Clove monopoly fails

There was nothing really surprising about the fact that the seminar held by the Saraswati foundation on Tuesday came to the conclusion that the 58-month old semi-private monopoly, the Clove Stock Management Company (BPPC), has failed to accomplish its mission of ensuring better earnings for farmers.

In fact, the monopoly was doomed to failure from the outset because it was assigned to do something which runs counter to the market forces and to carry out a mission, which is not only irrelevant for a private institution, but which even most international commodity pacts have failed to accomplish.

Nonetheless, the views of the seminar's panel of economists can serve as a well-meaning reminder to the government that it must cope with the negative repercussions of the monopoly's operations.

Besides failing to accomplish its task, the monopoly has had a damaging impact which may continue to affect the clove industry and village cooperatives for years to come.

Evidence of this damage can be found in the sharp deterioration in the farmers' trust in their village cooperatives at a time when the government is launching a drive to encourage the farmers to join the cooperatives, which are considered one of the mainstays of the economy. Many clove growers have been declared administratively unqualified to withdraw the compulsory savings of Rp 1,900 for every kilogram of cloves they sold. They feel they have been cheated by their cooperatives, which collected the funds, because the administrative requirements for the withdrawal of their savings were not announced until two years after the collection of the savings started.

Minister of Cooperatives and Small Enterprises Subiakto Tjakrawerdaya recently acknowledged that only 24 percent of the Rp 157.7 billion in compulsory savings collected in 1992 could be returned to the farmers because many farmers could not meet the requirements for reimbursement. The remainder has been registered as the assets of cooperatives.

The monopoly also has made things much more difficult for clove-cigarette companies because they are now subject to several economically unsensible rulings issued by the government to help the monopoly to sell its stocks. Regulations, such as those which set the minimum clove content of every clove blended cigarette, and the ones which link purchases of cigarette duty bands from the government with clove procurement invoices from the monopoly, have been hurting small and medium-scale companies.

Given the failure of the monopoly, it is perhaps high time for the government to review the function of the Clove Stock Management Company (BPPC). However, it is clearly not viable to outright free clove trading because the farmers could fall victim to oligopsony once again because the four largest cigarette companies alone account for more than 90 percent of the domestic clove demand.

We suggest a partially open market mechanism whereby cigarette companies are free to buy directly from village cooperatives at the government-mandated floor prices, with the Federation of Village Cooperatives acting as the buffer-stock manager to defend those prices.

We reckon the federation and its member cooperatives have accumulated the equivalent of hundreds of millions of dollars in the forms of savings and equity funds from the farmers over the past four years. Those funds can be used to finance its market operations: Buying cloves at a time when the prices tend to fall below the floor prices and sell stocks in case of supply shortage.

Such an arrangement will be much better for the cigarette companies, compared to the tight restrictions they are facing under the present system of monopoly. That scheme also will enable the farmers to gain a greater portion of the final price of the spice. At present BPPC sells cloves to cigarette companies at more than Rp 10,000 per kilogram, much higher than the actual average price of Rp 2,825 the farmers got last year.

Of most importance, however, is that the floor producer price should be set in such a way so as to discourage imports and smuggling. We think cigarette companies have probably learned a lesson and that this should discourage them from engaging in any kind of oligopsony in the future.