EITI Chairman in Op-ed: -EITI, a natural fit for Indonesia

In an Op-ed in the Jakarta Post 29 November, EITI Chairman Peter Eigen writes that joining EITI would be a natural fit to Indonesian President Yudhoyono's ambitious reform agenda. Also, the Initiative would in important areas stand to gain from Indonesia's joining.

Op-ed in The Jakarta Post, 29 November 2007:

 

Extractive industries need more transparency 

Peter Eigen, Oslo

President Susilo Bambang Yudhoyono has insisted that his administration will be a bulwark against Indonesia's legacy of corruption. In his recent meeting with me and Huguette Labelle, the Chair of Transparency International (TI), the President said that he even wanted to lead regional anti-corruption efforts at the ASEAN summit in Singapore which ended last week.

To his credit, the President has called on his various ministries to implement measures to enhance transparency and accountability in Indonesia in order to improve the investment climate and provide better public-sector governance.

I explained to the President that one more measure to improve transparency and accountability would be for Indonesia to endorse the Extractive Industries Transparency Initiative (EITI), a powerful tool for improving management of revenues derived from exploitation of natural resources.

Indonesia's oil, gas, and mining sector is a key component of the country's economy, and Indonesia is, in fact, the world's most populous resource-rich state. But the nation's energy and mining sector is lagging behind the general progress that President Yudhoyono has made toward forging an open, responsive government.

A recent IMF study on fiscal transparency gave generally high marks to Indonesia's public financial management, but the study tempered its praise when it came to the one-third of the national budget that originates from extractive industry revenues.

This lack of transparency and accountability in resource extraction industries can have dire negative consequences. Around the world -- from Azerbaijan to Zimbabwe -- huge revenues paid by resource companies to government -- and often to government officials under the table -- breeds poverty, corruption, and conflict. And poverty in turn breeds public resentment and unrest.

This problem is no stranger to Indonesia. Transparency International's perceived corruption indicators for Indonesia match closely with "resource cursed" countries such as Nigeria, Zimbabwe, and Papua New Guinea. The problem becomes even clearer in resource-producing regions. Riau, which receives 62 percent of all the revenues from oil that Jakarta transfers to Indonesia's provinces, has some of the country's worst development indicators.

A national survey conducted in September showed that the issue Indonesians consider "most urgent" is poverty and unemployment, cited by 48 percent. This is closely followed by concerns over the education system, health care system and corruption (eight percent). Capturing resources that may now be lost to extractive industries mismanagement and securing those resources for poverty reduction, education and health care could become a new priority for the Yudhoyono administration.

President Yudhoyono would take an important step forward if he were to endorse and oversee the implementation of the international Extractive Industries Transparency Initiative (EITI). The Initiative is entirely country-led and governments join it voluntarily. It has the strong backing of international petroleum and mining companies, producing countries, civil society, and other stakeholders.

EITI is setting a new global standard of transparency for the oil, gas, and mining industries. Under EITI, all operating companies in a participating country report publicly what they have paid the host government, and government reports what it has received. Data are compared by an independent monitor, and the whole process is overseen by a national committee that includes representatives from government, the companies, and civil society.

Nineteen countries, including middle-income oil states like Kazakhstan and Azerbaijan, have gone beyond endorsement of EITI and begun moving toward full implementation. Other important natural-resource-producing countries, including Norway, have announced their commitment to adopting the EITI standards.

Making the flow of oil, gas, and mining revenues in Indonesia transparent is a crucial step toward transforming Indonesia's investment climate and promoting economic growth in a way that will ensure its people greater security, better public services (health and education), and greater stability in democratic institutions. Endorsing EITI will also enhance Indonesia's international image and improve its access to foreign capital.

Although Indonesia stands to gain from joining EITI, the Initiative also stands to gain from Indonesia's joining. EITI has done an excellent job around the world in keeping track of the financial flows associated with the energy and mining sectors, but the Initiative has made fewer innovations in terms of keeping track of volumes of commodities which companies sometimes convey to governments in lieu of taxes. Such volumes comprise approximately 80 percent of Indonesia's energy and mining revenue.

It would be fitting if Indonesia, the modern birthplace of the Production Sharing Contract, could develop a method for and best practice in keeping track of volumes of oil and gas shared by producers with government.

Another opportunity for Indonesian innovation under the umbrella of EITI would be to develop a method for keeping track of resource revenues shared by the central government with local ones. African development success story Ghana, with its compact gold mining sector, was the first EITI state to keep track of local revenue sharing schemes. But much work remains to be done, and Indonesia is in a clear position to become a long-term world leader in this area.

Joining EITI would be a natural fit and a valuable contribution to President Yudhoyono's ambitious reform agenda. But the benefit of Indonesia's joining would be felt far beyond its borders, particularly in those nations that continue to struggle to ensure that the resources with which they are endowed are able to provide the maximum developmental benefit for their citizens.

The writer is the Chairman of the Extractive Industries Transparency Initiative (EITI) and Founder and Chair of the Advisory Council of Transparency International.