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Breaking out of the silo

Indonesia’s EITI can support the broader reform agenda in many ways.

One hundred days in office, the government of Indonesia is standing at crossroads facing reform decisions and implementing the EITI. The freshly compliant country now has a unique opportunity to integrate both the EITI work and reform efforts into a virtuous cycle.

Considerable effort is still needed to open up the extractive sector to public scrutiny and make use of the EITI as a diagnostic instrument for evidence-based discussion of reform. At a public forum at the beginning of this month EITI Chair Clare Short discussed the many ways the EITI could support broader reforms.

For this to succeed, the EITI has to move out of its technical niche and support the many items on President Joko Widodo’s reform agenda.

Ambitious reforms

President Joko (‘Jokowi’) Widodo’s wide-ranging reform programme promises extensive revisions to the laws governing Indonesia’s extractive industries.

Filling the regulatory void left by the disbanding of the former upstream oil and gas agency, BP Migas, in November 2012, the government aims to overhaul the production sharing contract (PSC) structure to promote more investment. While the government’s early reforms have focussed on the downstream segment, lifting fuel subsidies to channel roughly US $20 billion in savings towards necessary infrastructure investments, the government is now turning its attention upstream. Plans include overhauling existing oil and gas laws to improve certainty for investors and reduce the scope for fiscal leakages. The revised law is expected to create a system of fiscal incentives graduated according to the risk level of oil exploration, more support for enhanced oil recovery, a complete overhaul of the block licensing process and strict timeframes for approving and issuing permits. The reforms will also affect state-owned Pertamina by corporatizing its operations, enhancing its transparency and overhauling its oil-trading activities.

In mining, the government is seeking to enhance investment and curb corruption and illegal exports after a confrontational relationship with key investors under the previous administration. While the 2009 Mining Law requires miners to invest in downstream processing capacity and requires the conversion of existing Contracts of Work to licences, its implementation has proven uneven. The decentralised nature of permitting has hindered coordination between the three tiers of government, providing scope for abuses and overlapping permits. The new government will seek to resolve disputes with investors while expanding the sector’s contribution to value-added processing and job-creation. It also seeks to stamp out illegal production and smuggled exports – with unaccounted coal output estimated by the Corruption Eradication Commission (KPK) at an astounding 70 million tons - as well as tax avoidance.

From silos to synergies

With oil output falling some 25% over the past decade to roughly 800,000 barrels per day (bpd) in 2014 and its reserve replacement ratio – the pace at which new discoveries keep up with production – falling to 52%, according to the interim upstream regulator SKK Migas, promoting investment while addressing public concerns over ensuring the country’s fair share of revenues will be key. Yet attempts at reform worldwide run up against entrenched interests that benefit from opacity.

It is in this context that PWYP Indonesia had organised a public forum on the challenges of transparency in the extractives sector under the new government. Clare Short opened the discussion with a reminder of how the EITI could prove a valuable platform for reform, as a tool for diagnosis as well as an instrument for communicating the complexity of the challenges and of reforms.

A number of the government’s reformers participating in the discussion, including Energy Sector Reform Team member Agung Wicaksono, Ir.Sujatmiko of the Directorate General of Mining and Coal, SKK Migas’s Dr Rinto Pudiantoro and the KPK’s Dian Patria, made cogent arguments for reform and laid out specific and detailed plans. These included reconciliation on a quarterly basis of figures for oil production and related revenue, establishing an automated system for tracking ship manifests in an effort to curb smuggling and improve tax compliance, as well as reform of the system of surveyors that report mineral production data. Within the Ministry of Energy and Mineral resources, panellists reported that work was underway to establish a comprehensive mining cadastre and harmonise regulatory discrepancies between the ministry and other government agencies.

All of these efforts involve both institutional reform and the production of more and better quality data. There are some clear opportunities for EITI Indonesia to support the government with delivering reforms, including

  • explaining the complex licensing and contracting procedures and associated reforms,
  • disclosing the process for awarding rights to trade oil as well as transactions between the government and oil traders,
  • assessing whether revenue sharing mechanisms work as they should, by allowing for comparisons of whether transferred amounts correspond to what ought to be transferred in accordance with revenue sharing formulas,
  • enhancing governance and oversight of tax and non-tax revenues as well as information systems and database management,
  • reporting on Pertamina’s activities in accordance with the EITI Standard and
  • publishing of contracts and of the ultimate ownership of resource companies. Indeed Indonesia being the country that first pioneered the production sharing contract in 1966 could now take the lead in global efforts to open up such contracts to public scrutiny as encouraged by the EITI Standard.

The challenge is now for EITI Indonesia’s multi-stakeholder group as well as the EITI Champions in the Indonesian government to re-focus the work of EITI Indonesia to break away from its current technical silo to make sure it becomes an effective tool to support and communicate wider reforms.