On reforming state monopolies

Iming M. Tesalonika, Business Law Lecturer, University of Pelita Harapan, Jakarta, imingtesalonika@lawyer.com

In his article Reassessing State Monopolies at The Jakarta Post dated April 2, 2004, Patrick Guntensperger provided a brief overview of how and where government utility monopolies should be managed and how private utilities should be directed. I have concern his article may lead to incorrect perceptions among foreign investors.

In my opinion, Patrick does not have a complete picture of the existing business situation and legal infrastructure governing state monopolies.

Patrick said Indonesia had a dilemma on its hands. He asserted the Indonesian government had not been able to run any state utilities efficiently because of the inexperience of the bureaucrats, the instability of political parties and the appalling and widespread corruption of the bureaucrats and managers at these utilities.

While there are many truths in his points, they should not be viewed as the underlying causes of inefficiencies in the management of state utilities. In my opinion, the inability of the current Indonesian government to manage state utilities is due to the sudden unbundling of authority, leading to an unbalanced distribution of power. After 32 years of a centralized management system under the Soeharto regime, this is not surprising.

It was not until 1999, we realized Indonesia was unprepared in terms of legal infrastructure and in attitude and behavior to foster competitive, transparent and accountable management systems.

Patrick's statements help us identify the current urgent problems (i) the lack of political will towards legal enforcement and (ii) lack of policy implementation -- little focus on changing monopolistic behavior and the absence of reform of personnel within government institutions and state utilities.

During Megawati's presidency she maintained Attorney General M.A. Rahman despite his low credibility and there was little strategic effort to improve the quality of human resources elsewhere in her government.

On the management of privately owned utility monopolies, Patrick said these utilities would have to be closely monitored and regulated.

However, he believed this was likely to lead to enormous amounts of bribery and graft involving bureaucrats responsible for this monitoring. Meanwhile, a few government officials and their pet corporations would get wealthy while services remained non-existent at worst and undependable at best.

While he identifies the symptoms, Patrick's view in my opinion does not highlight the root cause of inefficiencies in privately owned utilities, which revolve around the issue of law enforcement.

State bureaucrats do not feel insecure nor hesitant about making under-hand transactions and blatantly ignore laws and regulations when undertaking their duties.

The Megawati administration does not seem to realize such behavior easily leads to (i) the inefficiency of private companies, (ii) more hurdles for policy makers in designing strategies to reengineer the behavior of businesses, (iii) the market's lack of respect for state bureaucrats.

Patrick ventured a proposal to resolve the inefficiency problem in state and privately owned utilities. He said each type of service should be evaluated to determine whether maintaining or granting monopolies was in the country's best interests.

Some services and products, if allowed to compete freely and honestly, he said, were best left to private entrepreneurs -- this competition provided free-market control over price gouging and encouraged improvement and ongoing research and development in an effort to maintain a competitive edge.

While conceptually his idea is accurate, it is more of a theoretical approach towards better management by use of the market mechanism. However, his approach is not new, it was applied right after the New Order stepped down and was replaced by the Reform Order in 1999. These reformists have been introducing new laws in the spirit of free market competition ever since.

The landmark law was the enactment of Anti-Monopoly Law No.5/1999 in March, 1999, which was subsequently followed by several new laws which are antimonopolistic in nature.

When we take a close look at Law No.20/2002 on Electricity, the role of the private sector, including foreign participation, is wide open. This is a revolutionary change.

The enactment of this law is a clear signal Article 33 of the Constitution (stipulating the state shall control vital resources) is now loosely interpreted, thereby enabling private participation in vital industries.

The new law on electricity encourages market competition in the electricity sector through the unbundling of the state electric company, Perusahaan Listrik Negara (PLN), into fragmented players -- retailers, distributors, wholesalers, market operators, system operators and power generators.

This unbundling process will be a key factor towards the application of market mechanisms to remove monopolistic behavior and create competition.

To accommodate the principle of accountability, transparency, and independence in the management of state utilities, Indonesia has also passed the Law on State Owned Companies (BUMN) No. 19/2003, although it does has loopholes which can be abused by company directors.

However, perhaps the most urgent issue in improving the performance of state utility employees is redefining the performance standards of the state auditor, the Supreme Audit Agency (Bepeka).

To my knowledge this agency is endeavoring to increase capacity and to improve good corporate governance, performance audits, risk based audits, fraud audits, policy evaluation, human resource assessment and information technology.

We desperately need performance evaluation along with a reward and punishment system. We need to map human resources to evaluate and identify workloads so workers can be evenly distributed. Each employee should be motivated to perform and understand the consequences of failing to comply with standard practice.

Finally, I strongly hope the next elected government of 2004 will effectively encourage high quality professional management and legal enforcement.