INTERFACE BETWEEN COMPETITION AUTHORITIES, COMPETITION REGULATIONS AND OTHER REGULATORY FRAMEWORKS AND INSTITUTIONS IN INFRASTRUCTURE SERVICES

MULTI-YEAR EXPERT MEETING ON SERVICES, DEVELOPMENT AND TRADE: THE REGULATORY AND INSTITUTIONAL DIMENSION Geneva, 17-19 March 2010 INTERFACE BETWEEN COMPETITION AUTHORITIES, COMPETITION REGULATIONS AND OTHER REGULATORY FRAMEWORKS AND INSTITUTIONS IN INFRASTRUCTURE SERVICES By Tresna SOEMARDI Chairman of KPPU Indonesia

Interface between competition authorities, competition regulations and other regulatory frameworks and institutions in infrastructure services Introduction The economic crisis in 1998 shifted a paradigm in Indonesian national economic policy. From economic policies that put forward sentralistic approach with dominant role of central government as the motor of economic development, to policy development with a fair market economic system with greater role of business actors. In such a situation, the government s role would shift from initially economic player and regulator to mere regulator. Through clear and articulate distribution of roles between business actors as economic players and the Government as the regulator, it is expected that the economic sector would fastly developed. The regulator is expected to be able to develop a business climate that always encourages fair business competition, which in turn will result in competitive business actors in each economic sector. Specifically for the infrastructure sector, once in a national meeting with infrastructure players, the Minister of State for National Development Planning (Head of National Development Planning Agency) at that time presented an explanation about strategic initiatives in Indonesia s development acceleration set forth in three policies that engage the sector s involvement. Those policies include general policy environment (that gives assurance through a guaranty system on incertainty); entry policies (consisting of reduction in regulatory constraints and facilitation of fair business competition), and pricing policies (about pricing that can be accounted for procedurally and institutionally). In line with the limited budget, the government is no longer able to fully finance the development of infrastructures such as highways, bridges, drinking water networks, oil and natural gas processing, as well as port affairs. Such a condition also requires that an alternative financing mechanism must be applied through Government-Private Investor Cooperation or Kerjasama Pemerintah-Swasta (KPS). This is also encouraged by the trend that currently infrastructures are no longer considered as public goods, but as economic goods instead. Therefore, KPS method is the most advantageous method of cooperation. The rule stipulates that almost all business entities may cooperate with the Government, whether in private form, State-Owned Enterprises, Regional-Owned Enterprises, and cooperatives. The involvement of private investors can be applied through two approaches, i.e. concession by means of public bid and license by means of licensing bid in case infrastructures and services are impossible or difficult to be unbundled. Competition for the Market Procurement of business entities in the framework of cooperation agreements shall be conducted by means of open and transparent bidding. The procurement process shall be conducted through several activities, particularly preparation of procurement; execution of procurement; determination of the winner; and formulation of cooperation agreements. The types of infrastructure projects that will and may be cooperated with private investors cover several strategic sectors such as: a. transportation (ports of sea, river, or lake, airports, railways, dan railway stations); b. roads (toll roads and toll bridges); c. irrigation (undistilled water carrying canals); 1

d. drinking water (undistilled water taking installation, transmission network, distribution network, drinking water processing installation); e. wastewater (wastewater processing installation, collecting network and main network) as well as facilities for garbage (transportation and garbage dump); f. telecommunication (telecommunication network); g. electric power (plants, transmission, and distribution of electric power); h. oil and natural gas (processing, storage, transportation, transmission, or distribution of oil and natural gas); All of the above sectors shall be cooperated in accordance with the laws and regulations that regulate the above sectors. In maintaining reasonable price, the government takes two kinds of approach, i.e. simplified procedure in tariff fixing and reinforcement/establishment of a regulatory board. Simplified procedure in tariff fixing shall be conducted by means of rationalization and depolitization of pricing for infrastructure sector, pricing based on fair business competition (including price regulation for monopolized infrastructure sector), encouraging certainty for private sector related to tariff policy for various sectors, and promoting comprehensive plan to recover the tariff at cost-effective level, and promoting socialization on the change of tariff to the public so that they would understand the real costs for services and what occurs at peak as well as off-peak conditions (e.g. electric power). Meanwhile, the reinforcement/establishment of a regulatory board shall be conducted to monitor the process of fair tariff fixing. An effective and credible regulatory board shall be established to transfer the functions of the ministry, such as the establishment of the Toll Road Regulatory Board (BPJT) and the Indonesian Telecommunication Regulatory Board (BRTI). These regulatory boards will be responsible to monitor and assure that certain tariffs would be able to fulfill the aspiration of the publid as well as investors. A regulator at practical level refers to a technical department with duties to administer public service functions. The duties and functions of this regulation is usually conducted by an office of the Directorate General. However, for several sectors such as telecommunication, drinking water, toll roads, and oil and natural gas, the functions of a regulator if separated from the function of the government. In general, such separation is intended to improve the regulator s performance and improve the quality of service to the service using community. In that context, separation of the scope of duties and functions among policy makers, regulators, and service operators shall be expressly stipulated. Competition Policy and Sectoral Policies As an agency that enforces the mandate of Law No. 5/1999, KPPU shall be obligated to ensure the creation of fair and favorable business competition climate in Indonesia. To that end, KPPU of the first period (2000-2005) had laid down five main programs, i.e. law enforcement development, competition policy development, communication development, institutional development, and information system development. In the period of 2006-2011, those five programs has remained to be KPPU s programs, but the emphasis is more on two main functions of KPPU, i.e. to enforce the law of competition and to give recommendations to the government related to policies that are potential to contradict with Law No. 5/1999. The function of law enforcement is intended to eliminate various constraints of competition in the form of unfair business conducts. Meanwhile, the process of giving recommendations and suggestions to the Government would encourage the process of regulatory reform towards effective competition policies througout economic sector. So far, both in law enforcement process and in the Government s policy analysis, policies have been frequently found 2

as the sources of various unfair business competition practices in several sectors. Based on this development, competition policies will take the place of KPPU s main priorities in the future through reform regulatory programs, in the form of efforts to internalize the principles of fair business competition in every policy of the Government. In connection with the efforts for internalization of fair business competition values in the Government s policies, KPPU has so far played its roles by always making regulatory assessment in the perspective of business competition, of various policies issued by the Government or regulatory agencies. The results of those activities are then submitted to the Government or the regulatory agency concerned through the process of policy advocacy and harmonization. It is in this case that most of KPPU s programs are always synergized with the Government s programs in economic sector. In the last several years, in order to synergize KPPU s programs with the Government s agenda, regulatory assessment is focused on the sectors that are in association with the public life. For example, the sector that has close relationship with public service such as telecommunication, energy, health, and transportation. KPPU also always conducts assessment of various policies on the trading of agricultural commodities that often result in distorted effects with unfavorable impacts to the welfare of the people, considering that agriculture has so far been a sector where the majority of Indonesian people rely on their lives. These priority sectors are determined in order to optimize KPPU s roles in stimulating the emergence of efficient economic sector which in turn will create welfare to the public. Based on KPPU s observation for the last several years, policies which are not in harmony with Law No. 5 of 1999 are categorized in three groups. Firstly, the group of policies that provide bigger room for business actors who have dominant positions or certain business actors. Such Government policies tend to create entry barriers to their competitive business actors. As a result, the behavior of misusing dominant positions by those business actors arises. The second group is the Government s policies that facilitate the rising of agreeements among business actors that are explicitly in contradiction to Law No. 5 of 1999. For example, the partnership program in chicken breeding industry that result in close agreements. Likewise, the DSM Terang Program of the Ministry of Energy and Mineral Resources facilitates the presence of exclusive agreements among business actors. The effects of such agreements are anti-competition behavior of business actors who look like creating entry barriers and restrictions to partners who enter into agreements. The third group is the policies that constitute the Government s intervention to the ongoing market mechanism. These arise among others in the form of trading systems or regulations that limit the number of players involved. Seen from the perspective of competition, this is a setback in that it prevents the operation of market mechanism in the sector that can provide many benefits to the society. A market with free competition is believed to be highly advantageous and the Government s role is required to realize it. In certain cases, however, competition can be successful if the Government does not intervene. It is more so if the intervention tends to benefit few business actors earning big profit. Ironically, problems in the industry sometimes spoil the system that has run well and been in accordance with competition mechanism. An example is the handling of policies in sugar industry. At the end, through those two main activities, it is expected that KPPU can provide contribution to the national economic development, by minimizing restraints of competition in the form of restraints on business actors innovation as well as on the effectiveness of the business world itself, both in the form of private restraint and 3

government restraint. KPPU s efforts to encourage the reform of policies in the sectors of public service, infrastructure, and review of agricultural commodity trading system will be in line with the Government s program to enhance the roles of private sector in national economy. On the other side, the harmonization process of competition policies conducted by KPPU is expected to be able to affirm the functions of regulation and monitoring conducted by both the Government and sectoral regulatory boards. Fair business competition climate will assure the achievement of efficiency and effectiveness in economic system. It is also through fair business competition climate that the efficiency and effectiveness of economic system will be surely achieved. It is also through fair business competition that there will surely be equal business opportunities among big, medium, and small business actors. In addition, fair business competition will enhance domestic industrial competitiveness, thereby being able to compete in domestic as well as international markets. Therefore, it can be concluded that the enforcement of competition law and the implementation of effective competition policies will guard the implementation of proper market economic system, which will finally enhance the welfare of Indonesian people. Issues of Business Competition Agency in Sectoral Regulation; A Case Example in Telecommunication The regulator for telecommunication in Indonesia is determined through a Decree of the Minister of Transportation No. 31/2003 concerning Indonesian Telecommunication Regulatory Board (BRTI) which was signed on July 11, 2003. The functions were separated considering that the monopolistic system had shifted to open market system through Law No. 36/1999 concerning Telecommunication. The monopolistic system is opened based on four reasons. Firstly, the investment is big so that there is only one business actor that can provide telecommunication services with cost lower than those provided by two or more business actors. Secondly, there are network externalities so that they should be provided monopolistically. Network externalities arise in telecommunication sector because the useful value of networks increases in line with the increasing number of users, so that a network with many users is more valuable than several unconnected small networks. The third reason is that there should be a cross subsidy among the provided services; this cross subsidy will ensure that users of certain basic telecommunication services can communicate with affordable prices. For example, local connection is cheaper than direct-dial long-distance call (SLJJ) and international direct-dial call (SLI). The last reason is sovereignty, safety, or protection against the state so that the provision should be safeguarded by the government. The shifting process from monopolistic system to the competition makes the government s roles in the sector are adapted to be four forms of control. The first form is to make the government as a direct provider of telecommunication services. The second form is that the government reduces its ownership in the company and give opportunity to other parties to jointly own the shares, where the company is still the holder of monopolistic rights. The third form is that the government opens competition to reduce monopolistic rights or eliminate them so that there will be more than one business actor in telecommunication sector, but in this case, the government keeps owning a part of shares in the company. In the third form, the government begins to reinforce its role as the regulator and reduces its role as an operator. The fourth form is that the government eliminates its ownership totally and lets private parties to be business actors in telecommunication market. In this form, the government has functioned as the real regulator. The change of these role functions automatically requires monitoring or intervention by a business competition agency or the government. 4

The intervention in the competition includes among others: a. Elimination of various entry barriers in various segments of telecommunication service, such as with obligation for vertical separation of cross-ownership; b. Fair interconnection among operators, both among dominant players and new business actors; c. Anti-discrimination, particularly in the use of limited resources such as spectrum and telephone numbers. d. Convenience of customers to change operators, thereby creating equal level playing field among operators and minimizing switching cost. e. Arrangement of merger, acquisition, or cross ownership. In order to ensure the creation of fair competition in the sector, the competition agency enters into a formal cooperation in the form of memorandum of understanding with the Ministry of Communication and Informatics as well as with the sectoral board under it, i.e. the Indonesian Telecommunication Regulatory Board (BRTI). The cooperation is realized with various joint activities and meetings to discuss the issue of competition in telecommunication, request of data and information for law enforcement, up to the planned formulation of manual for fair competition in telecommunication sector. The manual is intended to give guidance that can be a reference for primary stakeholders including the government, the regulator, the business community (telecommunication providers) as well as legal community, and the society in general, in anticipating and understanding every policy and enforcement of business competition principles in telecommunication sector stipulated by the government, the regulator and/or competent institutions. The manual is also expected to give explanation to telecommunication providers so that they will be concerned about and understand the application of Law Number 5 of 1999 concerning Prohibition against Monopolistic Practices and Unfair Business Competition in telecommunication sector, as mandated by the provision of Article 10 of Law Number 36 of 1999 concerning Telecommunication. The manual specifically explains the implementation of three basic principles of business competition in telecommunication sector, i.e. non-discrimination, nonrestrictive agreement, and non-abusive practice. Enforcement of Business Competition Law in Infrastructure Sector With regard to the enforcement of law on business competition, the majority of cases in business competition related to infrastructure sector are violation against Article 22 of Law No. 5 of 1999 concerning tender conspiracy. The objects of conspiracy are various, among others are development of roads and bridges, improvement of roads, utility network facilities, supply of fresh water, development of the government s means and infrastructures, up to the development of flood control projects. There are several cases of business competition related to the development of infrastructures in the field of pharmaceuticals/hospital affairs and education, but they are limited to the construction of hospital and school buildings. The cases of business competition related to the development of roads and bridges are dominant cases of business competition. However, almost all cases are violation against Article 22 of Law No. 5 of 1999. 5

Besides the development and improvement of roads and bridges, other cases of business competition are related to electrical power or development of electrical networks. At least up to 2009, KPPU had handled 5 (five) cases of business competition related to electric sector, all of which were violation against Article 22 of Law No. 5 of 1999 concerning tender conspiracy. The violation was conducted by various business actors, among others State-Owned Enterprises, Associations, Private Parties, and Tender Committees. Over time, the violation is not only limited to conspiracy in tender, but also in the form of pricing cartels and discriminatory practices. The cases of infrastructure handled by KPPU throughout 2000 2009 consisted of: 13 cases in development of building and public means and infrastructures, three cases in flood and wave control development, six cases in electric power, eight cases in fresh water development and supply, 14 cases related to development/improvement of roads and bridges, and one case related to the supply of infrastructures in general. Therefore, since 2000 up to 2009, KPPU has handled 207 cases of business competition. At least 45 of them (22%) were the cases of business competition related to infrastructure. Meanwhile, in 2010, up to February 2010, KPPU is handling 13 (thirteen) cases related to infrastructure sector. The majority of cases are related to the procurement of goods and services in the development of office buildings and development/improvement of roads and bridges. Some of them are airports, seaports, dams, and irrigation networks. Throughout the year of 2010, the cases handled by KPPU will still be dominated by those related to development/improvement of roads and bridges. 6