Making e-procurement work in a decentralized procurement system: A comparison of three Indonesian cities

Introduction

Corruption is one of the most serious problems badgering public institutions of many developing countries, including Indonesia. Many cases of corruption that occur in the institutions of Indonesia’s government take place in the procurement of goods and services. In this regard, the use of information-communication technology (ICT), more specifically e-procurement, is considered to be one way to prevent corruption by increasing transparency and accountability of the budget process. In 2008, the Indonesian government created INAPROC, a national e-procurement system, in order to procure and deliver goods and services electronically. In five years, there have been increasing numbers of e-procurement instruments: the number of system providers went up from 11 in 2008 to 491 in 2012; service providers from three in 2009 to 43 in 2012; provincial coverage from nine in 2008 to 33 in 2012; and user agencies from 11 in 2008 to 731 in 2012. This trend was followed by the increased number of tenders issued through e-procurement. In 2008, there were only 33 tenders, but the number of tenders increased to 119,797 in 2012. INAPROC claimed that there was a savings of 10.89 percent in 2012.

Until now only a small amount of research has been conducted on Indonesian e-procurement. Kodar (2010) found that the implementation of e-procurement at Yogyakarta Municipality in 2009 was visible but not accountable. Nightisabha et al. (2009) found that the procurement committee and the e-procurement suppliers of goods and services had different perceptions. Utama (2009) found in the experience of Yogyakarta City that strong leadership, underlying laws/regulations/policies, available resources (human, budget, infrastructure), as well as changes in management had an influence on the smooth process of implementing e-procurement. But the existing research stands insufficient for providing an adequate analytical framework for e-procurement development in Indonesia. In particular, it fails to explain variations in e-procurement implementation in different parts of Indonesia since the policy was launched in earnest in 2008. The Committee for the Monitoring of Local Autonomy (KPPOD, 2012) found that only 62 percent of the Kabupaten/Kota level regencies and cities carried out e-procurement – and with varying degrees of implementation. The Executive Director of the Committee Robert Endi Jaweng says that the situation is not in accordance with Regulation No. 54/2010. According to him, the regulation requires the entire ministries/agencies/units of work device region/other institutions be already implementing e-procurement as of the end of 2012 at the latest. Regencies or cities in Indonesia have varied widely in adopting and implementing the e-procurement initiative led by the central government. However, the lack of telecommunication infrastructure is a crucial problem for improving e-procurememt management at the level of the local government. Owing to Indonesia’s archipelagic geography, technological connectivity is achieved via submarine cables and via satellites. Therefore, urban areas on the most-populous islands of Java and Bali have much better information access compared to other areas.

On May 20, 1998, Soeharto resigned from his presidential position due to strong pressure from a civil movement. Habibies, as a new president, formulated the new democratized law on democratic decentralizaion law between May 1998 and October 1999 managed to lay the foundation for a more democratic and decentralized political system have been causing much political change at the local level. Local governments in particular have become more independent than before and more democratic at the local level. Many experts noted the successful approach of big bang theory has at least empowered many to build local areas with the limited central government control. A 2008 survey funded by the US Agency for International Development found that trust in local officials grew from 42 percent in 2006 to 55 percent in 2008. And 70 percent of respondents said that local government executives were accountable to the people of their area, an increase from 61 percent in 2006. Some successful stories of locally autonomous policy implementation are the creativity of local governments in handling specific local problems, such as street trader management in Solo City with Joko Widodo, information technology use introduced by Yogyakarta’ mayor Herry Zudianto in Yogyakarta, and local agriculture policy done by Damassara as a new autonomous regions. Bennett (2011) noted that the hope for decentralization in Indonesia was that with greater autonomy at the local level, constituents could increase the accountability of their local leaders. Along with the authority given to regional governments, however, these authorities have not been balanced with accountability, there for the cases of corruption in the local government. In line with the majority of the theoretical literature, we argue that the monitoring of bureaucrat’s behavior is an important determinant of the relationship between decentralization and corruption (Lessmann and Markwardt, 2009).

One of the causes of corruption is the lack of accountability of the procurement of goods and services in the local government. The study of Indonesia Procurement Watch on 793 respondents of government goods and services providers in Jabotabek (Jakarta, Bogor, Tangerang, and Bekasi) found that 92.7 percent respondents had bribed government officials, while it was only 1.3 percent said that they never practiced bribery. Studies conducted by the Anti-Corruption Agency in 2012 of Aceh’s goods and services procurement showed similar phenomena. This study also found that the number of alleged incidents of corruption in procurement and the complexity of the procurement process did not affect the willingness to appoint procurement committee chairmen. Based on the survey, only 34.2 percent of respondents are unwilling to be appointed as chairman of the committee on procurement. Concerning e-procurement, most respondents answered that the new system and the integrity of the human resources were not yet ready.

We developed hypotheses in relation to efficiency and effectiveness of e-procurement with dependent variabels: leadership, policies and regulations, human resources, policy and planning, infrastructure and standarization, and private integration. We advance an alternative approach to the measurement of correlational approaches in the multiple informant surveys and qualitative analysis of secondary data. Against this backdrop, this paper asks: what explains regencial variations in e-procurement implementation in Indonesia? How do policies, institutions and regulations, system and infrastructure, and human resources affect e-procurement performance by local governments in Indonesia?

A theoretical overview: factors affecting e-procurement implementation

The objective of the implementation of e-procurement in the public sector is reformation process of goods and services procurement. From the various studies done based on the experience of the countries around the world, the implementation of e-procurement is to prevent or to reduce the level of corruption (Neupane et al., 2012). e-Procurement can improve the efficiency over traditional procurement methods (Chang, 2011; Hanna, 2011). The process of goods and services procurement electronically has obviously omitted the use of paper for the providers or the budget users. The providers just upload all documents by the existing web site without coming to the office. e-Procurement can also reduce the less necessary projects (Achterstraat, 2011). With e-procurement, only the projects needed by the people need be sold at auction. However, this assumption is only valid in the economically advanced countries. In developing countries, many projects are proposed by politicians for their personal interests (Murray, 2007).

e-Procurement is also a procurement automatization process (Henriksen and Mahnike, 2004) which improves the competition among the competitors (Mahmood, 2001; Thai, 2001) and reduces the human intervention in the process of bidding (Khanapuri et al., 2011; Magrini, 2006). Automatization through the internet makes the competition open, because any supplier can monitor the bidding process online at anytime. As a result, human intervention in bidding process is becoming lower and lower. e-Procurement also encourages bidding automatization in bidding process (UN, 2006), in order to monitor better (Achterstraat, 2011; Hanna, 2011; Zang and Yang, 2011), to make a procurement process faster and easier (Hanna, 2011), and to obtain the best quality/price ratio (Kaliannan and Awang, 2009). In their discussion on the success factors affecting e-procurement both at private sector and the public sector, Barahona and Elizondo summarized with the above table. Explicit diffusion and change management strategy are the factors affecting the successful e-procurement project mentioned by the most researchers. In public e-procurement, state capacity to adopt innovations, leadership, and political support are found in 13 research articles. However, they did not differentiate between the public sector and private sector, each of which have distinct characteristics. In Indonesia’s case, local governments that have adopted the e-procurement project are both likely to have implemented Independent Procurement Units and more likely to have a higher number of staff-certified in procurement (Sacks et al., 2014). Some researchers (Sacks et al., 2014; Kodar, 2010; Nurmandi, 2013; Wahid, 2012) found that the influence of e-procurement implementation at the local level, particularly leadership, human resources, planning and management, policies and regulations, system integration, infrastructure and standarization, and the dependent variable of the efficiency and effectiveness of e-procurment.

Leadership

Much previous research on e-procurement points to a positive relationship between leadership and organizational innovation, particularly the application of information technology in government organizations. Addressing the issue from the angle of technological diffusion, MacManus (2002) found that leadership was a key factor encouraging the implementation of public e-procurement systems and consequently offered a cautious and incremental perspective on their diffusion. Coggburn (2003) conducted an exploratory study to understand the political, socioeconomic, demographic, and geographic factors affecting the adoption of procurement reforms. Wahid (2012) also found that leadership was an important factor affecting e-procurement institutionalization process in developing countries. The top management teams (e.g. steering committees) must involve the project manager, consultants working with the committee, and agency staff to develop an implementation strategy (ECOM Group, 2002). Utama (2009) found in the experience of Yogyakarta City that strong leadership, underlying laws/regulations/policies, available resources (human, budget, infrastructure), as well as changes in management all had an influence on the smooth process of implementing e-procurement. In this regard, considerable attention and support need to be provided by senior management to ensure that the procurement reform is well understood in the agency (Stenning & Associates Pty Ltd (S & A), 2003). Furthermore, the executive management team is responsible for setting the vision and goals, bringing about collective commitment to change in process and organizational structures, and formulating the policies and strategies necessary for putting an e-procurement initiative in place (World Bank (WB), 2003):

P1. The high level of top management support is positively associated with the efficiency and effectiveness of an e-procurement initiative.

Human resources

The adoption of e-procurement in the government requires the support of human resources. More capable human resources affect the speed of adoption of e-procurement. Henriksen and Mahnke (2004) observe that public managers need sufficient resources and the mandate of the political leadership to successfully adopt e-procurement. Political structures need to be considered as much as the economic rationalities to better explain e-procurement adoption. Apart from IT sophistication, organizational factors only moderately influence the adoption of e-procurement. But employee acceptance, financial resources, political commitment, and centralization are found to be the strongest determinants of e-procurement adoption in Germany (Veit et al., 2012). The Office of Government Commerce (OGC) (2002) recommends that increased change in underlying processes requires more learning and effort on the part of users. Consequently, some researchers found that the lack of technical, personnel, and financial capacities is perceived to be major barriers to the development of e-government in many municipalities of USA (Lim, 2010a, b; Moon, 2005):

P2. The high degree of human resources program is positively associated with the efficiency and effectiveness of an e-procurement initiative.

Research method

Three cities are selected in this study in order to investiagte the differences and complexity of e-procurement initiative, namely Yogyakarta City in Yogyakarta Special Province, Tangerang City in West Java Province, and Kutaikartanegara Regency in East Kalimantan. Yogyakarta City, the capital city of Yogyakarta Special Province, has successfully won an e-government award since 2009, granted jointly by the Ministry of Information and Telecommunication and The Economist magazine of Indonesia. This city is considered to have successfully implemented smart city governance supported by information technology.Tangerang City, a second research case city, has also successfully earned an e-government achievement in four times from same ministry. This city also has been granted as an “unqualified opinion” in its financial report by the National Audit Board (BPK) six times since 2008. Meanwhile, Kutaikartanegara Regency is in the early steps of developing an e-government program and was recognized as an ICT Pura in 2012, considered to be a local government having good e-readiness to e-government.

As Murray (2007) mentioned the validity of e-procurement research is rarely because of the research design and the interface by politicians. The research focus of e-procurement is based on operational management and strategic management research. Then other reseachers, Hardy and William (2011) called for the research of procurement involving trans-diciplinary and interactive research design. Therefore, in this research we try to use not only comparative-explanatory studies among three cities in Indonesia, but also to go beyond this utilizing multiple informant and secondary data analysis.

All variables are operationalized into some indicators (see the Appendix) and trnsformed into questionaire in Indonesian language (bahasa). Primary data for the current research were collected using a cross-sectional survey conducted in the three local governments of Indonesia, i.e., Yogyakarta City, Tangerang City, and Kutaikartanegara Regency. The randomly selected sample was comprised of 230 elements representing procurement management units. Before the commencement of the survey, focus group discussion meetings were held, and pre-testing of the measuring instrument was conducted. In both exercises, the procurement practitioners were involved to enable the assessment to have face validity. Such pre-field deployment research tasks allowed for the study’s questionnaire to be improved by either rewording or deletion of the items found to be ambiguous during the pilot phase. The pilot study, which involved 30 procurement practitioners, facilitated the improvement of the research instruments as well as the determination of the reliability of the scale items. Response from the final survey involved 150 fully completed questionnaires, 25 incomplete questionnaires, and 33 unreturned questionnaires.

The questionnaire was refined via several rounds of experts’ reviews and pre-testings before the actual distribution took place. For content validity purposes, an extensive review of the literature was undertaken to gain an understanding of each construct and its items, and to ensure that no important dimensions were neglected. Ten e-procurement practitioners and ten academicians/researchers participated in this process. Each item on the questionnaire was reviewed for its content, scope, and purpose. Their feedback resulted in several modifications to the items. Two rounds of pre-testings were carried out to ensure that the instrument was well designed and contained items that would really measure the constructs. Table I summarizes the results of these pre-testings.

Discussion

The decentralized e-procurement system in Indonesia may have different local scenarios depending on the conditions of a specific locality, such as in case study cities (see Figure 2). The relationship between the NPA and the Local Government Procurement Agency is missing link. The main task of the NPA is to supervise the local governments’ procurement, but the NPA does not have the authority to impose sanctions. Thus, the performance of local governments’ e-procurement is determined by the local government itself such as in Tangerang City. Looking at the institutions involved in the procurement, it is fair to say that fragmentation and decentralization of institutional procurement occurs. Each region has authority to conduct its own procurement, and there is no enforcement to implement the e-procurement. The National Procurement Agency (LKKP) is an institution which is responsible for e-procurement, based on the Presidential Decree No. 54, 2010.

Each ministry, non-ministry institution, and local government can set up an independent Procurement Service Unit which is separated from the organization units which make the budgets. This separation function is aimed to avoid the collusion and the autonomy of the procurement process. Each Institution which is called ULP (Procurement Service Unit) is created based on Minister Decree or Head of non-ministry institution and regional head. Yayan Rudianto’s (2011) study on legal format mentioned that based on the President Decree No. 54, 2010, that National Procurement Agency (LKKP) is the only non-department institution in Indonesia which has the authority to improve and formulate the policy of government goods/services procurement. Test results prove this analysis results in the previous test showing that the main weaknesses of the implementation of e-procurement is a legal vacuum or less strong legal basis that became the foundation for implementing procurement at the local level. One of the vacuums in e-procurement regulation is public watch regulation in order to prevent corruption in public purchasing. “one of (the) factor(s) causing deviation of procurement is the vacuum of regulation on surveillance done in whole procurement phases and processes, so it creates the potential state budget loss or misuse”stated by non government organization activist.” In line with above statement, Transparency International interviewed some businessmen and confirmed the conclusion:

Participants agreed that decentralization has made procurement much less transparent. They noted that many of the provinces and local governments have different procurement regulations, which are not consistently applied. Moreover, on the provincial and local level, responsibility and reporting duties are not very clear. The representative of National Public Procurement Organization (LKKP) noted two problems at the provincial and local level: 1) there are many different interpretations of the procurement rules and 2) there is political pressure to favor certain bidders. National Public Procurement Organization is drafting a national procurement law but it is not expected to become law until 2014 or 2015 (Transparency International-USA and Center for International Private Enterprise, 2011).

Regardless of its legal standing, a presidential regulation has many weaknesses in terms of regulating the procurement of good and services. APEC Procurement Strategy (2012) noted that there are three weaknesess of the regulation. However, it does not address a number of problems in Indonesia’s procurement system and it does not apply to all state-owned companies, particularly national oil and mining companies. The regulation is also missing interaction between the Presidential Regulation and other existing laws applicable to procurement, such as the Construction Services Law (Act No. 18/1999) and the Law on State-Owned Enterprises. The relationship between the former and the latter is not clear since both these laws also have provisions governing procurement. Second, the regulation also does not contain provisions specifically authorizing civil society monitoring of procurements and third the Presidential Regulation does not have a sufficiently high legal status to truly standardize the public procurement system throughout Indonesia, but rather there exist a “plethora of decrees, regulations, and instructions” ranging from ministers and provincial governors to district officials and municipal mayors “that contain conflicts and inconsistencies.”

As a result, the implementation of regulations is less powerful. Second, many legal institutions (police and attorney offices) have different interpretations in the field. Various cases found in some local governments that many goods and services procurement committees resigned from their position because of frequent conflicts of interest and strong pressures from the internal and external environment in the procurement process, such as the Local Council Office of Rangkasbitung (Serang Post, February 1, 2009). Another case is the resignation 35 members of the entire procurement committee caused by a suspect decision of the Local Attorney Office on its five members in the case of a road and pedestrian project (Tabalongpost, April 13, 2013). Panda et al. (2010) did same study in India and found that the lack of an enabling national legal procurement law has allowed overly flexible interpretation of government policies by corrupt officials for vitiating public procurement process.

In addition, the systems integration factor became a problem, which is important for the implementation of e-procurement, since the absence of the same standard in e-procurement system and the lack of good monitoring of the NPA cause serious problems. e-Procurement Unit (LPSE) was developed by the Centre for Policy of Good and Service Procurement, the National Planning Agency in 2006 in accordance with Presidential Instruction No. 5 Year 2004 on Accelerating Corruption Eradication. e-Procurement is becoming one of the important programs under the coordination of Bappenas. In early implementation in 2007, this method has been performed electronically by Bappenas and the Ministry of National Education. At that time there was a new server for the e-procurement unit residing in Jakarta with the address: www.pengadaannasional-bappenas.go.id, which was managed by Bappenas.

In 2010, the NPA developed an NPA digital certificates (OSD) collaborated with the Code State Institute. This system embodies the concept of a Public Key Infrastructure (IKP) whose development started in 2009 and was expected to be implemented gradually in 2010. Through the application of OSD, every provider of goods/services will have a digital certificate that can be used to do the bidding securely.

The independent e-procurement model brings consequences for the many scattered and fragmented e-procurement units (see Figure 3). Providers must first register in each auction to follow at e-procurement of NPA. In Jakarta, for example, a provider will register and verify in e-procurement unit of Ministry of Finance or Ministry of Education or National Police Office, and Ministry of Health. In 2010 LKPP developed the aggregation system through INAPROC which allows providers to simply register and verify at one e-procurement unit, after which they can follow auctions across all e-procurement units. This system was implementated gradually starting from the city of Yogyakarta and provincial e-Procurement Unit.

NPA currently manages, limits, and monitors three types e-procurement: e-Procurement (LPSE) system providers, e-Procurement (LPSE) service providers, and autonomous e-Procurement (LPSE):

1. The provider LPSE has system LPSE organizations such as are described below, and have hardware which is not limited to network devices and servers that have installed electronic procurement systems (SPSE). As for the other functions which fall under the responsibility of the field system administration, this type of LPSE also carries out other functions: socialization of PPK/procurement committee and goods/services providers; training for the procurement committee and PPK/goods/services providers; serving the PPK/procurement committee to get the access code; and verifying the document (Deed, SIUP, TDP, a business license compliance field, ID card owner and/or director of the company, etc.), for goods/services providers who previously have done registration to obtain an access code online; and other functions. With this the applicant LPSE will have its own web address.

2. LPSE service provider: the service provider LPSE manages non-owned web-LPSE server that has installed SPSE such as Tasikmalaya City Government web site with the address: www.lpse.jabarprov.go.id (this address belongs to LPSE West Java province).

3. Autonomous e-Procurement (LPSE) belongs to autonomous agency.

Conclusion

In this paper, we focussed on confirming that conventional variables actually affect the efficiency and effectiveness of e-procurement. Second, we try to answer why some variables have no effect on the dependent variable. Throughout the test, the impact of all independent variables on efficiency and effectiveness of e-procurement were not statistically significant at any of the local governments. Although these differences does tell us the relative effectiveness of the e-procurement initiative. The varying degrees of success in e-procurement implementation and a different mix of determinants affecting e-procurement efficiency and effectiveness in three Indonesian cities imply that it is crucial to consider local contexts in carrying out reforms. The synergy between the central government and local governments, the effective response of local governments to the central government, and reinforcement of local capacity and willingness to fight corruption and carry out e-procurement programs are important factors for successful e-procurement implementation.

A crucial question arising is whether, there has been significant sub-national variation in the e-procurement implementation, we are witnessing the better performance of local government in doing e-procurement project. By observing three cases of procurement above, we try to build the theory of joint project between central government and local government is built on a simple model of local implementer, which I capture as a repeated prisoner’s dilemma game between a central government as an enforcement agent and the implementer (Osborne, 2004). The presence of a strong local government policy to e-procurement will not in itself secure implementation. In other word, the local government needs to secure support from the central. However, if the central government remains indiscipline then prosecution is much less likely and dependent on the extent of local government discipline (see Table V).

Table V captures this game with static payoffs; it shows that in a one-shot game both players will obey and receive but that they could neglect. This simplifies the dynamic formation of local government and central government alliances by assuming that the game is played. Each government can either discipline or neglect in terms of president’s instruction on e-procurement implementation. If central government do discipline way then local government prefer to neglect.

Implication

The result of this study has practical implications to improve the performance of e-government at local level. Studies still need to be carried out concerning some strategic policies, namely to speed up the law deliberation on public procurement; to make the NPA more powerful in terms of its power to execute procurement policy and to speed up e-procurement implementation at central government. One urgent step of the central government is to create a national procurement plan covering the variation of local government capacity in implementing e-procurement. The practical plan for Indonesia’s complexity of government administration is to divide the procurement plan according to big islands and their characteristics, such Sumatera, Java, Kalimantan, Sulawesi, Maluccous, and Papua. Those characteristics are geography, ICT infrastructure, human resources, and local government capacity. Sacks et al. (2014) found that procurement reform across Indonesia points to a strong association between the wealth of a district and the adoption of procurement reform. A crucial question which arising is whether there has been significant sub-national variation in the e-procurement implementation. We are witnessing better performance of local government in e-procurement projects. By observing the three cases of procurement above, we try to build the theory of joint projects in the context of a decentralized procurement system between the central government and local governments. This is built on a simple model of a local implementer, which I capture as a repeated prisoner’s dilemma game between a central government as an enforcement agent and the implementer (Osborne, 2004). The presence of a strong local government policy to e-procurement will not in itself secure implementation. In other words, the local government needs to secure support from the central government. However, if the central government remains undisciplined, then prosecution is much more dependent on the extent of local government discipline.

Acknowledgments

This work is supported by an International Scholar Exchange Fellowship (for the academic year of 2013-2014) of the Korea Foundation for Advanced Studies (KFAS), Seoul, Korea. The authors also wish to thank anonymous reviewers for their insightful comments and suggestions. The last version of this paper was presented in International Conference on Public Procurement, Dublin Irlandia, August 14-16, 2014.