Sanyoto's misleading signal

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.