The Effect of E-Procurement Policy on Corruption in Government Procurement: Evidence from Indonesia

ABSTRACT

This study investigates the effect of E-Procurement policy on corruption in government procurement across 34 provinces in Indonesia. Using the difference-in-differences (DD) approach, this study analyses the panel data of 103 government procurement corruption cases handled by Indonesia’s Corruption Eradication Commission (KPK) from 2005 to 2017. This study finds that the use of E-Procurement significantly decreases the amount of government procurement corruption in provinces that have relatively high government procurement spending or capital expenditure. This finding shows the positive effect of E-Procurement on reducing the number of corruption cases in government procurement; it is in line with previous studies suggesting that E-Procurement supports the implementation of good governance in government procurement.

KEYWORDS:

• E-Procurement
• corruption
• government procurement
• capital expenditure

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The KPK handles large corruption cases with values of more than 1 billion Rupiah and identifies corruption cases into seven categories: (1) government procurement; (2) licensing; (3) bribery; (4) levies/extortion; (5) misuse of the budget; (6) money laundering crime; and (7) obstructing the process of the KPK. Corruption in government procurement includes price or value marked-up, misuse of authority in the mechanism of direct appointment to a provider, and discriminatory specifications that favor particular tenders.

2. The cases of corruption in bribery are related to briberies in the process of acquiring business permits, influencing a legal or court decision, and influencing the procurement committee in determining the auction winner. Thus, some of the bribery cases are related to government procurement. However, since bribery cases also include non-government procurement bribery, this study does not use bribery cases in the analysis.

3. Government procurement spending consists of two major components: capital expenditure and goods and services expenditure. Capital expenditure is government expenditure on the purchase/procurement of the construction of tangible fixed assets with benefits of more than one year, consisting of land acquisition, equipment (heavy, transportation, workshops, processing and maintenance of agriculture, office equipment, laboratories, medicine and health, school displays, communication, computers), road construction, bridges, water networks, street lighting, electrical and telephone installations, waste management, buildings, and art goods.

4. The discussion is grounded on the contesting “sand the wheel” vs. “grease the wheel” hypotheses on corruption. While the previous argues that corruption would impede economic growth and efficiency, the latter suggests that in the case of ill-functioning institutions, corruption such as a graft may act as a problem-solving device to speed or grease the economic activities and investments, thus raising efficiency and growth in the end (see the discussion in Méon & Sekkat, 2005).

5. Tangentopoli is a term for “Bribery City” that is attached to the cities in Italia during 1980 to 1990s because of the huge corruption scandal that involved public officials, (12,000 of them were investigated and 5000 of them were found guilty and arrested) at various levels, who accepted bribes in tenders of capital projects (infrastructure).

6. There are three procedures for the bidders in submitting a bidding document, which are: (1) One envelope system, all of the bid documents (all the requirements and documents that are requested based on the auction document) are included in one envelope; (2) Two envelope system, which includes all the bid documents, which consist of two envelopes (the first one contains the administration and technical data and the second envelope contains calculation data on the bid prices) which are included in one envelope, and (3) Two-stage bidding, where the submitting of the documents is conducted in two stages with two envelopes (The first stage, submission of bidding documents on the first envelope consisting of administrative and technical requirements and other supporting documents that are required in the bidding document and the second stage is the inclusion of price quotes with the second envelope by the partners who have been declared passed by the auction committee in stage one evaluation).

7. Although this study covers government procurement data for the period of 2005-2017, pre-policy variation in government procurement spending that is used to define the treatment and control groups was obtained based on government procurement data prior to the years of the implementation of E-Procurement that vary across provinces ranging from 2008 to 2017.

8. Although not all financial losses were further charged as corruption, this study used it as a proxy to corruption because Article 2 and 3 Law No. 31 Year 1999 as amended by Law No. 20 Year 2001 concerning Corruption Eradication (Indonesian Anti-Corruption Law) determines that a corruption case must fulfill the element of creating state financial loss.

9. Other than using some legally binding cases of corruption in the government procurement, a robustness check is also used for the number of corruption cases in government procurement that are under investigation (146 cases) to illustrate further the depiction of corruption in the government procurement trend.

10. The total 146 cases consist of 103 legally binding cases and 43 under investigation cases by the time this study was conducted.