Law Number 5 Year 1999 on Prohibition of Monopolistic Practices and Unfair Business Competition (‘Indonesian Competition Law/ICL’) was introduced in March 1999 and entered into force one year later. Prior to the adoption of this law, there were legislations containing competition rules fragmented in numerous laws or regulations but they lacked enforcement power. Thus, promulgation of ICL as well as the establishment of special competition agency signifies the commitment and effort of Indonesian government to strengthen competitive structure of Indonesian economy or businesses and to eliminate monopolistic practices or unfair business competition which was widely practised between 1970 and the 1990s.
In its early period of enforcement, this law brought controversies as to the background, title of ICL, content and wording used therein, as well as the interpretation and application of ICL. Compared to competition laws of other countries or the United Nations Conference on Trade and Development Model Law on Competition (UNCTAD-MLC), ICL has a number of different approaches on stipulating competition rules. For example, UNCTAD-MLC and other competition law generally categorise restrictive practices into restrictive agreements, abuse of dominant position, and merger or acquisition. On the other hand, ICL divides restrictive business practices into three chapters or parts as follows:
- restricted agreements, which include prohibition of price fixing, price discrimination, resale price maintenance, and market allocation;
- restricted activities, which include prohibition of bid rigging, non price discriminatory practices, and predatory pricing; and
- (abuse of) dominant position, which include prohibition of interlocking directorship, cross ownership and rules on merger control.
This classification and the wording used therein have led to numerous complexities in the interpretation and application of ICL. In view of the aforementioned, national competition agency, officially known as Komisi Pengawas Persaingan Usaha Republik Indonesia or Indonesian Competition Commission (ICC), has issued a number of internal guidelines to provide guidance as to the interpretation and application of specific provisions under ICL. Between 2000 and 20101, the ICC received more than 1,400 reports on alleged violation of Law of Competition 1999. More than 80 per cent of the reports dealt with allegation of collusive tendering or bid rigging but most of them dealt with vertical collusion dimension in several state owned companies. From those reports, ICC had initiated investigation of more than 240 cases and issued 190 decisions.
In order to enhance effective enforcement of ICL, ICL has provided the ICC with various powers, which include the power to issue internal guidelines and summon or subpoena against individuals or business entities, request for documents or information from relevant parties or agencies, open investigation based on report or upon its own initiative, and issue decisions as well as impose administrative sanctions to the businesses. To date, the ICC has investigated more than 30 cases upon its own initiative power.
The ICL provides provisions on the prohibition of restrictive agreements or cartel under several articles or chapters. The ICC has adopted different approaches to these practices depending on the languages or wording used in the corresponding article and taking into account general approach used in other jurisdictions.
Restricted agreements (cartels)
The ICL provides prohibition of restricted agreements or cartels in chapter 3 and 4. In these chapters, ICL as well as the ICC apparently applies two different approaches in stipulating the practices. The first approach refers to provisions which include the phrase ‘which may result in the occurrence of monopolistic practices or unfair business competition’. In this approach, ICL seems to require that the prohibited agreement shall or may have an effect on the market or competition and thus require the ICC to conduct in depth analysis as to the effect of certain agreements in the relevant market. Thus, this approach resembles the application of the rule of reason principle as applied in the United States. The second approach refers to provisions which do not include such phrase. In this approach, the ICC does not have to necessarily analyse the effect of an agreement to the relevant market as it is considered sufficient to only establish the existence of an agreement. Again, this is similar to the application of the ‘per se illegality’ rule as applied in other jurisdictions. To understand how ICC has interpreted and applied rules on cartel or restricted agreements under current legislation, we may look at the following cases.
Cooking oil (Case Number 24/KPPU-I/2009)
The case was initiated upon the ICC claim that the market structure of cooking oil is an oligopoly and the participants had entered into restricted agreement or cartel. The ICC analysed the buying price of CPO, price fluctuation or signalling as well as sales movement in cooking oil market to determine whether or not there is a cartel. In this case, the ICC considered structural and behavioural factors in the relevant market. Market concentration, number and size of the firms, product homogeneity, stock and capacity of the product, relationship between market participants (vertical integration), entry barrier, type of demand (regularity, elasticity and adaptation) are all assessed under structural factor analysis. In addition, the ICC had also considered transparency and exchange of information as well as price pattern and contract (parallel pricing) as a behavioural factor that may support the allegation. Based on the analysis of these factors which are considered as indirect evidence, the ICC concluded that there is sufficient evidence of cartel in the cooking oil market in Indonesia and thus imposed an administrative sanction. The ICC maintained that circumstantial (indirect) evidence supported the conclusion of the existence of communication or coordination between participants, which led to price parallelism and thus the existence of restricted agreement.
Fuel surcharge (Case Number: 25/KPPU-I/2009)
This case came up after the ICC examined Fuel Surcharge Price (FSP) as set by 13 Indonesian airlines. The ICC asserted that it had found an agreement between those carriers to fix prices based on the fact that there is tendency for similar price (FSP) movement between these firms and they had, through business association (INACA), entered into an agreement to fix FSP for a few months. Although the agreement was then annulled by INACA, the ICC believed that the agreement was actually still in force as there was a similar prices (FSP) movement and positive correlation despite the fact that load factor and cost assumption as well as formula are different from one airline to another. The ICC concluded that there was price fixing among these airlines and thus imposed sanctions totalling more than US$50 million.
Cement (Case Number 01/KPPU-I/2010)
In 2010, the ICC started an investigation against several cement producers in Indonesia upon the allegation that there was a cartel in the industry in the form of price fixing and market allocation. The ICC alleged that cement producers had allocated market and fixed prices for the cement product through the assistance or utilisation of the Indonesian Cement Association (ASI). The ICC again applied economic (circumstantial) evidence, such as price parallelism. In this case however, producers argued, by referring to literatures on price parallelism, that it is insufficient to conclude the existence of cartel only on the basis of price parallelism as such an event could be consistent with an agreement as well as with independent action taken by each competitor unilaterally or with competition. Taking into account this argument and other factors such as the absence of motive, the ICC accepted the argument and concluded that similar price movement did not necessarily prove that there was a cartel. The ICC, however, maintained that business association might have facilitated its members to enter into a concerted action.
Anti-hypertension medicine (Case Number: 17/KPPU-I/2010)
In this case, the ICC argued that two drug producers - one of which is a group of affiliated firms who owned a patented product and the other is a buyer of the patented product - had entered into a cartel for the patented product. The ICC asserted that a supply agreement between these firms and a distribution agreement between the two affiliated firms had served as an agreement between competitors for the sale of drugs containing the patented product to fix price and allocate market. The ICC referred to, among other things, a number of provisions in the supply agreement and distribution agreement, as well as sales and price parallelism, to conclude that there was communication and agreement between these competing firms which were in breach of ICL. This case has raised debate and caused controversy as the ICC was considered to have failed to properly elaborate the relevant market of the alleged cartel, the period which comprises off patent period and on patent period, common practices and legitimate rationales of the provisions contained in the supply as well as distribution agreements, complexities of the production and marketing of a patented product and other factors such as price and sales parallelism.
One last case to illustrate how the ICC has applied rules on the prohibition of cartels or restricted agreements is a collusive tendering case in Donggi-Senoro (Case Number: 35/KPPU-I/2010). In other jurisdictions and UNCTAD-MLC, bid rigging or collusive tendering is an anti-competitive practice commonly specified under the rule on prohibition of cartel or restrictive practices. The ICL, however, provides this practice in article 22 or chapter 4 under the title of ‘collusive tendering’. In this case, the ICC maintained that three firms - two of which were Indonesian oil companies and the other a Japanese investment company - had engaged in an illegal conspiracy against PT LNGEU through fabricated competition, discriminatory or exclusive practices and exploitation of confidential information, as well as beauty contest procedure.
Mergers and acquisitions
After waiting for almost 11 years since ICL took effect, the government finally issued the implementing regulation required by ICL for the enforcement of article 28 - which prohibits mergers, consolidations and acquisition of shares that may lead to anti-competitive effects - and article 29 - which requires companies to notify their merger transaction 30 working days after being completed (Government Regulation No. 57 of 2010 or GR 57/2010). This long-awaited legislation was adopted on 20 July 2010.
Even though ICL only requires post-merger notification, the GR 57/2010 provides that companies may voluntarily consult the ICC about their merger before it is consummated. This procedure is formally known as ‘consultation’. By consulting the ICC in the first place, companies can avoid a risk that their merger is dissolved by the ICC if it finds that the merger has anti-competitive effects. The process is similar to post-merger notification. If a consultation is made, the ICC then will give its opinion on the proposed merger. There are three possible opinions by the ICC:
- firstly, there is no anti-competitive effect;
- secondly, there is no anti-competitive effect when conditions set by the ICC are implemented by the merged entity; and
- thirdly, there is anti-competitive effect.
There is no explanation or precedent to date whether the merging parties may negotiate the remedies imposed by the ICC.Because it is mandatory, post-merger notification is still required despite a consultation. However, if a merger has been notified before its consummation, the ICC will not reassess the transaction when it is notified after its consummation. So, as such, it is only a formality. A reassessment will only be conducted when there is material change to the information submitted when consultation is made or there is material change to market condition when post-merger notification is submitted. The material change may result in a different opinion by the ICC if taken into account. There is no specific rule on the deadline to conducting a consultation. Consultation may carry on at any time before merger is consummated. However, the ICC encourages merging parties to consult their merger plan as early as possible, subject to the certainty of the transaction and time needed by the ICC to complete its review.
In a consultation, the ICC has a maximum of 30 working days to complete its preliminary assessment and decide whether a comprehensive assessment is necessary or not. It has a maximum of 60 working days to complete its comprehensive assessment. In the preliminary assessment, the ICC will only review the market concentration before and after the merger. If HHI is less than 1800 following the merger, there would be no competition concerns and therefore the ICC will not challenge it. It would do the same if the post-HHI is above 1800 but the delta is less than 150 points. If the post-HHI is above 1800 and the delta is more than 150 points, the ICC will conduct a comprehensive assessment in which it will assess the possible anti-competitive effects, barriers to entry, efficiencies put forward by the merging parties, and whether failure firm factor that has triggered the merger.
As soon as the merger is formally effective, the undertakings should notify the ICC by submitting a written notification in no later than 30 working days as from the date on which the merger becomes effective. For mergers involving a limited liability company, the definition of ‘formally effective’ refers to the following conditions:
- approval by the minister upon the amendments of articles of association, in case of a merger;
- receipt by the minister on notification for particular amendments; and
- legalisation by the minister upon the deed of establishment of the company, in the case of consolidation.
In case a merger does not involve a limited liability company, notification is obliged in no more than 30 working days from when the merger agreement is signed by the merging parties. For mergers concluded between foreign companies, the merged entity needs to provide an official document released by the competent authority if available; for example, an approval from the minister or financial service authority, evidencing that the merger has been completed. If such an official document is not available, the merged entity may submit a legalised joint statement by the merging parties stating the merger has been completed.
Following the filing, the ICC will issue its opinion within a period of no longer than 90 working days upon declaration by the ICC on the completeness of all required documents/data. In post-merger notification, there is only one phase of review; it is not a two-phase process like in a consultation. However, the substantive test method will be the same. There are two possible opinions of the ICC coming from a post-merger assessment: firstly, there is no anti-competitive effect; and secondly, there is an alleged anti-competitive effect. If the ICC opinion is that anti-competitive effect is likely, it will open a formal investigation and decide whether to dissolve the merger or not. In addition to the dissolution, the ICC may impose fines on the merging parties of between 1 billion and 25 billion rupiahs.
GR 57/2010 has set criteria or thresholds for mergers that must be notified to the ICC. These criteria include:
- the value of total assets of the company resulted from the merger exceeds 2.5 trillion rupiahs; or
- the value of total sales (turnover) of the company resulted from merger exceeds 5 trillion rupiahs.
These thresholds are also applicable for filing before merger or consultation. For a merger transaction involving banks, the threshold set is much higher. The government regulation sets 20 trillion rupiahs in combined assets as the threshold for notification.
The thresholds are national in scope; global sales or assets will not be taken into account. With regard to assets, only assets located in Indonesia will be accounted and, with regard to sales, products for export will not be included in the assessment. For mergers in which the parties involved are all foreign companies, notification is also required. However, notification can be triggered only when both parties have businesses activities in Indonesia, either because one or both parties have assets located in Indonesia and the other one or both of them have sales in Indonesia. A foreign company will be considered to have an operation in Indonesia if it has a subsidiary, branch or country representative in Indonesia.
Sanctions for failure to notify
The ICC has power to impose fines in the amount of 1 billion rupiah per day, with a maximum of 25 rupiah billion in total, if the merged entity does not notify the merger within 30 working days after the merger is complete.
Case handling procedure
On 6 January 2010, the ICC adopted the Commission Regulation No. 1 of 2010 on Handling Procedure (new regulation) which came into force on April 2010. This new regulation is a complete overhaul of the handling procedure set out in the old regulation. There have been many criticisms before that the old regulation does not guarantee a due process of law for the case handling before the ICC. The reasons are, among other things, that there is no clear separation between the party carrying out the investigation and the party making the decision, and because the alleged parties are not given an opportunity to examine witnesses presented during a proceeding before the ICC. The new regulation has introduced an adversarial system, so there will be a clear separation between the Commission Assembly which will decide on a case and the investigators from the ICC secretariat acting as prosecutor during a proceeding before the ICC. So the alleged party will now go face to face with the investigators during a proceeding and the Commission Assembly will act like judges in a court trial. For a case in which the reporting party seeks damages, then the reporting party or its lawyer has the burden of proving the alleged anti-competitive practice during the proceedings before the ICC and they will go face to face with the alleged party or its lawyer before the Commission Assembly. So it will be like a private litigation but under the ICC’s roof.
Under the new system, the alleged party or their lawyer has the same right as given to the ICC investigators. They can also examine the witnesses presented during a proceeding before the ICC or a right to present witnesses. In the past, the alleged party would never know the witnesses that had been examined by the ICC or what had been said by the witnesses during the proceeding, and would never know what documents had been produced by the ICC during the proceeding until a final examination report was made and given to the alleged party. In order to increase transparency, the proceeding will be made public. In the past, the alleged party has even had no right to present when a witness is heard by the Commission Assembly.