Prior to 1998, the so-called Suharto Franchise — a cabal of ministers, key bureaucrats and the military — was known to secure property and enforce contracts in both public and private sector markets. Without links to the inner circle, no businesses could hope to win a contract, particularly in the public sector. After Suharto’s departure in 1998, those cabals who ran the franchises remained largely intact.
To overcome these bad practices, Indonesia has made major efforts to increase efficiency in the public procurement process, with the eventual aim of increasing the money available for public priority projects. Pursuant to a World Bank Assessment Report, the first national procurement regulation was issued in 2003. Revised seven times and substantially amended last year, the purpose of the new regulation was, among other things, to reduce bottlenecking in budget spending due to delays and cancellations on the part of officials. Many attribute such delays and cancellations to the unnecessarily complicated public procurement procedure required by the first version of the regulation and by officials overreacting to concerns about the higher risk of prosecution since the establishment of the Anti Corruption Commission (Komisi Pemberantasan Korupsi/KPK) and the Commission for the Supervision of Business Competition (Komisi Pengawas Persaingan Usaha/KPPU). These new institutions enjoy a high degree of public trust on independence and fair investigation. Almost all the cases that they handle involve illegal practices and unfair competition in public procurements.
In 1999, Indonesia enacted its Competition Law and the KPPU in order to enforce it. The law provides rules and guidance with respect to substantive and procedural matters. It covers monopolistic practices, price fixing, price discrimination, bid rigging, cartels, trusts, and vertical integration, among other features.
In its first eight years, ‘bid rigging’, emerged as the predominant form of complaint filed by providers to the KPPU. Since 2000, the KPPU has accepted around 2200 bid rigging cases, or around 80 per cent of total investigations.
The high proportion of bid rigging cases is interesting. For some time there has been a general assumption in Indonesia that collusive practices in public procurement are usual, if not ‘accepted’, so businesses tended to follow the ‘rules of the game’, to maintain future business opportunity and good relations with public procurement officers. For this reason they might be expected to abstain from filing formal complaints in situations where they presume collusive practices. Second, the public and businesses have had low trust in law enforcement institutions and may consider filing a complaint to be a waste of time, money and energy. Thus the high rate of bid rigging complaints might indicate an increasing willingness by providers to play a more active role in breaking the cycle of collusion within public procurement.
Before the establishment of the KPPU, complaints could only be filed to the police, in the form of a criminal allegation, or to the procuring entity itself on the grounds of administrative fault. A 2003 regulation (Perpres 80/2003) tried to provide a better mechanism, but the system for dealing with complaints resulted in a clear conflict of interest, with final appeals heard by the project officer in charge of the budget.
The 2007 establishment of the National Public Procurement Policy Agency (Lembaga Kebijakan Pengadaan Publik/LKPP) brought little improvement. As the only external unit LKPP’s task remains limited only to providing recommendations upon the request of the Head of Department or Ministry, there remains huge potential for conflict of interest, sending a negative message to business community and the public in general.
Should the KPPU maintain or even improve their performance, bid-rigging complaint applications might continue in the years to come. Thus, considering the positive impact KPPU can bring about, effort should be taken immediately to overcome challenges such as insufficient budget and human resources.
Two other important elements introduce by the new procurement regulation (Perpres 56/2010). First is e-procurement. Second is wide access to small businesses and local products.
E-procurement is a recent innovation involving the acquisition of goods and services through an electronic catalog system. In 2010, the volume of public procurement of goods, civil works and consulting services using e-procurement was around US$1.4 million. Started in 2010, 172 e-procurement service unit has successfully be set up in 29 provinces, but only 33 from the potential of 284 public institutions actually use it. This is still a promising figure and will increase in the future. With e-procurement it is hoped that any registered provider will have an equal opportunity to participate in the procurement process, giving rise to healthy competition.
Access to small businesses and local products mean that procurement officials should maximize the use of local products and providers, while increasing the participation of micro and small businesses. When no local product meets the requirements, imported goods may be used. But foreign providers must first consider local services such as insurance, bank financing, product maintenance and shipping. These requirements should be inserted in the procurement qualification documents – a kind of protection measure that has become a trend in other countries. It is also a challenge for the KPPU to interpret fair competition should any dispute arise around the unfair application of protectionist measures.
Nisa Istiani is a Phd candidate in Asian and Comparative Law, Asian Law Centre, University of Washington. This piece was originally published in the East Asia Forum Quarterly.