Monday, December 21, 2015

Can Asians Really Think?

I write this blog to pay my respect to Prof. Kishore Mahbubani, both a Singaporean career diplomat and an Asian scholar.

I encounter him through his engaging debates encapsulated in his book Can Asians Think? The 264 page book is a collection of his essays first published in 1998. His lively arguments to posit an equal footing of debates between the East and the West and at the same time posing challenge to post-colonial mentality of Asians is very close to my own personal experience.  

Grew up and educated in a Jesuit school in Timor and later study philosophy and International Relations (IR), my intellectual development and worldview has been shaped by Western philosophy and ideas. For instance it is impossible for me to think about better political system than democracy. I appreciate the fact that although Mahbubani challenges dominant liberal democracy narrative culminating after the fall of Berlin wall he believes that at some point all nations must be a democracy. 

I also learn to appreciate that democracy also has evolved into various ideological strands and political system not only liberal democracy. For instance we can also find social democracy  in some European countries and if you ask a Cuban he or she would also say that their political system is also a democracy within one party system.

Therefore I would argue that in forging dialogues one should be able to appreciate different historical and political development of each nation and civilization. The fact that liberal democracy in the United States is also not a perfect system resulting in what Fukuyama calls vetocracy and neopatrimonialism should bring everyone into mutual respect when it comes to debates over our political systems and values.  

Mahbubani believes that Asians should stand firm with their thousands of year culture and values and strengthen the state capacity to deliver development and end poverty. This view is different with most Western development templates during the liberal peace era which tends to weaken the governments capacity by over-emphasizing the ill-conceived individual freedom and market fundamentalism without strengthening the government capacity and rule of law. He believes that economic development can only be better delivered in the poor and developing countries through establishment and strengthening of ‘good government’. By this term he refers to (1) political stability, (2) sound bureaucracies based on meritocracy, (3) economic growth with equity, (4) fiscal prudence and (5) relative lack of corruption.

While I appreciate this view, I also think that this is only part of the story – the technocratic narrative. The other part of the story as I personally experienced during the Suharto authoritarian regime in Indonesia and witnessed the use of military force to commit violation of human rights in Timor, is that a strong government without proper check and accountability mechanism from the citizens and other state apparatus will also lead to disaster. Developmental state advocated by Mahbubani can only work effectively when you have a ‘good emperor’ and enlightened elites in Confucian ethics which is not always the case in many Asian societies. Too much power without sound accountability and feedback mechanism is potentially corrupt. 

It appears to me that he wants to export Singaporean development template with a population less than Jakarta, the Indonesian capital, to other Asian nations but I think he fails to appreciate variety of historical and political narratives of these societies.

Nevertheless, I think he deserves appreciation as one of the best Asian minds trying to argue from different perspective and critically examine dominant narrative imposed by one society to other societies. What remains to be our struggle is to liberate our post-colonial minds from discursive power that may not be necessarily true and critically examines them.        

Thursday, November 26, 2015

Why States in general are Resistant to Human Rights Agenda?

Why states in general are resistant to the promotion of human rights agenda? Universal Declaration of Human Rights were created in 1940s to re-affirm human agency. Before that the Westphalian system, where the state is the central authority in the public affairs, became the norm. In effect human agency is subject to the interest of the state.

Human rights instruments were created after the devastating World War II. It was aimed to restore agency and give individuals the juridical resources to stand up when the state ordered them do wrong. This is a turning point because before that only states had rights in international law. Human Rights according to Ignatieff (2000) also re-affirms European tradition on the importance of the individual. With the Universal Declaration of Human Rights, individuals received international legal recognition. Individuals are able to challenge unfair state law or oppressive customary practice as their rights are enshrined in the Declaration.   

Given the above, in practice, the adoption and implementation of human rights principles by the states have been inconsistent across the board. The states in general regard human rights as a direct challenge to their sovereignty. It is considered a threat to their sovereignty because in principle it is a liberation of the individual from the state’s control and also in practice in many countries human rights agenda are pushed through by the non-state actors such as NGOs and other international actors.

Therefore if states are to adopt and ratify human rights instruments it is normally driven by the tangible benefits such as foreign aid, trade and investment or intangible motive like praise, acceptance and legitimacy. However as Nielsen and Simmons (2015) found in their empirical study that there is almost no evidence that states can expect increased tangible or intangible rewards after ratification of human rights treaties. This presents a puzzle. Why should sovereign states agree to subject an internal issue to international scrutiny?  

The United Nations Commission on Human Rights (UNCHR) has been used as a forum where governments are publicly named and ashamed others for abusing their citizens. Through this forum governments hold each other accountable to their promises and are ‘forced’ to live up to their commitments through ‘social conformity’, peer pressure mechanism and that states want to keep their good reputation in such forum.  (Lebovic & Voeten, 2006).

Apart from UNCHR, many human rights based NGOs such as Amnesty International and Human Rights Watch have employed ‘information politics’ to set human rights agenda at international level. Given the constraint funding resources (they don’t receive funding from governments) these human rights watchdogs have strategically used media and selected cases to gain public attention in the North thus able to influence human rights discourse through various international forums, bilateral trade and investment between the states in the North and repressive states (Ron et al., 2005). 

Apart from that, the fact is that human rights is also largely political. This can be observed in ‘American exceptionalism’ – death penalty and watering down of International Criminal Court (ICC) decisions. Human rights campaign can also become very selective depending on the interest of audience in the Northern states. The concept of human rights as ‘universal’ has also been challenged by other concept such as ‘Asian values’ where the position of community represented by the state is much higher than the individual. This contradiction of concepts and values are better reflected in the ASEAN human rights declaration, which for many analysts can be seen as a compromised result between universalism and relativism of human rights. In short the contradictions between the human agency and the state sovereignty, Western values versus Asian values will not be resolved anytime soon.      

Friday, November 20, 2015

Should Indonesia Establish Natural Resource Fund?

Sovereign Wealth Funds (SWF) commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports (IWG, 2007).  Truman (2010) defines SWF as Large pools of government-owned funds that are invested in whole or in part outside their home country. It is also publicly owned investment vehicles with a mandate to transfer wealth to future generations by investing in an international portfolio of securities and assets, including companies (Castelli and Scacciavillani, 2012).

Natural Resource Fund (NRF) is a subset of Sovereign Wealth Fund. The difference between a sovereign wealth fund and a natural resource fund is that the latter is principally financed through oil, gas and mineral sales while the former may be financed through fiscal surpluses, foreign exchange reserve or pension contributions. As of July 2014, there is approximately US$ 4 trillion in assets of NRF[1].
SWFs have grown significantly in the first period of 21st century. Balin (2008) estimates that 35 percent of all SWFs were established over the five years leading up to 2008. It was the commodity boom of the 2000s and the rise of emerging markets economies which boosted the new wave of SWF creation, with China, Russia and Dubai creating their own sovereign wealth management institutions (González Cid, 2008).
Figure 1 : Growth of SWF Globally

Source : Balin (2008)
The regional distribution of SWFs displays a predominance of the Middle East (43 percent) followed by Asia (36 percent), and Europe (18 percent) and Africa (2 percent) (International Financial Services London Research, 2009). However, the distribution of fund equity holdings ranks Asia on top and then Europe, North America, and later Middle East (Factsheet and Thomson Financial database, 2009).
Governments normally establish Natural Resource Funds for the following reasons: tackling pro-cyclical spending or to smooth expenditures, save resource revenues, mitigate Dutch disease by sterilizing large capital inflows, earmarking revenues for public investment, ring-fence resource revenues and greater political leverage, power and autonomy (NRGI, 2014).
This essay will describe types of natural resource funds, the role of oil, gas and mining in the Indonesian economy and provide an analysis whether Indonesia should establish a natural resource fund.
Natural Resource Funds
A comprehensive study on natural resource fund has been undertaken by Natural Resource Governance Institute (NRGI) and Columbia Center on Sustainable Investment (CCSI) in 2014.[2] The study found at least 58 NRFs worldwide, 52 of which are active. In terms of source of funding, 77 percent of funds are financed primarily out of oil and/or gas, 17 percent out of minerals, and the rest is out of a combination of oil and minerals or land rent.

Natural Resource Funds (NRFs) are growing fast and popular. Thirty of the fifty two active funds have been established since 2000 and there are new funds planning to be established.[3] Of these funds there is a trend toward codifying good governance requirements – fiscal rules and how the funds are managed. However, the study also found that only about half of the funds are transparent, releasing their audit reports and publish the details of their investments – meaning mixed results of the funds surveyed in terms of their transparency. Because of that the rhetoric that natural resource funds are symbols of progress and development can be misleading if the basic macroeconomic and good governance requirements are not met.  

Oil, Gas and Mining in Indonesian Economy 

Extractive industries sector plays an important role in Indonesian government revenues. Oil, gas and mining revenues accounted for approximately 23 percent of state revenues in 2014. The mining sector accounted for 6 percent of total 2011-2012 GDP and more than 17 percent of export revenue. During the same years mining contributions to GDP rose from $39.9 billion to $46.4 billion.

Indonesia’s rapid and all-encompassing decentralization process has posed a range of challenges to extractives governance, including limited transparency of resource revenues and a lack of clarity regarding legal mandates. Although oil and gas revenues are collected by the national government as a result of decentralization policy certain portion of the funds must be shared with the producing regions.[4] Thirty percent of gas revenues passing to the subnational level: 12 percent to the producing district, 12 percent split between all other districts in the province, and 6 percent to the producing provincial government. 15.5 percent of oil revenues pass to the subnational level: 6.2 percent to the producing district, 6.1 percent to all other districts in the producing province, and 3.2 percent to the producing province.[5] Mining royalties are collected by the Ministry of Energy and Mining, and taxes are collected by the Ministry of Finance before 80 percent of those revenues are also distributed sub-nationally.[6]

As a result of this policy, some resource rich provinces and districts in Indonesia have experienced increasing local budget through revenue sharing of natural resources (Dana Bagi Hasil). On top of that as stipulated in existing oil and gas law (2001) as well as mining law 2009 some of these resource rich regions have also established region’s state owned companies to manage either their participating interest in the case of oil and gas or divestment for mining. In practice this is proven to be difficult for local governments to buy the share as they naturally do not have sufficient funds therefore in many cases they cooperate with private investors and other local governments to form a consortium.

Should Indonesia Establish Natural Resource Fund?

In September 2008, the Organization of Petroleum Producing and Exporting Countries (OPEC) announced that Indonesia had formally suspended its membership in the oil cartel because of concerns over the high price of oil and declining oil production in Indonesia (Hanshaw, 2009). In fact the role of oil in Indonesian economy already declined in mid-1980s after the oil boom experienced in 1970s. However other resources such as liquefied natural gas (LNG), copper, gold, tin, nickel and thermal coal increased.  By the mid-1990s, Indonesia had become the world’s largest exporter of LNG, the second largest producer of tin (after China), the third largest exporter of thermal coal (after Australia and South Africa) and the third largest exporter of copper (after the United States and Chile). It also produced significant quantities of gold, and nickel. Despite significant contribution of natural resource revenues to Indonesian economic growth during the 1970s, in mid-1980s the non-natural resource based sectors such as manufacture and services have taken over as the main engine of economic growth (Resosudarmo, 2006). Therefore some experts argue that Indonesia was able to reverse the oil curse in less than two decades (Rosser, 2007). 

Figure 2 : Share of oil, gas and mining commodities export and gross value added in Indonesia GDP (1870 – 2010)

Source : Van der Eng, Pierre (2014)

With the declining oil production and diversified Indonesian economy, at the national level an economic case to establish natural resource fund is weak. Natural resource revenues are less likely to cause any macroeconomic instability or Dutch disease.

This could be a different case for resource rich provinces and districts. Increasing revenues from oil, gas and mining in their local budget and economy could undermine the growth of other sectors and cause Dutch disease. In East Kalimantan for instance total contribution of oil, gas and coal for its economy in 2013 is 67,15 percent. This is relatively higher compared to other sectors in the province. And if we look closer at district level the percentage of extractive sector in their economies is even higher. In Bontang city, 94,69 percent  of its economy is driven by LNG industry, in Balikpapan city 45,95 percent  of its local GDP is dominated by oil, gas and coal refinery industry and in East Kutai 87,02 percent  of its economy  is from coal industry (BPS, 2013).

In the case of Bojonegoro district in East Java, one of the major oil producers in Indonesia, it has experienced significant increase of oil and gas in their economy as shown in the figure below.

Figure 3 : Oil and Gas  contribution to local GDP in Bojonegoro

Since Bojonegoro is still in the early stage of its oil production, the increasing trends of petroleum dominance in the economy will continue especially with the opening of new blocks in the future. The oil rich district also has experienced budget volatility in recent years. In fact, the impact of the oil price drop in late 2014 has also forced the central government to reduce around 60 percent of oil and gas revenue transfer to Bojonegoro by mid-2015. This is another case where the need to smooth Bojonegoro government spending becomes necessary.

Given the facts above, in late 2014 Bojonegoro government has decided to start establishing a petroleum fund in Bojonegoro through a local regulation. This decision was taken to address the budget volatility in Bojonegoro as well as to save petroleum revenues for future generation and invest in human development. It is expected that once the fund is established through a sound legal and economic analysis it will become a model for other resource rich provinces and districts in Indonesia.

Bibliography :

Balin, 2008, Sovereign Wealth Funds : A Critical Analysis, Washington : The Johns Hopkins University School of Advanced International Studies

Castelli and Scacciavillani, 2012, The Economics of Sovereign Wealth Funds, Hoboken :Weley Finance

Indonesian Central Bureau of Statistics (2012)

Indonesian Central Bureau of Statistics (2013)

Factsheet and Thomson Financial database (2009).

Hanshaw, 2009, Indonesia’s Oil Crisis : How Indonesia Became a Net Oil Importer in the Journal of International Policy Solutions, Vol. 10

International Financial Services London Research (2009).

International Working Group (2007)

NRGI& Columbia Center on Sustainable Investment, 2014, Natural Resource Fund Governance : The Essentials

Resosudarmo, 2006, The Politics and Economics of Indonesia’s Natural Resources, Singapore : Institute of Southeast Asian Studies

Rosser, 2007, Escaping the Resource Curse: The Case of Indonesia in Journal of Contemporary Asia, 37:1, 38 - 58

NRGI, 2013, Resource Governance Index

Truman, 2010, Sovereign Wealth Funds : Threat or Salvation? in Peterson Institute for International Economics, pp 216

Van der Ing, 2014, Mining and Indonesia’s Economy : Institutions and Value Adding, 1870 – 2010, Tokyo : Hitotsubashi University

[2] Ibid
[3] New funds are being planned or considered at the national level in Afghanistan, Israel, Kenya, Lebanon, Liberia, Mozambique, Myanmar, Niger, Peru, Uganda, Sierra Leone, South Sudan, Tanzania and Zambia and at the subnational level in many other countries.
[4]It is stipulated in Law Number 33 Year 2004 on Intergovernmental Financial Relation and Government Regulation Number 55 Year 2005 on Revenue Transfer.
Also Government Regulation PP No. 55 year 2005 on Balance Transfer
[5]The Resource Governance Index 2013 provides additional information on transparency of oil revenue transfers. The central government transfers revenue to local authorities based on regional petroleum extraction. The Finance Ministry publishes information on these allocations, but the reports are very technical and lack narrative explanations. Local authorities rarely disclose information about the transfers. Rules for transfers are defined by law and followed in practice
[6] Revenue distribution in mining as regulated in Law number. 33, 2004 is as follows. Land-rent distribution: 64 percent to the producing district, 16 percent to the producing province, the rest 20 percent retained nationally; Royalty distribution: 32 percent to the producing district, 32 percent to all other districts in the producing province, and 16 percent to the producing province, the remaining 20 percent retained nationally).

Wednesday, November 18, 2015

After Paris Attacks....

How people react to the recent Paris terrorist attack on November 13, 2015 reveals a very important question on how countries especially those hosting refugees as well as global security actors like UNHCR should respond to forced migration in recent years.

This is an old question and has emerged following the September 11 terrorist attack in the United States. After that Western countries are confronted by the dilemma between humanitarianism and national security. Paris attack vividly narrates that story. The debate now is whether the European borders particularly in France should be closed to Syrian migrants fled their country due to war and persecution for the interest of national security. Does humanitarian response to forced migration compatible with national security? Are both mutually exclusive concepts?

International migration has moved to the top of the international security agenda, due in part to concerns that migration flows provide conduits for the spread of international terrorism. Although such concerns are not entirely unfounded, they must be placed within the broader context of the range of impacts both positive and negative that international migration flows have on states' national security interests. Migration flows affect at least three dimensions of national security: state capacity and autonomy, the balance of power, and the nature of violent conflict (Adamson, 2006).

In recent years causes of mass displacement have also changed. In the past most refugees fled their home countries due to repressive regimes but now the largest and fastest population displacement has been resulted from armed conflict and communal violence (Crisp, 2003). This has posed security risks not only to the home countries but also to the host countries. As happened in Paris recently and also in many other places terrorist groups that have forced people to involuntarily migrate to Western countries also use these migrant flows to penetrate into their target countries to launch their attack. This has raised major debates as forced migration has turned into security issue or in other words ‘securitization of international migration’.  

At theoretical level this problem therefore raises the question not only about how to manage international migration but also poses academic challenge to the study of International Relations (IR). Forced migration is still a major void in IR studies. The fact is that this phenomenon is not simply about how to manage migration but it goes beyond that as it touches upon national and international security. Therefore IR theoretical framework is necessary to help us better understand this complex issue. In response to this, Betts and Loescher (2010) together with other IR experts produced a book which basically represents an attempt to bridge the divide between studies on forced migration and IR studies. The book places refugees within the mainstream of IR studies such as realism, liberalism and constructivism.

Given the shift in the causes of forced migration as well as evolution of security concept in IR studies from traditional to also include non-traditional security such as ‘refugees’, from narrow strategic-military understanding of security to more fluid and unpredictable post-Cold War environment the role of global security actors like UNHCR is also evolved (Hammerstad, 2014).        

How states should respond to this dilemma? Adamson (2006) suggests that states capable to formulate and implement sound migration policies will be able to harness the power of international migration and therefore will become more secure and reduce security risks as a result of forced migration. 

Western countries have shown various responses to the recent migrant crisis in Europe and Paris attack. Time will tell if French government's war in Syria to respond to the attack will end terrorism or simply putting more fuel into the fire.   

Monday, November 9, 2015

Notes on 'China and the World : Scenarios to 2025'

In 2006 the World Economic Forum (WEF) published a document titled ‘China and the World: Scenarios to 2025’. This document sets out three scenarios for China in the next 20 years. These include regional ties, unfulfilled promise and new Silk Road.    

Below I will describe these three scenarios and assess how these scenarios work so far.  

Regional Ties

This scenario lays out how China plans to continue its reform process despite challenging regional and global terrain. The global trade has been obstructed by increasing protectionism especially in European Union and the United States. For instance these countries have restricted Chinese textile exports such as shoes, steel pipes, automotive parts, electronics and automobiles. These unfavorable international landscape have had a number of economic consequences such as the slowdown of export growth and foreign direct investment from 2008 – 2012 and far few new jobs created as well as the loss of existing jobs leading toward increased unemployment and mass incidents.

Facing the above challenges China comes up with the following strategies:

(1) Reduction of export oriented economic growth and foreign investment and develop broader domestic demand. In order to address the increased unemployment the government has launched series of large-scale infrastructure and construction projects since 2011 to create jobs and increase domestic demand. From 2011 – 2017 the government capital expenditure plan is tripled financed by the government-issued bonds. These infrastructure projects apart from creating jobs also improve connections between cities and deeper inland where most small and medium enterprise located.

(2) Forging closer ties with her neighbors in Asia where China becomes engine for trade and investment as well as economic growth and development. Given the historically political enmity among nations in Asia it takes time for China to be fully accepted by her neighbors. However slowly but surely China’s peaceful and constructive approach permeated into deeper connections with her neighbors. This is also partly because of the US gradual withdrawal from the region given its budget constraints.   

This scenario is part of the Chinese government white paper which is used to put forward its policy or reflect on the past.    

Unfulfilled Promise

This scenario was published in a Western online development journal which reviews China’s development over the period of 2006 – 2025.  It reflects the general sentiment that the promises made are not realized and obstructed by the lack of necessary structural reforms. As a result it has negative impacts on the social, economic and ecological development.

In the recent years the country’s internal division is getting deeper and it is worsening with economic slowdown and the leadership buys time to build common dream through new reform campaign. However this has not been successful to convince international partners who are still concerned about the internal dynamics in China that could create regional instability.

New Silk Road

This scenario lays out how China continues her economic and cultural progress despite the existing substantial internal obstacles. This reflects China’s peaceful rise as global and regional power and leading Asia regional economic and cultural integration. This mirrors China’s original construction of Silk Road and it has been proven by the progress made by China in the past 20 years. In this scenario China’s success is driven by strong and inclusive growth with emphasis on trade integration. All these are supported by China’s reforms in the area of finance, legal and administrative as well as the strong thrive of middle class and domestic market.

How these scenarios work so far?

The three scenarios above project different consequences on globalization. In the Regional Ties scenario direction toward regionalism as a response to protectionism in Europe and the United States could undermine international cooperation and global trade integration that could lead toward a global recession. As for Unfulfilled Promise lack of internal reforms and skepticism would affect global integration although this will not prevent it to take place. The last scenario of New Silk Road could benefit the global economy, trade and investment despite the fact that China would still struggle to undertake internal structural reforms.

With the sluggish global economy in recent years and the rise of protectionist policies worldwide especially in Europe and the United States toward China’s export products, China is facing new challenges.  It can no longer expect external demand to further contribute to its economic growth like in the past. On the other hand China is also facing domestic problem with declining working age population as a result of its one-child policy[1] as well as rising unemployment. China’s strategy to stimulate domestic demand through large infrastructure and construction projects and strengthening ties with her neighbors in Asia provide opportunity to respond to these challenges. However this reform could only be sustained through a robust economic, social and political reforms. Also in response to the market protection in the United States and Europe to China’s product, it needs to improve its quality of products to find new global competitive advantage as opposed to price competitiveness. Other important dimension of China’s strategy is its overseas direct investment (ODI) program using its large foreign assets and promoting Chinese firms investment abroad [2].   

China is now a significant global player and it has a unique approach toward international politics. Although economically China has exceeded the United States it is still reluctant to take over the United States role as the primary international player. However it is increasingly taking part actively in global commitments such as on anti-corruption and climate change which reflects internal changes toward a better international player in norm and standard setting. Country as big as China will need time to consolidate its strength for internal reforms and building robust connection with her neighbors in Asia and other regions.

These days China has used a combination of these scenarios to tackle domestic, regional and global concerns. As an export led oriented growth nation for a long time facing with protectionist policies abroad China has to re-orient its policies to increase its domestic demand and improve the quality of its industry especially in manufacture products. On the other hand China also increasingly establishes her ties through trade, investment and culture with her neighbors in Asia to boost regional market for its products and strengthen regional security. At the global level China is still advocating for the New Silk Road agenda and also tackling its domestic problems such as corruption. Recently China commits to reduce carbon emission as part of its commitment on climate change together with the United States. The leadership in China has tried hard to maintain the course of reform internally and build new friends abroad through its ‘global harmony’ policy. This needs to be understood by other global players to prepare for the peaceful rise of China and contribute to the global welfare.

[1] This is recently changed but the impact on demography will be in the next two or three decades.
[2] See : Lemoine (2013)

Saturday, October 24, 2015

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

Emanuel Bria and Max George-Wagner
This blog post originally appeared as an op-ed in theJakarta 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 hispresidential 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.