Can public service law be applied to private sector?

Mohamad Mova Al Afghani , Jakarta | Tue, 07/14/2009 9:55 AM | Opinion

The House of Representatives passed the public services bill into law on June 23, 2009. The law can impose a variety of sanctions on public servants in the form of written warnings, removal from office, termination of employment and compensation to victims.

It stipulates recourse for violations of public service obligations (PSO) through the ombudsman offices, the House of Representatives and the administrative court. This law represents quite a breakthrough for bureaucratic reform.

As far as regulating government officials goes, the law is fairly strong. However, in sectors where services are privatized, it is unclear if and how this law is applicable.

Consider for example the administrative sanctions that can be given to an offender. If the case involves public officials, the law on civil servants can be used to prosecute, but this is not the case when the offender is private actor.

The law mandates that if the offender is not a civil servant, complaints must be directed to the government official who delegates the function of public service to the private actor — this is difficult.

If the offender is not a civil servant, their employment is regulated by the ordinary labor law and not the law on civil servants. The most an official can do upon receiving a complaint is to pressure the offender’s superior to take action, but the official cannot intervene in the process.

The accountability mechanism for the public and private sectors is also different. When a public official is involved, they are accountable to the House, because of his/her direct action in providing the service or through their custody of shares. This is not the case in the private sector, where employees are directly accountable to their shareholders and creditors – not politicians. Hence, recourse for the victim through the House is not relevant to private enterprise.

When public services are privatized, the relationship between private actors and the government is governed through private law. The role of public law is limited to licenses. If the government determines that private actors deliver substandard services, it can revoke their licenses.

However, license revocation does not automatically drive a private actor out of business. Private actors can sue the government in an administrative court in order to get their license back. While this process is underway, their revenue stream remains. This means that private actors can hire lawyers in their litigation against the government using public money.

In practice, license revocation rarely happens, especially if the service is vital and employs many people. The government will not risk revoking licenses for minor violations. As such, governance by licenses alone may not be efficient.

If so, then, how do PSOs extend to private parties?

The public service law, unfortunately, does not adequately address the private sector. This is discouraging, given the fact that the role of the state in providing goods and services is gradually decreasing. What the government should have done, and needs to do, is to create mechanisms that can hold private enterprises publicly accountable beyond the traditional administrative law.

In foreign jurisdictions, PSOs can be extended to cover private parties through contracts. This is known as public contracting. In general terms, public contracting means that the freedom of contract rule under general private law is constrained. A private actors’ maneuverability in stipulating provisions of a contract is limited. Any provisions which may obstruct the materialization of public service obligation will be deemed inapplicable.

In order to ensure PSOs are met when contracting to the private sector, the law can impose mandatory provisions in contract form. Conversely, the law can also prohibit private actors from conducting actions which would be detrimental to consumers.

Although there are similar legal principles in PSOs, as each industry has its own specificities, generic formulation is not possible. For example, prohibition of disconnection from services is a typical PSO for water and electricity companies, but would be irrelevant to a railway company. Similarly, cross subsidy obligations are relevant in the network industry, but that may not be the case in banking or healthcare.

The detail of PSOs for each industry should therefore be extrapolated on in sectoral regulations; the public service law can act as an umbrella regulation for each sectoral PSO. This means that a PSO for a water company should be detailed in terms of water acts and a PSO for an electricity company should be regulated by electricity acts.

The question remains whether the public service law will have an impact on incidents that occurred before it was enacted. The transitory provision of the public service law is silent on this matter. But if the answer is positive, preexisting contracts between private actors and the government which contain public service functions may need some adjustment.