Sanyoto's misleading signal
We often hear high officials make prompt yet irrelevant and sometimes meaningless responses to particular issues. But the remarks made by State Minister for Investment Sanyoto Sastrowardoyo last week, regarding the sweeping ban on industrial companies already holding 50 percent or more of the domestic market to expand their capacity, went much farther. Sanyoto's statement at the House of Representatives is misleading and could cause further uncertainty for domestic and foreign investors.
Despite our strong opposition to private monopolies, cartel- like and oligopolistic practices, we see Sanyoto's statement as the wrong signal, especially in the wake of the May package of deregulation measures that includes the investment sector.
We feel that Sanyoto's remarks, made off the cuff in response to questions from House members, were partly prompted by the previous week's headlines regarding the 1995 World Bank Report on Indonesia. The report noted, among other things: "Some Indonesian industries are run like cartels with support from the government, preventing internal competition."
As it happened, the World Bank's observations were disclosed at a time when various groups were blaming the steep rises in the prices of newsprint and several textile materials on domestic producers and what they called cartel-like or oligopolistic practices.
Irrespective of such public opinion pressures, Sanyoto's policy statement that his office -- the Investment Coordinating Board -- would not allow industrial companies already holding 50 percent or more of the domestic market to expand their capacity is completely unwarranted.
The statement could amount to a limitless extension of the negative list of investments which was just shortened by the May deregulation package. Such a discriminatory measure could also discourage reinvestments.
But the most damaging element of the policy statement is the complete absence of clarification as to the definition for holding 50 percent or more of the market. The most fundamental question is how, and under what conditions, BKPM can determine whether an industrial firm has dominated 50 percent or more of the market.
A company which dominates even more than 70 percent of the market of a particular product cannot simply be accused of being a monopoly if the market is open to import competition and the entry to the particular industry is entirely free. What such a company holds is simply a natural monopoly, made possible by certain conditions such as lead time in the marketplace and big investments and high economies of scale required by that industry which discourage new entrants. Likewise, a company that already has a production capacity that exceeds 50 percent of the domestic market demand cannot immediately be classified as a monopoly either.
However well-intentioned the new policy, as pronounced by Sanyoto, it can be fairly and properly enforced only when the government has set clear rules to prevent cartels, unfair market competition and the abuse of market power. The fact is, however, such regulations have yet to be enacted. In the absence of such rules, enforcing such a policy would mean empowering the BKPM to act at its own discretion.
Pending the promulgation of legislation against cartels, unfair market competition, unfair business practices and the abuse of market power, we think the most effective way of preventing monopolistic or oligopolistic practices is for the government to: completely free up entry into the domestic manufacturing industries; expose them to import competition; and abolish any distortions that hinder open and fair market competition.