How Jokowi Can Fuel Reform in Indonesia's Oil and Mineral Sectors

Today, Indonesians will have a new president, Joko Widodo—known throughout the country by his nickname “Jokowi”—who ran on platform of reform. Many Indonesians view his inauguration as an opportunity for the country to turn over a new leaf and move toward more responsible governance and a technocratic approach to solving the country’s problems. His public commitments to curtailing corruption and his rise from the ranks of local government have created hope that he can navigate the challenges and opportunities of an increasingly decentralized Indonesia.

In particular, Mr. Widodo’s inauguration carries with it a moment of genuine opportunity to maximize the benefits that natural resource extraction has for Indonesia’s citizens, and to reduce some of the negatives associated with the status quo in the oil and mining sectors. While Indonesia has long been a middle-income country, it seeks to transform the economy from commodity-led growth and increase tax revenues for much-needed investment in infrastructure, health and education.

Joko Widodo (Photo: Hafid setia putra [CC-BY-SA-3.0], via Wikimedia Commons)
 

The new president has communicated a simple and clear vision of his priorities as leader; he describes a government that listens and responds to the needs of the people, and that is open, accountable and professional. Styling himself as a pragmatic problem solver, Mr. Widodo campaigned on his nawa cita, or “nine priorities agenda.” The manifesto emphasizes effective, reliable and democratic governance and at the same time aims to strengthen the national economy by improving strategic sectors, including the energy sector.

In the context of public hunger to better understand sectors which have traditionally been opaque, Indonesia has built some solid platforms on which the new government can build more accountable governance of the oil and mining industries. Last week, the country was deemed compliant with the Extractive Industries Transparency Initiative, meaning that a large amount of information on how Indonesia is benefitting from, and managing its resources is now in the public domain. The country has been one of the leaders of the growing Open Government Partnership (OGP), and has made special commitments as part of that initiative to increase the transparency of its natural resource sector.

The new government will nonetheless assume power with a long list of challenges, solutions to which will require concerted effort and extensive public communications. Long a major global oil producer, Indonesia’s production has declined by 25 percent in the last ten years. Despite the country’s status as a net importer of petroleum, the Indonesian population remains heavily dependent on fuel subsidies, which comprise about 20 percent of national budget expenditures—an issue that Mr. Widodo has vowed to tackle as a near-term priority.

The hard mineral sector presents the incoming government with similar challenges. There has been a significant decentralization of the power to award mining licenses, and a lack of effective coordination between national and subnational governments has resulted in overlapping titles and weak enforcement of legislation and regulation. The government is embroiled in complex negotiations with major international mining companies in the wake of its announcement earlier this year that it would not allow companies to export mineral products that are not processed in Indonesia.

Overlaying these technical challenges are allegations of corruption among senior government officials in the extractive sectors. Both the former minister of energy and mineral resources and the former head of the oil regulatory body SKK Migas have been investigated by Indonesia’s Anti-Corruption Commission because of alleged graft.

In recognition of the critical juncture at which Mr. Widodo takes office, NRGI has collaborated with Gadjah Mada University to prepare two policy briefs that present key considerations for governance of the natural resource sector.

The first brief focuses on steps that the government can take to bolster existing efforts to promote transparency and greater government-citizen dialogue around natural resources. Its recommendations touch on:

• Mechanisms to increase the transparency of licensing processes, especially in the mining sector

• The benefits that Indonesians could gain from public disclosure of petroleum and mining contracts

• The elements of the new, stricter EITI Standard that Indonesia will have to implement beginning in 2015, and the benefits that rigorous implementation can confer on Indonesia

• The importance of closer communication and coordination between national and subnational governments around extractive-sector management

Indonesia is also revising its oil and gas law, which necessitates a thoughtful approach to restructuring petroleum-sector institutions, particularly in the wake of a 2012 Constitutional Court decision which invalidated the role played by the regulatory agency BP Migas (which had been responsible for enforcing Indonesian legislation and monitoring the activities of international oil companies and the national oil company Pertamina). A new system that ensures rigorous and consistent enforcement of the rules and includes strong performance incentives for Pertamina and other public agencies will be essential. To this end, our second brief builds on Gadjah Mada University’s expertise on oil-sector institutions in Indonesia and NRGI’s global research on oil-sector administrative structure and national oil company management, to share:

• Pros and cons of various institutional models under consideration by Indonesian officials

• An assessment of the implications of different possible rules for enabling Pertamina to participate in (and lead) the operating groups that manage oil projects

• Lessons learned from international experience around various accountability mechanisms—including audits, advisory committees and rigorous reporting requirements—and the performance of national oil companies and regulatory bodies

We hope that these considerations will be of value to the new government and to Indonesia’s citizens as they seek to take advantage of this historic moment to make sustained progress in managing the Indonesia’s natural resources in the national interest.