Iwantono Cartels Workshop

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Presented at:Vth International Cartels Workshop

1 to 3 October 2003 in Brussels, Belgium

REPUBLIC OF INDONESIA

COMMISSION FOR THE SUPERVISION OF BUSINESS COMPETITION

JL. IR. JUANDA NO. 36, JAKARTA PUSAT 10120

TEL. + 62 21 350 7015, 3507016, FAX. +62 21 350 7008EMAIL: [email protected]; [email protected]

ECONOMIC CRISIS AND

CARTEL DEVELOPMENT ININDONESIA

By.

Dr. Sutrisno Iwantono

Chairman of the Commission for the Supervision

Of Business Competition (KPPU)


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ECONOMIC CRISIS AND CARTEL DEVELOPMENT IN INDONESIA

Sutrisno Iwantono

Chairman of the Commission for the Supervision of Business Competition (KPPU),Republic of Indonesia.

INTRODUCTION

Let me express my apology in composing on short notice this paper that may appearto be incomplete to some audiences. I was asked to prepare this paper on the 25 th ofSeptember while on the 30th in the same month I have to leave to Brussels for the

conference. For that reason I was not able to compile much empirical data for the purpose of constructing this paper. Secondly, there have not been any Indonesiancase studies on the relationship between economic crisis and cartel in the past, relatedto either the incentives or disincentives aspects of the discussions.

My paper has been based on the highlights of the experience of Indonesian economicdevelopment prior to and after the crisis which lasted from 1998 to 2003.

INDONESIAN ECONOMY BEFORE THE CRISIS.

Beginning in 1970, Indonesia adopted an economic development policy known as

import substitution. The purpose of this policy is to protect domestic industries fromforeign competitors. Policies included an imposition of high tariffs on strategicimported goods, especially those that have the potential to compete with local

products favored by the Government (commonly known as infant industries).Domestically, these industries received tax incentives, financial support,infrastructure, and more often than not, a captive market.

On the surface, the impact of this economic strategy resulted in growth for Indonesia, but on the industry level, this policy has also resulted in development of twocharacteristic types of industry.

The effect of the policy could be felt on the medium-size industries such as textile,garments industries and other light industries, which grow in a market situation inwhich the competition is intense. They have a substantial number of players and theirlocations are dispersed, usually small and medium scale enterprises using simpletechnology in production. Even though these industries are protected from foreigncompetition in the domestic market, they still must compete among them self to gaindomestic market share, and also have the chance to prove their competence in theinternational market through export-related transactions.

Secondly, as a result of the policy, there has been growth associated with big industry

groups, commonly known as conglomerates. This group too has also enjoyed protection from foreign competitors and domestically has gotten facilities and all


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types of lucrative arrangements, but in general their positions are in the monopoly andoligopoly markets. In many cases they have integrated their production processes,either vertically or horizontally. It is also suspected that they have made many cartelagreements, either in the form of geographical or regional-based cartels or price fixing.

THE 1998 ECONOMIC CRISIS.

In 1998 a financial crisis occurred in Korea, Thailand and its contagious effect werefelt by the whole Asia-Pacific region including Indonesia. In Indonesia the economiccrisis grew into a multi-dimensional crisis, a crisis which played an important role inthe fall of the Suharto regime.

On the economic front almost all conglomerates that have dominated the Indonesianeconomy have fallen disgracefully after being hit broadside by the waves of the crisis.They are ridden with bad external debt and their financial positions are almost indefault. The Government of Indonesia had to take over these companies and assign

them to the Indonesian Bank Restructuring Agency (IBRA), and restructure themaccording to their financial positions.

The fall of the Indonesian conglomerates also weakened the cartel power developedbefore the crisis. At the same token the reformation spirit triggered massive politicaland economic support for the small and medium scale enterprise in order to augmentthe peoples economy.

THE BIRTH OF AN ANTI MONOPOLY AND UNFAIR BUSINESS

PRACTICES LAW.

The debates concerning the need for an antimonopoly law in Indonesia actually hadbegun to take place long time ago. In the mid-1980s there were polemics in the massmedia and among academics. At that time it was difficult to enact the law as theIndonesian economy was very much dominated by the conglomerates. Theseconglomerates were very much against the proposed antimonopoly law and they hadspecial access to the policy makers.

However, during the crisis in 1998, most Indonesian conglomerates were badly hit byfinancial turmoil and they lost their influence on the policy makers as the New Orderregime also lost much of its power. It was around this time that the idea to issue an

anti-monopoly and unfair business practices law was promoted as part of theIndonesian economic restructuring plan.

This idea was responded to positively and politically supported by many since thelaw was created to support peoples economy. The Parliament quickly used this

proposal to issue the law, and this was the first time the House utilized its initiativeright to propose a draft of the law. This happened in 1999, and at the end of 1999 theGovernment of Indonesia finally issued Law No.5 Concerning Anti-Monopoly andUnfair Business Practices. The law was made effective one year after its issuance inorder to give enough time for the private sector to prepare to respond to the Law. TheCommission for Supervision of Business Competition was formed in the middle of

year 2000.


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CARTEL EXPERIENCE AFTER THE BIRTH OF ANTIMONOPOLY AND

UNFAIR BUSINESS PRACTICES LAW.

The economic crisis that plagued Indonesia for a long time created a situation whichwas not conducive to cartel practices. Apart from the bad-debt ridden conglomeratesthat have been viciously affected by the crisis, there also was a weakening marketdemand as a result of weak consumer purchasing power.

As the economy was sliding into a further abyss, all business players had to competefiercely in order to get a share of the much reduced market pie. All forms ofagreements concerning geographic cartels or horizontal agreements have lost theireffectiveness. Many of the business players involved are no longer loyal and haveviolated most of those agreements.

By the same token, as Law No. 5 began to be effectively implemented, many forms ofsocialization and case-handling have been initiated by the agency. Business playershave been informed about the negative impact of cartels and the legal consequences ifsuch cartel practices continued.

The Commission for Supervision of Business Competition (KPPU) has also started tocarry out socialization of Law No. 5 for policy makers (Government), especially thoseconcerned with regulations that could cause monopoly and unfair business practices.Results have been slow but gradually the KPPU has been getting positive responsesfrom the Government. A special note must be made, however, that apart from theauthority to conduct cases in the form of investigation, KPPU also has the right to

provide recommendations to the Government in a case that there are Governmentpolicies which are in conflict with the Law No.5.

Cases and recommendations that have been handled by KPPU include: a suspectedcartel in the airlines industry, and the regulations on sugar and cargo shipping.

CARTEL CASE IN THE AIRLINE INDUSTRY

1. In Indonesia the airline industry consists of many operators that are State-owned enterprises as well as private businesses. The biggest operator is

Garuda Indonesia Airways, an operator registered under IndonesianAirlines Association (INACA ); there are now 12 members of INACA.2. Airline tariffs have been regulated by Decree of Minister of Transportation

No.20/1996, amended by No. 61/1996 and Decree No.25/1997. Decree No.25 provided INACA could establish scheduled passenger tariffs ondomestic economy class routes.

3. The Pricing mechanism used by INACA involves getting the consensus ofall of its members and then consulting with the Minister of Transportation.The INACA price will then be used as reference by members in setting theairlines tariff..

4. Until 1999 the tariff used in general was above the market price. Theeconomic crisis was the motive for INACAs members to conduct price


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wars and even predatory pricing in order to gain market share. In otherwords, the agreement was no longer treated as binding by the members.

5. Later in 1999 the INACA members reached a new consensus, and a newtariff was agreed upon that is not a single rate but the price spread betweenthe floor price and the ceiling price. The lowest price was established by

pegging US$ 1 = Rp 4000, while the highest price was pegged with US$ 1= Rp 7500. US currency was used since airline ticket pricing generallyuses US$ for transactions.

6. Based on the condition above, the KPPU conducted analysis and meetingswith various stakeholders both with private operators and with theGovernment. The result was that the KPPU decided that delegating the

price mechanism to INACA and the agreement among its members should be categorized as a cartel and therefore potentially in conflict with Law.No.5/ 1999.

7. Based on the above considerations, the KPPU made a recommendation tothe Government of Indonesia that the right and authority for INACA to

establish tariffs be abolished and the pricing mechanism should be freedfrom the floor and ceiling spread. The Government has responded

positively to the KPPUs recommendation and now the pricing mechanismis free from a cartel arrangement.

8. As a result of freeing the price mechanism, airlines tariffs have beendrastically reduced -- by around 50%. The airline industry has becomemore competitive and utilization levels have also increased as a result ofincreasing demand caused by cheaper fares.

CARTEL CASE IN THE SUGAR INDUSTRY.

1. Since before its independence and until 1967, Indonesia was the second largestsugar exporter in the world. After 1967, there has been increasingconsumption, decreasing productivity because of failure to replace seed and anincreasing amount of cheap subsidized imports of sugar into the Indonesianmarket. In the current year 2003, it is estimated that sugar consumption mayreach 3.3 million tons while domestic production is estimated at around 1.7million tons, so the estimate for imported sugar would be around 1.6 milliontons.

2. Even though there was a tariff barrier, before Sept 2002 importation of sugarcould be conducted virtually by anybody and it is estimated that there were

about 200 sugar importers. This led to uncontrolled importation of sugar andhurt the local sugar farmers. This issue has also become a threat to thenational program for sugar swasembada. Swasembada means selfsufficiency, is implemented by the Government, and is targeted until 2007with strategies to increase productivity of land use and seed replacement..

3. In the spirit of protecting the local farmer, other than imposing tariffs, theGovernment announced the imported sugar management policy in September2002. The essence of the policy is to end freedom to undertake sugarimportation by imposing special criteria to be fulfilled by importers. Underthese criteria, only five institutions (mostly State-owned enterprises) areeligible to import sugar.


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4. Regarding this matter, the KPPU has conducted study and research, publicdiscussions and has collected related information in order to examine the issuesurrounding the policy.

5. For the time being, the KPPU has concluded that the policy may give rise tounfair business practices. The five importers who dominate the market and

tend to carry out cartel activities among themselves in order to maximizeprofit..

6. The KPPU faces a dilemma, because the sugar policy has both economic andpolitical nuances. Abolishing the policy would have significant economic andpolitical impact. By letting imported sugar in, Indonesian sugar cane farmerswill be in a very disadvantageous position since the imported sugar hasalready received subsidies from the respective producer governments. On theother hand if such policy is maintained, it will constitute an entry barrier thathas the potential to trigger cartel activities in the sugar business.

7. The KPPU holds the opinion that the Government has the obligation to protectthe local sugar cane farmers from the threat of cheap imported sugar and a

policy for such protection is politically appropriate but is inconsistent by itselfwith Law No.5 /1999.

CONCLUSION

1. Indonesian experience shows that economic crisis was a disincentive for cartelformation. The shrinking size of the market caused cartel members to becomedisobedient and to carry on a price war in various ways.

2. Economic crisis also gave political support to correcting unfair businessbehavior as the promulgation of Law no 5/1999 indicates, something that wasunthinkable of before the crisis.

Iwantono Cartels Workshop

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Transcript of Iwantono Cartels Workshop