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  • Star Report:  Indonesia Compact
  • August 2019

Procurement Modernization Project

Procurement Modernization Project

  • $50.0 million[[During compact implementation, MCC approved increasing funding for the Procurement Modernization Project to $75 million.]]Original Compact Project Amount at Signing
  • $69.2 millionTotal Disbursed
Estimated Economic Rate of Return over 20 years Estimated beneficiaries beginning in year 6 Estimated net benefits over 20 years
At the time of signing N/A N/A N/A
At compact closure 13.3 percent 49.7 million[[This represents the estimated population of project-affected local governments. Benefits associated with improved procurement within national ministries were not found to be significant.]] $16.7 million

Economic Analysis: The Procurement Modernization Project did not have an ERR at the time of compact signing because key elements of the program were not sufficiently defined and supported by evidence. MCC proceeded with the project with the stipulation that the first phase of implementation would be assessed to produce an ERR before all $50 million in funds would be dedicated to it. However, the procurement for such an exercise failed, and the project was scaled-up without a detailed assessment of Phase One. In the fourth year of compact implementation, MCC attempted to estimate economic benefits by exploiting geographic variation in the program’s impact. Several months prior to compact closeout, MCC conducted three separate surveys, including government vendors and local procurement service unit officials.[[Officials from approximately 80 procurement service units were contacted, including all phase 1 and comparison PSUs.]] MCC was able to detect modest impacts and calculated an ERR of 13.3 percent. The close-out ERR is based on an internal assessment performed by MCC, using qualitative and quantitative surveys, that includes estimates of program impacts based on ex-post data.

There were three major benefit streams in the model. First, the model considered whether improvements in the procurement process led to improvements in value-for-money. Second, winning vendors were surveyed to determine the profit margin on individual contracts tendered from project-affected procurement service units (PSUs), to offset benefits which might come at the expense of firms. Indeed, evidence suggests lower firm profitability associated with the project. Finally, the model considered efficiency improvements, which could 1) allow for additional procurements to occur on the margin, or 2) reduce the need for local governments to hire additional staff. MCC found evidence for the former hypothesis, and therefore dropped the latter to minimize the risk of double-counting. Taken together these benefits also imply potential tax savings associated with the lower costs net of additional procurements, but hypothesized tax savings benefits were estimated to be small and highly uncertain.

Project Summary

The objective of the Procurement Modernization Project was to achieve cost and efficiency savings on procured goods and services, while assuring their quality satisfies the public need, and to achieve timely delivery of public services. These savings were expected to lead to greater provision of goods and services to the economy and positively impact economic growth. The constraints analysis noted that weak governance and institutions as well as inadequate and poor quality infrastructure were major constraints to economic growth in Indonesia. The weakness of the public procurement system was noted in particular as it is at the heart of the efficient delivery of public services and development of quality infrastructure and touches the daily lives of every Indonesian.

The public procurement of goods and services in Indonesia accounts for $45 billion of expenditures (2016 figures), or 30 percent of the national budget. It is the biggest business in the country. During the time of compact development in 2010-2011, Indonesia’s Corruption Eradication Commission concluded that up to 40 percent of public procurement value was misused. While not backed by rigorous research and analysis, if anything close to this percentage were true, it would mean that the Indonesian public was losing the equivalent of over $15 billion annually in diminished quality and availability of public services, not including the lost economic impact of the inadequate and under-supplied services.

At the time of compact development, professional procurement was not yet a recognized function in government. Procurement was largely seen as an administrative function, performed on an ad hoc basis by government personnel temporarily assigned to the task. Staff members were not trained adequately in procurement and did not view themselves as members of a recognized, highly-valued profession. Staff performing procurement functions operated in a context of weak or absent controls, presenting an enormous vulnerability to the efficient use of public resources. While government regulations allowed for more modern procurement methods, those in use by the GOI at the time of compact development were generally limited to the most basic, traditional procedures, ill-suited to the needs of a public sector of the size and sophistication of Indonesia.

The Procurement Modernization Project was designed to help the GOI overcome these institutional weaknesses in the public procurement system and to modernize the system with the goal of substantially improving the government’s ability to deliver pubic services. To strengthen the system, the project focused on developing well-resourced professional procurement institutions and a well-trained professional workforce equipped with more efficient procedures and the latest technology. To accelerate infrastructure development, the Procurement Modernization Project also provided support to reform the institutional, legal, regulatory, and procurement framework to make PPPs more feasible.

The  Project consisted of two activities and worked in partnership with the National Procurement Agency (LKPP) and newly formed procurement service units (PSUs), which are administrative units of government attached to a spending authority whose responsibility is to buy goods and services in a range of government institutions at the local and central government level. In exchange for MCC’s support, the GOI committed to establishing the procurement profession with a career path within its civil service for the first time.

Activity Revised Compact Allocation Final Disbursements
1 Procurement Professionalization Activity Establishment of permanent, independent procurement service units $68.2 million $62.6 million
2 Policy and Procedure Activity Development of procurement policies and procedures to improve outcomes for PPPs and research into sustainable procurement practices $6.8 million $6.6 million
TOTAL $75 million $69.2 million

Procurement Professionalization Activity

The Procurement Professionalization Activity supported the establishment of permanent, independent PSUs serving national and local governments. At the time of compact development, a recent regulatory decree had mandated that over 600 PSUs would need to be established in central ministries, regional offices, provinces, districts, cities, and public institutions across Indonesia. However, there was no vision for organizational standards, expected roles and responsibilities of the PSUs, nor a requirement that PSU staff be permanent and dedicated to the procurement function.

To establish and strengthen the PSUs, the project adopted an innovative approach. After selecting a group of 44 geographically and institutionally diverse pilot PSUs representing over 25 percent of national procurement spending, the maturity of each selected PSU was precisely assessed using the Indonesian Procurement Maturity Model (IPM2) tool developed within the context of the project. The results of the assessment provided a roadmap for institutional development not only in the areas of capacity development, but also in the resources needed, and proved to be a persuasive tool in gaining the necessary support from ministers, governors, and mayors.

The second component of Institutional Structure and Professionalization of PSUs Sub-Activity focused on creating a cadre of procurement professionals in Indonesia capable of conducting strategic, complex, and high value projects within ministries and at the regional and district level. The procurement skills training program adopted a competency-based training approach focused on building the skills and knowledge necessary to perform the duties of a procurement professional.

To complement the formal training program, the project also supported a mentoring and peer-to-peer learning program. During monthly visits to the pilot PSUs, the mentors assisted the PSU staff in applying their newly acquired skills and knowledge in their work activity and also assessed whether the participants demonstrated competency in the targets skills and knowledge defined in the competency framework. A network of women procurement professionals mentored other women in remote areas to enhance their confidence and career in this profession. The program also provided training for technical, budget, and audit personnel who contribute to executing procurements successfully. 

In order to leave a sustained footprint of procurement professionalization in a country the size of Indonesia, the training targets were high. The goal was to train 500 individuals to procurement professional status (12 courses plus mentoring) and take 300 of those through advanced training and mentoring. The program also sought to train 500 non-procurement professionals in programs tailored to their procurement-related functions, including the special program for auditors. The program met – and in some areas even exceeded – the ambitious targets. LKPP adapted the procurement skills training modules for use in the GOI competency requirements for procurement professionals across Indonesia. By raising the level of expertise, PSUs are expected to grow and apply more strategic procurement techniques (e.g., considering lifecycle costs and sustainable procurement factors). Mastering these more strategic techniques will increase Indonesia’s ability to improve the provision of goods and services to its citizens in a more cost effective manner. 

This project also aimed to empower women economically. A 2013 Gender Vendor Survey revealed that women vendors received less than five percent of contracts in public procurement, and women had low rates of participation (19 percent) in the procurement profession.[[LKPP/Bappenas/MCA Indonesia (2013) Gender in Government Procurement in Indonesia: Survey Findings on Access to Procurement, Key Barriers and Trends, Jakrata Indonesia]] As a result, two specific gender and social inclusion activities were included in the Procurement Modernization project: 1) establishment of a network through consultative process to support, mentor and strengthen women’s career and leadership development in this profession, and (2) training for women vendors to build their capacity to successfully participate and bid in government procurement processes. MCA-Indonesia signed a memorandum of agreement with the Indonesian Women’s Business Association (IWAPI), which was keen to build the capacity of women vendors with training, mentoring, and networking opportunities. At the end of the compact, 24 percent of trained procurement specialists and staff of PSUs were women, with four becoming the heads of PSUs. MCA-Indonesia also trained 147 women vendors in five major cities in e-procurement in partnership with IWAPI, increasing their access to public procurement.

The second part of the Procurement Professionalization Activity was the Procurement Management Information System (PMIS) Sub-Activity which consisted of: 1) the acquisition of hardware and software to set up a modern cloud based e-procurement system, and 2) development of policies, procedures, and capacity to realize framework agreements to support a new E-Catalog system. The PMIS sub-activity funded the building of a modern, sophisticated PMIS that automates procurement processes, collects data, generates reports, and sends alerts of possible fraudulent activity. The PMIS is an important part of a modern procurement system and aims to liberate the procurement professional from the administrative burden and transaction costs related to the purchasing of routine commercial products and services, making better use of their skills for more complex purchases. To make maximum use of the new electronic catalog system, the Procurement Modernization Project supported developing policies and procedures that modernized the business transaction between government and suppliers. Most important among these tools were procurement procedures and standard bidding documents for framework contracting, a form of indefinite quantity, indefinite delivery procurement transaction. 

As part of the investments in information technology, the Procurement Modernization Project developed automated fraud/integrity filters and integrated these into the procurement systems and processes—an innovation that has been undertaken by few if any other countries—and established a fully integrated system for the creation and management of framework agreements and the resulting e‐catalogues. The functionality of this system matches that of leading public jurisdictions in Scotland, Australia, and South Korea. Other investments in data warehousing and a procurement management information system took a vulnerable, insecure system of over 600 servers with limited functionality and no data analysis functions and transformed it into a highly secure, cutting edge cloud system able to report extensive procurement data to LKPP, the Ministry of Finance, and the President’s office. The Procurement Modernization Project also provided funds to establish a knowledge and communications center in LKPP to sustain and scale up procurement modernization in Indonesia beyond the compact term.

Policy and Procedure Activity

The Policy and Procedure Activity aimed to 1) develop procurement policies and procedures to improve the outcomes for PPPs and 2) to conduct research that would lead to environmentally and socially sustainable procurement practices. Attempts at tendering PPPs took as long as three years, much too long to attract investors and make projects financially viable. Therefore, the PPP sub-activity was designed to address these problems with the goal of accelerating infrastructure development, especially in locations most harmed by the lack of procedures and capacity. In addition to supporting the development of procurement regulations for PPPs and developing and delivering a PPP training program at basic and advanced levels, the PPP sub-activity also partnered with four government contracting agencies to assist them with developing model bidding documents based on the two-step procurement process. As a result of the PM project, LKPP has become a major player in PPPs within the GOI, thereby emphasizing the importance of transparency, competition, and fairness in the PPP process.The PM Project was able to make a substantial contribution to the revision of PPP regulations by taking part in an inter-ministerial process to modernize the PPP framework. These contracting agencies had projects in water supply, airport infrastructure, waste-to-energy, and street lighting. The PM Project assisted each of these agencies, LKPP, and others to transparently reach out to the market and gauge interest and understand possible constraints in order to adequately prepare the projects for the two-stage procurement PPP process.

The Policy and Procedure Activity also aimed to conduct research that would lead to environmentally and socially sustainable procurement practices. In the area of policy reform, LKPP strongly supported the recommendations that came from the sustainable public procurement work done through the compact. The policy recommendations came from original research into approaches adopted by other jurisdictions as well as consultations in Indonesia with government officials and representatives from several embassies familiar with experiences in their own countries. The PM Project also provided funds to establish a knowledge and communications center in LKPP to sustain and scale up procurement modernization in Indonesia beyond the compact term.

Project Sustainability

One of the reasons the Procurement Modernization Project enjoyed broad support during implementation was due to the crowding-in of partners at the national, provincial, and municipal levels. Leaders at all levels saw the benefit of improved public services to their citizens. Leaders within the PSUs benefitted from having clear benchmarks for improvement outlined within the Indonesian Procurement Maturity Model (IPM2). Staff within the PSUs benefitted from improved skills and a dedicated career path in procurement. This broad-based interest is critical to sustaining the gains made under the Project.

During the course of the Project, the GOI independently took several important that also contributed to building the momentum for procurement reform, including creating the Village Fund as a mechanism to channel money from the central government budget to villages directly, greatly increasing high-priority infrastructure spending and expanding the number of other transfers from the center to the provinces. All of these efforts led to a significant increase in budget and procurement spending at the local level. Along with the increase in resources came an increased responsibility at the local level to spend these funds wisely. As a result, local governments had a greater need for expertise. In highly decentralized Indonesia, the regions are responsible for supervising procurements all the way down to the village level. For example, the district of Badung in Bali Province was responsible for 46 villages with annual budgets ranging from $500,000 to $1 million. Since the level of procurement knowledge at the village level was very low, Badung developed procurement clinics to extend the knowledge to the villages to meet their regulatory requirements and deliver better outcomes for their local government. Replicating the procurement skills training and mentoring program from the Procurement Modernization Project, the procurement clinics provided consultancy/advisory services, mentoring, peer-to-peer learning, and training using materials developed by the project. Other pilot PSUs developed similar procurement clinics for neighboring PSUs.

Greater commitment and consistency from LKPP would have further enhanced the Procurement Modernization Project’s sustainability. LKPP’s policy mandate did not always translate to an ethos for reform. Most LKPP functionaries lacked procurement knowledge and LKPP’s staffing and budget priorities changed several times a year as it developed and re-developed its own work program. At times LKPP’s work program was congruous with the Procurement Modernization Project activities; and at other times, the agency showed a genuine lack of interest in supporting the Project. Over the compact period, LKPP reshuffled its own senior leadership every few months, creating inconsistent support for MCA-Indonesia and frequent policy reversals.

In the end however, the Procurement Modernization Project provided an extensive organizational development training and mentoring program that included performance management and intense change management. By the end of the compact, 30 of the 44 pilot PSUs had so advanced in institutional maturity that they were formally recognized as Centers of Excellence (COE) and trained to mentor non-pilot PSUs. During the final phase of the project, and largely at GOI expense, these COEs began spreading the reforms to the remaining 620 PSUs. All 620 non-pilot PSUs attended regional workshops, 137 participated in coaching clinics and the “sistering” mentor program recorded over 500 visits between pilot and non-pilot PSUs. The organizational development program and PMIS has received strong support from LKPP and will be sustained through an online IPM2 platform and annual budget allocations to reach all of the PSUs in Indonesia.

Evaluation Findings

The Procurement Modernization Project evaluation with an impact evaluation/pre-post mixed methods design will explore whether there were changes to the shared culture and values; structure, leadership, and management; systems, including policies, procedures, and processes; skills and knowledge; and staffing of the PSUs as a result of the project.

Status of the evaluation:

Component Status
Baseline Completed in September 2017.
Interim Data collection completed December 2018. Report expected mid-2019.


Data collection to be completed April to July 2019. Report expected December 2019.

Key Output and Outcome Indicators

Procurement Professionalization Activity

Outcome: Improved procurement capacity and function of procurement service units and related spending units.

Key Performance Indicators Baseline End of Compact Target End of Compact Achievement Percent Target Complete
Number of pilot PSUs permanently established 15 45 43 96%
Number of framework agreements signed 0 No Target 66 No Target
Number of PSU staff trained on procurement skills (Basic) 0 500 675 (22.5% women) 133%
Number of PSU staff trained on procurement skills (Intermediate) 0 500 589 (23% women) 110%
Number of PSU staff trained procurement skills (Advanced) 0 300 494 (23% women) 151%
Date procurement management information system (PMIS) launched N/A 31-Mar-18 15-Mar-18 Complete

Policy and Procedure Activity

Outcome: Increased rate and success of PPPs and improved environmental sustainability of government procurements

Key Performance Indicators Baseline End of Compact Target End of Compact Achievement Percent Target Complete
Number of Public Private Partnership standard bidding documents produced 0 6 4 67%
Date Sustainable Procurement Policy (SPP) Discovery Phase Report finalized N/A 31-May-17 30-Nov-17 Complete
Number of female entrepreneurs trained 0 30 147 490%

Explanation of Results

Most of the key performance indicators were selected during project design, but the targets set early in project implementation were modified when the project entered Phase II and upon a funding reallocation that added $25 million to the project. Most of the targets were met or exceeded. The target for Standard Bidding Document (SBDs) for PPPs fell short because in the closing months of the compact the government discovered regulatory barriers to applying PPPs in two sectors for which SBDs were planned and partially developed. There was not enough time left in the compact to develop SBDs for other sectors.

Lessons Learned

“Jump starting” nationwide institutional reform should be built into the structure of a pilot. The Procurement Modernization Project had many features designed to support sustainability of impact and learning. First, rather than provide less support to a greater number of pilot PSUs, the project provided focused and intense training and mentoring to only 44 of over 600 government procuring entities in Indonesia. Second, the 44 pilot PSUs were carefully chosen for geographic and institutional diversity to provide a rich cohort for national replication. Third, the project initiated a formal Procurement Modernization Project “sistering” program to facilitate peer-to-peer learning and knowledge sharing among the 44 pilot PSUs. This peer-to-peer learning and mentoring became a critical tool and provided a huge boost to gaining acceptance of change and accelerating reform. Fourth, in the final year of the compact, the project expanded the “sistering” program by providing champion pilot PSUs with training and tools to establish an institutional mentoring program for non-pilot PSUs to learn about PSU institutional establishment and organizational development. In addition, the compact set forth that the PSU support and training program would be implemented in two phases, with Phase II (scale up) contingent on an assessment of the results from Phase I, precisely so that the design could be adjusted in the event it showed little impact or was not cost-effective. By the end of the compact, a strong program for spreading PSU development appears to have been in place, and there were indications that the reforms sown in the pilot program were spreading beyond the pilot PSUs. The independent evaluation will determine conclusively whether and how program features have enabled sustainability of positive outcomes.

Institutional development requires an effective assessment and aspirational tool. Building a professional, strategic procurement organization is a multi-dimensional task that requires strengthening institutional, management, personnel, and operational resources and capabilities. The development and delivery of the Indonesian Procurement Maturity Model (IPM2) tool provided an essential framework for institutional development of the pilot PSUs. As an assessment tool, it provided each pilot PSU with a clear picture of its current status and capacities. As an aspirational tool, it showed a clear action plan to organizational maturity. These action plans proved extremely effective in developing annual budget requests and advocating for increased resources for the procurement function. As a surprising added bonus, the precise grading scale of IPM2 ignited competition among political leaders hungry to demonstrate their reform agendas. The independent evaluators will assess the effect of the design and implementation of the maturity model on PSU performance.

Building a professional organization with a professional workforce requires more than a few weeks of technical training. In designing the project, MCC recognized that institutional development, especially in the context of procurement, is a heavy task. Accordingly, The Procurement Modernization Project was an elaborate program that focused on developing human and institutional capacity as necessary steps towards a larger goal of building a professional organization with a professional workforce, combining formal training with mentoring, change management, and networking, touching on a wide range of subjects and skills. The procurement skills training program developed and delivered 36 training modules, lasting two or three days each, with programs for procurement professionals, technical and budget professionals, auditors, and managers. The on-site mentoring program insured proper application of the skills learned in the class room. In addition, the Procurement Modernization Project delivered 12 modules of organizational skills training and on-site mentoring with an emphasis on change management, performance planning and management, customer relations, stakeholder management, knowledge management, end-to-end procurement management, and risk management. There were also special programs in legal protection, strategic communications, and administering a virtual procurement forum for procurement professional to network. The independent evaluators will examine the role of the on-site mentoring program in the effectiveness of the project. However, these technical training and mentoring efforts should not be seen as sufficient to develop a sustained, strong institution and workforce, which is the GOI’s ultimate goal.

Strategic communications campaign should launch at the beginning of a project. The strategic communication campaign was designed to sustain the reforms and did not begin until the last year of the compact. However, reform projects require effective communication with many stakeholders including political officials, budget officers, sector specialists, auditors, vendors, law enforcement, and the general public. Given the significant improvement in spreading the message of procurement modernization and the importance of reform that resulted from the communication campaign in just the final eight months of the project, the campaign should have been an integral feature of project design from the beginning.

Approach PPPs as a procurement tool and not just a funding source. PPPs are often portrayed as a financing option to governments that do not possess sufficient funds to afford payment for the basic delivery of infrastructure assets. In reality, however, these projects are funded in large part with taxpayer money. These projects deliver public services and generally involve major infrastructure, but due to their size and complexity suffer from shortcomings in planning and execution and are highly vulnerable to corruption. The design of the PPP Sub-Activity was unique as it supported the consideration of these complex projects in the context of procurement and as an alternative to the traditional procurement for delivery of physical infrastructure assets in Indonesia. The program’s objective was to introduce the primary principles of procurement: transparency of decision processes; accountability of public officials; introduction of fair, non-discriminatory, competitive PPP Procurement Policy and Procedures; and access to standardized bidding documents with relevant generic contractual provisions accessible to all stakeholders. As a result of the Procurement Modernization Project, LKPP now has a central role in procurement of PPP projects in Indonesia with procedures, tools, and skills to safeguard the planning and selection process.