Public Procurement Reform in Indonesia

Online (Indonesia), 8 December 2020 - Globally, public procurement is a major risk area for corruption. Accounting for an average of 15-30% of GDP in many countries, procurement is a highly lucrative form of government expenditure. According to UNODC’s Guidebook on Anti-Corruption in Public Procurement, an average of 10-25% of a contract’s value may be lost through corruption, amounting globally to hundreds of billions of dollars per year.

The recent spread of Covid-19 has worsened the anti-corruption outlook, with many governments bypassing procurement provisions in order to respond quickly to the pandemic. In Southeast Asia, estimates of the total emergency expenditure from the first few months of 2020 are as high as $60 billion USD. According to a UNODC study, in many instances emergency packages were disbursed with irregular levels of compliance, accountability and due diligence, creating opportunities for new levels of corruption. To address these ongoing risks, and to sustain the economic recovery from the pandemic, the United Nations has issued a global call to action for States to place integrity at the heart of their Covid-response strategy.

Under Article 9 of the United Nations Convention Against Corruption (UNCAC), States pledge to establish procurement systems “based on transparency, competition and objective criteria” that serve to prevent corruption. Provisions include the public distribution of information relating to procurement procedures and contracts, the establishment of selection criteria in advance, an effective system of review and appeals mechanism, and integrity measures for procurement personnel.

As in much of the world, the majority of corruption cases in Indonesia relate to public procurement. Nationally, as much as $4 billion USD is lost per year through this form of corruption alone (ES 2015; OCP 2020). The Second Review Cycle of the implementation of the UNCAC found Indonesia to be largely compliant with regards to Article 9, with the country receiving praise for its use of integrity pacts and e-procurement. Meanwhile, the Review suggestions for consideration, such as the introduction of a comprehensive procurement law, greater transparency surrounding direct appointment and direct procurement practices, the establishment of external audits looking specifically at procurement, and the issuance of clear regulations on the handling of complaints procedures – including through an independent appeal mechanism.

To mark International Anti-Corruption Day 2020, UNODC held a Webinar on Public Procurement Reform Agenda in Indonesia (viewable here), supported by the UK Embassy in Jakarta. The event was opened by H.E. Owen Jenkins, UK Ambassador to Indonesia and Timor-Leste, who described the impact of corruption from development, economic and social perspectives. He described public procurement and beneficial ownership reform as “key strands of an effective corruption prevention strategy”, noting the shared priorities of the Governments of Indonesia and the UK to address and prevent corruption.

Key discussions from the webinar include:

Procurement Integrity is an Essential Element of Effective Governance

Dr. Taufik Hanafi, Deputy for Monitoring, Evaluation, and Control of Development at the National Development Planning Agency (Bappenas), explained that public procurement spending accounts for almost half of all ministerial, institutional and local government spending. Meanwhile, the pandemic has contributed to a significant projected increase in the Indonesian State budget, from $195 billion USD in 2020 to $196 in 2021, as well as to a rise in procurement expenditure over the same period..

Data from r. Taufiq Hanafi (Bappenas) shows procurement as proportion of government expenditure

In light of this, Dr. Hanafi explained that strengthening the procurement system and e-government performance was regarded as an important element of Indonesia’s corruption prevention strategy. In order to support this effort, the government has committed to strengthen bureaucratic reform and accelerate digital transformation, including through One Data Indonesia, an interface which aims to unify its digital governance platforms.

Visualization from Sarah Sadiqa (LKPP) shows increase in procurement spending (2018-2019), even prior to the pandemic

The role of procurement reform is reflected in the first and seventh agenda of the National Medium Term Development Plan (2020-2024), referencing the need to enhance high value-added exports, manufacturing competitiveness, good governance and the rule of law. Meanwhile, the National Corruption Prevention Strategy, Focus 2 Action 7, stresses the importance of modernizing the procurement of goods and services. National priorities for 2021 to achieve these goals hinge particularly on the development and integration of e-government initiatives, as will be seen below.

Dr. Taufiq Hanafi (Bappenas) shows how procurement reform is situated within broader government priorities, under the National Medium-Term National Development Plan (2020-2024)

While procurement has a role in determining the effectiveness of operations across government, Dr. Hanafi stressed that a cooperative and inclusive approach was key to achieving such reform. Programmatic efforts to build on the National Anti-Corruption Strategy centre around coordination between the Corruption Eradication Commission (KPK), National Development Planning Agency (Bapanas), Ministry of Home Affairs, National Public Procurement Agency (LKPP) and the Ministry of Administrative and Bureaucratic Reform, among others.

Extricating Corruption from Procurement is a Monumental Challenge

Mr. Hayidrali, Daily Coordinator of National Strategy at the Corruption Eradication Commission (KPK), gave two main reasons why, despite the progress achieved in recent years, corruption in public procurement remains high:

First, attempting to monitor public procurement in Indonesia is a vast undertaking. In 2020, the size of the national budget was 2400 trillion Rupiah, up from only 475 trillion in recent years. Procurement takes up more than 45% of the national budget, primarily in the sectors of infrastructure, health and education. Mr. Hayidrali stated that Indonesia has the largest national budget in Southeast Asia, spanning over 632 procurement units and 700,000 suppliers.

Secondly, corruption has a corrosive effect on existing mechanisms, undermining the very systems that seek to maintain integrity. A range of studies suggest that elements of undue influence are embedded in existing administrative processes. According to data from the KPK (2004-2019), around 70% of cases investigated and prosecuted by the KPK involve public procurement, of which 65% involve bribery. The same study finds that, after private sector actors, the most likely to be linked to corruption were parliamentarians, government officials and providers of goods and services, suggesting extensive collusion between suppliers and officials. Consistently, a survey by Indonesia Procurement Watch looked at 720 marketing and procurement managers, and found that 93% reported having paid a bribe, with 83% claiming that winning a state bid was not possible without resorting to bribery. A further KPK study found that 82% of electoral candidates had sponsors behind them, suggesting that undue influence is often strategically targeted even prior to elections. Meanwhile, research by Marepus Corner finds that of the country’s 560 parliamentarians, 55% are business owners, suggesting that corruption in government and the private sector respectively may be a false distinction in some instances.

Other challenges to procurement reform include significant structural and legal gaps. Mr. Hayidrali cited the lack of a procurement law in particular, needed to harmonize regulations and to provide legal certainty where multiple jurisdictions come into play. He floated the idea of a law that could place the burden of proof on suspects to prove that their assets were legitimately acquired – rather than the other way around – which could help to boost convictions in cases of unexplained wealth. As well as this, a complaints mechanism would help to increase accountability and enable key agencies to understand how procedures can be improved. Finally, he spoke of the need to streamline procurement, given the possibility that lengthy or overly-complex processes could risk disincentivizing compliance.

Timeline presented by Ms Sarah Sadiqa (LKPP) shows progress in reforming the public procurement system over the past two decades

Accordingly, Ms. Sarah Sadiqa, Deputy Chair of the National Public Procurement Agency, argued that the gradual and sustainable improvement of the procurement system was a more realistic goal than radical change. Currently, programmatic plans underway include moves to establish a permanent unit within the National Public Procurement Agency (LKPP), with the aim of shoring up the independence of procurement entities. To build the capacities of procurement officers, all ministries at national and sub-national level will be able to draw on dedicated independent service units. These units are to be embedded within their respective organizational structures and in receipt of monitoring and capacity-building led by the Secretariat of National Strategy and the LKPP.

The importance of measures to guarantee the independence of procurement entities was likewise underlined by Mr. Francesco Checchi, UNODC Anti-Corruption Adviser, who explained that it was important for governments to seek both internal and external input in order to build optimal procurement systems. He drew on feedback from the most recent UNCAC review of Indonesia, which recommended the external audits of procurement practices and moves to increase the meaningful participation of civil society organizations. Mr. Checchi also shared such suggestions as the introduction of conflict of interest requirements for procurement staff, regulations around unexplained wealth, victim-compensation measures, enhanced access to information and independent sanction-based complaints mechanisms.

The Role of the Digitalization of Procurement Processes

As a recent UNODC webinar shows, momentum is growing across Southeast Asia regarding the use of e-governance to enhance transparency and anti-corruption measures. In the context of Indonesia, Ms. Sadiqa stated that more needed to be done to bring together clear data on procurement practices from across government departments. For instance, she quoted LKPP data (below) showing a sharp increase in the total budget ceiling for governmental in-house procurement, from $15.47 billion USD in 2018 to $19.12 in 2019, which does not reveal how much or how little of this procurement was undertaken using legitimate methods.

Ms. Sarah Sadiqa, Deputy Chair of the National Public Procurement Agency, presents aggregated data showing an increase in the total budget ceiling of in-house procurement (2018-2019)

Notwithstanding this challenge, the speakers demonstrated that significant progress is underway to digitalize procurement processes. For instance, Mr. Hayidrali stated that the Secretariat of National Strategy has developed e-catalogues across the five “highest budget” ministries, since July of this year. Meanwhile, at the sub-national level, 34 provinces are currently working to integrate their procurement processes using local e-catalogues.

As digitalization gathers pace, it is important to ensure that new initiatives adapt to new strategic challenges. Ms. Sadiqa explained that current work in this area is being designed with the economic recovery from Covid-19 in mind. Partly for this reason, faster and simplified local e-catalogues have been built to empower local industries and businesses. This could help to invigorate the business environment, for instance by improving opportunities for local enterprises to compete with larger chains.

Other potential measures under consideration in Indonesia include efforts to build on the e-catalogue for public procurement through e-payments, and the expansion of the Vendor Management System, which is currently only used for quick tenders. To prevent corrupt individuals from setting up fake companies to target specific bids, Mr. Hayidrali stated that the Secretariat of National Strategy also wishes to increase the selectiveness of vendors, to ensure that only established or trustworthy suppliers are eligible for participation in government projects.

As technology evolves, new opportunities will doubtlessly be created for innovation across government. Mr. Warren Smith, Director of the UK Government Digital Service (GDS) Global Digital Marketplace Programme, underlined the importance of embracing the internet-era culture of collaborative, transparent and evidence-based decision-making. He explained that collaborative approaches, using short feedback loops, were needed to tailor procurement systems effectively to the needs of different audiences. Furthermore, he recommended that the role of design elements was not overlooked in ensuring the accessibility of platforms.

Open Data Brings a Broad Array of Benefits

Ms. Bernadine Fernz, Head of Infrastructure at the Open Contracting Partnership (OCP), illustrated how machine-readable, open data on procurement can enable potential corruption to be identified proactively. Among the many benefits of open data, she argued that the combination of procurement and beneficial ownership data would enable analysts to see not only which companies appear to be winning bids through corrupt practices, but who ultimately benefits from the ownership of such companies.

To illustrate how open data can bring about change, she showcased a flagship project in Ukraine (below) that revolved around the transparent use of open procurement data. Within the first year of operation, the platform helped to save over one billion dollars in cost savings through the efficiency gains alone, thousands of new suppliers were able to enter the market and perceptions of corruption halved.

Visualization by Bernadine Fernz (Open Contracting Partnership) of open data procurement project Prozorro

The potential of open data to tackle corruption and improve the business environment was likewise cited by Mr. Thom Townsend, Executive Director of Open Ownership. He showcased the project Bluetail, the first example of a platform bringing together beneficial ownership and contracting data in an intuitive and interactive way, to show how bids may be impacted by collusion and conflicts of interest. Through this, he demonstrated how open data approaches could be incredibly useful for States seeking to prevent corruption, as global norms around beneficial ownership continue to grow.

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