Subcontracting law must not be antimarket

By Edy Priyono

JAKARTA (JP): There have been reports on the government's plan to formulate a draft law on subcontracting. Generally speaking, this step should be welcomed for two reasons.

First, this step indicates the Office of the State Minister of Cooperatives and Small and Medium Enterprises (SMEs) seems to be on the right track in determining the direction of policy on cooperatives and SMEs.

The change in status from a ministry to that of a state minister's office implies a change in role, from that of an executing agency to that of an office in charge of determining direction of policy.

Second, various parties that are concerned about the growth and development of SMEs in Indonesia have long proposed that the government provide a wide "umbrella" of legal protection for SMEs, as a concrete manifestation of the government's commitment to creating a conducive environment for SMEs.

One extremely important aspect of such legal protection has to do with subcontracting.

Even so, there are a number of points that require attention from the start, so that the subcontracting law does not become counterproductive for SMEs and, in turn, for economic growth.

Such fears are unnecessary if the government can restrain from indulging in short-term, populist-oriented policies.

The government's draft of the subcontracting bill is not yet clear. The office of the state minister has revealed that the law is aimed at protecting SMEs from exploitation by large business operators in the subcontracting cooperation agreements they conduct.

Until now, SMEs have suffered a wide variety of injustices at the hands of large businesses with which they have cooperation agreements. One is the system of payment in arrears, of up to two or three months, to SMEs that provide goods to large retailers.

Such long payment periods are highly disruptive to the cash flows of small business operators with limited capital. This is why many parties feel the system of late payments is a retailers' trick to enable, implicitly, their rejection of SMEs' products.

But such late payment practices do not only occur in relations between SMEs and large private businesses.

It is highly ironic that such unfair payment practices as these nearly always occur when SMEs deal with government agencies. Although the transactions are normal purchases (not subcontracts), it is an open secret that government agencies are almost always late in paying for goods purchased from SMEs.

Another type of unfair practice that often arises is the tendency of large businesses to be monopolistic.

SMEs are often "held hostage" by certain large businesses and forced to supply goods only to these businesses. The firms have no other choice in selling their products. The end result of this is price reductions that are highly detrimental to the SMEs.

It is such practices that the law should seek to eliminate.

However, the subcontracting law has aims other than these. The office of the state ministry has explained that the law is expected to guarantee mutually beneficial partnerships.

Without careful consideration, this could lead the government to antimarket actions.

Very often, the government's desire to support SMEs is manifested through regulations that require large businesses to provide "guidance" to SMEs. Policies on the "foster-parent" system between large and smaller companies were a clear indication of this tendency, at least in the past.

The result was that policies on partnerships between large companies and SMEs were, and possibly still are, ineffective, because partnerships were considered more as obligations rather than business considerations.

Therefore, the forthcoming law must not require large businesses to provide "guidance" to SMEs as part of their subcontracting cooperation agreements.

The technical support that large businesses provide to SMEs should be left to the business considerations of the two parties.

In theory, large businesses should be concerned about the performance of SMEs that serve as their subcontractors, because this also affects the performance of their own businesses.

Once again, this is not to say that it is not necessary for large businesses to provide technical assistance to smaller businesses; but this matter should be left to market mechanisms.

Another thing to avoid is any requirement for large businesses, especially state-owned enterprises, to conduct subcontracting cooperation agreements with SMEs.

It is requirements such as these that ultimately bring about only artificial cooperation between large businesses and smaller ones. The important thing is fair treatment for SMEs, not business transactions based on requirements set by the government.

In addition, the draft law should be communicated to all parties concerned with the growth and development of SMEs in Indonesia.

One such party is the National SME Support Network, an alliance of local non-governmental organizations involved with SME development through the issue of policy reform.

And what definitely must not be neglected is the involvement of small and medium-scale business operators in discussions of the draft law. They are the ones who will directly experience the impacts and benefits of the law.

The government also could involve parties such as the SME forums KUKMI and HIPMI, and the new SME National Forum.

The government must end its practice of "hide-and-seek" in formulating laws. Only in this way can it avoid suspicion of a "hidden political agenda" behind the creation of this law.

The writer is a Jakarta-based economic program officer at The Asia Foundation.