The Public Competition Enforcement Review: Indonesia
Law No. 5 of 1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition (the Indonesian Competition Law (ICL)) is the primary legislation regulating business competition in Indonesia. Besides being the basis for the prohibition of anticompetitive agreements and conducts, the ICL is also the basis for the establishment of the Indonesia Competition Commission (or Komisi Pengawas Persaingan Usaha (KPPU)). As the only authority responsible for the enforcement of the ICL, the KPPU may initiate investigations and examinations as well as issue decisions and impose administrative sanctions for any violation of the ICL.
Since its establishment in 2000, the KPPU has actively enforced the ICL and conducted investigations and examinations in various industries. Up to 2019, the KPPU has issued 339 decisions regarding alleged violation of the ICL.2 Among those, 242 decisions were related to bid-rigging.
Based on the information provided on the KPPU's website, the KPPU mostly resolved cases that are related to bid rigging and merger notification in 2019. Out of the 32 resolved cases, 12 cases relate to failure to notify any notifiable transactions to the KPPU and 18 cases relate to bid-rigging practice. The increased scrutiny by the KPPU on alleged notification failure in 2019 is quite apparent when the number of merger-related cases resolved in 2019 is compared with the number of cases resolved from 2010–2018. This trend is actually expected considering in 2018 the KPPU set an agenda to review transactions completed from 2010 (when the Indonesian Merger Control Rules came into force) in order to identify any that should have been notified but were not.
The prohibition under the ICL covers several forms of cartel behaviour, including price-fixing, production arrangements, market allocation, boycotts, bid-rigging and other horizontal arrangements that may restrict competition or harm consumers.
The prohibition of cartels, as well as other stipulations under the ICL, applies to an undertaking, which is defined as any individual or business enterprise, whether incorporated or otherwise, established and domiciled or conducting activities within the territory of the Republic of Indonesia, whether individually or jointly through agreement, in the form of various operations in the economic sector. Although the KPPU has included individuals as reported parties in several cases, there is some debate over whether the ICL applies to individuals.
Violation of the ICL is subject to several forms of administrative sanctions. Should the KPPU conclude that a violation has occurred, it has the power to:
- annul the anticompetitive agreement;
- award compensatory damages incurred as a result of anticompetitive conduct; and
- impose a fine in the amount of 1 billion rupiah up to 25 billion rupiah.
Even though the ICL also stipulates criminal sanctions in the form of imprisonment and criminal fines, these sanctions are only applicable when an undertaking has obstructed the investigation or examination carried by the KPPU or did not comply with a legally binding KPPU decision. The enforcement of criminal sanctions is under the jurisdiction of the National Police, since the KPPU is only authorised to impose administrative sanctions. To date there has been no published official guideline on how to perform criminal sanction procedure.
There is no stipulation regarding formal leniency programmes, an 'immunity plus' policy, 'plea bargains' or other forms of binding settlement, or programmes aimed at detecting cartels under the current ICL. The KPPU in its decision might consider the cooperation offered by the reported party as a mitigating factor in determining the imposed fine.
There have been discussions and attempts to implement a leniency programme through amendments of the ICL. Based on the latest draft of the amendment that is available to the public, the KPPU will have the authority to grant a reduction in the fine to undertakings that admit and report certain anticompetitive agreements. The details regarding the procedure for such leniency programme are still unclear, since the latest draft only stipulates that further provision on the leniency programme will be stipulated in a KPPU Regulation.
i Significant cases
Bid-rigging is the most common cartel practice investigated and examined by the KPPU in 2019. Out of the 19 decisions on alleged cartel practice, 18 of them are related to bid-rigging. The only non-bid rigging cartel decision in 2019 is the KPPU Decision No. 09/KPPU-I/2018 relating to alleged cartel practice in the importation and supply of food-grade industrial salt (the Salt case).
The investigation in the Salt case was launched at the KPPU's initiative, in which the KPPU's investigators accused seven salt importers: (1) PT Garindo Sejahtera Abadi; (2) PT Susanti Megah; (3) PT Niaga Garam Cemerlang; (4) PT Unichem Candi Indonesia; (5) PT Cheetam Garam Indonesia; (6) PT Budiono Madura Bangun Persada; and (7) PT Sumatraco Langgeng Makmur, of allocating the quota for food-grade industrial salt importation and restricting the supply in the market. In the investigation report, the KPPU's investigators stated that since March 2015, consumers in the food and beverages industry have had difficulty obtaining the supply of imported food-grade industrial salt for their production. This led to the price increase for imported salt in 2015–2016. According to the KPPU's investigators, such shortage was unreasonable since their calculation showed that the remaining stock of imported food-grade industrial salt at the end of 2014 was sufficient to meet the demand at the beginning of 2015.
In its decision, the KPPU's Commissions Assembly provided its analysis on the movement of the price for salt in 2015 from each reported party. Based on this analysis, the KPPU's Commissions Assembly concluded that there was an increase in the price from several reported parties. However, the price increase was below 10 per cent, which is deemed by the KPPU's Commissioners Assembly as the inflation rate for two years. Hence, the price increase was deemed insignificant and tolerable. Based on this, the KPPU's Commissions Assembly declared that there was no significant increase in the price for food-grade industrial salt. Considering the alleged cartel practice unfounded, the KPPU's Commissions Assembly then declared all reported parties are not guilty of the cartel allegation.
The used of inflation rate as a reference in assessing price increase can be considered ground-breaking since such approach has never been used by the KPPU before. However, in the Salt Case, it is unclear what data was referred by the KPPU's Commission Assembly to come up with such inflation rate, as official data from the Central Bureau of Statistics suggested that the year-on-year inflation rate for 2015 and 2016 are 3.35 per cent and 3.02 per cent, respectively.3
ii Trends, developments and strategies
Based on the information on the KPPU's website, there is only one cartel case currently undergoing the examination stage. The case involves two of the biggest airlines groups in Indonesia, namely Garuda Indonesia and Lion Air Groups. The KPPU's investigator accused those two airlines of fixing the ticket price for domestic flights.
In August 2019 in several media releases, the KPPU has hinted a possible investigation into the fintech industry. The KPPU suspected that there might be an alleged cartel practice to fix the interest for online peer-to-peer lending through the Indonesian Joint Funding Fintech Association. However, there is no additional information provided by the KPPU relating to this matter.
In several media releases, the KPPU has acknowledged the strategic nature and rapid growth of the fintech industry. The Financial Services Authority (OJK) has also acknowledged the business model of fintech lending that is prone to cartel practice. At the time of the writing of this publication, the KPPU has not released its work plan for 2020. However, based on informal discussion with the KPPU, the fintech industry will be one of the industries to be monitored closely by the KPPU in the year ahead.
Further, in the following years, we may also see the long-awaited enactment of the amendment to the ICL. Even though many have estimated this enactment to take place in 2019, it is understandable that this target was not met considering the changes in the House of Representative following the General Election in mid-2019. Based on the previous draft, the enactment of the amendment will bring significant changes to cartel enforcement by the KPPU through the introduction of the leniency programme, which is expected to provide an efficient tool for the KPPU in detecting cartels and is in line with competition law enforcement best practices in other jurisdictions. The leniency programme will be a very attractive option for undertakings that are involved in an anticompetitive agreement, considering the amendment will likely introduce higher fines compared to the current ICL.
Antitrust: restrictive agreements and dominance
Vertical restraint provisions are regulated in Chapter 3 and Chapter 4 of the ICL. In addition to the above, the KPPU has issued several regulations serving as guidelines for interpreting provisions under the ICL.
The ICL stipulates the following specific prohibitions on to vertical restraints:
- resale price maintenance: any agreement with distributors or other undertakings obliging distributors to refrain from reselling or resupplying goods or services below the set minimum price, creating an unfair business competition;
- vertical integration: any agreements between businesses at different levels of the production chain with the intention of one business controlling the production of the other business's products, in which the latter's products are used as the part or parts of inputs for the former business;
- exclusive distribution agreement: any agreement requiring distributors to only supply or not supply such goods or services to certain parties or in particular places;
- tying arrangement: any agreement requiring customers who purchase one product or service to purchase another different product or service (the tied product or service);
- discount or rebate: any agreement offering certain prices or lower prices on goods or services that requires customers to purchase other goods or services from suppliers or not to purchase suppliers' competing goods or services; and
- market control: any agreement requiring suppliers to engage in discriminatory practices against certain undertakings.
There are no industry-specific provisions or rules applicable under the ICL in general or even more specifically for provisions related to prohibitions of vertical restraint.
When assessing vertical restraint under the ICL, the KPPU should undertake an analysis of whether all the elements of the related ICL article have been fulfilled. The KPPU should know the facts concerning the vertical restraint rationale and also the implications of the agreement for all affected parties. Further, the KPPU should stress its analysis of market structure and whether a dominant undertaking has the ability to abuse its market power. The KPPU may also consider whether there are any restrictions on an undertaking's strategy that forecloses access for potential entrants into upstream and downstream markets. Vertical restraint provisions under the ICL adopt the rule of reason approach, which means in order to declare a violation of such articles, the vertical restraint must be proved by (1) the emergence of a negative impact on the market and (2) the motive and economic benefits gained by the undertaking in doing such restraint.
i Significant cases
Since the enactment of the ICL, the KPPU has rarely initiated an investigation for cases related to vertical restraint prohibitions. In 2019, there is only one decision related to abuse of dominance, namely KPPU Decision No. 15/KPPU-L/2018 concerning container loading and unloading services in the L Say Maumere Port (the Container case). In the Container case, PT Pelabuhan Indonesia III (PELINDO III), as the operator of the L Say Maumere Port, was accused of requiring container shipping companies to stack their containers in the L Say Maumere Port and to use the service provided by PELINDO III, including PELINDO III's trucks, for loading and unloading the containers.
In its decision, the KPPU's Commissioners Assembly declared PELINDO III guilty of the allegation and imposed fine in the amount of 4.2 billion rupiah. The KPPU's Commissioners Assembly also ordered PELINDO III to cease the mandatory container stacking policy. Following this decision, PELINDO III filed an appeal to the Surabaya District Court, and later on the Surabaya District Court annulled the KPPU's decision.
ii Trends, developments and strategies
As there is only one decision relating to vertical restraint prohibition in 2019, there have been no significant developments on the enforcement of the provisions by the KPPU.
With the rise of digital business in Indonesia, we can expect more enforcement of the provisions by the KPPU towards companies in digital markets.
For vertical restraint prohibitions, one of the challenges of enforcement would be defining the relevant market. Since vertical restraint prohibitions are closely related to abuse of dominance conduct, the challenges in this respect also include the determination of the market shares in order to accurately conclude the relevant parties' dominance in the market.
Sectoral competition: market investigations and regulated industries
In 2017, the KPPU published a report regarding digital economies issues in Indonesia. The report was made as part of the Technical Cooperation Agreement with the Australia Indonesia Partnership for Economic Governance (AIPEG) to promote effective competition policy. The KPPU also conducted some consultations with several stakeholders that have an interest in Indonesia's digital economy, such as the Indonesian Ministry of Trade and the OJK, among others.
The report explains that digital technology is quite disruptive and is transforming the traditional markets and business models. In this era, the relevant stakeholders, such as the government as well as the competition authorities, should be able to protect and empower consumers in a complex and rapidly developing online environment. However, at the same time, the government should be able to maintain the growth of the economy and business, including the growth of digital technology-related businesses.4
Furthermore, the report explains that most of the challenges faced by the government involve the competition between the traditional and digital services providers. Since the governing regulations related to the digital business operations are not similar to the traditional ones, the traditional service providers often face an uneven playing field in the market.
The report also describes that the regulation of digital services is considered challenging as regulators must determine whether there is a basis for regulation; whether the regulation will restrict the market entry; and whether the regulation is practical and enforceable. If regulation is too strict, it can hamper innovation and increase costs, as well as restrict the growth of the Indonesian economy in the future. From a competition perspective, the issue that arises is whether the entry barriers can prevent the competition, and whether they are natural or induced (e.g., by anticompetitive practices or exclusive licences). As such, any regulatory framework on digital technology aspects must be flexible in order to keep pace with and benefit from technological advances. The new framework should also be able to reduce the entry barriers while at the same time maintaining consumer protection and the certainty of rules.5
Further, the report also recommends that to underpin the digital economy and enhance trust from the consumers, a coherent data framework is required. Any data protection must be flexible to further enable innovation. The economic and social benefits of data flows, including increased market access, investment, innovation, development and growth, as well as increased productivity, are best realised when there are no data residency restrictions.6
Under the current regime, there is no specific provision under the ICL regarding state aid. The KPPU currently does not have any focus on state aid control; therefore, state aid control is not applicable in Indonesia.
Pending the long-awaited amendment of the ICL and in response to the urgency from the KPPU to oversee non-share-based transactions that may raise anticompetitive concerns, the KPPU recently published KPPU Regulation No. 3 of 2019 on Assessment of Merger or Consolidation of Business Entities or Share Acquisition of Companies that could Result in Monopolistic Practices and/or Unfair Business Competition (the 2019 Merger Guidelines). The 2019 Merger Guidelines came into effect on 3 October 2019 and supersede the previous 2013 Merger Guidelines. Any notification that has been registered by the KPPU and has not been stipulated prior to the 2019 Merger Guidelines came into force will be processed based on the previous 2013 Merger Guidelines.
The most notable feature under the 2019 Merger Guidelines is the mandatory notification of asset acquisitions to the KPPU. This means that after escaping scrutiny by the KPPU, asset acquisition is finally receiving the same treatment as share acquisition.
The Indonesian merger control regime adopts a mandatory post-merger notification system whereby all mergers that satisfy the statutory threshold and certain criteria shall be notified to the KPPU within 30 working days of the transaction becoming legally effective.7 Under the 2019 Merger Guidelines, the KPPU outlines four transactions that are subject to the Indonesian merger control rules: mergers, consolidation, share acquisition and asset acquisition (hereinafter collectively referred to as 'mergers').8
In general, the criteria for notifiable mergers under Indonesian merger control are as follows:
- the transaction satisfies the statutory threshold. The above notification thresholds also apply to asset-based transactions. However, the calculation of asset threshold in asset-based transactions is calculated based on the worldwide value of the assets of (1) the buyer group; plus (2) the value of the purchased assets as stated in the target's financial statements. If the number (2) above is not available, the KPPU will look at the value of the transaction. The thresholds are:
- the combined sales value in Indonesia of the merging parties (buyer and target) exceeds 5 trillion rupiah; or
- the combined worldwide assets value of the merging parties (buyer and target) exceeds 2.5 trillion rupiah. If both of the merging parties are banks, the combined asset value must exceed 20 trillion rupiah. If only one of the merging parties is a bank, it must adhere to the asset value threshold of 2.5 trillion rupiah;9
- the transaction is performed by and between non-affiliated parties;10
- the transaction results in a change of control;11 and
- specifically for an asset-based transaction, the transaction can trigger a notification if:
- the assets are not sold under an ordinary sales activity; and
- it increases the acquirer's market share or integrate vertically with the business activities of the acquirer or its group company.12
For foreign mergers, there is one additional criterion that needs to be satisfied: a local nexus (i.e., all or one of the parties to the transaction has any business activities in or make sales to Indonesia).13
i Significant cases
Since the enactment of the regulation of Indonesian merger control in 2010, the KPPU has never issued any opinion with objections. An opinion will be issued only if there is any alleged potential of anticompetitive impact resulting from the merger. To date, the KPPU has only issued no objection opinions with or without remedies. Based on publicly available opinions, to date the KPPU has issued around nine no objection opinions with remedies. One of the recent high-profile conditional no objection opinions is the acquisition of shares of Vinythai Public Company Ltd (Vinythai) by Asahi Glass Company Ltd (Asahi). Asahi is a Japanese company that engages in the production of glass, electronic chemicals and ceramics. Meanwhile Vinythai as the target company is domiciled in Thailand and engages in the manufacture of polyvinyl chloride (PVC) and epichlorohydrin, which are mostly used in the plastic industries.
In its assessment, the KPPU only focused on one type of PVC product sold by Vinythai in Indonesia, namely suspension PVC (S-PVC). S-PVC is used for the production of pipes, film and sheets, floors, bottles, cables and other things. In its opinion, the KPPU found that one of Asahi's subsidiaries in Indonesia was the market leader in PVC, with a market share of more than 50 per cent. This resulted in a significant increase in the Hirschman-Herfindahl Index (HHI) for this transaction particularly on the S-PVC market. The KPPU then continued the assessment on this transaction to Phase II (comprehensive assessment) as the HHI was higher than 1,800.14
Based on KPPU's Phase II assessment, there was a significant structural barrier for the S-PVC market in Indonesia. The KPPU also found that based on upward pricing pressure (UPP) analysis, this transaction could put significant pressure on the domestic price of S-PVC. The result from the efficiency test also showed that the potential efficiency of this transaction may not lead to a price decrease to one of the merging party.
Considering the above analysis, the KPPU decided to issue a no objection opinion towards this transaction with the following conditions:
- Asahi should report their production, sales and price of S-PVC in Indonesia to the KPPU on a quarterly basis for the next three years; and
- Vinythai should report its export and price of S-PVC to Indonesia on a quarterly basis for the next three years.
The above conditions were imposed by the KPPU on the merging parties to prevent the acquisition from resulting in anticompetitive effects.
In addition, to date there have been at least 28 decisions issued by the KPPU related to the failure to notify mergers. Among these 28 cases, the KPPU imposed penalties on 26 transactions. As for the remaining two cases, the KPPU decided that the merging parties in those transactions were not proven guilty for the failure to notify allegation.
One of the significant cases on merger control enforcement in 2018 that were not proven guilty is the decision of the late notification of PT Erajaya Swasembada, Tbk (Erajaya), an Indonesian company engaged in the mobile phone import industry. Erajaya was alleged to have notified its acquisition of PT Axioo International Indonesia (Axioo), an Indonesian company in the mobile phone manufacturing industry, 145 working days late. Even though Erajaya was found to have notified the transaction late, the KPPU did not impose any sanction on Erajaya, considering that its acquisition over Axioo was conducted in order to comply with the requirement under the Ministry of Trade Regulation which obliges mobile phone distributors to have a manufacturing facility in Indonesia.
Thus far there is only one foreign transaction that has been sanctioned by the KPPU due to failure to notify, which is the share acquisition of Woongjin Chemical Co by Toray Advanced Material Korea Inc.
In 2019, the KPPU imposed the highest fine ever in a failure to notify case in the amount of 12.6 billion rupiah on PT Matahari Pontianak Indah Mall for submitting the notification of the share acquisition of PT Indo Putra Khatulistiwa 240 working days past the deadline.
Thus far there is only one foreign transaction that has been sanctioned by the KPPU over failure to notify, namely the share acquisition of Woongjin Chemical Co by Toray Advanced Material Korea Inc. Both Toray Advanced Material Korea Inc and Woongjin Chemical Co had business activities and sales in Indonesia. Subsequently, their combined asset and sales value met the threshold and, therefore, the acquisition transaction triggered a notification obligation in Indonesia. The KPPU imposed a fine of 2 billion rupiah on Toray Advanced Material Korea Inc for submitting the notification of the share acquisition of Woongjin Chemical Co four working days past the deadline.
Currently, the KPPU is quite active in carrying out merger control investigations in Indonesia. During 2018, the KPPU issued eight decisions or half of the total number of all decisions on the failure to notify cases issued until that year. In 2019, such number was increased to 12. All of the issued decisions in 2018 and 2019 relate to domestic transactions.
ii Trends, developments and strategies
In 2018, the KPPU received 50 notifications of mergers.15 There was a decrease in the number of mergers notified to the KPPU in 2019 compared with 2018, which amounted to 74 transactions.16 A similar decrease also occurred in 2018 where the KPPU saw a reduction of 17 per cent to the number of mergers notified in 2018 compared with 2017. According to the KPPU then, this might be for two reasons: the lack of awareness of the undertaking to submit the notification to the KPPU; and a significant decrease in the number of corporate actions, especially merger transactions.17
Furthermore, there were no updates on the KPPU's website regarding the 2019 notification list after 31 May 2019. During January–31 May 2019, all the notified transactions submitted to the KPPU are shares acquisitions transaction.18
Based on the KPPU's website, during January–31 May 2019, eight out of 50 notifications were foreign-to-foreign transactions. Japan and Singapore are listed as the top two countries that notified the most foreign-to-foreign transactions to the KPPU in 2019.19
The KPPU has not issued any public opinion for mergers submitted in 2019. Therefore, the details of the mergers submitted in 2019 are not publicly available yet. In 2018, however, the most notified mergers related to the manufacturing industry (35.4 per cent), the energy sector (17 per cent) and the property sector (14 per cent). There were several mega transactions whose values exceeded 1,000 trillion rupiah notified to the KPPU in 2018, which, among others, include:
- the acquisition of PT Freeport Indonesia by PT Inalum;
- the merger between KWA Investment Co and Monsanto Company;
- the acquisition of PT Bank Danamon, Tbk by MUFG Bank Ltd; and
- the acquisition of TMF Orange Holding BV by Saphire Bidco BV.20
Based on the previous draft, one of the key points in the amendment of the ICL related to the merger control issue is the change from a mandatory post-merger notification to a pre-merger notification regime.21 However, the previous members of the House of Representatives have been replaced with new members following the general election in 2019. It is worth noting that the current members of the House of Representatives have included the amendment of the ICL into the agenda for the current term. Unfortunately, there is no further information on the timeline of the amendment and whether the current members will use the draft amendment of the ICL prepared by the previous member of the House of Representatives.
The KPPU focused more on merger control enforcement during 2018 and 2019. With the enactment of the new 2019 Merger Guidelines, we should be seeing an increase in the number of transactions reviewed by the KPPU as asset-based transactions are now subject to the notification to the KPPU. To the date of this publication, we found no publicly available information of asset transactions that have been notified to the KPPU. In the coming year, we can expect the KPPU to put more effort into cartel enforcement, particularly in industries that are closely related to the interest of the general public, such as food commodities and airlines, as well as industries that are strategic in nature and undergoing a rapid growth, such the fintech industry.
Despite the unclear timeline of the amendment to the ICL, the KPPU will surely benefit from the amendment, both in its cartel and merger control enforcement. The implementation of the extraterritoriality principle through the amendment will provide the KPPU with the power to review and supervise cross-border agreements, activities, and transactions that potentially affect the Indonesian market. This may be necessary to address the developing competition issues entailing the rise of the digital economy that by nature are likely to involve markets in different jurisdictions.
1 HMBC Rikrik Rizkiyana, Farid Fauzi Nasution are partners, co-heads of competition practice group, Vovo Iswanto is an Of Counsel at Assegaf Hamzah and Partners.
2 The authors' own calculation based on the KPPU's website.
5 The Digital Economy in Indonesia Report, available at http://eng.kppu.go.id/newkppu/wp-content/uploads/REPORT_Digital_Economy_27-December-2017-FINAL.docx.pdf.
6 See the Digital Economy in Indonesia Report.
7 See Indonesian Government Regulation No. 57 of 2010 on Merger or Consolidation of Business Entities and Acquisition of Shares that may result in Monopolistic and/or Unfair Business Competition Practices (GR No. 57/2010), Article 5(1).
8 See GR No.57/2010, Article 1.
9 See GR No.57/2010, Article 5(2).
10 See the KPPU Regulation No. 3 of 2019 on Assessment of Merger or Consolidation of Business Entities or Share Acquisition of Companies that could Result in Monopolistic and/or Unfair Business Competition Practices (Merger Guidelines 2019).
11 See Merger Guidelines 2019.
12 See Merger Guidelines 2019.
13 See Merger Guidelines 2019.
14 See KPPU Press Release on Asahi/Vinythai transaction, available at http://eng.kppu.go.id/kppu-