On reforming state monopolies

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.