Subcontracting law must not be antimarket

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.