Indonesia’s E-Procurement System Upsetting the Applecart!!

photoBy Syamala Ariyanchira,
July 17, 2016

During a recent visit to Jakarta, the cautious optimism of both suppliers and buyers of diagnostics products was hard to ignore! It was intriguing since I expected an overall market excitement as the recent national healthcare regulations are predicted to create new opportunities for all key stakeholders.

The implementation of e-procurement system is one of the most ground breaking regulations introduced by the government recently. While both suppliers and buyers agree in general on the potential benefits of this system, no one is in a hurry to switch to it.

Universal Healthcare Coverage (UHC) for the entire population is another ambitious move by the government. Along with e-procurement system, the healthcare industry landscape is expected to change completely!

For some, however, the rug is getting pulled right under their feet!

Adapting with effective strategies is not easy as the impact of the new policies is unclear. It is also doubtful, if all the policies will be successfully implemented, and if so, by when.

For foreign manufacturers, Indonesia has always been a challenging market. The new policies make it even more complex and puzzling. Gathering critical insights and passing through this unclear phase is crucial since Indonesia can offer compelling opportunities for the ones who survive the journey.

While developing our recent market research report on Indonesia’s diagnostics markets, we came across with many critical insights that can be helpful for foreign IVD companies to tap the emerging opportunities in Indonesia.

Assessing the Opportunity

Indonesia is a compelling market for healthcare companies. To begin with, the 250 million plus population of the country is too big to ignore. And the rising healthcare conscious middle-class population offers huge potential!

Assessing the market trends, early movers may also benefit in future. In fact, Indonesia’s policies to protect local businesses have been a challenge for foreign manufacturers. For instance, only one pharmaceutical brand is allowed for one particular drug molecule targeting an indication. Contrary to this situation in the pharmaceutical sector, currently there are no restrictions on the number of IVD products that can be registered in Indonesia for the diagnosis of a particular indication. In the case of IVD, competition is encouraged at present to manage price levels. However, the situation may possibly change in future offering clear advantages to early movers.

The government’s declaration to offer health care coverage to 100% of its population by 2019 has created a new wave of investments in both government and private sectors. Community Health Centres (CHCs, which are locally known as Puskesmas) are being offered better facilities to convert them as efficient primary care centers. This offers a huge opportunity for IVD companies – especially for those that offer easy-to-use and point-of-care diagnosis platforms.

When contacted, several CHCs confirmed that they have started offering regular diagnostic tests for many infectious diseases including HIV, malaria, hepatitis, and dengue for members. Just five years back, CHCs that could offer simple rapid tests were rare!

However, guarded optimism and careful planning are needed to navigate through these unchartered waters. An effective strategy to deal with e-procurement policies ranks as one of the top priority factors to consider before making investment decisions.

Concerns of IVD Suppliers

E-procurement of IVD products are routed through the e-catalogue. The public can access the prices of all the products registered in the e-catalogue. The idea is to introduce transparency that can eventually eliminate deep-rooted corruption practices of the tender-based purchase model.

E-catalogue price needs to be the lowest for a particular product in Indonesia. And, it is mandatory for all government organizations to purchase through e-catalogue. Tenders are allowed if the products are not listed in e-catalogue.

As more and more products get registered in e-catalogue, the government expects e-procurement to completely replace tender-based large-scale purchases, saving millions of dollars lost due to corruption.

As more and more products get registered in e-catalogue, the government expects e-procurement to completely replace tender-based large-scale purchases, saving millions of dollars lost due to corruption.

The distributor or manufacturer of the IVD product, whoever holds the import license, is responsible to register the product on e-catalogue and negotiate prices with the government agency. The distributor margin allowed for most products is in the range of 2-2.5 times of the import price.

Shipping costs to each region is fixed by the government, which is added to the distributor price. If a distributor is considering offering further discounts on the e-catalogue price for a particular buyer, it can only be based on the shipping cost component. In the case of low-cost IVD products, suppliers have to work around lower margins since competition is high.

Though private hospitals are not allowed to take advantage of the e-procurement system, their access to e-catalogue price has become a major setback for suppliers. Private hospitals have started negotiating based on e-catalogue prices. Thus, e-catalogue is indirectly affecting the profit margins suppliers can derive from the private sector as well.

Basically, revealing prices is a serious concern for distributors. Hence, many IVD distributors are delaying product registration in e-catalogue. Most of them could not indicate when they will complete their e-catalogue registration process. Some of them have opted for registration of a few selected products and delay the registration of the rest of the products.

In the absence of whole-hearted cooperation from suppliers, effective implementation of the e-procurement system can get delayed much longer than what the government bodies expected.

Getting Buyers on Board

One would expect that end-users would embrace the system as it can help to avoid tedious tender processes making purchase easy and fast. However, we observe a severe lack of enthusiasm in buyer circles. As tender-based large-scale purchases are replaced by e-procurement system, purchase managers are losing an important channel to make extra income. This poses another major challenge for government’s plan to switch to e-procurement.

Hospitals in distant provinces often ignore e-procurement regulation, as they are confident that the government lacks the workforce for stringent implementation of the policy. Purchase managers in many public hospitals in remote provinces confided that they still call for tenders even for products that are available through e-catalogue.

Some hospitals indicated genuine reasons for choosing tender process over e-procurement, though. For instance, if a particular product brand that physicians prefer is not registered in e-catalogue, purchase managers opt for tender purchase instead of buying other brands that are perceived to be of lower quality, even if they are available through e-catalogue.

Strategies of IVD Companies- Current and Future

IVD companies have mainly focused on purchase managers to promote their products. More distributors are currently increasing their budget for organizing seminars and other gatherings targeting physicians.

The way companies used to handle logistics of IVD products is also changing. For instance, delivery to remote provinces is a logistics nightmare for distributors – especially if the purchase volumes cannot justify shipping costs! The Government has introduced serious consequences that include revoking the distributor license if distributors fail to deliver a purchase approved by the principal company.

Distributors are getting creative to manage such situations. While some of them work together with principal companies to avoid approving orders from remote provinces, others ship to local MOH offices and hand over the responsibility of delivery to a final destination to them.

For foreign manufacturers, identifying distributors with product and market knowledge is critical to grow in Indonesia. Equally important is the logistics capabilities of the distributors and their ability to make right connections with authorities. As distributors often hold import licenses of foreign manufacturers, changing to a new distributor can be costly and time-consuming! Hence,  a thorough due diligence of local distributors aiming for the long-term business association is crucial for foreign companies.

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