New Developments In Indonesian Public Procurement Law

The Public Procurement of Goods and Services Agency of Indonesia, the Government institution mandated to reform Indonesia public procurement, ("LKPP"/Lembaga Kebijakan Pengadaan Barang / Jasa Pemerintah) released statistics showing that in 2017, the Government of Indonesia completed 30 public procurement tenders with a total value of IDR31 billion (around US$2.2 million). These figures are more than double compared to 2016 when the Government of Indonesia only completed 17 public procurement tenders with a total value of IDR13 billion (around US$934,593). It is expected that government spending on goods and services will increase in coming years.

In this article, we evaluate the new Indonesia public procurement regulation issued in March 2018 and highlight the differences to its predecessor, in particular with respect to public procurement of construction works and services. This change in regulations will be of interest to business entities that intend to be involved in public procurement of goods/services in Indonesia with respect to tenders commenced after 1 July 2018 and in particular, contractors of public buildings and other structures¹.

Overview of the change in public procurement regulations

Until 22 March 2018, the main legal framework for public procurement in Indonesia was set out in Presidential Regulation No. 54 of 2010 on Public Procurement of Goods/Services, along with its numerous amendments (collectively referred to as “PR 54”), and various other detailed implementing regulations issued by Government departments pursuant to PR 54.

On 22 March 2018 (“Issuance Date”), the Government of Indonesia issued Presidential Regulation No. 16 of 2018 on Public Procurement of Goods/Services (“PR 16”) which repealed and replaced PR 54 with immediate effect. However, to avoid a lacuna in the legal framework, PR 16 provides that the implementing regulations of PR 54 remain in force to the extent they are consistent with PR 16 and until the issuance of replacement implementing regulations under PR 16. The implementing regulations of PR 16 must be issued within 90 days after the Issuance Date (i.e. by 20 June 2018), however if they are delayed, the previous implementing regulations will continue to apply.

PR 16 will not affect public procurement contracts awarded under PR 54, which will remain governed by PR 54 until their expiry. PR 54 may also still be implemented on procurement activities commenced prior to 1 July 2018.

The Scope of PR 16

PR 16 applies to publicly procured goods and services, including construction projects, procured by the public sector using (a) State or regional budgets; (b) domestic loans or grants; or (c) foreign loans or grants. This article focuses on selected changes impacting on the construction industry introduced by PR 16.

PR 16 defines construction projects as including various activities which involve the establishment, operation, maintenance, demolition and reestablishment of buildings. Interestingly, the definition of “construction project” in PR 16 is different to the definition of construction project in PR 54. PR 16 covers projects relating to “buildings” while PR 54 covers “buildings or other structures”. Based on an informal discussion with LKPP we understand that Government’s intention is for PR 16 to have same coverage as PR 54 and the term “building” will be interpreted to cover “buildings and other structures”. We expect that more clarity on the coverage of construction projects under PR 16 will be provided in the upcoming implementing regulations.

The key changes introduced by PR 16 include the following topics:

Parties to public procurement

Under PR 54, a “budget holder”(Pengguna Anggaran)(“PA”) is authorized to award contracts under tenders or direct appointments for construction projects with value above IDR100 billion (around US$7.2 million); and (ii) has the ability to delegate these powers to delegates called Kuasa Pengguna Anggaran (“KPA”). Unfortunately, PR 16 does not provide guidance on who may act as the PA for the purposes of the regulation. However, under State Treasury Law No. 1 of 2004, which is referred to in PR 16, a PA can be a Minister or Government institution, a Regional Head (i.e. Governor/Regent/Mayor (as applicable)), or the Head of Regional Treasury.

The key changes under PR 16 relate to the scope of authority of the PA and KPA and the use of the private sector for complex procurement. Under PR 16, the PA now has additional authority to award an e-purchasing construction contract with value above IDR100 billion (around US$7.2 million). Further, a KPA is now authorised under PR 16 to respond to appeals (sanggah banding) submitted by construction project tender participants. This is a re-introduction of the appeals mechanism which was eliminated in the last amendment of PR 54.

PR 16 also introduces the ability for Government to use “private sector specialists” to assist in running highly complex procurement as “procurement agent”. Public sector bodies can now delegate some of their procurement functions in highly complex procurements, including construction projects, to appropriately qualified third parties.

Forms of contract for public works and services

Like PR 54, PR 16 prescribes the mandatory standard form of contract for various types of public procurement. However, unlike in PR 54, where the applicable contract form was dependent upon the relevant payment method, budget year, sources of funding and type of work, under PR 16 the applicable prescribed form will depend upon whether the contract involves a:

1. fixed lump sum;
2. fixed unit price;
3. combination of lump sum and unit price;
4. turnkey approach; or
5. framework approach(kontrak payung).

Public procurement construction contracts with a value of above IDR200 million (around US$14,400) must be made in the form of a detailed works contract, while public procurement construction contracts with a value of IDR200 million or below can be entered into using purchase orders (Surat Perintah Kerja). Further information on standard documents of public procurement of goods/services can be found at www.lkpp.go.id.

Government estimates and e-marketplace system

Both PR 16 and PR 54 require the use of Government estimates in public tenders. The HPS is calculated by adding (i) the estimated value of goods and/or services; (ii) the estimated profit and overhead cost; and (iii) value added tax.

HPS is used as the basis for evaluating:

1. the fairness of bid prices;
2. the maximum limits of bids; and
3. performance-bond values for bids which are lower than 80% of the HPS.

PR 54 provided for limited exemptions to the use of HPS in tenders involving (i) procurement through contest²; and (ii) direct procurement with receipts. PR 16 modifies this position and now only exempts the mandatory use of HPS for public procurement with a value of IDR10 million (around US$720) and below, e-purchasing and tenders for integrated projects.

Furthermore, PR 16 introduces an e-marketplace system, although the regulation does not clearly define what this is or how it is intended to operate. Pursuant to PR 16, the e-marketplace system will operate as a publicly available platform through which tenders will be advertised. The idea is that prices offered, use of local content, and bidders will be published in an e-catalogue which is made publicly available through the e-marketplace platform. The use of an e-marketplace that publicly shares information, in particular bid prices, is expected to improve transparency in the procurement process. Based on our informal discussion with LKPP, the e-marketplace has not been implemented as at the date of this article. Therefore, the impact of the e-marketplace in the procurement process still remains to be seen.

Collaterals and down payments

PR 54 did not specifically require bid stage security to be provided by bidders. However, PR 16 now requires bidders to submit a bid bond and, where applicable, a bond with respect to appeals (sanggah banding). These are in addition to the performance bond, advance-payment bond, and maintenance bond required by PR 54. For general construction projects, the appeal bond is required to be 1% of the total HPS value, and the value of the bid bond is to be 1 - 3% of the total HPS value (if the total value of HPS is above IDR10 million/US$720).

For integrated construction projects, the appeal bond is required to be 1% of the budget ceiling value, and the value of the bid bond to be 1 - 3% of the budget ceiling value (if the total value of HPS is above IDR10 million/US$720). PR 16 does not define “integrated construction projects”, but LKPP has informally advised that, under Construction Law No. 2 of 2017, “integrated construction works” covers engineering, procurement and construction works services.

All types of collateral under PR 16 (like PR 54) may take the form of bank guarantees or surety bonds and must be:

1. unconditional;
2. on-demand;
3. and payable by the relevant bond issuers by no later than 14 business days after the relevant demand has been received.

Down payments may be paid to small contractors up to a maximum of 30% of the value of the contract, and a maximum of 20% of the value of contract for larger contractors. PR 16 does not define what constitutes a “small contractor”. However Law No. 20 of 2008 on Micro, Small and Medium Business, which is referred to in PR 16, provides that a small business entity is characterised by the following criteria:

1. the entity’s net value is between IDR50 million to 500 million (around US$3600 to 36,000), excluding land and buildings; or
2. the entity’s annual revenues is between IDR300 million to 2.5 billion (around US$22,000 to 180,000).

Appointment of public procurement contractors

Both PR 54 and PR 16 permit a number of different methods for the public tender processes depending on the particular circumstances. Under PR 54, construction works and services were procured using general tender, limited tender, simplified tender, direct appointment, direct procurement or contest. However PR 16 no longer recognizes general tender, limited tender, and simplified tender methods.

Under PR 16, construction works and services may be procured using:

1. e-purchasing, through the use of the e-catalogue;
2. direct procurement, for construction procurement projects with a value of IDR200 million (around US$14,400) or below;
3. direct appointment, for construction procurement projects under special conditions (e.g. urgent and confidential);
4. expedited tender, for construction procurement projects with fixed specification and volume of works and the contractor has been qualified in the Government procurement system; or
5. tender, if none of the above methods are applicable.

Conclusion

The issuance of PR 16, in particular, the implementation of an e- marketplace, is expected to improve transparency and efficiency of the Indonesian public procurement regime. The use of information technology in the procurement process demonstrates the intention of PR 16 to be more market-orientated.

Further, simplification of contractor appointment methods may well create a cost and time efficient procurement process. In complex procurement, the new ability to use experienced private sector players as procurement agents may also lead to a more effective process and the Government can benefit and learn from experience, expertise, efficiencies and innovation from across the world. However, much will depend on the implementing regulations still to be issued.

Based on our latest discussion with LKPP, a new regulation will be issued by LKPP prior to 1 July 2018 to provide more detailed guidance on PR 16. We will closely monitor the implementation of PR 16, and the issuance of its implementing regulations.

For more information about Indonesian public procurement, please contact Dhani Pattinggi (Partner, Hiswara, Bunjamin and Tandjung), Matthew Goerke (International Counsel, Hiswara, Bunjamin and Tandjung), Mark Veitch (Senior Associate, Herbert Smith Freehills), or Hanna Meliana (Associate, Herbert Smith Freehills).

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¹ Public procurement involving a public-private partnership is separately regulated and is therefore not considered in this article.

² A form of procurement used with new innovations where pricing precedent is not available for the purpose of estimation