New Public Management Practices in Indonesia*

by Khairul Rizal


After economic crisis and democratisation in the late 1990s, Indonesia has started its public sector reform. It is strongly believed that international pressures mainly from the IMF and the World Bank have put the reform, in significant degree, to the direction of market liberalisation (Nef, 2003, p. 530). This somehow has led to the adoption of New Public Management (NPM) approach into practices of Indonesian public service. This analysis is trying to assess public sector reform in Indonesia particularly on how and why the NPM approach has been applied in Indonesian public service. As a tool of analysis, four strategies of NPM practices identified by Minogue (1998) will be used. The first two strategies mainly deal with broader reform in terms of privatisation and market-based provision, or Davis and Rhodes (2000) describes it as marketisation. Therefore, the main query of analysis is how and why privatisation and marketisation have been carried out in Indonesia? The other two strategies deal with narrower reform in terms of organisational and managerial aspect. The analysis, therefore, will try to examine how and why organisational and corporate management principles have been adopted in Indonesian public services. Some key issues and prevalent problems faced in each strategy will also be explored. In doing the analysis, this paper will highlight three strategic cases that are considered as ongoing NPM practices in Indonesia: privatisation of State-Owned Enterprises (SOEs), expansion of market-based provision, and establishment of financial management unit called Public Services Agencies.

Minogue (1998) reviews four strategies in NPM practices: restructuring the public sector, introducing competitive approach in the provision of public services, restructuring the public service organisations, and promoting efficient public management. All those strategies emphasize efficiency and responsiveness to customers, referring to citizen, as its underlying logic. This means that the NPM approach is in favour of minimalist structure in public sector and support for privatisation; that the NPM approach is prefer market-based provision through competition and contracting out rather than public provision; that in NPM approach fragmented organisation is considered to be more responsive to customer instead of unified and large size organisation; that corporate management can promote efficiency and effectiveness in service delivery. Similarly, Kjaer (2004) offers several measures of NPM approach. The differences are that Kjaer uses specific term of ‘agencification’ instead of Minogue’s general terms of restructuring public service organisations. Moreover, Kjaer put two additional measures namely decentralisation and citizen’s empowerment as part of NPM’s measurement. The former, however, can also be considered as variation under the broader label of restructuring public service. If we look closer, they have similar idea of breaking up the organisation from highly centralised into more decentralised and autonomous organisation in order to deliver services efficiently and responsively. The later, although it is considered of having some degree of NPM’s characteristic in the sense of focus on customers’ preferences, is likely to be more appropriate discussed under the rubric of governance. Limited space and for simplicity reasons, these two measurements of NPM are not part of the analysis.

Privatisation and Marketisation

As discussed above, privatisation and marketisation in Indonesia are largely imposed by the IMF through its Structural Adjustment Program. With regard to privatisation, in the period of 1998-2006 the Government of Indonesia privatised 14 out of 158 state enterprises with total value of IDR 44,441.9 billion. It is proportionally small counted only 8.9 percent of total number of SOEs or 3.3 percent of SOEs’ total assets in 2006 (for rough comparison, the value of SOEs’ total asset in 2006 was IDR 1,361,812.52 billion)[1]. These data lead to an important question of how much is efficiency gained from this privatisation? If we look at the top ten of most profitable state-owned enterprises in 2005 and 2006, seven out of ten are privatised enterprises (Ministry of SOEs, 2006). However, efficiency is not always a result of private ownership. The three profitable SOEs show that state ownership can also be efficient. This is confirmed by Parker and Kirkpatrick (2005) by saying that the real issue is actually monopoly instead of ownership issues. That is why if privatisation takes place in a competitive market it would lead to better services with lower price. Telecommunication industry is one good example of how privatisation works. Before privatisation, the industry is monopolised by only two big SOEs (Telkom and Indosat) but now more than five companies are competing in telecommunication industries. As a result, the citizens are now enjoying better communication services with relatively low price.

Moreover, privatisation has politically accepted in Indonesia especially since the establishment of Law no. 19/2003 concerning SOE. Although privatisation is politically acceptable, it is still highly politicised. As Habir (2003) discusses about privatisation in Indonesia, political interests still have significant influence in ‘controlling public companies and using them as cash cows for political parties’ (p. 381). This is confirmed by Kjaer (2004) who says that ‘public sector enterprises in developing countries had often served as ways to provide patronage’ (p. 27). Those two arguments from Habir and Kjaer suggest that the idea of privatisation is unlikely to be easily implemented in Indonesia. High politicisation in public enterprises is probably the reason why privatisation in this country, based on the data above, has been experiencing a slow progress.

In terms of marketisation, introducing competition in the provision of public services through contracting out is likely to increase particularly since the establishment of Presidential Decree No. 80/2003 concerning public procurement. The decree regulates that every public purchase of 50 million rupiah (equivalent USD 5,000) or above should be treated through tender mechanism. Although there is no official data available, some statements from government officials in national mass media indicates that in average around 30 percent of total national budget is purchased through tender process (Kompas Daily, 2009). These data indicate that private sectors have significant contribution in the provision of public service.

Market-based provision, however, is not free from problems. As Davis and Rhodes (2000) discuss on finding of Australian Industry Commission, contract-based provision has some problems, some of them are accountability (unclear responsibility), quality (difficult to specify desired quality and to monitor the outcomes), and cost (including cost of monitoring the contract). Indeed, those problems are also present in Indonesia’s context. In the case of accountability, for instance, citizens often get confuse about who should be made responsible for under-performed services, let say rubbish collection, since both agency and contactor have refused to take responsibility. Moreover, the World Bank (2001) in its Country Procurement Assessment Report identifies prominent problems in Indonesian’s procurement system, namely lack of legal and procedural framework, lack of institutional and human resource capacity, lack of competition and transparency, and corruption. All of those problems are likely to undermine the idea of contracting out and increase inefficiency in Indonesian public services.

Agencification and corporate management

Regarding organisational and corporate management, we will look at why and how far these principles have been adopted into Indonesian public service. The idea of minimalist organisation and efficient management originally come from British experience in the 1980s. As Minogue (1998) points out, British public service changed its internal structure from unified organisation model to a series of fragmented and autonomous agencies (known as ‘Next Steps’ agencies[2]) with smaller core ministries. These agencies operate like private company in delivering public services. Since 2005, initiated by Government Regulation no. 23/2005 concerning Public Services Agency, Indonesian public service has started to follow similar path to what British public service started more than two decades ago. Although it is still in its infancy stage, up to now there are 69 autonomous agencies called ‘Public Services Agencies’ which operate based on corporate management principles. Most of them are in health sector (28 hospitals) and education sector (26 universities)[3]. Such agencies are chaired by a manager who has some privileges in running their agencies such as flexibility in managing its own budget and hiring its employees. Although having high degree of autonomy and privileges, these agencies still under supervision of its core ministry.

Some issues, however, are present regarding the operation of these autonomous agencies. Firstly, system compatibility between these agencies and its core ministry are in question. According to Budi (2007), financial accountability of these agencies is questioning in terms of its compatibility to the core ministries’ accounting system. Whereas core ministries are using public account standard for its financial and performance report, these agencies are using business account standard. Using different standard might create problem in auditing since these agencies are still considered as public institutions by Public Audit Agency. This incompatibility issue suggests that the relation between agencies and its core ministry, as Polidano (1999) argues, is confusing and often problematic.

Secondly, the idea of having such British’s Next Steps agencies with small central core ministry seems influential for Indonesian public service. It is true that Indonesian public service, to some extent, becomes more fragmented and business-like organisation. However, the core ministries show a growing trend in size which gives a sense that public service becomes less efficient. From 2005 to 2009, Indonesian public servant has steadily grown as many 717.686 personnel or 19.6 percent in five years (National Apparatus Agency, 2009). The trend suggests that the NPM approach has been partially and, perhaps, inconsistently implemented.


The analysis suggests that Indonesian public service reform is likely moving toward the NPM model. Emphasizing too much on technical efficiency through privatisation and initiating competition into public service, NPM model, to some degree, may reduce accountability and, if it is not supported by advanced procurement system, increase inefficiency. Agencification and corporate management may also create other problems such as fragmented organisation which leads to compatibility issue. Although there are some positive signs of successful NPM practices in Indonesian, there are also inconsistencies in policy level that might undermine it in the future.


Budi, K 2007, ‘Laporan Keuangan Badan Layanan Umum Dipertanyakan’, Tempointeraktif, 22 March 2007, viewed September 5, 2009, <,20070322-96138,id.html>

Davis, G & Rhodes, RAW 2000, ‘From hierarchy to contracts and back again: reforming the Australian public service’ in Keating, M, Wanna, J & Weller, P (eds.), Institution on the Edge?, Allen and Unwin, Sydney.

Directorate General of Tresury 2009, PK-Badan Layanan Umum, Ministry of Finance Republic of Indonesia, Jakarta, viewed 5 September 2009, <>.

Habir, AD, Sebastian, E & Williams, L 2003, ‘Governance and privatisation in Indonesia’, Bulletin of Indonesian Economic Studies, vol. 39, no. 3, p. 381.

Kjaer, A 2004‚ Governance, Cambridge University Press, New York.

Kompas 2009, ‘Waduh, Tiap Tahun Rp 70 Triliun APBN Menguap’, 16 March 2009, viewed September 5, 2009, <>.

Ministry of State Owned Enterprises 2009, Master Plan of State Own Enterprises 2005-2009, State Ministry of State Owned Enterprises, Republic of Indonesia, Jakarta, viewed September 5, 2009,

Minogue, M 1998, ‘Changing the state: concepts and practice in the reform of the public sector’ in Minogue, M, Polidano, C & Hulme, D (eds.), Beyond the New Public Management, Edward Elgar, Cheltenham, UK.

National Apparatus Agency 2009, Layanan kepegawaian, Republic of Indonesia, Jakarta, viewed September 5, 2009, <>.

Nef, J 2003, ‘Public administration and public sector reform in Latin America’, in Peters, BG and Pierre, J (eds.), Handbook of Public Administration, Sage, London.

Parker, D & Kirkpatrick, C 2005, ‘Privatisation in developing countries: a review of the evidence and the policy lessons’, The Journal of Development Studies, Vol. 41, No. 4, pp. 513-541.

Polidano, C 1999, ‘The bureaucrat who fell under a bus: ministerial responsibility, executive agencies and the Derek Lewis affair in Britain’, Governance: An International Journal of Policy and Administration, vol. 12, no.2, pp. 201-229.

Republic of Indonesia 2003, Law no. 19/2003 concerning State Owned Enterprises, Republic of Indonesia, Jakarta, viewed September 5, 2009, <>.

­­____ 2005, Government Regulation no. 23/2005 concerning Public Services Agency, Republic of Indonesia, Jakarta, viewed September 5, 2009, <>.

____ 2003, Presidential Decree no. 80/2003 concerning Public Procurement, Republic of Indonesia, Jakarta, viewed September 5, 2009, <>. World Bank 2002, Indonesia: Country Procurement Assessment Report: Reforming the Public Procurement System, Report No. 21823-IND, Washington, DC, viewed September 5, 2009, <>.

[1] Based on data from official website of Ministry of State Owned Enterprises:

[2] Some countries also have such agencies like Special Operating Agencies (SOA) in Canada, Independent Agencies in the U.S., Organismos Autonomos in Spain, Autorites Administrative Independantes in France.

[3] Based on data form official website of Directorate General of Treasury, Ministry of Finance <>.

*This paper was written in the late 2009 as a final assignment submitted to the class of Public Sector Management.

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