Antitrust body's report is an embarrassment

Thursday, October 25, 2007 Vincent Lingga, The Jakarta Post, Jakarta

After about four months of controversial investigations, a special team of the Business Competition Supervisory Commission (KPPU) has concluded that Singapore's Temasek Holdings Pte. Ltd., PT Indosat and PT Telkomsel conspired in price-fixing practices in the mobile telecommunications industry, thereby violating the anti-monopoly law.

However, the KPPU report is unlikely to do any damage to Temasek's international reputation. It instead embarrasses the Indonesian government and causes great concern about the quality of governance at our state companies and the competence of their managements and supervisors.

I will not bore or confuse you with all the telecommunication, cellular or financial jargon used in the KPPU report. The 109-page document looks professionally impressive, showing the hard work of the five-member investigation team, which was assisted by eight investigators and two notaries public.

The essence or central message of the report is that Temasek, through its cross-ownership in Indosat and Telkomsel, was found to have masterminded price-fixing practices by both cellular operators and that Temasek deliberately obstructed Indosat's sound growth to allow Telkomsel to maintain its market dominance.

These findings, if they prove to be true -- the final ruling will be made in the middle of next month -- would be damaging to the government, especially the state minister for state companies.

The government controls PT Telkom, which in turn owns 65 percent of Telkomsel, the country's largest cellular operator, and consequently appoints the majority of its directors and commissioners.

Temasek, through its subsidiaries, owns only 18.9 percent of Telkomsel.
On the other hand, Temasek, also through its subsidiaries, holds 30.61 percent of Indosat, the country's second largest mobile operator, with 14.29 percent owned by the Indonesian government, 10.20 percent by the Qatari government and 44.89 percent by the investing public, including foreign institutional investors.

Even though the Indonesian government owns only 14.29 percent of Indosat, it succeeded in appointing five of the nine members of the board of directors, including the president director. More than half if its nine-member board of commissioners were either representatives of the government or independent commissioners.

The government holds a golden share (A share) in Indosat which gives it veto power over important corporate decisions.

What then is the logic of the KPPU findings? Wouldn't those allegations also insult the intelligence of the investing public, including foreign institutional portfolio investors, who own 44.89 percent of Indosat and 47.77 percent of Telkomsel?

If the conclusion of the investigation team is true, which theoretically should be the case because, as the vanguard and defender of fair business competition, the KPPU is supposed to come out with an assessment that has logic and makes economic sense, that would be worrisome indeed.

But the question then is how could Temasek, despite its cross-ownership at Indosat and Telkomsel, control both companies and dictate their prices while the Indonesian government simply sat back and relaxed, acting as a seemingly innocent bystander.

What then is the function of government-appointed directors and commissioners at both cellular operators, and why did the Telecommunications Regulatory Body close its eyes to the alleged price fixing?

Has the government been ignorant or grossly incompetent in recruiting and appointing directors and commissioners?

Is the way the government treats and oversees Indosat and Telkomsel typical of its management and supervision of the other 128 state companies?

It is Telkomsel, which is 65 percent controlled by state-owned Telkom, that would benefit the most if Temasek deliberately hampered Indosat's business growth, as the KPPU team concluded.

What is the logic of this? It simply insults the intelligence of even the man on the street, because Temasek indirectly holds only 18.9 percent of Telkomsel.

These are just some of a layman's questions about the logic of the most important conclusions of the KPPU report.

But then, the events that led to the KPPU investigation of Temasek, Indosat and Telkomsel were controversial and full of political intrigue right from the outset. The KPPU also seemed to have departed from its standard procedures and practices in handling the case.

Departing from the KPPU's normal practice, Benny Pasaribu, a member of the KPPU investigation team who disagreed with the conclusions of the team, was not included in the five-member panel of judges.

Very rarely has the KPPU chairman talked to the media about a case still under investigation. But over the past few months Muhammad Iqbal has often been quoted in the media about the case even though he was not a member of the investigation team.

Given the KPPU's reputation for absurd rulings -- many of these rulings were simply overturned by district courts or the Supreme Court -- the KPPU panel of judges that is scheduled to make its ruling in the middle of next month may simply adopt the findings of the investigation team.

Temasek and its subsidiaries will certainly appeal to the district court and up to the Supreme Court, and may even bring the case to the international court if unsatisfied.

Whatever ruling the KPPU panel of judges makes next month, the controversy and political maneuvering surrounding the Temasek business group's investment in Indosat and Telkomsel has damaged the investment climate in the country.

The Qatar government, which owns 10.20 percent of Indosat, may in retrospect ask itself, "Why in the first place should I have put my money in this Indonesian asset?"

The KPPU report will not affect the international reputation of the Singapore government's investment company, given the notorious image of Indonesia's law-enforcement system and, by implication, the integrity and technical competence of the KPPU.

All in all, the biggest victim will be Indonesia's investment climate and the Indonesian government, which was made to look silly by the report.

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Trade expo opens with an attitude of optimism

Wednesday, October 24, 2007 Vincent Lingga, The Jakarta Post, Jakarta

President Susilo Bambang Yudhoyono opened the annual Trade Expo Indonesia at The Kemayoran fair grounds here Tuesday amid fears of a weakening global economy that could dampen international demand for the country's commodities.

The President cited the International Monetary Fund's downward revision of world economic growth from 5.2 to 4.8 percent next year and the steep rise in oil prices, warning "this could affect our exports, the state budget and the whole economy".

"But the government is fully aware of this challenge and has taken preemptive measures to minimize its impact on our economy," he said.

He said less favorable international market conditions should lead to stronger cooperation between the central government, regional administrations and the business community to improve the country's economic competitiveness and its exports.

The President urged all government institutions to improve public services and expedite the licensing process for businesses, saying the competition on the international market and for investment would only get tougher.

"It is a big sin to deliberately make things difficult for businesses," Yudhoyono said to the applause of businesspeople, foreign buyers and exhibitors attending the opening ceremony.
Trade Minister Mari Elka Pangestu said the five-day trade expo was being attended by more than 1,000 exhibitors and was expected to be visited by 4,000 foreign buyers and book US$200 million worth of export deals.

During the opening, the President also honored 29 small and large companies with the Primaniyarta export award for their outstanding performance in the international market.
Among those honored was PT Musim Mas, an integrated palm oil company in Medan, North Sumatra, which won the award for the eighth time. Its affiliate PT Megasurya Mas in Surabaya, also a palm oil industry, won that award for the third time especially for global brand promotion.
Most of the winners are natural resource-based exporters that process such commodities as palm oil, bamboo, rattan, rubber, wood, ceramic, pulp and coal.

Yudhoyono said Indonesian exports last year for the first time exceeded $100 billion, or almost 18 percent higher than 2005, and are expected to continue expanding by nearly 16 percent this year.

According to the Central Statistics Agency, non-oil exports totaled $59.9 billion in the first eight months of the year, up 19 percent from a year earlier, but most of the gain was generated by steep rises in the prices of primary commodities such as palm oil, rubber, coffee, wood, coal, pulp, copper and other minerals.

The President said exports were not the sole responsibility of the Trade Ministry because the competitiveness of export products was influenced by numerous factors under the jurisdiction of other ministries.

"The projected decline in global economic expansion should force all of us to work together to strengthen the competitiveness of our exports to make our economy more attractive to foreign investment. Customs service should be expedient, taxpayers should pay their taxes in full," he said. Inefficient logistical arrangements related to roads, transportation services and seaport handling have often been cited as one of the biggest difficulties facing Indonesian companies seeking to expand exports.

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Market mechanisms, not government, should enforce CSR initiatives

Friday, October 05, 2007 Vincent Lingga, The Jakarta Post

Good reputation in the community is a company's best defense against business risks and its strongest competitive advantage to gain market share and increase corporate value for shareholders and stockholders.

That is the most outstanding message conveyed by business and civil-society leaders from more than 25 countries who shared their managerial successes and mistakes at the sixth annual Asian Forum on Corporate Social Responsibility (CSR) in Ho Chi Minh City last week.

They asserted that merely abiding by the laws is no longer sufficient to secure smooth business operations as firms are now required to expand their social responsibility and do more to protect the environment and empower the communities around their operational areas.

However, the CSR concept is not about philanthropy, which will only create a sense of artificial prosperity. Nor is about throwing money around or simply writing a check for a foundation which is not sustainable in the long term.

The core of CSR is the process of empowering the local community through programs that gradually transfer business, technical and social competence.

Highly profitable companies are not automatically great or admired by the public. Cases of successful businesses presented here testify that businesses, which have fulfilled their social obligations and care much about the natural environments are the most admired companies.

The mainstream thinking on CSR is converging on two basic issues: The ethical conduct of business and the contribution of business to sustainable development involving all stakeholders. Sustainable development itself is regarded as another term for the triple bottom line -- social, environmental and economic lines.

For example, honoring human rights, meeting labor, occupational health standards and fulfilling environmental regulations are simply good corporate governance practices. That is obeying the laws not CSR in its broadest sense.

CSR requires companies to share a portion of their profits for programs to empower the people or at least the local communities around their areas of operations.

Accounting investments or spending in CSR programs as part of production or operation costs (hence tax deductible), as Indonesia's Limited Company Law No.40/2007 stipulates, will reduce the meaning of the concept.

Certainly, companies must abide by regulations in any country where they operate, but implementing CSR should not depend on a specific law. It should be inspired by the strong commitment of the shareholders and management to create sustainable development. Making CSR mandatory may shift the focus of attention to the amount of spending, not the outcome.
No wonder, there have been many international initiatives launched to promote standards of business conduct which are all designed to create sustainable development.

The United Nations Global Compact, which was formed in 2000, brings companies together with UN agencies and civil society groups to promote universal principles on human rights, labor, the environment and fighting corruption.

Then there is the World Business Council for Sustainable Development and the Dow Jones Sustainability Index. Other well-known initiatives include the Business Charter for Sustainable Development drawn up by the International Chamber of Commerce, the Charter for Good Corporate Behavior drawn up by Keidanren in Japan and the Consumer Charter for Global Business developed by Consumers International, which links 200 consumer groups in more than 80 countries.

Memberships in these organizations are mostly based on invitations, meaning that only companies which have good records in CSR or honor their principles or codes of business conduct they are entitled to join.

However, the implementation of the business codes of the organizations is voluntary, not legally binding. But even though voluntary in nature, the business codes have made positive impact because companies which join the CSR organizations impose the codes and standards on their business partners within their respective supply-chain management.

Such a kind of arrangements, though without law enforcement mechanism, has unleashed market pressures to force companies to implement the business codes or CSR principles pursued by the various organizations oriented to the promotion of CSR.

The emphasis of the CSR principle certainly differs from one company to another, depending on their areas of operations. Environmental concerns, for example, are the top priority for businesses engaged in the extraction of natural resources. But labor rights are the main concerns for such labor intensive industries as shoes and garments.

However, enforcing CSR principles through legislation as Indonesia did with its new corporate law in July could be counter-productive and even cause a new source of uncertainty in the business world.

The stipulation of mandatory CSR for natural resource-based businesses in the 74th article of the Limited Liability Company Law simply reflected the muddled thinking about CSR among the politicians at the parliament.

Making CSR mandatory only makes doing business in Indonesia unnecessarily more complicated, especially if regional governments join the fray and come up with their own standards or guidelines of CSR.

There are already too many laws governing the conduct of business and fulfilling these laws alone is already an uphill challenge for most companies. And in so far as Indonesia is concerned, these numerous laws, instead of strengthening the legal frameworks and law certainty, have often incited conflict, caused bribery due to acutely inadequate enforcement, caused either by technical incompetence or high venality among officials.

How is then to contain the damage already done by the 74th article of the company law?.
Simply by not issuing regulations on its enforcement. This particular article stipulates its implementation shall be governed by a specific regulation. Hence without the desired specific implementation regulation, the specific article will not be effective.

Let the market mechanisms -- pressures from shareholders and stockholders such as suppliers, consumers, civil society organizations -- work to enforce the CSR principles.

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