A Pos Indonesia staff arranges packages for delivery at a post office in Palembang, South Sumatera on June 21, 2017. (Antara Photo/Feny Selly)

Pricing Formula, Vessel Ownership Among Competition Hurdles in Logistics Sector

BY :JAYANTY NADA SHOFA

JUNE 12, 2021

Jakarta. Indonesia’s logistics sector is still facing various competition hurdles such as pricing regulations and obligatory vessel ownership, to name a few, according to the Organization for Economic Cooperation and Development, or OECD.

The OECD has recently run a competition assessment across Indonesia’s logistics subsectors, including maritime freight transport and small package deliveries. The result? There is still much work to be done.

“Indonesia has made quite significant strides in the last few years converging towards best practices in many fields, including in competition," OECD senior competition expert Ruben Maximiano told the Jakarta Globe in a recent interview. 

"In the logistics sector, there is a quite significant increase in overall performance and reductions in logistic costs, but we still think much remains to be done,” Maximiano said.

In maritime freight transport, the OECD recommends the government remove the vessel ownership licensing requirement. 

According to the 2008 Law on Shipping, service providers must own vessels of a certain size (at least 175 gross tonnages) to obtain a permit.

The OECD fears this requirement can hinder smaller firms from entering the market, while larger potential entrants have the upper hand as they can purchase a vessel. With fewer entrants comes less competitive pressure for the established operators.

“Owning a vessel can significantly increase the costs upfront, which will discourage market entry,” Ruben said. 

“In other jurisdictions, what seems to be the common practice is you are able only to lease a vessel for a license. A lease would significantly decrease costs and spur entry,” he said. 

The small package delivery sub-sector —which is currently on a roll thanks to e-commerces— also has its share of anti-competitive restrictions, namely the strict pricing formula. 

Under the 2012 Communication and Information Technology Ministry regulation, commercial postal services must follow a certain pricing formula in which the tariff cannot go lower than its production costs. 

To keep things under control, the government obliges postal services to report their set prices. 

Non-compliant postal services would risk getting a written warning. Those who have been warned thrice can have their permit revoked.

The OECD suggests the government remove the below-cost pricing ban and its penalty provisions to foster market entry.

“Below-cost pricing may be a pro-competitive strategy. A new company might wish to price below its costs to enter the market. In the short-term, this might lead to an expansion of demand and allow rivals to enter,” Ruben said.

During the discussion, Ruben highlighted charging below costs would only be predatory pricing if a dominant firm undertakes such a strategy. 

“So companies that don’t have a dominant position should be able to price below costs presumably only until they can enter the market,” he said.

“Indonesia’s competition law also covers predatory pricing as an abuse of dominance. The Business Competition Supervisory Commission [KPPU] should be well-equipped to monitor, and to eventually sanction if applicable, any predatory strategies undertaken by a dominant firm.”

But is addressing anti-competitive regulations necessary amid the Covid-19 pandemic? According to Ruben, competition policies and KPPU can help pave the way for a faster economic recovery.

“Empirical evidence has shown in prior crises, economic recovery was slower whenever competition was suspended or when state measures did not consider a well-functioning competitive market," Ruben said.

Ruben noted that Indonesia should take careful consideration of competition policies and KPPU’s budget and resources during these times.

"KPPU plays an important role in economic recovery. Not just for its enforcement powers, but also in helping the government precisely identify anti-competitive regulations."

Transportation and logistics account for 4.72 percent of Indonesia's $1 trillion gross domestic product. Still, restrictions during the pandemic have pared it by more than 13 percent in the first quarter this year, making it the worst-performing sector in the period. 

 

 

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