KPPU Draft Guidelines on Cartels

Overview

Markets dominated by a small number of actors (e.g., Indonesia’s cement industry) are prone to the formation of ‘cartels’: the few competing business actors can coordinate their activities and production, so as to manipulate the supply - and thus, price - of goods or services to maximize profits for each, and also to prevent the entry of other competitors to the market.

In short, collusion to control the supply of a necessity allows for price control by the cartel, which is hostile to consumers; prevention of competitors from entering the market hampers product development and creativity, which is hostile to economic and thus national development. As such, it is common practice in market economies to prohibit cartels, or at least most forms of them.

In Indonesia, the prohibition is set out by Article 11 of Law No. 5 of 1999 on the Prohibition of Monopolistic Practices and Unfair Business Competition (“Anti-Monopoly Law”), but only vaguely. The generality of that provision makes consistent application of the Law difficult. 

The Commission for the Supervision of Business Competition (‘KPPU’) will be releasing interpretive Guidelines to elaborate what Article 11 means by ‘cartel,’ in what cases they are considered illegal, and what will be done to investigate and address them. The regulation is currently in Draft form.

This Indonesian Law Digest will examine the Draft Interpretive Guidelines to Implement Article 11 of the [Anti-Monopoly Law] on Cartels, which hukumonline obtained at the end of March and are in near-final form. The KPPU is currently soliciting public inputs, and this inquiry will thus highlight the key features of the Draft.

Purpose

The authority to formulate interpretive guidelines to the Anti-Monopoly Law rests with the KPPU, and is being exercised now to elaborate more regulatory structure for Article 11 regarding cartels. This structure provides legal security to business actors who have complex arrangements with other firms, and allows the KPPU to consistently apply the Law with reference to the detailed criteria of what is and is not legal, healthy market activity.

Disseminating Article 11 of the Anti-Monopoly Law

If the near-final Draft is any indication, the Guidelines - as with other KPPU Guidelines - will surgically disseminate each piece of Article 11, which reads as follows:

“Business actors are prohibited from making an agreement with their competing business actors for the purpose of influencing prices by controlling the production and / or distribution of a good and / or service, which may cause a monopoly and / or unfair business practice to occur.”

The Draft defines such terms as, among others: ‘agreement,’ ‘influencing the price,’ ‘controlling the production and / or distribution,’ ‘cause a monopoly,’ and ‘cause [an] unfair business practice.’

‘Agreement’ is referred to Article 1 (7) of the Anti-Monopoly Law, which views it as any form - written or otherwise - of one or more business actors binding themselves with one or more business actors, regardless of the label used by those actors.

‘Influencing the price’ is simply the desired effect for the cartel, which is achieved by controlling the production or distribution of a good or service.

‘Controlling production’ occurs when the cartel members coordinate the amount of production for each to supply, whether the amount is higher or lower than the capacity of a given company.

‘Controlling distribution’ is regarded as when cartel members control when and where they sell the goods or services.

In the cartel context, ‘cause a monopoly’ means that the production or distribution of a good or service is effectively controlled by the cartel, which serves as a single ‘unit’. This fulfills the definition of monopoly provided by Article 1 (2) of the Anti-Monopoly Law: an economic concentration by one or more business actors which causes control of production and distribution over certain goods and services, causing an unfair business practice. 

In the cartel context, to ‘cause an unfair business practice’ is regarded as collusion amongst business actors, regarded as a dishonest way of doing business. Article 1 (6) of the Anti-Monopoly Law equates ‘dishonest business’ with ‘unfair business practice’.

Indonesia’s Approach Upon Cartel Practices

Indonesia’s approach to assessing cartels, using the ‘Rule of Reason,’ differs from many other market-oriented economies, which typically employ the ‘per se Illegal’ approach. The Rule of Reason examines whether a behavior (i.e., ‘agreement’) results in excesses that breach the boundaries of the law. Per se Illegal simply considers certain behaviors to be inherently unlawful.

In the analyses assembled by Andi Fahmi Lubis, Ningrum Natasya Sirait, and others in Hukum Persaingan Usaha: Antara Teks & Konteks, the Rule of Reason effectively means: “not all cartel arrangements cause unfair business practices.”

Identifying Cartels: KPPU Evaluation Criteria

Identifying a cartel is difficult, especially because the ‘agreements’ to coordinate activities do not need to take official writing form. The Draft Guidelines provide two avenues for investigation of collusion between businesses in a single market: (1) the ‘structural factor’ and (2) the ‘attitude factor’.

At the structural level, the indicators include, but are not limited to: small numbers of actors in a single market, significant entry barriers for new competitors, and oversupplied markets.

Meanwhile, ‘attitudes’ are flexible indicators, including transparency of competing businesses, ease of information exchange between actors in a market, and so on; the basic idea being that truly competitive businesses vigorously guard their activities and information.

Identifying Cartels: Evidence Gathering

The Draft Guidelines set out the evidence required by the KPPU to assess that a cartel is indeed present. The evidence needed includes, among others:

Determination of a Cartel as Unlawful

With regards to the Rule of Reason, even after establishing the existence of a cartel, the KPPU may not simply declare the cartel illegal and assign sanctions to the actors involved. Instead, the Draft requires the KPPU to question the suspected actors and evaluate the responses, and assess the following points, among others: 

Sanctions

For the most part, the Draft Guidelines restate the Anti-Monopoly Law’s sanctions for unlawful, anticompetitive market activity.

Administrative sanctions could include: revocation of the cartel agreement, and a fine of up to IDR 25 billion. Criminal sanctions could include: imprisonment of those found accountable for up to 6 months, and a criminal fine of up to IDR 100 billion. These sanctions will be imposed to business actors, whether individuals or business entities, who were found guilty of charged. In the case of a violation being conducted by a business entity, the responsible party from that entity will depend on the types of the business entity (e.g. in a Private Limited Company the most responsible party would be the Director or Board of Directors).

The Draft additionally allows for the revocation of a business license, or a prohibition on individuals to serve as Directors or Commissioners for up to 5 years.

‘Leniency Program’

Following from the pragmatism visible in this regulation’s approach, the Draft provides for a ‘Leniency Program’: the KPPU is willing to effectively bargain with ‘whistle-blowing’ cartel members who come forward and cooperate to uncover a cartel, in exchange for reduced penalties to the member(s) who come forward.

The rationale behind this program likely stems from the difficulty in exposing cartels and gathering the necessary evidence to pursue a case without help from an insider; the mechanisms for price manipulation are inherently and ever-increasingly complex. This is particularly so because similar prices between competitors are natural, and differentiating it with price-fixing and unhealthy market activity requires data, and scrutiny.

The Draft’s Progress

The last Draft was circulated at the end of March 2010, and the KPPU continues to be open to public opinion before it issues the Guidelines. Typically, 30 days are given for this, but Ahmad Junaidi, the KPPU’s press representative, indicated to hukumonline (22/4) that it could be extended.

Conclusion

Not all cartels will be considered unlawful after the current Draft Guidelines are released as a KPPU Regulation. Although the definition of what Article 11 considers to be a ‘cartel’ is perhaps more clear, businesses involved in such-defined arrangements may still be left in tenuous legal situations: instead of simply being deemed unlawful, the Rule of Reason allows the KPPU to assess on its own subjective terms whether the arrangement results in an excess that creates ‘unfair’ or ‘dishonest’ business practices, or whether a market is sufficiently conducive to new competition.