Bringing revenue transparency to Indonesia's extractive industries
As a major producer of oil and gas and a global heavyweight in mining, Indonesia knows the many challenges that come with managing abundant natural resources. The extractive sector is the backbone of the economy in Indonesia, which is the world’s most populous resource-rich nation. Indonesia is a former chair of OPEC and remains to this day one of the world’s top gas exporters. It is also the world’s top exporter of tin, bauxite, nickel and thermal coal. Oil, gas, minerals and coal revenues account for about one-third of Indonesia’s national budget.
Without a doubt, extractive industries have been good to Indonesia, and yet the sector’s lack of transparency and accountability creates a credibility gap. Fortunately, Indonesia is now implementing an international protocol, the Extractive Industries Transparency Initiative (EITI), which will provide citizens of resource-producing nations a publicly accessible pool of reliable and factual information about the wealth being extracted from their countries. From this, more informed public discussion and decisions about the future of these sectors can take place.
Unanswered questions
Extractive industries make a crucial contribution to Indonesia’s national development. They constituted 16 percent of GDP (7 percent from mining and 8.5 percent from oil and gas) and more than 40 percent of exports (22 percent from mining and 20 percent from oil and gas) in 2011. But mistrust regarding the political economy of nonrenewable resource extraction persists. Much of the Indonesian public and many in government have unanswered questions, including:
- How much does the coal sector contribute to the nation’s revenue base? Indonesia has become the world’s largest exporter of thermal coal, most of it destined to be burned in power plants in China, India and elsewhere. Although 30 percent of Indonesia’s billionaires have made part or all of their fortunes in the coal sector and 20 percent of the capitalization of Indonesia’s stock market is from coal companies, the sector’s contribution to the national revenue base is thought to be in the low single digits.
Finance Minister Agus Martowardojo has commented that coal companies do not contribute enough to the national revenue companies to national revenues is not a public figure. Although the minister may well be correct that coal companies do not pull their weight, it is hard to definitively demonstrate this with no public figures.
- Who are Indonesia's locally licensed mining companies? A decade ago, the mining sector was tightly controlled by the national government, particularly in relation to foreign capital participation. Today, only 42 nationally licensed minerals contracts and 77 nationally licensed coal contracts remain from those days. In recent years, however, there has been a dramatic increase in locally issued mining licenses that have, since 2009, been open to foreign capital participation. The Directorate General of Minerals and Coal conjectures that there are 10,250 locally issued mining licenses, but no definitive figure exists. Many of the license-holding companies are accountable only to, and in some are cases are directly or indirectly owned by, the provincial district chiefs who issue most of the licenses.
These locally issued licenses are sometimes poorly governed by the authorities who issue them. Other major issues include:
- Licenses are awarded based on patronage rather than economic considerations.
- Mining companies are not good practitioners of environmental stewardship and tend to walk away when their operations are finished, without undertaking proper remediation practices. In 2011 in Sambutan district, East Kalimantan province, five children fell into lakes created by abandoned coal mines; two of the children drowned.
- Concessions often overlap with prohibited areas of land. One protected forest in South Kalimantan province is said to be completely covered by 229 locally issued mining concessions.
- Licenses are in some cases created within the boundaries of existing national mining concessions, which often causes the original licensee to abandon their investment.
- Companies in some cases engage in ore smuggling and avoidance of revenues owed to the government.
- The local licensing system has given rise to protection rackets; in South Kalimantan province, for example, well-organized local mafia figures extort money from coal trucks passing on public roads.
The Directorate General of Minerals and Coal has declared 4,500 of these locally awarded concessions to be “clean and clear,” which is thought to mean that they do not overlap with other resource concessions (mining, forestry or palm oil). The names of the clean and clear concessions are on a public the 5,750 concessions that are not yet certified clean and clear remain unknown, and many of the firms holding them continue to explore and produce.
Indonesia’s natural resources are to be used for the “greatest benefit” of its people, according to Article 33 of the Indonesian does not have even the most basic information on locally licensed mining companies, including their names, what they mine, who owns them and how much they do (or do not) contribute to the national treasury, it will be difficult for the public to have confidence that these mines are genuinely assisting the nation’s development in the long run, particularly in view of the excessive negative externalities they many generate. Transparency can help to expose companies that are not following the rules and help to confer positive recognition on the ones that do. the revenue base of local governments? In an effort to make sure that the wealth flowing from extractive industries is available to local people, the Indonesian government decreed more than 10 years ago that 80 percent of royalties (nontax revenues) paid by mineral and coal companies would be redistributed to the districts, surrounding districts and provinces within which these operations are located.
This redistribution of nontax revenues is definitely welcome. But the fact remains that until today most Indonesian citizens are neither aware of the amount of resource revenues flowing to their local governments nor how much originated from any particular company in a given year. As a result, citizens in resource revenue-rich districts are in a weaker position to request better services from local governments than they would be if such information were more readily available. In short, the Indonesian public, and even many in government, have numerous unanswered questions about the governance of the nation’s extractive industries and the management of revenues flowing from them.
Transparency creates shared understanding and trust
Fortunately, this about to change. The Indonesian public will soon have far more data at its disposal, which should result in an increased understanding about revenues flowing from extractive industries. In 2010, President Susilo Bambang Yudhoyono signed Presidential Regulation 26/2010, which lays the regulatory underpinnings for Indonesia’s implementation of the Extractive Industries Transparency Initiative, a global standard of transparency for revenues flowing from the oil, gas, and mining sectors.
Under EITI, which is currently in use by 37 nations, all large and medium (and over time, small), extractive commodity producers will report what they have paid to the government in a particular national jurisdiction, and in turn the government releases these reports. The data from the companies and the government are compared by an independent auditor and comprise each country’s EITI report.
The entire process in each country is overseen by a national multistakeholder working group that includes representatives from the government, extraction companies and civil society. In Indonesia, this working group is made up of 13 director generals from five government ministries; the highest-ranking civil servants from three resource-rich provinces; three members nominated from the oil and gas, mineral and coal industry associations; and three civil society figures. This working group provides a forum in which evidence-based multistakeholder dialogue can take place about the present and the future of Indonesia’s extractive industries.
Indonesia’s first EITI report was scheduled to be finalized and publicly released in late March, after Strategic Review went to press. The 125 largest (or most material) companies have reported. All five government agencies that collected the largest revenue streams from these companies also reported. One crucial and immediate benefit will be that some of the public’s most pointed and sensitive questions about Indonesia’s extractive industries, including those raised at the outset of this essay, can now be answered. Indonesians will no longer be in the dark about how much revenue the mineral sector and the coal sector contributed to the national revenue base. This will become public information for the first time. Moreover, Indonesians will find out how much each of the 15 largest mineral revenue payers and 53 largest coal revenue payers, as well as the 57 largest oil and gas revenue payers, contributed for all major categories of revenue.
For the first time, the public will be told the names of the 20 largest holders of locally issued mining licenses, what commodities they produce and how much revenue they contribute to the state. In each successive year, the list of reporting companies will grow, and so will the public’s understanding of these companies and their contributions. Finally, citizens in resource-rich districts will begin to receive answers to their questions about the amount of revenues from oil, gas and mining that companies paid to the central government and how much of that was shared with their local governments, as well as how much from each company made its way to their particular province and district.
Indonesia’s inaugural EITI report (available at www.eiti-indonesia.org) covers calendar year 2009. Revenues paid and received in calendar years 2010 and 2011 will be reported by December. After that, annual reports will disclose revenues paid and received, albeit with a two-year time lag. If the reporting schedule is achieved, Indonesia has a good chance of being named fully compliant with EITI and maintaining that compliance going forward. Whether Indonesia is compliant will be determined after it undergoes an independent external evaluation (known as a “validation”) no later than mid-April.
To ensure that the findings of the EITI report do not simply sit on a shelf, Indonesia will communicate the findings to the public through a variety of media platforms. Plans are underway for television and radio talk shows, a comic book, a book by a development writer and public meetings in resource-rich provinces where the reports will be explained. Ultimately, the goal is to make sure that basic information about Indonesia’s extractive industries, much of it hard to access, is in the public domain. The public will become more conversant with who the big and medium-sized extractives companies operating in Indonesia are, what they produce, where they operate, how much they give to the state and what subset of those revenues have made their way to their local governments.
Transparency is good for Southeast Asia
In addition to allowing governments to build trust with the public, EITI also allows them to earn the confidence of potential investors. EITI is good for the investment climate, and this message is beginning to resonate with growth-oriented Southeast Asian nations.
Extractive industry firms tend to view governments that implement EITI as relatively more committed to a level playing field because under the initiative, all companies must participate. No one is exempt (unless they are too small). Evidence from around the world, including places like Nigeria and Azerbaijan, shows that producers are more willing to put their investment dollars to work in nations that support EITI, because they are regarded as being more likely to treat investors impartially, maintain longer-term stability and be open to discussion and exchanges of views.
This is the argument that Indonesia has brought to its Southeast Asian neighbors. Awareness of EITI received a significant boost when efforts were made by Indonesia to include EITI in ASEAN discussions during its chairmanship in 2011.The idea that EITI is good for the economy was the core of Indonesia’s efforts. The Indonesian representative to the EITI Board was part of the Indonesian delegation at the 29th ASEAN Ministers of Energy Meeting in Brunei in September 2011, where Indonesia presented the concept of EITI. Indonesia argued that transparency of natural resource revenues is beneficial to the investment climate and would assist in the establishment of the ASEAN Economic Community in 2015.
In December 2011, the Indonesia representative to the EITI Board also attended the ASEAN Ministers of Mining (AMMin) decision was taken to build capacity within AMMin regarding EITI. This formal effort is ongoing. Since Indonesia introduced EITI to ASEAN, Myanmar and the Philippines have announced their intention to implement the initiative, and there is positive engagement with Vietnam.
In July 2012, the EITI International Secretariat met with the Myanmar government, after which its minister of industry affirmed an intention to implement EITI and put the Myanmar Development Research Institute in charge of its implementation. Indonesia’s representative to the EITI Board was invited to Myanmar last November to continue these discussions. It is clear that Myanmar and other ASEAN members want September, Philippine President Benigno Aquino III signed an executive order on mining that included an unequivocal statement on the government’s intention to implement EITI. Aquino’s adviser on the environment is taking the lead on the initiative.
In July 2012, Indonesia’s representative Vietnamese civil society organizations, the National Assembly, the Vietnamese Chamber of Commerce and others to explain EITI to key stakeholders. The Vietnamese government was receptive to the concept and its Ministry of Industry and Trade is currently initiating a feasibility study about implementing EITI. The Chamber of Commerce and civil society groups have already done their own feasibility studies and concluded that the initiative will be good for Vietnam. Indonesian contacts with Vietnam are ongoing. Delegates from the Vietnamese government visited the EITI Indonesia Secretariat last November to learn how Indonesia took its first steps toward EITI implementation.
Other Southeast Asian nations could also benefit from increased transparency. For example, Singapore, although not a producer of extractive commodities, is a major hub for oil and gas refining and trading, and a major crossroads for extractive industry financial flows. Malaysia now exports more gas and produces more oil than Indonesia and is also twice as dependent upon these industries for its public revenue as Indonesia. Both Singapore and Malaysia are highly successful, fast-growing, stable, modern states. But sometimes prosperity is not enough: their citizens have a right to know more about the benefits that flow from their extractive sectors.
Perhaps one day Vietnam, Singapore and Malaysia will follow the examples of Indonesia, the Philippines and Myanmar and implement EITI. Widespread adoption of the initiative will help Southeast Asia boost its reputation for even-handed treatment of investors, which in turn will lead to an increase in the willingness of extractive industry firms to make large investments in these nations. All this should lead to an increase in economic growth and energy security in one of the most dynamic regions of the world. The openness of information resulting from EITI will also help to harmonize economic information held by ASEAN member states and perhaps contribute to the goal of building a single ASEAN market by 2015.
