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sharing in governance of extractive industries

By Ian Wollff*

The article is originally featured in the Coal Asia Magazine, January 25 – February 25, 2018

Introduction

Many mining industry related seminars and publications provide the miners outlook on the Indonesian exploration and mining sector. Newspapers and mass media sometimes follow some popular trend, often just to boost their own ratings. A recent NGO seminar provided an opportunity to see the mining industries perspective from a civil society group who closely follow, and are concerned with improving the mining industry.

PWYP

Publish What You Pay (PWYP) Indonesia became a registered organization in 2014, that campaigns for good governance reform in the extractive industries. They have about 35 members that belong to various civil society organizations. PWYP try to maintain an independent perspective through not including members or sonship from extractive industry companies or from government linked bodies. Their web site www.pwyp-indonesia.org sets out their purpose, vision, organization etc., and provides free access to their many research publications. I found some interesting tables inCoal license agreements in coordination and supervision of the KPK (2017). Their operational approach is to persuade various government bodies (Commission 7 to village government) and ministries towards a policy of greater transparency. One of PWYP higher profile activities is their strong participation in the Extractive Industry Transparency Initiative (EITI) Indonesia.

Outsiders looking in

In later December 2017 PWYP held anEnd of Year Evaluationseminar with five young speakers. Fabby Tumiwa [Director of the Institute for essential service reform]. Maryati Abdullah [Coordinator for the National PWYP Indonesia]. Ahmad Hanafi [Director of Indonesia Parliamentary Centre], Wahyudi [Manager of economic governance, Transparency International Indonesia] and Aryanto Nugroho [Manager for advocacy network, PWYP Indonesia].

None of the speakers at the PWYP December seminar are miners, but are concerned citizens that spend considerable effort following and researching the issues relating to the governance of the extractive industries. Their outlook provides the miners with a different perspective of how the community perceives the governance of the mining industry. The seminar was often free flowing, and held in Indonesian, wherein I apologize if some of my following notes are not accurate. I have preceded each point with my interpreted simplified overview in bold:

  • Modest corruption in Mining sector: To date, the media focus on corruption in the mining sector is mainly associated with the issuance of IUP tenements. The number of KPK convictions in the mining sector is relatively small compared to some other sectors. There are ongoing concerns with some unexplained discrepancies between the ESDM lists of revoked IUPs and some districts actual revocation. Ongoing efforts are being made to reduce corruption through expanding the transparency initiative to include beneficial ownership, along with a review of transfer pricing.
  • Stumbling oil & gas sector: The oil & gas industry has undergone a dynamic few years, with the biggest change being the move towardsGross Split. However, this has not been embraced by the industry. The current trend is towait & seeif the gross split will finally be taken up by the industry. At the moment the delay in acceptance is blamed on the lack of tax clarity. [Some days after this seminar, the government issued these long-awaited tax rules for the gross split scheme - we shall soon see if the scheme works.] Oil & gas exploration and production is not increasing. The two main producers seem to be at theirpeakproduction, and so Indonesia is facing a critical period for the overall oil & gas sector. The popular politics of one price for some fuels makes it more difficult for Pertamina to fund exploration, though the unpopular end of some subsidies for the 3kg domestic gas canisters may help Pertamina.
  • Downward spiral in State power sector: Indonesias electrification ratio has been increasing, but falling short of the national target. However, the availability of electricity is still poor, with many PLN customers only receiving intermittent power supplies. This power uncertainty is causing manufacturers to move out of Indonesia to its ASEAN competitors that have more reliable and cheaper power. The exit of manufactures then unbalances the consumers of power towards domestic houses, wherein the growth potential for electricity is limited. This leads to reduced projections for new power, further dis-incentivizing industry to develop in Indonesia, dis-incentivizing investment in the power sector and making reliable power even more difficult to achieve. A further complication for PLN is the steady rise of fuel costs (oil & coal), that is not passed on to the customer through the governments control over electricity prices. The Governments revision of private power purchase agreements is good for PLN that does not want to manage an over-supply of take-or-pay power, but is losing prospective growth in the power sector through await and seeoutlook by investors. The private power industry is growing, though the nature of this industry tends to provide reliable power in a timely manner to their own groups factories (including smelters, refineries, industrial estates etc) and supporting infrastructure (including workers houses).
  • More consultation and transparency in preparing ESDM programs to be workable: In the three years of the Jokowi government we have seen many changes from the ESDM, including Gross Split for oil & gas, increase in national take from the mining industry, ban of raw ore export, emphases on building smelters etc. It has proved difficult to implement such programs, and to improve their outcome. It is acknowledged that Sri Mulyani has a rational approach to strengthen the financial sector. However various issues for the ESDM, such as Gross Split, are not attracting investment and leading to a wider geopolitical disinterest for investment in many Indonesian sectors. Pertamina was the first to try the Gross Split scheme, and they partially rejected the scheme, wherein the government learnt-by-doing to modify the scheme. A more industry consultative and transparent development of such Gross Split scheme may have avoided its continuing rejection by industry. 
  • Parliament is looking after itself, not the future of Indonesia: The Migas issues and many other mining & smelting issues are deemed critical to Indonesias future well-being, however there is disappointment in that the Parliament is busy on its own local popular social issues. The legislative performance of parliament is underperforming for the resource sector, with the acclaimed priority legislation for a new mining law and revised oil & gas law being delayed over many years.
  • Greater transparency urged for new holding company: The new concept of a holding company for mining SOEs appears a good idea. This project should proceed with greater emphases on transparency and ethical management. It is well understood many mining SOEs and BUMNs do not have good transparency, and creating the giant holding company may simply hide incorrect actions under even more deeper layers of corporate structure.
  • Beneficial Ownership good intentions: The Governments general approval to implement the Beneficial Ownership program of EITI is good news. This program is not limited to the extractive industries, but to other sectors. The program is to improve tax collection performance, combat money laundry and terrorism, and also to expose inappropriate political influence. A presidential regulation is hoped to be signed in 2018, as part of the support the regulations for the Government of Indonesia to prepare regulations for the Automatic Exchange of Information (AEoI) in 2018.
  • Weakness at ESDM: The ESDM new web site provides great value to Indonesia, unfortunately parts of the web site are often out of date, blank, or simply not working. There is concern the renegotiated COWs agreements are not published, so the public can not see if such agreements are fair, achieving their objectives of increasing State revenues etc, or are being properly implemented. The ESDM has shown significant inconsistencies, with all implementing regulations (PPs) issued being either revised or withdrawn. There are further inconsistencies between ESDM and regional lists of terminated IUPs etc.
  • EITI to be developed further: It would appear from Minerba data that 130 mining companies provide about 90% of royalty paid to the government. However, this should not be the cut off point for reporting through the EITI system, but all producing companies should be listed. All mineral and coal companys production tonnage should also be included in the EITI reports, to provide transparency to uncover smuggling and transfer pricing etc.
  • The DPR is not working optimally: The revision of the 2009 mining law has been identified over the years as being a priority project. There have been various submissions from academics, industry and civil society groups. But debate and drafting of the new law has constantly been put off. One analysis of this situation is that some 52% of parliamentarians are strongly linked to industry, wherein the nationalistic and business approaches are at odds with each other. It is hoped the future Beneficial Ownership program will help clarify the business influence within the parliament and make debates more transparent. Further transparency in drafting the new mining law is called for to avoid back room deals. There is a call for the DPR to update its working system, such that meetings are undertaken on schedule and resolutions completed in a timely manner.

PWYP - 2018 is a good lobby time

A wrap up session of the seminar looked at what to expect for next year. 2018 is the year of preparation for the 2019 national elections of parliament and the president, wherein the civil societies and public are to be encouraged to use this opportunity to get a stronger political commitment for greater transparency in the governance of the resource sector.

  • The actual risk to the oil & gas, mining and energy sectors is the minister himself. His indecision, lack of public consultation and singular direction has brought down the ESDM sectors. Investors want to see predictability in regulations. Investors recognize that from time to time regulations are to be updated, but the recent nature and rate of change of implementing regulations and policies is too unpredictable for investors. It is clear that investors in the oil & gas sector have said NO to the present Gross Split proposal, with local and major players selling out and pulling back on investment.
  • There are a number of popular outstanding issues facing the ESDM, including developing various gas blocks, Freeport and other COW negotiations, further developing the smelter programs, opening up new mineral tenements through the bidding process, developing a holding company for the SOE mining industry, and attracting local and international finance through new bonds and various financial instruments for SOEThere are further related issues on trading, imports & exports, including shipping, the operation of smelters, fuel subsidies, forestry permits etc. The prospect of exploiting these issues to secure campaign funds needs to be countered by greater transparency at the parliament and various ministries. The temptation to plunder some SOEs and BUMNs for campaign funds needs to be guarded against through greater transparency and ethical behaviour from such company executives.
  • We might expect the DPR to focus on political positioning rather than passing bills. There is a potential such political manoeuvres may be to increase community tensions or to pass bills at midnight. The ESDM and associated industries may be caught up in this political conflict, wherein greater consultation, transparency and ethics may help calm any situation. When the DRP sign a Law, then there should be an awareness of how it may impact various parts of Indonesia in different ways. Thus, greater effort on consultation and socialization is required.
  • Indonesia is a signatory to a number of high level international trading and cooperation agreements. Such agreements should be properly considered in preparing policies and implementing regulations. Note that SOEs and BUMNs should also follow such international agreements.

Conclusion

The general trend of this seminar suggests to me that transparency and some other governance administrative factors of concern to PWYP have improved, and are to undergo further development. However, it appears there is general disappointment that there has been inadequate consultation and inclusion of industry concerns, whereby the performance of the industry sectors under the ESDM (mining, oil & gas, power) are suffering under the present ministry, and Indonesias future well-being is in jeopardy.

PWYP is comprised of many NGOs that want to improve the governance in the extractive industry. This is a common goal with the various mining industry associations and such bodies. PWYP has a broader range of interests than presented in this small seminar, including matters related to extractive revenue management, community consultation, CSR and mine closure. I imagine it must be difficult for PWYP to maintain an independent view when it is easier to talk with upset communities seeking a wider audience, and the bombardment of anti-mining sentiment, than it is to talk to local government that must be more sensitive to reflect a wider representation of interests. 

PWYP does occasionally contact the mining professional associations to interact or collect input on their policy research and advocacy projects. It is suggested herein that in 2018 the year of lobbying, the mining association and mining companies can provide greater access to PWYP and similar NGOs to explain the nuances of the exploration and mining industry.

*The writer is an expatriate principal geologist of about 30 years’ experience in the Indonesian exploration and mining industry

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