THE CHRONICLES OF A CAPITALIST LAWYER

RANDOM THOUGHTS OF A CAPITALIST LAWYER ON LAW, ECONOMICS, AND EVERYTHING ELSE

  • A Phony Market Oriented Law: Some Critiques on the New Electricity Law


    I have grown tired with the absurdity of some of the laws that have been passed recently by the Indonesian House of Representatives ("DPR"), particularly the laws on film and electricity (thanks to Mova for the link on Electricity Law). I won't make a review on the new Film Law as Rob Baiton has made an excellent summary and review on such law in his post here. So, I'll go with the new Electricity Law instead.

    The Current Nature of Indonesian Electricity Business

    Now, before we go forward with the review, we need to understand the nature of electricity business in Indonesia. First of all, in Indonesia, and probably in the majority parts of the world, electricity has been considered as a public utility, which means that it is also a political commodity. I'll discuss further below on the implication of electricity status as a political commodity.

    As you might be aware, there is only one electricity provider in Indonesia, PT PLN (Persero) ("PLN"), an Indonesian state owned company, that has been deemed by the Government to provide public service obligation in the electricity sector. As a public service company, PLN has the first priority to establish electricity business in Indonesia and may receive Government supports in order to run its business, including to receive subsidies to replace any costs of PLN for performing such public task.

    Under the old Electricity Law (Law No. 15/1985) and its implementing regulations, the electricity business is actually opened to private enterprises, and to certain extent these companies can also directly sell and distribute their electricity to end consumers. However in practice, most private enterprises sell their electricity to PLN and then PLN shall sell and distribute such electricity power to the people. Arguably, this is not efficient for business purposes, but as will be discussed further, I tend to believe that this is the best option in Indonesia, at least until we have a better solution.

    Issues on Electricity Price

    Historically, the electricity price is always determined by the Government, which makes sense when we considering the nature of electricity as a political commodity. Since politicians need to maintain their votes, most of them would try to make the electricity price as low as possible by all necessary means, even if such means are not economically viable. What is the easiest option for the Government then? Subsidizing the electricity price. It causes a considerable amount of pressures to our Stated Budget, but hey, who cares as long as the people is happy, right?

    Who is the main victim of this policy? PLN. For years PLN has been operating in loss, not because they are not efficient but because they cannot sell their electricity in accordance with the market price or at least a price that can cover their basic costs. Though I understand that now some type of industries must purchase electricity from PLN on a market based price, the majority of ordinary citizen like us pay the subsidized price of electricity.

    The other victims of this policy are of course private enterprises. As long as there is a subsidy, market price wouldn't work, and thus there are not many incentives for private enterprises to enter into this business. Even worse, there is also a price control for selling electricity to the end consumers. So, the least thing that they could do is to sell electricity to PLN and hoping for a better price which is of course still higher than the subsidized price.

    Review on the New Electricity Law: The Government Misunderstanding of The Market



    At a first glance, it seems that the new Electricity Law is a market oriented law. The law unbundles the electricity industry by separating electricity business into electricity generation, transmission, distribution, and sale businesses, and opens the opportunities for regional companies and private enterprises to enter directly into the electricity business in certain territories of Indonesia (provided that PLN doesn't have the capacity to establish and run an electricity business in such territories). So, under the new Electricity Law, private enterprises can now sell their electricity to end consumers. Seems a very market oriented law to me, but is it true? Now, before people go to the Constitutional Court and wasting their time asking the Court to deem this Law as unconstitutional due to its market oriented policy, I suggest that those people should look further into this new Law and compare it with the old one, so that they can realize that this Law is indeed one of the greatest blunders of all time.


    Yes, all of the concepts provided in the new Electricity Law has been already regulated in the old Electricity Law and its implementing regulations. If there is an actual change, that must be the fact that the new Eletricity Law combines the concepts in the old Electricity Law and its implementing regulations into one Law, and yeah now the new Electricity Law opens the possibility of local governments to join the mess. Good job, DPR, good job.


    Further, apart from the introduction of regional government in determining the price of electricity, there is no change to provisions on electricity price control. Articles 33, 34 and 35 of the new Electricity Law clearly state that any electricity generating business license holders cannot sell their electricity to the consumers without having secured approvals from the Government or local government. The law does state that the price of electricity should be based on healthy market practice, but what the use of having this provision if in the end the price should be approved first by the Government or local governments?


    In my opinion, the above articles render this new Electricity Law to become useless if not bring unnecessary problem. The reason why we open a business to the market force is to let business players compete and create competitive prices that benefit the consumers. But that wouldn't happen if the prices are still being controlled! As long as the politicians care about their votes in the next election, who would willingly let the electricity price goes to the market? They all know already that the current price of electricity is lower than the actual market price.


    In other words, there would be no incentives for business players to enter into electricity business and start directly selling their electricity to consumers if they cannot enforce market price. The only way that this policy will work is if the Government/local governments subsidize the price of electricity generated by private enterprises in order to cover their costs. However, this will create additional paper work and in overall would not be efficient.


    I bet that the private enterprises would rather stick to the old ways, i.e. they sell their electricity on a market price basis to PLN (theoretically it's not a truly market price, but it is still the best option) and then PLN will sell such electricity to the people in subsidized price. Everyone would be happy and the Government will not have to be bothered by dealing with entities other than PLN with respect of subsidy.


    Some Thoughts on Indonesian Electricity Business
    I think this is the time for the Government to be consistent in issuing its policies. The Government can't expect that private enterprises would be amused by this mumbo jumbo government-market synchronized regulation. It doesn't create harmony, it creates discord! If we want to stick with market oriented policy, we would need to let it work based on market principles, the price should not be fixed anymore and the most efficient company will emerge as the winner from the competition.


    But come on, can we do that? I'm not sure that we can quickly change our policy after having so many years running the electricity business as we have it today. That would be suicidal. In my mind, rather than creating a fake opening of business opportunities, the Government should focus on helping PLN to become a more efficient company, which means that PLN can reduce the costs of its electricity generating, cutting its actual price and therefore would enable the Government to reduce the subsidy in the long run. How can the Government help? Well, some have been done such as the Fast Track program where the Government acts as a guarantor for PLN's financial obligations for establishing coal fired power plants. The Government can also provide tax incentives to PLN or build new infrastructures to be injected to PLN's equity as a payment in kind. Of course this will cause the Government to bear additional costs in the short run (since they will also need to pay the subsidy), but in the long run, if PLN can improve its efficiency, all of us, including the Government, would receive the benefit. I would love to see the implementation of market principles in the electricity sector, but now is not the right time.

  • The Indonesian Cigarettes Chronicles: A Quick Review on the Latest Constitutional Court's Decision


    Today, the Constitutional Court issues its decision on the Judicial Review of Article 46 Paragraph 3 (c) of Law No. 32/2002 on Broadcasting ("Broadcasting Law") which basically deals on the constitutionality of the provision of a Law that allow cigarettes advertisement in broadcasting media. You can see the complete 306 pages decision here. The constitutional claim was made by among others the National Committee of Child Protection and the Child Protection Agency of West Java.

    From my quick reading of the decision, I can conclude that the main target of this claim is to banish all type of cigarettes advertisement in Indonesian broadcasting media by claiming that the above provision of the Broadcasting Law is contravening with Article 28B paragraph (2) (the right of each child to live, grow, and develop, and to earn protection from violence and discrimination), Article 28A (the right of each person to live and maintain its life), Article 28C paragraph (1) (the right of each person to develop himself through satisfaction of basic needs) and Article 28F (the right of each person to communicate and obtain information to develop himself and his society) of the 1945 Constitution.

    In its decision (by 5 to 4 vote, which means that it is a very close decision), the Constitutional Court rejects such claim entirely based on the following reasons: (i) cigarettes industry is still a legal and valid industry in Indonesia and therefore has the same right with other industries to promote and make advertisement on its business activities; (ii) there is already a strict regulation on cigarettes advertisement in Indonesia and therefore, if there is a violation to such regulation, such violation must be handled through the mechanism stated by the relevant regulation, i.e. it is not an issue on the constitutionality of the disputed provision, rather an issue on the implementation of a regulation; (iii) it is not clearly evidenced that there is a causality between cigarettes advertisement and the inability of a person to develop himself and his life; and (iv) even if cigarettes advertisement in broadcasting media is deemed unconstitutional and therefore must be banned, it won't affect the ability of the cigarettes company to use other media and mechanism to promote cigarettes and therefore it would not be effective to deemed such provision as unconstitutional and it wouldn't be fair to the cigarettes industry, i.e. why are they being prohibited to advertise in the broadcasting media only?

    How about the dissenting opinion? It's quite simple, they discuss the danger of cigarettes and their bad effect to the youth and also the fact that while the advertisement of any other addictive substance is prohibited in the broadcasting media, the advertisement of cigarettes (which could definitely be considered as an addictive substance) is not prohibited as long as the advertisement does not involve any visualization of cigarettes. Therefore, in their opinion, advertisement of the cigarettes in the broadcasting media should be deemed unconstitutional and should be prohibited.

    I tend to support the Constitutional Court official decision. However, before I discuss my reasons to support the decision, let me tell you that I'm not a fan of cigarettes, in fact, I hate them. I can't breath normally when cigarettes are all around, they cause bad odors and will definitely ruin your health. I guess everyone knows that, after all each cigarettes advertisement contains a warning on the danger of smoking and its negative effect to human's health.

    So why do I support the Constitutional Court decision? Simply because from legal point of view their analysis is correct. If the Government declares that an industry is legal to be established and operated in Indonesia, why prohibit such Industry to develop its business here, including making advertisements through various broadcasting medias? Such advertisement prohibition would be nonsense and it would be better if from the first place the Government banned the entire cigarettes industry in entirety. Further, it is also correct that rather than arguing the constitutionality of the advertisement of cigarettes in broadcasting media, it would be better to focus on enforcing the regulation on cigarettes advertising. You know, there are already many regulations in Indonesia which deal with the danger of cigarettes and the proper advertising mechanism for cigarettes. Why don't we improve these regulations instead?

    Though I would love to see the banning of cigarettes in Indonesia, we need to look at a bigger picture here, as long as the benefit of having cigarettes industry in Indonesia is higher than the costs of having such industry, there would never be an end to the Indonesian cigarettes industry. The case becomes more difficult since the benefit of having the industry is easier to calculate, i.e. the amount of Government income from cigarettes duty and levies, the huge income of most of the cigarettes companies, and the amount of worker which are involved in this industry, compared to the costs of having such industry, i.e. bad development for the youth and public health which is very hard to calculate.

    If we really want to prevent people from smoking in Indonesia, I would suggest that rather than prohibiting the development of the business which may also negatively affect the whole economy, we should build an industry which can provide the substitution of cigarettes in a more efficient way and can be easily accessed by all people, such as chewing gum or therapic medicines. If the Government really cares with the quality of life of its citizens, it can encourage the development of this cigarettes substitution industry by providing some incentives such as tax cut, subsidy, easier licensing, etc. Of course continuing education for the people on the danger of smoking would be always needed.

    We can also use one of the most famous legal principle, i.e. people must be responsible for the externalities of their acts, or in a less complicated way, if you cause loss to other people, you need to be responsible to such loss and pay the damages. To certain extent, this has been reflected in our current regulation on cigarettes, i.e. this industry pays a huge amount of money to the Government in the form of tax and duties in order to run their business. Further discussion can be made on what kind of policy that need to be established in order to implement this principle.

    In the end, our goal here is to replace the cigarettes industry through several stages in order to ensure that the transition would be smooth and would not adversely affect our economy. Remember, there are many stakeholders in this industry, and there is no easy answer when dealing with cigarettes industry. Let us hope that we can find a better solution in the future.
  • On Why the Negative List Should Stay Away from Publicly Listed Companies


    Let me start this article by explaining the basic concept of the Negative List. It is a regulation issued by the President of the Republic of Indonesia stipulating the area of business which are opened (with certain requirements) or closed to foreign investment in Indonesia. The main reason for Indonesia in having this Negative List is to close or limit any foreign investments in industries which: (i) are being prohibited in Indonesia, such as gambling; (ii) are being considered as strategic for the interest of Indonesia; and (iii) are being reserved for small to mid scale business players.

    In short, except for point (i), the Negative List can be considered as a protection mechanism imposed by the Government of Indonesia. Is it good? I must admit that I'm not a huge supporter of the Negative List, as I don't believe that restriction of ownership would be effective to protect the what so called interest of the people of Indonesia.

    Up until today, it is generally assumed that the Negative List is not applicable for publicly listed companies. The Negative List is not quite clear on this issue, but at least Law No. 25/2007 on Capital Investment ("Investment Law") states that the provisions of the Investment Law are not applicable for any indirect or portfolio investments, whereas the majority of Indonesian legal scholars interpret that indirect or portfolio investments refer to investment in the capital market, i.e. in publicly listed companies. Therefore, as a logical consequence of this interpretation, the Negative List (in its capacity as one of the implementing regulations of the Investment Law) should not be applicable to publicly listed companies.

    However, recently I've heard a shocking news, i.e. there are some discussions within Government officials that the Negative List will be revised in order to cover publicly listed companies. If such plan is executed, foreign investment limitations will also be applied to publicly listed companies. Clearly, I oppose this plan and my reasons shall be further discussed below.


    First of all, how can the Government limits foreign ownership in the shares of publicly listed companies? Those shares are listed on the Indonesia Stock Exchange and are effectively being traded (at least most of them). Some of the most active shares are even being traded by each second. While it is possible to control the sale of shares in an Initial Public Offering, it is almost impossible, if not entirely impossible, for someone to control or limit parties in purchasing the shares of a publicly listed company in the secondary market, unless such purchase is considered as a change of control, i.e. takeover.

    Even if it is somehow possible to limit the foreign ownership in the secondary market, any attempt to maintain such limitation would be mostly inefficient since it will require a great monitoring mechanism. Under the current technology, such mechanism would be very costly. You want to supervise all transactions and then impose a system which will limit the purchase of shares by foreigners if certain thresholds have been satisfied? And then you want the monitoring system to operate on per second basis? I say, tough luck.

    A possible restriction mechanism that can be applied is by limiting the amount of shares that can be offered to the public. However, this is not recommended because such restriction may negatively affect the liquidity of the shares of such company and as a result of which, the public may suffer unnecessary losses.

    Second, an attempt to limit foreign investments in the capital market might cause a turbulence within the capital market. I understand that some people might regard this risk as a theoretical risk rather than an actual risk, but I wouldn't be too confident if I were them. Like or not, in most of the time, capital market is driven by fear and greed. Announcing to the public that foreign investment limitations will be applied to publicly listed companies is a very good way to cause unnecessary fear within market players. And believe me, the imaginations are unlimited, foreign investors may think that the market condition is not conducive anymore, some of them will think that their investments will be reduced or they will be forced to divest their shares, etc. In any case, it wouldn't be good for most of the time!

    Third, with respect to foreign investments, most Indonesian regulations do not differentiate the ultimate ownership of foreign entities who made investment in Indonesia, i.e. whether the ultimate owners of such foreign entities are truly foreigners or Indonesians. You may be aware that many Indonesian business entities use foreign companies as their investment vehicle in the capital market, which is mainly done for tax purposes.

    As a result of the above policy, any investment made by foreign entities in Indonesia will be considered as foreign investments regardless of the ultimate ownership of such entities. Applying this limitation to publicly listed companies would be counterproductive because it may also jeopardize the interest of Indonesians who made their investments through foreign entities.

    In addition, as stated above, is having an ownership restriction would be an effective way to protect the interest of the Indonesian people? By all means, capital investment, whether made by foreign or domestic entities should be good for the development. If we want to have the full benefit of such investment, forget about the ownership, or at least put it as the last issue to be considered. The most important issue that we need to achieve through foreign investments is how we can actually "force" those foreign investors to transfer their knowledge to their Indonesian counterparts and how these foreign investments will contribute to the greater good of the society, i.e. creating job opportunities and establishing infrastructure for stronger industry in Indonesia. Shares ownership would be useless if the Indonesian counterparts are not capable to conduct the business as they will end up as puppets of the foreign investors. Surely, this is not something that we want.

    Now, if the Government insists that this new regulation will be applied, I will suggest that: (i) the limitation will only be applied to publicly listed companies established after the enactment of such regulation, so all publicly listed companies prior to the enactment will be exempted and their shares are free from any foreign ownership limitations; (ii) the limitation (if any) should only be applied to foreign investors who clearly control the relevant publicly listed companies (under the current Bapepam-LK regulation, a party will be deemed as a controller of a publicly listed company if it owns at least 50% of the shares of such company).

    My advice to the Government, stop trying to make politically correct acts, you won the election with a considerable support from the voters, so please focus on making the best policy available rather than trying to look like a populist government which is a shame.

  • Ketchup Economics and The Problem of Valuation


    Here is a long and nice article on the current macroeconomics issue by Paul Krugman. I must admit that I share the same view for some of his thoughts, particularly with respect to the misuse of economic models to explain the world and the argument that the market is perfectly efficient and can always maintain that condition. For further discussion, you can see my post here on the issues of Capitalism. To cut it short, I never believe that someone can explain how the market works through some sophisticated mathematical equations and models. Of course you need to make some calculation in economics, but don't expect that everything will work perfectly in accordance with the calculation, there are too many factors which are affecting the economics performance. Now, let us move to today's main theme. What exactly is Ketchup Economics? According to Mr. Krugman, this is related to the assets valuation method use by finance economists in determining whether asset prices are reasonable, i.e. they don't ask whether asset prices made sense because of its real-world fundamentals like earnings, but whether asset prices made sense given other asset prices. Using Larry Summers' parable, the simplified version would be as follows: The "ketchup economists" have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup, therefore they conclude from this fact that the ketchup market is perfectly efficient. Got the message? Using the Ketchup Economists logic of thinking, the fact that the prices of certain assets are going considerably up or down in certain periods should not be questioned as long as the prices of other similar assets are going up or down together. Without a doubt, this is dangerous. But how can we blame them for making this kind of assessment? If we take the assumption that the market is truly efficient, it is useless to make a price valuation based on the fundamental aspects of the assets, since it is the market force, the supply and demand mechanism, that will determine the exact value of those assets. Let me clarify first, while I do believe the concept of Invisible Hand, i.e. the best way to let the economy moves is by letting the force of supply and demand works automatically, I also believe that the market is not always efficient, there would always be a case where the amount of the supply or demand is too high or too low. There are many factors that can affect such amount of supply and demand, and I can assure you that not all of those reasons were made on a reasonable basis. Sometimes people are being in a state of high optimism and are willing to take more risks and then the economy moves forward, in other times people are being too pessimistic and then we're going through a recession. Then, what could be done? To be honest, I don't know yet. Many professional economists have tried to solve the problem, but no one has ever succeeded, so I don't think that I can provide the perfect solution. However, since most victims of the current crisis are major financial institutions, I would suggest that a better supervision mechanism should be implemented by the Government in the near future. We would also need certain regulations that will encourage financial institutions to have a better assessment on their business and investment risks and to ensure that they can always maintain a prudent approach with their risk management. I was quite surprised with the collapse of some major financial institutions back in 2008, it is just ridiculous that from all the possible companies to collapse, those who should actually be the most prudent companies are the ones who were proven not prudent and therefore collapsed firstly. In addition, since most of the major financial institutions are relying on rating companies in determining their risk of investment, it would also be helpful if the Government can start to have a meaningful discussion with major rating companies concerning their rating standards in order to create a better and more prudent rating mechanism. Further elaboration on this idea will surely be needed in the future.
  • A Short Defense on Lawyers Work


    I'm quite shocked with this piece of letter, especially because it was published in the New York Times. What's wrong with being a highly paid lawyer? Is it that bad to work as a lawyer in the United States? How come the shortage of job with high salaries is good for the development of law graduates? And, the most important question is, how on earth can someone made a claim like this: "as the jobs with large salaries disappear, law students will draw on the thoughtfulness, intelligence and perseverance that got them into law school in the first place in order to find employment that they actually find rewarding."

    Is he trying to say that having a career as a lawyer would cause law graduates to lose their thoughtfulness, intelligence and perseverance??? Pardon me sir, but among many types of career that can be pursued by a law graduate, I find that being a lawyer provides the biggest opportunity for a law graduate to maintain and increase their thoughtfulness, intelligence and perseverance. It goes without saying that a good lawyer must combine all of those three qualities in order to survive in their job.

    Any law firm who truly cares about the quality of their work and talents would be most probably establish a system which will ensure that all of their lawyers are able to maintain those three qualities. These include proper distribution of work, work review mechanism, and systematic training program. Why I believe that those three qualities will be maintained and increased by becoming a lawyer? See some examples below:
    • If you want to train a lawyer's perseverance, throw him into a very boring due diligence exercise. It's very important, but everyone knows that it's an administrative paper work. Those who can survive the hellish due diligence exercise will not doubt have a perseverance of a true knight.

    • If you want to train a lawyer's thoughtfulness, throw him into various negotiation meetings with clients and their counter parts. The first experience will always be scary, but it will definitely train his ability to think and act carefully, as he will have to respond to on-the-spot questions and he will need to understand his clients needs and translate those needs into commercially acceptable legal terms. He will also learn to act in a professional manner all the time to ensure that he can gain trust from both sides.

    • If you want to train a lawyer's intelligence, throw him into structuring a complex transaction or make him do some advisory works. That would done the job easily.
    And come on, how can someone says that having a job with less salary is good? No sir, that's not good at all. You ask people to be happy with less salary? You're saying that dreaming a career in a big paid law firm is not worthy to be pursued? My suggestion, if you want to cheer up these poor law graduates about their prospective careers, find a better reason next time.

  • The Protection of Criminal Suspects in Law and Economics Perspective

    Forthcoming in Jurnal Teropong Edisi RUU KUHAP 2015 | 23 Pages | Posted: 10 May 2015 | Date Written: April 28, 2015

    Public Choice Theory and its Application in Indonesian Legislation System

    24 Pages | Posted: 8 Oct 2012 | Last revised: 8 Nov 2014 | Date Written: October 8, 2012

    Special Purpose Vehicle in Law and Economics Perspective

    Forthcoming in Journal of Indonesia Corruption Watch, 'Pemberantasan Kejahatan Korupsi dan Pencucian Uang yang Dilakukan Korporasi di Sektor Kehutanan', 2013 | 15 Pages | Posted: 22 Aug 2013 | Date Written: August 18, 2013

    Legal Positivism and Law and Economics -- A Defense

    Third Indonesian National Conference of Legal Philosophy, 27-28 August 2013 | 17 Pages | Posted: 22 Aug 2013 | Last revised: 3 Sep 2013 | Date Written: August 22, 2013

    Economic Analysis of Rape Crime: An Introduction

    Jurnal Hukum Jentera Vol 22, No 7 (2012) Januari-April | 14 Pages | Posted: 12 Nov 2011 | Last revised: 8 Oct 2012 | Date Written: May 7, 2012

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