Indonesia needs strong competition regime

Muhammad Sauri Hasibuan, Fortech Consulting, Jakarta

Many would probably think that competition policy and law are merely tools for the rich. Yet the design and implementation of competition policy also improves the welfare of poor consumers.

An effective competition regime or consumer law covering competition distortions can prevent consumer abuses both at the industry and village level -- e.g. the shopkeeper who cheats the whole community -- and the locality.

Competition is regulated by a set of policies and laws. In theory, it encourages firms to focus on efficiency, and to meet consumer demand; and provides goods and services at lower prices, with improved quality and greater choices.

It also lowers the risk of misguided investments, reduces price distortions, and results in a more efficient allocation of resources.

Competition also fosters greater accountability and transparency in business decision making and in government- business relations. It strengthens corporate governance, generates opportunities for employment; and provides governments with fiscal space to allow them to provide adequate social spending, since it frees up resources otherwise used for state ownership or regulation of economic activity.

When in harmony, these goals would deliver welfare. Indeed, it is consumers who are supposedly the biggest beneficiaries of competition, mainly in terms of lower price, better quality of goods and services, more choices, product innovation and availability.

Yet consumers have become the main losers due to anti competitive activities in the market. The competition policy making here suggests that the pressure to come up with an instrument consisting of technical as well as institutional measures has never been greater.

Competition policy is a set of policies that enhances competition in local and national markets: A liberal trade policy, relaxed foreign investment and ownership requirements, deregulation and privatization etc.

While competition policy has an interface with many other government policies, it needs to contain specific elements to be able to improve welfare. These elements may either be built into the competition policy itself or be practiced by the government itself.

What is required is a coordinated approach while implementing several policies affecting welfare -- especially that of the poor -- and also accommodating policies pertaining to small and medium enterprises, which allow certain concessions to maintain their competitiveness over others.

The guiding principle for deregulation should be that legislation should not restrict competition. For public utilities there is growing acceptance that only the distribution function (such as electricity grid, a gas pipeline system or a system railway tracks) possesses natural monopoly characteristics and thus need to be regulated.

With the growing acceptance and success of the free market model, nearly all monopolies of public utilities will be targeted for reform. Competition authorities can play a large role in deregulation, primarily by providing expertise and dialoguing with industry regulators. The practice in other countries suggest that this can be done on a formal level, through interventions, or on a less formal level through dialog and cooperation.

The competition authority has thus the right to offer advice on competition issues to the government. Such moves allow the authorities to bring a perspective to proceedings where the regulator or the parties may not have the required expertise or even interest in addressing the market implications of the matter under consideration.

The World Bank guidelines on competition suggests the following: o Initiate a comprehensive review of existing laws and regulations, o Develop a consistent set of criteria for their evaluation, and o Identify and evaluate the net benefits that they impose.

Therefore it will be necessary to develop an institutional mechanism for the provision of this advice through a consistent framework for public or net benefit reviews of legislation that impedes competition.

Large conglomerates and cartels in the past dominated the Indonesian business landscape. Under the right conditions conglomerates can be supportive of rapid and equitable growth. But their dominance has often been accompanied by government policies and regulations protecting them from competition. This produced unsustainable growth that left Indonesia vulnerable to crisis and fueled popular resentment.

To prevent further misconduct by business actors the government established Law No.5 / 1999 regarding prohibition of monopolistic practices and unfair business competition and the Business Competition Supervisory Commission (KPPU), an independent government authority, to implement and enforce the law.

Law No. 5/1999 provides a regulatory framework to maintain and improve efficiency in markets, promote competitive pricing practices, and restrain price rises in markets where competition is affected by business practices; namely: horizontal and vertical restraints (i.e., collusive price-fixing. Input/output allocation, bid-ridging); abuse of dominant position, and mergers and acquisitions.

The implementation of the new competition law and operation of the KPPU are at the initial stages and it is the first independent regulatory agency in Indonesia's history.

Hence, its effectiveness will first depend upon its capacity to overcome past practices involving close dealings between government agencies and business to favor a few large firms. KPPU will also have to be able to identify the forces and policies that affect competition in markets, and address competition issues in a technical, transparent, non-intrusive and fair manner.

The agency will also need to develop an effective advocacy strategy for public policy measures affecting competition; and the KPPU must be built on the basis of stability, independence and technical merits.

If these goals are accomplished, the KPPU would have the potential to exercise significant influence on important policy matters that affect market structures and business conduct. However, making KKPU an effective instrument requires both technical and institutional measures, as well as vision and leadership from both public and private stakeholders.