Why Does Resource Governance Reform Matter in Jokowi's Economic Policy Package?

This blog post originally appeared as an op-ed in the Jakarta Post on 19 October 2015.

Indonesia's President Joko “Jokowi” Widodo recently outlined new economic policies which aim to produce greater certainty and efficiency in business through deregulation, de-bureaucratization, and improved law enforcement. His overall objective is to revive foreign investment in Indonesia in the context of global economic slowdown.

Economic theories about so-called “rent seeking” hold that heavy regulation and bureaucracy are channels through which corrupt public officials can extract money for themselves at the expense of the general public. In Indonesia, many such regulations are in natural resources. While changing them is a good step toward reform, the government could further advance these efforts by introducing a more transparent and accountable system in natural resource management. The president has recognized this in his presidential instruction on prevention and eradication of corruption. These are promising steps, but they stop short of what is needed if relevant ministries do not take concerted efforts to support the president's anti-corruption agenda.

Studies have shown strong connections between improved governance and development dividends, as well as increased investment through better transparency mechanisms such as the Extractive Industries Transparency Initiative (EITI). Governance is one of the key challenges currently facing the extractive sector in Indonesia and this is the right time to adopt innovative policies and governance reforms. Introducing greater transparency in natural resource management is an essential component of good governance. By becoming more transparent and accountable, the government has an opportunity to foster public confidence in its actions, reduce corruption risks and attract new and responsible investment.

Here, we discuss three transparency measures the government should consider, in order to demystify the extractive sector and bolster ongoing reform efforts.

1. License allocation should be conducted in an open and competitive manner

The government should allocate rights for exploration and extraction of Indonesia's resources to the most efficient company. Reforms underway to simplify license allocation are a positive step but the government should also introduce greater transparency into the process. A recent survey conducted by NRGI found that extractive companies regarded disclosure of licensing rules and procedures as the most critical transparency issue and that greater transparency increases the likelihood of investment.

The Resource Governance Index highlights existing legislation in Indonesia's petroleum sector that is aligned with international best practice, requiring the disclosure of the terms of auctions and justifications for selection of the winning company. However, mining licenses are still issued in an opaque, first-come, first-served basis. Furthermore, licenses allocated at the sub-national level have often been found to overlap with existing licenses. Such practices create an unfavourable investment climate and create a space for corruption and mismanagement. The national and local governments should therefore adopt a fully transparent mining licensing process. It should publish the criteria for allocating rights, clearly define and disclose the roles and responsibilities of national and local governments in granting mining licenses and finally, make public the geospatial cadastre system, One Minerba.

2. Contracts for oil, gas and mining exploration and production should be made public.

The contracts between the government and companies include crucial information on how, when and at what cost extraction takes place. Whilst it is the government that signs these agreements, it does so representing the nation. Because Indonesia's citizens own the country's natural resources, they ought to have a right to understand the terms of these deals. Although some officials have begun considering the benefits of disclosure, petroleum contracts remain secret.

There is growing consensus that making contracts public can be highly beneficial to a country. Indonesia can gain from contract disclosure by increasing its reputation with investors, which in turn can foster greater investment and a reduction in investor risk. Disclosing contracts would also help to prevent revenue loses by making it difficult for a single official or agency to sign deals with limited long-term advantages. And from a private sector perspective, companies would benefit from more stable contracts that have broader buy-in and less pressure to renegotiate, as well as facing a lower risk of corruption during negotiation.

The government of Indonesia should therefore engage with the private sector and develop a roadmap for disclosing all oil, gas and mining contracts. Indonesia would thereby join a growing list of countries that are already doing so.

3. The government, together with companies, should publish the names of the ultimate beneficial owners of the companies extracting Indonesia's resources.

Along with knowing the terms by which a private company is extracting the country's resources, citizens should know with whom the government is doing business on their behalf. An important aspect of demystifying Indonesia's extractive sector is disclosure of information about the ultimate beneficial owner(s) of a company; this means the human beings (not faceless shell companies) who ultimately profit from drilling and mining. Such information is important because extractive companies often have complex and opaque ownership structures which can enable companies to evade paying taxes or hide improper relationships with government officials.

As part of its membership of the G20, Indonesia adopted a set of High-Level Principles on Beneficial Ownership Transparency in 2014, declaring “financial transparency, in particular the transparency of beneficial ownership of legal persons and arrangements a ‘high priority.'”. The government should now act on these recommendations and move towards full disclosure of beneficial ownership. The EITI, of which Indonesia is a member, also encourages such disclosure and provides a platform for bringing government and companies together to identify and publish names of ultimate beneficial owners. Through the EITI process in Indonesia, the government has already collected the names of companies' shareholders, but it needs to go beyond that to publish the ultimate beneficial owners.

Current reforms to oil, gas and mining legislation, as well as Jokowi's push for simple and efficient business processes in the extractive sector, must be combined with greater transparency to ensure better public oversight and accountability.

Emanuel Bria is the Asia-Pacific senior officer at the Natural Resource Governance Institute. Max George-Wagner is NRGI's governance program associate.