TRANSPARENCY SNAPSHOT

Since the fall of the Suharto regime, information on Indonesia's extractive industries has become increasingly decentralized and available. The country's rapid and all-encompassing decentralization process has posed a range of challenges to increased transparency, including overall limits of governance capacity and a lack of clarity regarding legal mandates. In the interim, civil society groups report extremely disparate access at the local level to information on budgets, revenues, and potential extractive industries investors.

The collection and publication of accurate and timely information remains a challenge to both civil servants and civil society. Pervasive corruption compounds the difficulty of verifying the accuracy of information once documents are obtained.

Though Indonesia has a longstanding and positive engagement with the idea of the EITI, to date the country remains an outsider to the initiative. A growing network of civil society organizations in Indonesia are advocating for the adoption of the EITI, including a PWYP-Indonesia coalition that consist of over 40 NGOs from the various oil rich regions in the country.

Extractive industries production has declined, but the sector still plays an important role in government revenues. Oil and gas revenues accounted for approximately 25% of the projected total government revenues in 2007, and approximately 25%¹ of foreign trade². While economic growth has increased since the Asian financial crisis to 5.1% in 2006, widespread unemployment is creating an increasingly disparate population. Despite Indonesia's economic growth, 52.4% of the population lives on less than $2 per day.

After decentralization in 2004, local governments took the authority to provide local licenses for small-scale miners, despite the illegality of artisanal mining at the national level. The significance of illegal artisanal mining in Indonesia should not be ignored, in particular the practices contribution to revenue loss and environmental degradation.

Indonesia ranks 143rd on Transparency International's Corruption Perception Index, with the parliament, judiciary, and police force cited as the most corrupt institutions. A valiant effort by a newly created Anti-Corruption Commission has exposed corrupt practices in high cabinet positions but continues to face a growing caseload at the national and local level.

Revenue Transparency

Indonesia's support of the idea of transparency of revenues is longstanding. Beginning in a 2003, the Deputy Minister of Environment told a London conference that Indonesia "would like to do its utmost to implement" the EITI³. Since that statement, despite a slew of advocacy from EITI board members, Indonesian and international civil society, and the donor community, Indonesia has yet to publicly endorse the EITI or make specific strides towards resource revenue transparency.

There is, however, continued progress and support towards the EITI. In mid-2007, prominent TI Indonesia board members, including Todung Mulya Lubis, visited with the Minister of Finance to discuss the EITI, and later reported that the minister "supports the transparency initiative in the extractive industries sector."⁴ The Minister of Energy and Mining, Dr. Purnomo Yusgiantoro, has also revealed in meetings that he is favorably inclined towards the EITI.⁵ When the EITI chairman, Peter Eigen, met with President Yudhoyono in late 2007, the President Yudhoyono insisted that his administration intends to be a bulwark against the country's legacy of corruption.⁶

Advocacy for EITI endorsement in Indonesia continues to grow. A national PWYP coalition, which launched in November 2007 with over 40 local NGO members, cites EITI endorsement as one of its primary advocacy objectives. With support from Britain's Department for International Devolpment (DFID), an EITI representative works full time in Jakarta to promote the importance of the initiative in dialogues with government officials, civil society, and companies.

The conversation regarding EITI takes place in the midst of wider fiscal reform efforts in Indonesia. The 2006 Report on the Observance of Standards and Codes (ROSC) for Indonesia praised the Government of Indonesia for recent national reforms to improve transparency such as the State Finance Law, the Treasury Law, and the State Audit Law. But the report also highlighted the lack of transparency in the oil and gas sector. The report specifically refers the government to EITI as an option for reform.⁷

The nation's quick and all-encompassing decentralization process has also had a significant impact on fiscal regimes and the availability of information. Oil and gas revenues are collected by the national government, through the Ministry of Finance, the Ministry of Energy and Mineral Resources, the regulatory body BP Migas, and the national oil company Pertamina. After the collection, these funds are shared with producing regions. Thirty percent (30%) of gas revenues passing to the sub-national level: 12% to the producing district, 12% split between all other districts in the province, and 6% to the producing provincial government. 15% of oil revenues pass to the sub-national level: 6% to the producing district, 6% to all other districts in the producing province, and 3% to the producing province.

Mining royalties are collected by the Ministry of Energy and Mining, and taxes are collected by the Ministry of Finance before 80% of those revenues are also distributed sub-nationally. While projections of revenues sharing disaggregated by province and district are available on the Ministry of Finance's website, the data is not available until after the budget cycle and does not necessarily correspond to actual revenue transfers.

Indonesian law does currently not require contract transparency, although there is a growing demand from civil society. Contracts are, however, reviewed by Parliament. There is also a push from nationalistic politicians to renegotiate existing contracts. Many of these are inspired by recent examples from Bolivia and Venezuela. The related discontent focuses on the perceived unfair revenue sharing agreements; environmental and social costs to local communities; corruption and the presumption that military aid, especially from the U.S. is closely tied to the protection of extractive operations in remote regions.

The Supreme Audit Agency (BPK) has uncovered potential violations in the calculations of profit sharing and the debiting of cost recovery claims proposed by Production Sharing Contract (KPS) contractors. The resulting loss to the state could reach US $3.53 billion or around Rp23 trillion. This figure was reported by the BPK after it examined financial reports for early 2004 and 2005 from five KPS contractor companies: PT Chevron Pacific Indonesia, PT ConocoPhilips Grissik, PetroChina International Jabung Ltd., PT Medco E&P Rimau and BOB Upstream Pertamina-PT Bumi Siak Pusako. The BPK is encouraging the government to issue clear, detailed and firm regulations regarding cost recovery.

Rapid decentralization has also forced some legal ambiguities. For example, in the mining sector, it remains unclear whether the local or national government has the mandate to provide licenses for some mining and smelting activities. Investors thus face an untenable environment as they can not be certain which legal regime will eventually hold them accountable.

Expenditure Transparency

At the national level, the Open Budget Index ranked Indonesia in its middle tier, for "providing some information to citizens." Pre-budget statements and in-year reports remain unavailable to the public.

As a consequence of the decentralization process there are the new and growing requirements for human capital to competently manage the large sums transferred to the local level. The decentralization of finances and public services has also spurred a growth of non-profit groups advocating for local budget transparency. Implementation of these local reform efforts is sporadic, but national rankings, such as those put forth by the Jawa Post Institute, highlight local governments that are innovating for transparency and good governance.

Because information concerning regional oil, gas and mining revenue receipts at the local level remains unclear, civil society groups report that tracking the expenditure of these revenues impossible. In addition to inaccuracies in revenue projections, many branches of government and civil society advocates cite corruption at multiple levels as a limitation on their access to resources for expenditures.

Freedom of Information

It is still difficult for citizens to obtain information that is not proactively published by the government. The parliament has debated a Freedom of Information Act and alternative State Secrecy Act for seven years. The most recent iteration of the FOIA would exclude all state owned enterprises, limiting access to Pertamina and major mining companies.

Reporters without Borders ranks Indonesia 100th out of 169th on their index of press freedom. Recent legal reforms, including landmark rulings by the Indonesian Constitutional Court, have given reporters additional protection against legal charges of defamation and libel. However, broadcast regulations still severely limit influence of multiple vendors over the airwaves and the majority of media outlets are dominated by a few owners.

The quality of news reporting is low outside the major Jakarta outlets. "Envelope journalism" is prolific as journalists in Indonesia are extremely underpaid - receiving as little as a third of what their counterparts in the Philippines or Thailand do.

1. Del Granado, Javier Arze et al "Oil and Gas Revenue Management, Domestic Petroleum Product Pricing and Subsidies in Indonesia" World Bank Indonesia. Mining accounts for .49%, of national revenue.
2. As of 2004. Embassy of the United States of America, Jakarta. Petroleum Report Indonesia 2005-2006. June 2006.
3. Report of the Extractive Industries Transparency Initiative (EITI) London Conference, 17 June 2003, http://www2.dfid.gov.uk/news/files/eitireportconference17june03.asp
4. Menteri Keuangan Mendukung Inisiatif Transparansi dalam Industri Ekstraktif, Rabu 20 Juni 2007, http://www.ti.or.id/news/44/tahun/2007/bulan/06/tanggal/20/id/1340/
5. Kolom "Haruskah Renegosiasi Kontrak," Mohamad Ikhsan, Peneliti Senior LPEM-UI, Staf Khusus Menko Perekonomian, in TEMPO Edisi. 28/XXXVI/03 September 2007.
6. Opinion Editorial, Peter Eigen, Oslo in the Jakarta Post, November 29, 2007.
7. Section C-57, https://www.internationalmonetaryfund.com/external/pubs/ft/scr/cr06330.pdf