Redefining SOE Subsidiary And SOE-Affiliated Company

Indonesia:

New Regulation On SOE Procurement: Redefining SOE Subsidiary And SOE-Affiliated Company

29 January 2020

Assegaf Hamzah & Partners

New Regulation on SOE Procurement: Redefining SOE Subsidiary
and SOE-Affiliated Company

After the issuance of Presidential Regulation No. 16 of 2018 on
Public Procurement of Goods and Services
(“Presidential Regulation No. 16“), the
public procurement landscape in Indonesia underwent another change
when the government issued the Minister of State-owned Enterprise
Regulation No. PER-08/MBU/12/2019 on Guideline for Procurement of
Goods and Services by State-Owned Enterprise
(“SOE“) (“New
Regulation“). The New Regulation supersedes the
entire previous regulation on the same subject
(“Previous Regulation“).

Below we highlight some notable changes from the New
Regulation:

1. 
   

   Qualification as an SOE subsidiary or SOE-affiliated
   company

   
   

   The New Regulation relaxes the shares percentage requirement for
   an SOE subsidiary or SOE-affiliated company. Previously, the law
   requires 90% ownership by one or more SOEs before a company can
   qualify as an SOE subsidiary or SOE-affiliated company. Now, the
   law only requires more than 50% ownership.

   
   

   While the New Regulation still requires that a supplier must be
   an SOE subsidiary or SOE-affiliated company to qualify for direct
   appointment for the procurement of goods, the change from 90% to
   more than 50% SOE-ownership will widen the pool of companies that
   can qualify as an SOE subsidiary or SOE-affiliate. SOEs would not
   be limited in their choice and more private companies can now
   participate in government projects.




2. 
   

   Utilisation of state budget

   
   

   The Previous Regulation exempts the procurement by an SOE that
   is funded by the state budget. As such, this type of procurement
   must follow the tedious government procurement procedures set out
   under Presidential Regulation No. 16.

   
   

   This distinction has not been retained in the New Regulation,
   which goes further to state that the New Regulation will apply to
   the procurement by an SOE that is funded by the SOE’s own
   budget, government’s equity contribution to that SOE,
   reimbursement of subsidies for public service obligations and
   government loan.

   
   

   On the other hand, Presidential Regulation No. 16 does not
   specifically include SOE procurement using state budget.
   Consequently, it remains to be seen which law would actually apply
   for this type of procurement.




3. 
   

   Optional adoption of the New Regulation

   
   

   Interestingly, the application of the New Regulation is optional
   for an SOE subsidiary and SOE-affiliated company. As such, these
   companies can choose whether or not to adopt the requirements under
   the New Regulation or to set their own internal procurement
   procedure.

   
   

   A key point to note here is that the New Regulation allows an
   SOE subsidiary or SOE-affiliated company to directly appoint
   another SOE, SOE subsidiary or SOE-affiliated company if the
   appointing SOE chooses to adopt the New Regulation. But it is
   unclear whether this privilege would still apply if the SOE
   subsidiary or SOE-affiliated company chooses not to adopt the New
   Regulation at the outset.

   
   

   Thus, it is important for SOE subsidiaries and SOE-affiliated
   companies to weigh the flexibility of setting its own internal
   procurement procedure against the direct appointment privilege
   under the New Regulation.




4. 
   

   Additional requirements for direct appointment

   
   

   Under the Previous Regulation, an SOE needs to satisfy 11
   conditions for the direct appointment of a supplier. While these
   conditions continue to apply, the New Regulation adds one new
   condition that allows an SOE to directly appoint a consultant if
   the service provided by the consultant is:

   
   

   1. unplanned;

   
   

   2. required to resolve certain issues; and

   
   

   3. intended for urgent work that cannot be postponed.

   
   

   Consequently, this condition may allow an SOE to directly
   appoint, among others, legal consultants to provide legal
   assistance, such as in filing or defending a lawsuit/claim.

   
   

   The New Regulation also prescribes general requirements for all
   direct appointment, one of them being that the supplied goods or
   services must be in line with the businesses of the supplier. It
   seems that this requirement is imposed to encourage SOEs to
   purchase goods and services directly from the producer and avoid
   the use of an intermediary. Further, the New Regulation also states
   that a direct appointment can only be done if it is allowed under
   the relevant sectoral regulation.

   
   

   Where the direct appointment is made to another SOE, SOE
   subsidiary or SOE-affiliated company, the procuring SOE must also
   be able to justify the quality, price and purpose of the supplied
   goods or services.




5. 
   

   Priority for domestic products

   
   

   Although the Previous Regulation already required an SOE to
   prioritise the use of domestic products, in addition to utilising
   national engineering designs and expanding opportunities for
   small-scale businesses in its procurement, it does not provide
   detailed rules on this issue.

   
   

   The New Regulation retains this prioritisation, in addition to
   requiring the board of directors of the appointing SOE to form a
   local content committee who will be responsible to monitor and
   ensure the use of domestic products and fulfilment of the
   prescribed local content in such SOE’s procurement. The New
   Regulation also provides the following guidance for SOEs in
   granting price preference to bidders that use domestic
   products:

   
   

   1. bidders that supply domestic products having a local percentage
      of 25% or more is eligible for the price preference;

   
   

   2. the price preference must not exceed 25%; and

   
   

   3. specifically for construction services by a domestic
      construction company, the price preference must not exceed
      7.5%.

   
   

   However, the New Regulation does not set a formula to calculate
   the points for price in respect of a tender that has a local
   content percentage of 25% or more. As a reference, Presidential
   Regulation No. 16 sets the following calculation for the price
   preference:

   
   

   
   

   
   

   Final Evaluation Price = (1 – (local content percentage x price preference) x Offered Price

   
   




6. 
   

   Deadline to file a refutation

   
   

   The New Regulation shortens the period in which a bidder can
   file a refutation against the SOE’s determination of the
   winning bid or contract award. Previously, a bidder can file a
   refutation within 4 business days as of the date of announcement of
   the winning bidder or the date of the contract award (whichever is
   earlier), and the SOE will have 14 calendar days to respond.

   
   

   Now, a bidder can only file a refutation within 2 days as of the
   date of announcement of the winning bidder or the date of the
   contract award (whichever is earlier), and the SOE will have 7
   calendar days to respond. Consequently, bidders have very little
   room to move after the date of announcement or contract award.




7. 
   

   Multi-year procurement contract

   
   

   The New Regulation clarifies the detail of the requirements for
   a multi-year procurement contract whereby:

   
   

   1. the required scope of work can only be completed within more
      than 12 months or 1 fiscal year;

   
   

   2. it is more beneficial for the SOE to use a single contract for
      several years, provided that the term of the contract does not
      exceed 3 fiscal years;

   
   

   3. the work requires a long-term investment; or

   
   

   4. the work constitutes routine items that must be available at the
      beginning of the year.

   
   

   As with the Previous Regulation, the board of directors of an
   SOE is allowed to formulate the price adjustment for multi-year
   contracts based on market conditions and prevailing best
   practices.




8. 
   

   Bid bond

   
   

   The New Regulation stipulates that an SOE may set a bid bond as
   a requirement in an open tender, general selection, selective
   tender, or selective selection process, unless the supplier of the
   goods/service is an SOE or ex-SOE.

   
   

   However, an SOE will still have to consider the relevant
   sectoral laws and regulations as certain sectors will require
   bidders to submit a bid bond regardless of their status.

As seen from above, the New Regulation sets comprehensive terms
and conditions for SOE procurement. While SOEs now enjoy more
flexibility in appointing an SOE subsidiary or SOE-affiliated
company in the procurement goods/services, SOEs have to navigate
the New Regulation carefully. In particular for awarding direct
appointment to other SOE, SOE subsidiary or SOE-affiliated company,
the SOE will need to check the requirements of any other laws as a
direct appointment may not be in line with the objectives of other
laws, for instance, the Indonesian Competition Law.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Government, Public Sector from Indonesia