Indonesia’s Oil and Gas Legislation: Critical Issues

Indonesia faces several critical decisions as stakeholders finalize long-gestating revisions to the country’s oil and gas legislation.

Natural Resource Governance Institute staff members have prepared a briefing (also available in summary in English and Bahasa Indonesia) on critical issues facing the country as the government and legislature move forward with the legislative process. In these documents, the authors share perspectives on legislative options to pursue critical goals for the oil and gas sector, including reinvigorating investment, strengthening state-owned company Pertamina, generating a fair tax take, reducing the risk of corruption and promoting accountability and good governance.

Based on consultations with Indonesian stakeholders, the authors have identified four issues of particular significance:

• Institutional structure and the role of state-owned enterprises
• Fiscal regime for oil and gas
• Subnational transfers of oil and gas revenues
• Transparency mechanisms

The analysis is based on our global experience researching oil, gas and mining sector governance, and working with officials and citizens as they weigh difficult policy questions. In each case, the authors provide context on the potential implications of each option.

Three major themes run through the analysis. First, in trying to simultaneously attract investment and make sure the country derives maximum benefits from oil and gas activity, Indonesia needs a clear-eyed and objective analysis of what kinds of policies are likely to deliver long-term returns to citizens. Other countries have run into problems by prioritizing populist political reforms that dissuade investment without delivering tangible economic benefits to the people.

Second, the performance of the sector cannot be meaningfully improved without a significant commitment to increasing accountability mechanisms and good governance. Global experience has repeatedly shown that economic policy on its own is insufficient if the sector is to be a stronger contributor to development. A careful focus on transparency and checks and balances is critical, and the current legislative process is a moment to enact reform.

Third, there are no quick fixes. A few simple provisions will not reinvigorate investment or restore public trust on their own. Rather, governments need to commit to building institutions over time and communicating with citizens and businesses. Revisions to the legislation can be a meaningful starting point to long-term institutional reform by establishing dynamic and open systems and tackling deep-seated problems. And follow-through in the years to come will be critical.