21 November 2007

Supervision of Business Competition - Indonesian Style

Business competition in Indonesia is an interesting dilemma particularly when you are trying to develop a more conducive investment climate for both local and foreign capital investors while simultaneously always trying to ensure that the competition that you allow under this climate is fair and not monopolistic in nature. The decision handed down by the Commission for Supervision of Business Competition (Komisi Pengawas Persaingan Usaha / KPPU) in a recent case involving monopolistic and unfair business practice in the telecommunications sector is an important lesson as well as indicator as to where Indonesia stands on the issue of cross-ownership. The case will undoubtedly become known as the Temasek case and the case itself involves both an Indonesian telecommunication company and nine Singaporean telecommunications companies.

The most interesting aspect of the decision relates to the manner in which the KPPU is going to define cross-ownership in the future. If the KPPU is to maintain this definition and interpretation then foreign firms will need to consider the way in which they structure their ownership interests in Indonesia. This would be for no other reason than to avoid the steep fines that the KPPU has dished out in this case.

The crux of the case revolved around the ability to appoint members to key positions and access to sensitive business data and information that would allow the Reported Parties (defendants) in this case to dictate market practices and prices.

There are ten defendants in the case and each were fined IDR 25 billion for the breaches of Law No. 5 of 1999 on The Prohibition Against Monopolistic Practices and Unfair Business Competition (Anti-Monopoly Law). The KPPU has the power to fine but the size of these fines is at the very high end of what the KPPU has dished out in the past. When combined with the other orders that further restrict the defendants' income generating potential, then the decision has long-term implications for all the companies concerned.

The ten defendants are: Temasek Holdings Pte. Ltd (Temasek), Singapore Technologies Telemedia Pte. Ltd (STT), STT Telecommunications Ltd. (STTC), Asia Mobile holding Company Pte. Ltd (AMHC), Asia Mobile Holdings Pte. Ltd (AMH), Indonesia Communications Limited (ICL), Indonesia Communications Pte. Ltd (ICPL), Singapore Telecommunications Ltd. (SingTel), Singapore Telecom Mobile Pte. Ltd (SingTel Mobile), and PT. Telekomunikasi Selular (Telkomsel).

It was argued that the Indonesian government was the majority shareholder in the respective local companies and therefore the defendants had no ability to dictate market practices or prices. Unfortunately for the defendants the KPPU rejected this position. The basis for the rejection was reasoned solely on the point that the government is not a business entity and in any event holds shares in the national or public interest. There are a number of logical extensions that lawyers will be able to explore based on this interpretation of the government not being a business entity (but these are for another blog entry).

Aside from the heavy fines the KPPU also ordered the foreign defendants to sell all their shares in the Indonesian companies and then restricted them to repurchasing a maximum of 5% of the shares sold. This must be completed within a period of two years. The KPPU further ordered that the purchasers of the shares do not enter into any association with Temasek.

What can be derived from this decision is that the KPPU views cross-ownership as a scourge of fair business practices and the power that cross-ownership provides is akin to a monopoly that allows a single business entity to determine key appointments and have access to crucial business data that then permits them to engage in unfair business practices and ultimately price-setting for the entire market.

There is little doubt that the defendants will appeal. The appeal will be held at the District Court. It is expected that this appeal will be lodged within the next 14 days.

Any suggestion that this decision will bring into question the independence of Indonesia's courts and tribunals is a little premature. Furthermore, the impact on business confidence is likely to be limited, at least until after the judicial process has run its course. The reality is that there is precedent for bad tribunal and court decisions being overturned on appeal.

Calm heads and patience needs to prevail.

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