body by open election more complexity to align the strategic national agenda and Direct transfer; Funds to be its implementation managed by city/district govt • Minister of Education stated that, only 15% of IDR ~550 Tn City/district • City mayor and legislative City/District City/District City Legislative education budget is managed govt non-tax & members elected by open tax revenues govt budget Government Body election under the ministry, while the rest is managed by local government and other ministry Central govt non-tax and tax revenues – VAT, income tax, luxury tax, share profits from SOE, oil & gas, etc. Provincial govt non-tax and tax revenues – Vehicle tax, fuel tax, share profits from regionally-owned ENT., etc. City/district govt non-tax and tax revenue – Hotel, restaurant, entertainment taxes, other retribution, etc. Source: Ministry of Finance, Press search, BCG Analysis www.gigaconnect.org | info@giga.partners 15
Country & school overview Connectivity status & developments Indonesia case study | Telco landscape Table of contents Recommendations Funding models Financial impact of funding models Short-term next steps www.gigaconnect.org | info@giga.partners 16
Costs of a mobile broadband data basket are below affordable level, yet income spent on fixed broadband is still considerably high 1.3% of GNIpc spent on 1.5 GB mobile broadband data … on the other hand, fixed broadband costs are still basket, which is below ITU recommendation for considerably high, with 10.9% of GNIpc spent on a 5 affordable internet … GB FBB data basket Spent on data-only mobile-broadband (1.5GB) as % of Spent on fixed broadband (5GB) as % of gross national gross national income per capita-2020 income per capita-2020 25 180 160 20 140 120 15 Even though 1.3% is affordable according to ITU's definition, for 100 27.5m (10.2%) Indonesia's population who live below poverty line, MBB 80 GNIpc 10 costs are still too high to be affordable 60 5 40 Ø 2.9 average 1.3 20 10.9 2% ITU Ø 9.4 average 0 recommendation 0 2% ITU Indonesia for affordable Indonesia recommendation internet for affordable Countries (N = 206) Countries (N = 206) internet Source: : ITU, BCG analysis www.gigaconnect.org | info@giga.partners 17
Many districts still have weak or no mobile broadband signal, while fixed broadband penetration is considerably low at 0% for some provinces Despite mobile broadband costs being below … while fixed broadband penetration only affordable level, many districts still have weak or reaches 15% of HH, with 13 provinces having a no signals … 0% rate Villages with weak or no signal (%) Fixed broadband access to total households (%) Jakarta Raya Only Jakarta has >50% HH access to FBB, with 82.6% rate 0-20% 20-45% 45-80% >80% 0-5% 5-20% 20-50% >50% Source: Statistics Indonesia, BCG Analysis www.gigaconnect.org | info@giga.partners 18
Solutions are required to improve coverage quality to reach better (school) connectivity 29% primary schools … and 56% of Indonesian districts still receiving low … showing we need a clear remain without internet … quality networks … focus on 2 topics The mobile internet coverage by no. of districts 83,937 Connectivity access Needs 7% Coverage Gap • Fund internet 19% 29% No signal coverage Fund internet 24% coverage Investment Gap • Upgrade Weak signals on all network quality 32% network 81% 71% Investment Gap • Upgrade to allow Strong signal on for meaningful Upgrade network 2G/3G connectivity 38% quality and Connected • Fuel the digital connectivity Strong signals on 4G economy Primary schools Total schools No connectivity Connected to the internet No signals Weak signals Strong signals 3G/2G Strong signals 4G Note: Strong signals split 4G/3G/2G using BTS types proportion from the top 3 telco operators; Telkom, XL, Indosat Source: Statistics Indonesia, Company Data, MECRT, BCG Analysis www.gigaconnect.org | info@giga.partners 19
Country & school overview Connectivity status & developments Indonesia case study | Telco landscape Table of contents Recommendations Funding models Financial impact of funding models Short-term next steps www.gigaconnect.org | info@giga.partners 20
Indonesia Overview of telco landscape in Indonesia Characteristics Description • Despite the high penetration of mobile services in Indonesia, there is still a connectivity gap between sparsely populated island and densely populated island in Indonesia, mainly outside Java • In 2019, Statistics Indonesia reports that only 41.8% out of ~84,000 districts in Indonesia have BTSs, and ~30% of districts in Indonesia having weak/no signal Current status of fiber and • Significant improvement in connectivity has been shown in the last 3 years after the Indonesian government initiated the Palapa Ring 4G, WISP, and of satellite project under national strategic agenda in 2016. The goal was to lay 36,000 km of fibre optic cable connecting from the west to the east coverage in country part of Indonesia to provide high-speed internet • The number of fixed broadband connections remains relatively low, with penetration only ~18% of households. The country’s geography, consisting of 17,000 islands, is an obstacle for operators’ deployments that have focused on fiber • The regulator launched different initiatives to improve the capacity and reach of fixed-broadband services. The five-year plan, publicized in 2019, aimed at providing a 20 Mbps service to 30% of the population, including 71% of urban households • Indonesian telecommunication sector has been increasingly competitive after the removal of monopoly regimes in the early 2000s and increase of the 49% foreign ownership cap to 95% • Currently there are 5 major players in mobile services, with Telkom as market leader covering almost 50% of total ~355m mobile Competitive landscape subscription in 2020 • In fixed broadband, where there is even lower penetration, market share concentration is more pronounced with Indihome (part of Telkom) accounting ~85% of total ~ 11.8m fixed broadband subscriptions in 2020 • 3 blocks of 2.3GHz frequency auction that will be used for 5G networks has been conducted this year and won by 2 telco player, Spectrum auction Telkomsel (2 blocks) and Smartfren (1 block) for 5G won by 2 players • The 2.3GHz frequency auction was divided into three blocks in the range 2360-2390 MHz with a capacity width of 10MHz each Source: Press search, Kominfo, BCG Analysis www.gigaconnect.org | info@giga.partners 21
Indonesia Overview of major upcoming changes in telco landscape and resulting school connectivity expected Major changes Description • In June 2021, the Telecommunication and Information Accessibility Agency (BAKTI KemKominfo) opened a joint service operation (JSO) for telco operators to participate in providing 4G mobile services in remote/underdeveloped regions across Indonesia, to alleviate some of Joint Service Operation (JSO) the financial burdens. to provide 4G mobile services • Under this JSO, BAKTI will be responsible to provide base transceiver station (BTS) and other supporting infrastructure including the land in remote areas site for the BTS that can be used by telecom providers to provide 4G cellular services. • This arrangement will incentivize telco operators to penetrate the low economic scale regions with lower capex. As a result, there will be wider network coverage to the regions and more schools will be connected • Ministry of Finance Indonesia stated that Indonesian government allocates IDR 17 Tn ($ 1.2 Bn) of 2021 state budget to improve IDR 17 Tn of 2021 state budget connectivity across Indonesia mainly for ~9,000 remote / underdeveloped villages to improve internet • This budget is a part of government 5 year agenda to improve Indonesia's connectivity inclusion especially in Indonesia's outermost, connectivity frontier, and underdeveloped areas (3T) • Together with improving the connectivity, it will allow more equalization of internet access to schools and the community Next frequency auction to • Another frequency auction to be set in 2022 for mmWave (26 – 28 GHz) and 700 MHz after the expiry from the current band usage in TV services increase available spectrum • KemKominfo also plans to offer 3.3 GHz and 3.5 GHz in 2023, and possibly 2.6 GHz in 2025 for 5G • These additional frequencies will help telco providers roll out 5G services as currently there is limited spectrum for it • The Omnibus Law allows telecommunications operators to share and transfer spectrum with prior approval from the central government. 2020 Omnibus Law to increase This flexibility could potentially pave the way for mobile industry consolidation telco sector efficiency • Sharing passive infrastructure with other telecommunications operators became mandatory under the new law. This potentially will allow smaller players in the industry to expand networks at slightly lower capex Source: Press search, Kominfo, BCG Analysis www.gigaconnect.org | info@giga.partners 22
Penetration levels of fixed broadband has room for improvement, whilst increasing uptake in fixed broadband subscribers Mobile broadband (MBB) declined post identity Increasing fixed broadband subscribers driven by the registration requirement; fixed broadband (FBB) needs rollout of infrastructure by Telkom, which currently has wider infrastructure deployment ~85% FBB market share Mobile broadband penetration to population (%) and Fixed broadband Fixed broadband subscriptions (in m) penetration to households (%) 11.8 Divided by 200 MCIT announced 7 FBB prepaid SIM 10.5 167 15% operators registration policy 14% 149 +19% CAGR 150 8.5 131 127 132 131 121 127 15% 6.6 Many telco operators offered aggressively priced mobile 100 5.4 21% plans on new SIM cards prior 2018, making the inhabitants buy multiple sim cards, thereby inflating the no. of total 4.7 85% 20% subscribers. However, this practice stopped after the 4.0 16% 86% 3.5 government required subscribers to link SIMs to IDs, and 15% 85% 50 13% limited 1 ID to a maximum 3 different SIM cards 79% 84% 80% 16 18 87% 85% 8 10 13 6 6 7 0 2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020 MBB FBB Telkom Others Source: Omdia, BCG analysis www.gigaconnect.org | info@giga.partners 23
60% mobile broadband subscribers have access to 4G, with three telco players controlling 80% of market share ~97% internet subscription using mobile broadband, while nearly ~40% MBB Telco industry has consolidated from ten subscribers still cannot access 4G operators in 2013 to five operators in 2020 2020 internet subscribers (in m) Mobile broadband subscriptions (in m), split by market share (%) • Mobile subscriptions declined in 2018 after # of 7% of “Others” market the government 367.3 367.3 355.5 operators share in 2013 consists of 5 imposed the 439.0 operators 3.2% 3% requirement that 12.8% 4 387.5 342.6 prepaid SIM card users 15% 329.1 324.1 3% 355.5 7% 13% 341.0 7% need to register their 3% 18% 12% 323.3 8% 26.5% 4 4% 4% SIM with their national 3% 19% 9% 11% 12% 10% identity 11% 12% 25% 17% 17% 16% • Telco industry has 18% 18% 96.8% 22% undergone 17% 17% 20% 20% 18% consolidation process in 18% the last ten years; from 60.6% ten operators to now 45% 45% 45% 45% 50% 50% 48% five key players, with 42% 5 three players controlling ~80% of market share Internet Internet type Mobile 2013 2014 2015 2016 2017 2018 2019 2020 subscribers broadband Fixed broadband Mobile broadband 2G 3G 4G Telkom Indosat XL Axiata 3 Indonesia Smartfren Others Source: Omdia, BCG analysis www.gigaconnect.org | info@giga.partners 24
Significant difference in 4G download speeds observed across operators despite similar 4G availability Smaller players continue increasing their network quality to compete with the market leader … … While increasing the availability of 4G over time 4G Download speed (Mbps) 4G Availability (Mbps) 12.9 12.7 90.5 90.1 92.1 12.0 86.7 87.0 86.3 11.3 10.7 76.2 69.6 70.8 8.9 8.7 6.6 4.8 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 4G Download speed – This metric shows the average download speed for each operator on LTE connections as measured by users 4G Availability – The proportion of time users have an LTE connection available to them on each operator's network. It's measure of how often users can access the 4G network Source: Open Signal, BCG Analysis www.gigaconnect.org | info@giga.partners 25
Telkom leads in terms of size and as a result of its scale advantage manages to have higher profitability levels Telkom leads by controlling the largest market share both in MBB and FBB, followed by Indosat and XL whose revenues are mainly driven by mobile broadband services; Telkom managed the scale, yielding higher EBITDA margin compared to peers Revenue and EBITDA (IDR Bn), EBITDA margin (%) 50.3 49.2 45.0 47.4 48.1 43.0 38.0 37.0 39.5 35.2 44.2 42.8 28.0 30.6 33.1 131 136 136 128 116 63 64 66 59 59 23 25 26 29 30 23 26 28 21 23 9 9 8 10 9 13 13 8 9 6 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Revenue EBITDA Source: Company Data, BCG Analysis www.gigaconnect.org | info@giga.partners 26
Telkom capex has remained constant, with smaller players investing slightly more to expand their 4G network Telco players aggressively increased their capex in 2019 to expand 4G base stations nationwide; Capex/revenue intensity higher in the smaller players as they are trying to increase network coverage & quality Capex (IDR Bn) • XL and Indosat to continue 4G network 41% expansion, especially 35 33 outside Java and 32 36% increase the network 30 28 30% quality 29% 27% • While Telkom has an 26% 26% 26% 24% established mobile 24% 24% 25% 26% Ø 27 22% network outside Java 19% already, its CapEx remain constant to 11 expand its fixed 9 7 8 7 7 6 6 6 5 broadband network • Passive infrastructure sharing requirement in new Omnibus Law 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 provides long-term positive for the industry capex efficiency Capex Capex/Revenue (%) Source: Company Data, BCG Analysis www.gigaconnect.org | info@giga.partners 27
Several interesting partners exist in Indonesia to reach school connectivity, either in terms of funding potential, or in terms of operating model IdREN Universal Service Obligation Fund BAKTI Indonesian USF to fund network coverage in A MCIT's arm to bring digital infrastructure A dedicated network infrastructure that the outermost, frontier, and under-developed and ecosystems in areas that are not connects research and dedication areas. USO is likely to be the main source of commercially viable, BAKTI is a good institutions, IdREN could be an operational fund to help govt co-invest alongside service candidate to work with as operational partner for connecting schools providers in remote areas partner for connecting school Deep-dives on next pages Note: BAKTI is the sole government agency that manages the USO. There is however a case in which the ministry of education could indirectly get support from the USO fund (for connecting schools). BAKTI is working with the MoE to connect schools using the USO fund. Therefore, contacting only BAKTI is the most logical route. However, as theoretically another option does exist, both have been highlighted here www.gigaconnect.org | info@giga.partners 28
IdREN brings better connectivity for education and research, providing potential operating model for wider coverage IdREN initiated close collaboration between stakeholders for … and provides potential operating model to reach wider better connectivity in education and research … coverage into primary and secondary schools across country … • Founded in 2017, IdREN is a dedicated network infrastructure that connects research and education institutions and community in Academy as Indonesia through national closed network that could bring faster ideator and more reliable connectivity • In this collaboration, telco providers help to provide network and Business communication services, colocation data center, and network Government as backbone interconnected with Global Research & Education as regulator enabler Network • Although this infrastructure still limited to universities and research institutions, it provides potential operating model to connect basic Education and education like primary/secondary schools. There is also no research indication that IdREN would not be open to it, therefore it has a potential to open for discussions network • Working together with IdREN in connecting schools would allow for: • Reliable connectivity, through national closed network that currently in place • Access to funding & expertise, as IdREN has connected many Media as institutions across country together with its partners from telco Community as industry expande accelerator r Source: IdREN, Press Search, BCG analysis www.gigaconnect.org | info@giga.partners 29
USO, Indonesian USF to fund network coverage in the outermost, frontier, and underdeveloped areas Funded by telco operators' contributions to fund coverage in … with ongoing agenda to connect … and connecting schools and underserved areas … islands with fiber optic and BTS … increasing digital literacy … • A non-tax govt revenue • Palapa Ring is a 36,000 km fiber optic • In cooperation between MECRT and (PNBP) backbones project connecting the west, MCIT, government has connected ~1,500 • 1.25% of gross revenues central and east Indonesia funded by USO schools in remotes area from 2015 – • In 2019, government has completed 2018, funded by USO. The program contributions from telco ~12,000 km with estimated cost of IDR operators, paid quarterly ~7.7 tn. Another ~13,000 km is estimated including funding the device acquisition • IDR ~3.3 Tn ($ ~227,6m) to start the construction in 2022 - 2023 for the usage of internet annually • From the ~12,000 km completed, 6,300 • Besides physical infrastructure, km is established in the east region, government is expanding the agenda • Main uses to fund network connecting the highly unconnected into digital literacy through seminar and infrastructure and OpEx regions such as Papua, Maluku, and other socialization methods subsidy in underserved areas Nusa Tenggara • Whether the government will allocate • Using regulated user tariff • As a result, remote regions like Papua USO to fund local start-ups is under saw a significant improvement of more discussion, but the decision is not than 80% in download speed in 2020 • Managed by TIAA under MCIT compared to 2018. clear yet • Criteria in utilizing USO is the • ~7,900 BTS in the outermost, frontier, • USO money is spent via BAKTI (see next region has no connection or and underdeveloped regions to be page) the connection is less than built Previously, government has built ~ 50% coverage 1,200 BTS in 2020 funded by govt budget and USO TIAA – Telecommunication and Information Accessibility Agency (BAKTI KemKominfo) MECRT– Ministry of Education, Culture, Research and Technology MCIT – Ministry of Communication and Technology Source: ITU, respective websites, BCG analysis www.gigaconnect.org | info@giga.partners 30
Bridging the connectivity gap and building digital ecosystems in not commercially viable areas through BAKTI … with priority programs to build both the infrastructure and the ecosystem needed to better utilize the digital connectivity Building digital infrastructure: Vision • Villages' connectivity using 4G BTS, building or upgrading 2G/3G site to 4G. Its focus • Bridging the digital divide for Indonesia's mainly in the outermost, frontier and underdeveloped (3T) regions better future • Internet access for public services including in school, public health center, etc. • Provision of satellite capacity rental and high-throughput satellite to support providing • BAKTI (TIAA) is an MCIT's arm on internet access in public services, using Satellite of Republic Indonesia (Satria). BAKTI connectivity program, with main targets there will be 10,000 points that will be supported by Satria services in 2023 function to build digital • Palapa Ring, connecting the outermost regions with fiber optic to provide high-speed infrastructure and ecosystems in and reliable internet connectivity areas that are not commercially viable Building digital ecosystem: • Building ICT ecosystem to develop human resources capabilities and expand the • Mainly funded by USO, with budget penetration of digital-based public services in unfeasible areas of IDR ~3.3 Tn annually • Working together with the Ministry of Villages, Disadvantaged Regions, and • Direct allocation from state budget Transmigration to strengthen the digital economy ecosystem and grow economic (size unknown) potential in villages • As a facilitator to develop digital literacy of the community TIAA – Telecommunication and Information Accessibility Agency (BAKTI KemKominfo) MCIT – Ministry of Communication and Technology Source: Expert interview, MCIT, Press news, BCG Analysis www.gigaconnect.org | info@giga.partners 31
Country & school overview Connectivity status & developments Indonesia case study | Telco landscape Table of contents Recommendations Funding models Financial impact of funding models Short-term next steps www.gigaconnect.org | info@giga.partners 32
Extreme regional differences exist between islands in Indonesia that lead to large discrepancies in educational standards between regions The key issue While mobile broadband costs in GNI per capita is below the 2% recommendation, taking into consideration the regional differences, being online is unaffordable for many on the poorer islands because income levels to be are lower resolved in These differences lead to the regions being less attractive to commercial parties, which exacerbates the problem. Low-hanging fruit, or the projects that have slightly positive NPV, have already been invested in, leaving only the areas Indonesia, with the worst prospects besides Besides the relatively high costs in poor regions, digital literacy is likely to be low because of low connectivity, meaning that demand would for connectivity funding, is would be low even if coverage was expanded by telco operators. Thus, telco operators are again less likely to invest in these regions, as revenues will be low regional For example, after the completion of the Palapa ring near Papua, the least densely populated island of Indonesia, mobile operators were still reluctant to differences broach the island because of low commercial viability Innovative funding models will help address these regional differences, but in order to become fully sustainable in the long run, these issues need addressing www.gigaconnect.org | info@giga.partners 33
Country & school overview Connectivity status & developments Indonesia case study | Telco landscape Table of contents Recommendations Funding models Financial impact of funding models Short-term next steps www.gigaconnect.org | info@giga.partners 34
Digitalization and school connectivity being top of mind of Indonesia leaders … • Under his administration, I hope that the 2021 Digital Connectivity program will become an important Indonesia’s President Joko Widodo, has launched several momentum that can connect Indonesian people with new technologies, new initiatives in bringing new era of mindsets, new global business opportunities, and a new future towards advanced digital disruption to citizens Indonesia.. • One of the main agenda points Joko Widodo, (current) President of Indonesia is bringing digital inclusive Launching of 2021 Digital Connectivity program revolution, with three principles February 2021 of access, affordability, and ability • He emphasizes the importance of equal distribution for connectivity especially on the outermost, frontier, and Those (in the outermost, frontier and undeveloped regions) who really need equal underdeveloped regions • By entering his second (last) distribution of internet access (in schools) like we have in the cities. This equalization period, the upcoming election in continues to be pursued by the government.. 2024 would again determine Nadiem Makarim, (current) Minister of Education, Culture, Research, and Technology whether this strategic agenda Bringing digitalization to schools still in place with the new February 2021 elected leader Source: Press news, BCG Analysis www.gigaconnect.org | info@giga.partners 35
… However, school connectivity gaps remain, especially in islands with lower population density, thereby requiring different funding solutions per region Well-developed islands of Java & Sumatra with high Less developed islands of Kalimantan, Sulawesi, Nusa population density that are generally easier to connect Tenggara & Papua with low population density and or have already been connected that are harder to connect www.gigaconnect.org | info@giga.partners 36
Regional focus: Java, Bali & Sumatra Well-developed islands with good connectivity for general population and higher school connectivity levels www.gigaconnect.org | info@giga.partners 37
Most of schools are connected already, despite Sumatra still needing more equalization of internet access High concentration of … and high variability in … and more schools are connected, although connectivity population in Java … economic set up … gap still exist in Sumatra Population (m) Spending per capita (IDR thousands) Schools per region map West Java 49.6 DKI Jakarta 18.2 East Java 40.0 Riau Islands 14.2 Central Java 34.7 DI Yogyakarta 14.0 0-3500 North Sumatera 14.8 Bali 13.9 3501-7000 Banten 12.9 B. Belitung Islands 12.8 7001-15000 DKI Jakarta 10.6 Banten 12.0 >15000 South Sumatera 8.6 East Java 11.6 Lampung 8.5 Central Java 10.9 Riau 7.0 West Java 10.8 West Sumatera 5.5 West Sumatera 10.7 School connectivity map Aceh 5.4 Riau 10.7 School connectivity Bali 4.4 South Sumatera 10.7 percentile DI Yogyakarta 3.9 North Sumatera 10.4 0.0 to 16.5 Jambi 3.6 Jambi 10.4 16.5 to 33.0 Riau Islands 2.3 Bengkulu 10.4 33.0 to 49.5 Bengkulu 2.0 Lampung 10.0 49.5 to 66.0 66.0 to 82.5 B. Belitung Islands 1.5 Aceh 9.5 82.5 to 99.0 Source: Statistics Indonesia, Uniced, BCG Analysis www.gigaconnect.org | info@giga.partners 38
For the well-developed regions, we believe four funding methods would be especially suitable to reach 100% school connectivity of a meaningful standard Funding method Reason for suitability • Suitable because: Government of Indonesia has shown high willingness to work with service providers to Overlaps with connect unconnected regions. In addition, government has shown willingness to invest in education Demand-side region 1 • Reason for concern: Government funding on education already very high vis-à-vis neighboring countries. subsidy Therefore, sustainability of solution in long-term likely not high. A combination of money from different, relevant ministries could work, so long as the total amount funded is a small increase • Suitable because: Commercial sector is most efficient in rolling-out connectivity Prerequisite in • Reason for concern: Commercial parties may have misaligned interests and provide lower quality service vs. upcoming 5G intended government/project outcomes. In addition, making school connectivity for all of Indonesia a prerequisite may lead to undesired responses to the RFP. Therefore, we would suggest to only include spectrum auction slightly negative, break-even, and positive cases, but exclude those that are too hard-to-connect • Suitable because: BOT where BAKTI is the procuring partner setting up the networks. Right to operate is Build, Operate & licensed through an auction, which then includes a mandate subsidization of school connectivity. Transfer by BAKTI • Reason for concern: Same as for '5G spectrum auction' • Suitable because: Private individuals are currently setting up their own networks that cover about 20 households. As this is technically illegal, a formal version of this is a revenue-sharing model where local businesses set up their own network by connecting to the main operators. These entrepreneurs are more Revenue-sharing flexible than operators, thus can cover areas where it is unviable for large players. • Reason for concern: Licensing and upfront CapEx needs to remain affordable and not too complicated for local businesses. Note: USO funding was removed from consideration for well-developed regions due to the maximum 50% coverage requirement Source: BCG analysis www.gigaconnect.org | info@giga.partners 39
Demand-subsidy | Government’s allocation to school funding is already high, making an increase from moe unlikely to be sustainable Education spending allocation has … but a 1% increase can already been maintained at ~20% from … which is considerably higher make a large difference total spending in the last 6 years … allocation than neighbor countries … Government education spending (IDR Tn) and Govt education spending allocation to total the allocation to total government spending (%) government budget (%) • In 2021, government allocates IDR ~7.4 Tn (1.3%) to support digitalization and 19.9 20.2 19.5 19.9 20.0 20.0 building connectivity infrastructure for 20 public education services • Only 15% of education budget is 17 +8% 15 16 managed by MECRT, while a huge 548 550 15 portion (54%) is directly managed by 432 460 local governments (including the IDR 406 ~7.4 Tn budget), bringing more 371 complexity in aligning the government strategic agenda • However, a 1% in education budget would already mean an IDR 5.5 Tn increase, which could be directly used to pay for connectivity 2016 2017 2018 2019 2020 2021 Indonesia Thailand Malaysia Philippine Vietnam MECRT– Ministry of Education, Culture, Research and Technology Source: Ministry of Finance, Press news, BCG Analysis www.gigaconnect.org | info@giga.partners 40
Prerequisite in upcoming 5G spectrum auctions : Upcoming spectrum auctions could provide new possibilities for school connectivity in urban areas Spectrum auctions can be used to sustainably connect Low frequency networks (e.g., 450 MHz) that are schools, if regulator has enough mandate currently empty can be used for school connectivity • Although these frequencies cannot be received by handsets, the When new spectrum auctions come up, include in the bidding frequency can be received by routers, which can then provide Wi-Fi process that winning party must connect a certain number of connection for 20 Mbps on selected locations schools in certain regions • This frequency can be received from 100 km, making it ideal for remote locations and Indonesia's scattered geography. A fine system needs to be put in place to ensure that parties provide agreed service levels and maintenance Auction revenues will likely be lower using this method, but it Net1 currently operates through a combination of low(450 MHz) and high creates incentives to connect schools in a reliable and sustainable (3.5 GHz) frequency networks way – given that there is an effective regulator. They collaborate with a local partner in Indonesia to provide a 4G This is an urban, rather than rural solution, as 5G-enabled devices network in remote areas (incl highlands and offshore areas) are more expensive and higher connectivity speeds are usually rolled out there first. Subsequently, funds from these auctions Net1 Indonesia's network is currently available in 31 provinces, of which can be used in rural areas through cross-subsidization 70% is located in remote and rural villages. The company is planning to Upcoming spectrum auctions in 2022 (26-28 GHz and 700 provide 4G LTE-450MHz network access on 14,000 islands to more than 260 million Indonesians MHz), 2023 (3.3-3.5 GHz), and 2025 (2.6 GHz) • Frequencies are suitable for 5G networks and therefore attractive They offer end to end connectivity for local government units throughout for major commercial parties the Philippines, connecting schools through a turn-key solution Source: Net1 Annual report; BCG Analysis www.gigaconnect.org | info@giga.partners 41
Build, Operate & Transfer by BAKTI| Selling infrastructure for expanding services into underserviced areas rather than money BAKTI can make negative NPV areas more attractive by selling infrastructure for payment in-kind • The backbone infrastructure that is built through BAKTI often operates in underserviced areas, where large telco players have not expanded to yet due to large CapEx, Opex and lower demand. Fiber Optic Cable • By offering to sell their infrastructure, BAKTI and MCIT provide these players with an opportunity to expand into BAKTI has been investing in backbone infrastructure these areas. • Instead of asking monetary returns for the use of the project such as the Palapa Ring fiber backbone of the Palapa ring, BAKTI can ask telco • Upon completion, the Palapa Ring project will span 36,000 players to expand into negative Net Present Value (NPV) km in on- and off-shore fiber optic network. BAKTI has project areas and mandate school connectivity (payment invested in this project and MCIT owns the infrastructure in-kind). This gives telco players the opportunity to • BAKTI also built BTS, which is then also owned by MCIT1 expand into areas at low CapEx and practically have a monopoly, as they are the first to service it. 1 MCIT – Ministry of Communication and Technology Source: BAKTI, MCIT, BCG analysis www.gigaconnect.org | info@giga.partners 42
Coverage as a service - revenue sharing (I/II) | Though Indonesia is used to sharing infra, formalized revenue-sharing provides opportunity for funding Subscribers, number plans, Formalized revenue-sharing in end-users remain in Current situation exists in cooperation with official telco For the formalized revenue- ownership of mobile operator; which informal players provide companies would allow for a sharing model to work, certain rural player owns internet to other households potential solutions prerequisites must be met last-mile infra In Indonesia, there are already many • In the formalized revenue- • Mobile operator must have • Rural operators do not have small informal players operating by sharing method, the mobile backbone infrastructure on the their own spectrum, numbering setting up their own connectivity operator owns backbone island in question plans or end users access point. This is not in line with infrastructure but is not nimble • Mobile operator must be willing • Mobile operators must use the legal guidelines as they do not have enough to expand into rural to share their infrastructure with assets of the rural operator in the proper licenses or formal areas or the pay-off is not large smaller, local/regional players case they want to expand to permission from large operators to enough. They will earn a • One of the following must be these areas commercialize percentage of the rural true: operator's revenue. • Rural operator has lower • The rural operator builds on the CapEx than mobile An individual can procure a backbone to provide last mile operator in the connectivity. They market the rural/difficult to connect stand-alone package and mobile operator's brand in their areas franchise it to 20 households local area • Rural operator has lower or so, then they collect fees. OpEx than the mobile This private procurement does operator in the not sit well with permits and rural/difficult to connect regulations areas Sr. Advisor, ITU Mobile operator Rural operator Source: Expert interviews, GSMA, BCG analysis www.gigaconnect.org | info@giga.partners 43
Coverage as a service - revenue sharing (II/II) | There are many local providers that could offer school connectivity at a fair price Explanation of role Financial consequences Considered players • Large player provides general network, • In return for opening the network, large • Main mobile players are Telkom along main infrastructure and cities player gets a share of the revenue Indonesia, XL Axiata, and Indosat who • Allows local player to add onto their obtained by local player from connecting have 4G coverage in most urban areas network and provides access the community • Most of the fiber is owned by Telkom • Large player does not have to provide Indonesia, the market leader in Indonesia. Large player maintenance, which is a bottleneck in the current system • Local player provides local network, • Local player obtains revenue from • There are currently many (informal) local connecting schools, households and other providing connectivity to schools and players that have a network in place but important community buildings community cannot compete for school connectivity • Can add onto general network from larger • Local player shares part of revenue with because government usually offers player, thereby reducing costs large player in return for network use nation-wide projects to firms Local player • Local player is responsible for maintenance and upgrades of network • The schools and community get reliable • Schools and community pay a fair price • This model would be most effective in connectivity through a player that knows for connectivity rural areas with larger villages and local needs and restrictions • When community members provide relatively close to 4G/fiber nodes • Optional: local player trains community training and maintenance, internet use members to provide maintenance and will go up and maintenance cost will go School training to community down, leading to a more competitive price (community collaboration model) for connectivity Source: Expert interview with Secretary of Education; BCG analysis www.gigaconnect.org | info@giga.partners 44
Regional focus: Kalimantan, Sulawesi, Nusa Tenggara & Papua Less developed islands with poorer connectivity for general population and lower school connectivity levels www.gigaconnect.org | info@giga.partners 45
Majority schools have limited or no connectivity in the sparsely populated islands Smaller size of population … and smaller size of economic … while schools are highly unconnected, with lower schools across the islands … contributions … per region due to smaller population Population (m) Spending per capita (IDR' thousands) Schools per region map South Sulawesi 8.9 South Kalimantan 12.0 East Nusa Tenggara 5.5 East Kalimantan 11.7 West Nusa Tenggara 5.2 Central Kalimantan 11.2 0-3500 West Kalimantan 5.1 South Sulawesi 11.1 3501-7000 South Kalimantan 4.3 North Sulawesi 10.8 East Kalimantan 3.7 West Nusa Tenggara 10.4 7001-15000 Papua 3.4 Gorontalo 10.0 >15000 Central Sulawesi 3.1 Central Sulawesi 9.3 Southeast Sulawesi 2.7 Southeast Sulawesi 9.3 School connectivity map Central Kalimantan 2.7 West Sulawesi 9.2 School connectivity percentile North Sulawesi 2.5 West Kalimantan 8.9 0.0 to 16.5 Maluku 1.8 North Kalimantan 8.8 16.5 to 33.0 West Sulawesi 1.4 Maluku 8.7 33.0 to 49.5 North Maluku 1.3 West Papua 8.1 49.5 to 66.0 Gorontalo 1.2 North Maluku 8.0 66.0 to 82.5 West Papua 1.0 East Nusa Tenggara 7.6 82.5 to 99.0 North Kalimantan 0.7 Papua 7.0 Source: Statistics Indonesia, Uniced, BCG Analysis www.gigaconnect.org | info@giga.partners 46
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