Bid-Rigging Case study : Indonesian policy toward bid-rigging on procuring health equipments

1. Bid-RiggingCase study : Indonesian policy toward bid-rigging on procuring health equipments Commissioner Dedie S. Martadisastra Commission for the Supervision of Business Competition (KPPU) Republic of Indonesia Presented at the ACF Conference Hong Kong, December 10-11, 2007

2. Introduction Bid-rigging is a conduct which stressed on price fixing Price fixing is set through synchronizing the bids, vertically and horizontally. Vertical collusion is a common tender activities involving government’s apparatus

3. Introduction Adam Smith in his book, An Inquiry Into the Nature and Cases of the Wealth of Nations, defined collusion as : …People of the same trade seldom meet together, even for merriment and diversion. But the conversation ends in a conspiracy against the public, or in some contrivance to raise the price

4. Introduction Bambang P. Adiwiyoto, in his book Glossary of Industrial Organization Economic and Competition Law, classified bid-rigging behavior into 2 terms. First, Business actors agreed to submit common bids Second, business actors agreed to commit tender collusion by arranging those who are about to be awarded in the tender. E.g: the winner of the tender is mentioned on the agreement of business actors

5. Fact 1: Public procurements absorb 2,1% of Gross National Product The number of public procurements financed by the state-budget reflected a number of bussinesses involved in the procurement process. An instrument to enhance good governance in handling bid-rigging is needed to avoid vertical colussion.

6. Fact 2 : Public procurements are highly regulated/supervised activities Government Regulations; Special task force by the President; Competition authority; Anti-corruption authority; Court of justice;

7. Fact 3: Bid-rigging has been deeply entrenched in Indonesia Central government’s policies cannot touch the local government’s; Most competition cases handled by KPPU are on bid-rigging(60%); For the last 7 years, various problems have been followed up to be cases. By November 2007, 60 cases on bid-rigging were handled by KPPU

8. Tender definition Regarding to the elucidation of the Law No. 5/1999 “Tender shall be bids submitted to contract certain work, for the procurement of goods, or the provision of services”

9. Part of Tender Activities Project’s work Procurement of goods and/or services; Purchasing goods and/or services; Selling goods and/or services;

10. Collusive Practices The definition of collusion is “an agreement between business actors (bidders) with other parties to arrange and to mention the tender winner” Collusive Practices consist of: An agreement between two parties or more Openly or secretly, the bid documents are modified prior to its submission Creating artificial competition Agreeing or facilitating the collusion Giving the exclusive chances

11. How to identify bid-rigging? Any bid-rigging activities, whether it is horizontal (among business actors) and/or vertical collusion (between business actors and the Tender Committee/Government’s apparatus);

12. The stipulations which lead to unfair competition The tender is closed or not transparent and not advertized publicly; it creates entry barrier Although business actors have the same competences, not all of them cannot participate in the tender Tender which requires technical specification or certain brand tends to drive to certain business actors. Consequently, it creates entry barrier

13. bid-rigging patterns The pattern of bid-rigging by the committee (government)-business actors was conducted in the phase of; Planning before submitting the budget; The Specifications tend to be advantageous to certain business actors To qualify disqualified bidders To set up the bid qualification during the progress of the tender.

14. KPPU actions To disseminate constantly the existence of Article 22 of Law No.5/1999 on prohibition collusive practice during a tender among government institutions, business associations, etc To draft a tender guideline To Sentence the defendants on tender collusion based on Article 22 Law No.5/1999

15. Case : bid rigging/collusion in procuring medical equipment of Bekasi State-owned Hospital Introduction Bid rigging in medical equipment is publicly known in Indonesia indicate that unfair business practices are rampant. This phenomenon brought-up through KPPU’s decision on bid rigging/collusion in medical equipment procurement at Bekasi State-owned Hospital. KPPU received the report in October 2004 from one of the bidders mentioning that which argued that the bid process was full of fraud and collusive aggrement.

16. Suspicious Indicators The bid committee advertised the project of procuring medical equipments for Bekasi State-owned Hospital in a local and small circulation newspaper called “KORAN 5”. Some bid requirements were discriminative, such as requirement to submit supporting letter from distributor or manufacturer and to have appointment letter as sub-distributor to any procured medical equipments

17. Suspicious Indicators (Continued…) The procured medical equipments referred only to certain brand. For example, the brand of Hamilton for ventilator, Meditec for incubator, Terumo for Syringe pump, etc. It contravene to the Presidential Decree No. 80 / 2003 concerning Guidelines on Procurement of Goods and Services for Government Agencies. Some of bidders did not have enough time to attend aanwijzing or technical meeting due to the acceptance of the invitation and the time of technical meeting was not extended, without any clear reason.

18. Bidding Process There are five bidders which bid the following prices: CV. Lodaya; for amount of Rp 1,477,166,600.00 PT. Mutiara Jaya Farma ; for amount of Rp 1,478,600,000.00 PT. Astha Purnama Prima ; for amount of Rp 1,.480,000,000.00 CV. Lami ; for amount of Rp 1,191,800,000.00 PT. Ina Farma ; for amount of Rp1,479,000, 000.00 Note : The Owned-Estimated Price of the project was Rp 1,480,132,800.00 and the budget limit was Rp 1,500,000,000.00 (about US $ 161,411).

19. Bidding Process (Continued …) The bid prices of Owned-Estimated Price for all awared bidder are : CV. Lodaya (the awared) is Rp 2,966,200.00or 0,2 %, First Nominee I was Rp 1,532,800.00 or 0,1 %, Second Nominee was Rp 1,132,800.00 or 0,076 %. The price disparity shows that there bid spreads indicate the existence of collusive practice in order to match Owned- Estimated Price. One of the bidder (CV. Lami) whose bid price was Rp 1.191.800.000 or lower than other participants, has been disqualified by bid committee due to unavailability of supporting letter from manufacturer or distributor (PT. Fondaco Mitratama).

21. Facts Finding The owner of PT. Mutiara Jaya Farma and PT. Ina Farma was the same person, so that there was a suspicion of collusion to determine the winning bidder. In other words, they didn’t want to win the bid but just as a complementary bidding. There was organizational relationship among the owner of CV. Lodaya, PT. Mutiara Jaya Farma, and PT. Ina Farma in the Medical Devices Business Association.

22. Facts Finding (Continued…) There was a request from the bid committee and Head of Project Committee to the distributor to give supporting letter to all participants except CV. Lami. The undertaking was alleged as collusive behavior to prevent CV. Lami to win the bid. On 2003, there was a meeting between sales marketing of PT. Fondaco Mitratama and Head of Child Care Division at Bekasi State-owned Hospital. In this meeting, PT. Fondaco Mitratama promoted a Hamilton Medical ventilator and gave its brochure to Head of Child Care. Head of Bid Committee compiled the tender work plan and requirement based on the document proposed by the users (doctors) at Bekasi State-owned Hospital. Head of Bid Committee never made any comparison to the alternative product.

23. Facts Finding (Continued…) According to those facts, KPPU decided that there is a strong indication in infringement of Article 22, Law No. 5/ 1999 concerning collusive tendering. Article 22 state that: “Business actors shall be prohibited from entering into conspiracies with other parties in order to determine awardees of tenders which may result in unfair business competition”

24. Verdict KPPU stated : There has been collusive practice in procuring medical eqipment for Bekasi State-owned Hospital among CV. Lodaya, PT. Mutiara Jaya Farma, PT. Ina Farma, PT. Fondaco Mitratama, Head of Bid Committee, Head of Project Committee, and Head of Bekasi State-owned Hospital. To declare that CV. Lodaya, PT. Mutiara Jaya Farma, PT. Ina Farma, PT. Fondaco Mitratama, Head of Bid Committee, Head of Project Committee, and Head of Bekasi Health Office legally violated Article 22 of the Law No. 5/1999.

25. Decision (Continued…) To prohibit CV. Lodaya, PT. Mutiara Jaya Farma, and PT. Ina Farma take part in the tender of medical equipment procurement for Bekasi State-owned Hospital for 1 (one) year after accepting the decision. To prohibit PT. Fondaco Mitratama to provide medical devices at Bekasi District Hospital for 1 (one) year after accepting the decision. To prohibit Bekasi District Hospital to accept CV. Lodaya, PT. Mutiara Jaya Farma, and PT. Ina Farma as their bid participants. To prohibit Bekasi State-owned Hospital to give the work to PT. Fondaco Mitratama in procuring medical equipment at Bekasi District Hospital for 1 (one) year after accepting the decision.

26. Further Effect After KPPU’s decision being released, Ministry of Health was paying great attention toward the case. KPPU has been investigating some new cases in procuring medical equipments.

27. End of Presentation Thank You …

28. The Hamilton Ventilator