Contents: I. The Indonesian experiences - Background;

1. Indonesia’s Economy& Market in Brief: Its existing legal and institutional framework in relevance with competition and unfair trade practicesNingrum Natasya Sirait University of North Sumatra Center for Law and Policy (PSHK) Indonesia Hanoi, 11 March 2011

2. Contents: I. The Indonesian experiences - Background; - Changing to Market economy, a choice or a must? II. Problems and Challenges - Political economy; - Industrial policy and competition policy; - Law enforcements (Commission and the Court) III. Lesson learnt IV. Example of an unfair trade practices case

3. I. Introduction/Background: • Each country have different background both in political and historical when adopting competition law in to their legal system. Some countries were forced during the economic crisis as part of the bail out program, while others may enacted voluntarily based on the need to enter global competition and change to market economy; • During the era of economic transition, some countries began to be referred as "emerging economies” instead of developing countries, where it suggests that these countries no longer have backward economies characterized with low economic growth rates, inadequate infrastructure etc, rather these economies are in transition to competitive or market economy; • Many laws have been introduced to emerging economies countries as the tool to improve development, welfare and a sign to participate in global market competition. Consumer Protection and or Competition Law among many other laws have been introduced and practiced and enforced;

4. Prior to the enactment of Law No.5/1999 Concerning the Prohibition of Monopolistic Practices and Unfair Business Competition, several other laws have existed such as: - Article 382 bis Criminal Code - Article 1365 Civil Code - Industry Law No 5/1984 - Corporation Law, No 1/1995 superseded by Law No.40/2007 • Article 52 Law No.5/1999 leaves in effect all of laws and regulations concerning monopolistic practices and unfair business competition, as long as they are not contradictory to Law No.5 and are not superseded by any new laws; • Consumer Protection Law is regulated under Law No.8/ 1999 • The two separate bodies of the law pose different approach on how to enforced competition and consumer protection in Indonesia;

5. Indonesia has many reasons when adopting Law on Prohibition of Monopolistic Practice and Unfair Business Competition (Law No.5 year 1999) such as: IMF Letter of Intent, intention to ban the existence of monopolistic practices & conglomerate problems, protection of state own companies, companies bankruptcy etc; • The law consists of heavy influence in both economy and legal aspects and in the first couple of years of its enforcement, it encountered various challenges and reviews in the national and regional level; • Consumer protection on the other end is was enacted in the same year but have different sound of enforcement, through BPSK and the Court;

6. II. Problems and challenges; • Political economy • Indonesia signed WTO Agreement, joint the AFTA and like many other Asian countries decided to move to market economy: • In the early stage of Law No.5/1999 enforcement, the policy was still not translate well in government industrial or competition policy. The responses did not seem to be in line and can be seen in government inconsistency, for example: in regulating or provide protection for certain industry, special treatment for state owned enterprises. The condition exacerbated with bureaucracy inefficiency, law enforcement problems, regional autonomy which allow local government to issue regulation which may conflict with competition policy at national level.

7. Earlier, many understood that Law No.5/1999 targeted at big business or conglomerates and in the same time is assurance for more business opportunities. Many business practices that took place during the 30 years of New Order regime which have destroyed competition culture through protection, crony, corruption in doing business has certainly changed in the last 10 years; • Best example can be seen in airlines industry which now enjoyed by consumers, although we can see consequences of airline more competitive market that hit other business such as land transportation (buses), ship, trains, hotels, workshops etc; • Other example: government allowing and open modern retail competition and the consumers enjoy the benefits. But to some extend, effects of open market competition in some regions has triggered the closing of traditional retailers/traditional;

8. Industrial policy and competition policy; • It is known that many of the past problems have been triggered by the protection to the State Owned Companies (SOE) which have enjoyed government protection and privileges. Special treatment have caused many SOCs unable to compete with private sectors especially with foreign investment. In the past, another attention can be drawn to special treatment to few conglomerates group who controlled strategic industries; • Government was not able to set up priorities whether to liberalized the market or implementing gradual privatization. For example: no clear policy whether to focus on the agriculture business or industrial sector; • Law No.5/1999 also expose some questions such as: exemption under article 50 & 51 applied for State Owned Companies which means to include what effectively is known as state action exemption - permitting monopoly if it is stipulated by the law or activities carried out by SOCs or institution formed or appointed by the government; • Exemptions are not yet clearly regulated- most of the time, the Indonesian Competition Commission found problems with the way government do business but without pro-competitive approach;

9. Law enforcements (Commission and the Court) • Law No.5/1999 has certainly introduced a new era and approach in doing business in Indonesia. The nature of Competition Law and complexity of its contents are two effects that stakeholders have to come across. • Law No.5/1999 itself posses multiple purposes which have caused confusion in understanding the primary objective of enforcing the law such as: safeguard the interests of the public and to improve national economic efficiency as one of the efforts to improve the people s welfare, ensure the certainty of equal business opportunities for large, medium, and small-scale business actors, To prevent monopolistic practices and unfair business competition and to create effectiveness and efficiency in business activities; • The introduction of the unique Commission under Indonesian legal system posed another dilemma. Law No.5 stipulated multifunction of the Commission duties –

10. Another issue when enforcing the law is dealing with the Court. Court plays an important role with response to the appeal and execution of the decisions. In the early phase when appeal to the KPPU decisions came to the court, only few judges have been familiarized what competition law is all about, and yet, the final decisions will come from their chamber; • Judges were sufficiently exposed to the economy aspect of the law which in turn may causes some problems. Legal and economic approach are different plus understanding competition policy becoming another challenge. These facts are common to be found in some of the emerging economies countries; • With all of this irregularities, Law No.5/1999 have been enforced for 11 years with over 80 cases decided plus thousands complaint/reports have been submitted to KPPU. Some questions remain open: Has competition policy and industrial policy more clear and improve? Has business behavior changes appropriately? Has market becoming more competitive? Have consumer’s enjoyed positive impact of competition thus improve welfare? Has the unfair business practices still exist but in the different forms?

11. Example of Unfair Business Practices case under Law No.5/1999 • Like many other countries adopting market economy and entering global competition, Indonesia encountering few economic dilemmas – one of them is dealing with the issue of retail business; • Rapid growth of retail business in Indonesia took place since the issuance of Presidential Decree No.96/2000 & amended with Presidential Decree No. 118/2000 on Negative List for Foreign Investment in Indonesia; • The Decree provided opportunities for foreign investors to open business in the area of big retail business such as shopping mall, supermarket, modern mini market; modern mini market, department store and big traders (import/export, wholesaler/distributors); • As the consequences of the open market, it does give impact on competition between small/traditional shops/retailers with hypermarkets but also from other smaller types of modern market, i.e.: modern mini markets;

12. Small/traditional retailer facing “double squeeze” situation, i.e. lack of efficiency, innovation in their market niche and pressure competition from modern retailers; • For example: Indonesian Traditional Market Retailer Association (APPSI) stated that under various reasons, over the last 5 years around 400 traditional market kiosks in Jakarta closed down; • AC Nielsen survey revealed that market share at traditional markets in Indonesia was 69,6 % in 2004 down from 78,1 % in 2000 - increase of modern market share from 21, 8 % in 2000 to 30,4 % in 2004; • The change reflects the question and consequences of Indonesia’s retail sectors which rests upon fundamental principle of consumer’s freedom to choose among competitive products/ services, and the opportunity of producers and traders to expand their business;

13. With the enforcement of Law No.5/1999 Concerning Prohibition of Monopolistic Practices and Unfair Business Competition, Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha - KPPU) has decided on 2 cases relates to retail business competition: • Decision No : 03/KPPU-L-I/2000 on Indomaret case in 2000: issue of unfair business competition between modern and traditional markets; • Decision No: 02/KPPU-L/2005 on Carrefour case in 2005: issue of relation between wholesalers and producers/suppliers on trading terms which covers best prices guarantee, fixed rebate, regular discount, promotion discount, promotion support, opening fee, opening discount, listing fee, new item discount, volume incentive, damage goods allowances, carrier bag support, assorted allowances, marketing fund/advertising support, promotion display, including unfair business practices for small medium business scale (Usaha Kecil Menengah (UKM);

14. Issues on Government Policy Issues: • It is noted that there are a lot of overlapped policies and ineffective regulations in regulating retail business such as: • No clear distinction in determining the function between wholesalers and retailers. In theory, wholesalers may only sell to retailers and retailers will eventually sell to end consumers; In reality, there are few wholesalers who sell directly to the consumers – doing retailer function; • The unclear policy arise because of: a. government is unsure about the relation between wholesalers and small/traditional retailers; b. whether wholesalers are predator to the small/traditional retailers; c. whether wholesalers provide consumer surplus/welfare; • On the other side, there are considerable positive impacts given by wholesalers: • provide more opportunity for local goods producers - as supplier to wholesalers; • provide more working/job opportunities which expectedly will lead to better income;

15. Government response is ambiguous, whether to limit the expansion of wholesalers – however if refer to Negative List for Foreign Investors – the business are already in the market; • The most that government did is an effort applying “zoning system” to allocate designated locations for wholesaler - it seems that zoning system justified as the best solution; • If competition does not exist between wholesalers and small/traditional retailers - relation is complimentary, then zoning policy become irrelevant; • This issue can be more complicated in terms of regional autonomy where regions may regulates its own trading policy. Therefore, regions/county/city (kabupaten/kota) will play an important role in determining its retail policy in its own area (including zoning permit and zoning allocation); • Permits also maybe conflicting with approval from Office of the Ministry of Foreign Investment Office in Jakarta – i.e. recent opening of Carrefour in Tangerang area;

16. Few other dilemmas relates to government policy…… • Trade regulations found spread sporadically in various level of regulations, most regulations are in the level of Minister Decree which conflicting with regional policy; • Most regulations do not define clearly different trading activities such as: wholesaler, distributors, traditional retailers, small retailers etc and trade locations such as modern market and traditional market, the term of modern market use simultaneously/ inconsistently with wholesalers and this raised ambiguities in determining the policy. KPPU in its decision then defining the criteria and functions of wet/traditional market, retailer/wholeseller and the modern market: • Consistent policy and regulations should be inline with Law No.5/1999 concerning Prohibitions of Monopolistic Practices and Unfair Business Practices which will impact on Consumer Protection and Welfare as well • More clear and consistent government policy on regulations covers definitions for small/traditional retailers, wholesaler, distributors and modern market including permit or consent for foreign wholesalers; • More clear and consistent government policy on regulations including local competition policy which covers zoning system and trading business hours;

17. Lesson learnt • The market economy required the Indonesian economy to be more competitive and efficient and this can be achieved and well guarded through competition law and competition policy plus consumer protection law which must be supported by consistent enforcement; • It is also not easy to measure the relation between enforcement of Competition Law and acceleration of the country’s economy or consumer welfare. However the stakeholders who are greatly affected by enforcing competition law would be: a. the government: competition and industrial policy; b. the business: changing of behavior in doing business; c. the people/consumers: consumer welfare; • The relevant question remain is after all, have all of this issues and decisions/verdict have been enforced accordingly which will effect at the end, consumer welfare as the ultimate goal of the economy?;

18. Terima Kasih ningrum@indosat.net.id Mobile: + 62 81 161 2296