Subject to our own creation

Subject to our own creation

Shortages in cement supplies have occurred practically every
year since the early 1970s. Each time the result is an increase
in prices to well above the local reference prices set by the
government. Each time this is followed by a "dialog" between the
government and cement producers, who usually propose an increase
in local reference prices. And each time their demand is met.

As we pointed out in this column last week, this upward spiral
of pricing is a recurring quandary. It is an annual problem which
has actually never been resolved. Each time, the solution
addresses only the end part of the problem. Cement producers
usually end up the winners, at the expense of cement users all
over Indonesia.

And it is happening again this year. Cement prices have
increased to above local reference prices. Not surprisingly,
cement producers blame shortage of supply as the cause,
simultaneously giving out hints that an increase in supply is not
encouraged by the current reference prices. The proposal to the
government is: Increase the reference prices and the supply will
increase.

We can presume that the government will announce a new list of
(increased) local reference prices within the next few weeks. We
can presume that supply will meet demand soon afterwards, at a
higher level of prices. And again it will be hard to refute the
allegations that this whole annual event is engineered by
producers in collaboration with distributors.

All of this has been recurring in that sequence since 1974,
when the government laid the foundation for an oligopolistic
market for cement through a ministerial decree signed by the then
minister of trade, Radius Prawiro. That ministerial decree, No.
05A/Kp/I/1974, dated 15 January 1974, has been renewed several
times. Other ministerial decrees have been issued to supplant it.
The foundation, however, has never changed.

It is the foundation for a producers' cartel, in which only a
few producers supply the market through a state-controlled
distribution system. The government sets their selling prices,
but their market is effectively protected. Cement producers do
not need to compete in an open market, as each producer is
provided with a specific market area where nobody else is allowed
to enter. Even wholesale distributors and retailers in each
specific area are accredited by the state.

All this was justifiable in the beginning because of the
shortage of a domestic supply of cement. At that time, the
domestic cement production capacity could not adequately meet the
increasing domestic demand. At the same time there were
indications that worldwide demand exceeded world supply. By
effectively protecting their market against "intruders", the
government could expect producers to increase their production
capacity and thus avoid a situation in which Indonesian economic
development would be subject to world price fluctuations or even
manipulation.

The national production capacity has indeed been increasing.
Every cement producer has grown substantially, to the extent that
they are now comparable in size to world cement producers.
Indonesian economic development is proceeding practically
unhampered by fluctuations in world cement prices. The initial
goal of the ministerial decree was thus achieved many years ago.
The protection, however, remains to the extent that the state
itself, and the rest of the nation, has become subject to a
circumstance of its own creation.

The time is long overdue for the oligopolistic power of cement
producers in this country to be harnessed. By now -- after having
been securely protected for more than 20 years -- they should be
able to compete fairly, not only in the domestic market but in
the global market as well. As long as the protection is there for
them to enjoy we will all remain the victims of annual cement
"shortages" and price increases.