Indonesia needs strong competition regime

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.