The Extractive Industries Transparency Initiatives Challenges of

Transparency in the Extractive Industry Sector

Fuad Mahbub Siraj, Gilang Cempaka and Leonita Syarif

Paramadina University Jakarta, Indonesia.

Keywords: Transparency, Extractive, Industry, Extractive Industries Transparency Initiatives.

Abstract: Transparency is a solution to various problems in the extractive industry and also perceived as the main

prerequisite to achieving good governance. Transparency in the extractive industry can encourage the quality

of natural resource management so that natural resources owned by Indonesia are expected to have a

significant effect on people's welfare and development. EITI (Extractive Industries Transparency Initiatives)

is a global standard for transparency in the extractive industry sector. The advantage of Indonesia to

implement transparency according to the EITI Standards from the perspective of the government is that

transparency will facilitate the process of communication and information to the public. Through published

information, the public can find out how far the government records and manages extractive industry sector

utilization. From a business standpoint, transparency will provide equal information to all parties. With the

same information, business people will compete healthily to provide optimal benefits for the country. From

the perspective of the community, transparency can provide information to the public about the natural

resources extracted from the region. Communities can monitor whether management is appropriate and

provide fair benefits.

1 INTRODUCTION

The industrial sector always plays an important role

in the country's economy, especially as a driver of

economic growth. One industry that holds an

important role in the extractive industry sector.

Extractive industries are one of the biggest

contributors to state revenue in Indonesia. The data of

the Extractive Industries Transparency Initiative

(EITI) stated that 25% of total state revenue comes

from extractive industries. The Data from the

Ministry of Energy and Mineral Resources states that

in 2017, minerals and coal contributed 40.6 trillion

Non-Tax State Revenues (PNBP) or an increase of

48.3 percent from 2016.

Seeing the strategic position of the extractive

industry towards state revenue, poverty in Indonesia

is still very high. An industry with such great

potential should be able to become an engine to

improve people's welfare and reduce poverty.

Unfortunately, extractive industries have not been

able to do much to improve the people's economy due

to the poor and weak governance of extractive

industries, which also has an impact on the high

potential for corruption in this sector. The weak

transparency in all extractive industry lines has an

impact on the ease of political actors to commit

corruption without being examined. Environmental

damage is still largely due to mining techniques and

waste that has an impact on society. This happens

because many mining companies do not pay for

reclamation and post-mining guarantees. Even

though the obligation is regulated by Law No. 4/2009

concerning Minerals and Coal. In China, most cement

factories are closed because they are believed to

pollute the environment, which causes factory

workers and the surrounding community to get acute

respiratory disorders. Similar conditions also occur in

India, where the government began to think about

reorganizing the mining sector because it has taken

many lives. According to the Antara News portal in

2017, as many as 16 miners died due to an ecological

disaster (landslide) at the Jharkhand coal mine in

January 2017.

Besides, countries with abundant natural

resources tend to be in an unfavorable economic

condition when compared to countries without

natural resources. This condition happens because of

the countries with high natural wealth are vulnerable

to changes in commodity prices, especially if the

financial system is not well developed (Ploeg, 2011).

Siraj, F., Cempaka, G. and Syarif, L.

The Extractive Industries Transparency Initiatives Challenges of Transparency in the Extractive Industry Sector.

DOI: 10.5220/0009399500490055

In Proceedings of the 1st International Conference on Anti-Corruption and Integrity (ICOACI 2019), pages 49-55

ISBN: 978-989-758-461-9

Therefore, various international civil society

organizations jointly campaigned for Publish What

You Pay in 2002 to invite extractive industry

companies to inform government payments to

encourage transparency in this sector while also

protecting the government and companies from the

game of changing commodity prices.

For this purpose and to be a solution to the

problems faced by extractive industries, increasing

transparency in the management of extractive

industries is important. Transparency means that

people understand the whole decision-making

process carried out by the government. Thus,

transparency means that it is open, easy, and

accessible to all parties who need it and is provided

adequately and easily understood. Transparency

requires that the public service implementers have

knowledge of the problems and relevant information

to those of service activities. Transparency is built in

an atmosphere of the free flow of information. In this

atmosphere, processes, institutions, and information

can be directly accessed by those who are interested.

In addition, enough information is also available to

understand and monitor these three things.

In the process, the Extractive Industries

Transparency Initiative (EITI) was formed. EITI is

expected to be a tool for the Indonesian government

to eradicate corruption and increase transparency in

the extractive industry sector.

2 METHODOLOGY

Through a qualitative approach with a descriptive

method, this study aims to obtain a picture of how the

practices of transparency in the management of

extractive industries in Indonesia are encouraged by

EITI Indonesia. There are two sources of data in this

study, namely primary data and secondary data.

a. Primary Data

The main data obtained from respondents or

research subjects. In this study, the authors get

primary data through the process of interviews,

observation, and document search. This primary data

was obtained through EITI Indonesia and Publish

What You Pay (PWYP) Indonesia.

b. Secondary Data

Data is obtained from secondary sources (other

than primary data), which are intended to supplement

information and strengthen the findings of primary

data. Secondary data in this study were obtained

through news or articles that are relevant to the

research.

3 EXTRACTIVE INDUSTRIES

TRANSPARENCY INITIATIVE

(EITI)

Increasing transparency is a solution to various

problems in the extractive industry (Richard, 1994).

Transparency in this extractive industry can

encourage the quality of natural resource

management so that natural resources owned by

Indonesia are expected to have a significant effect on

people's welfare and development. The experience of

several countries in the extractive industry sector

shows that transparency and accountability will

contribute positively to economic growth, and reduce

the risk of corruption and conflict (Evi, Francisia and

Yesi, 2014). Besides, transparency in extractive

industries is also a consensus for good governance.

History says that the idea of transparency in the

extractive industry did not come suddenly. The idea

has been campaigned globally by involving a

coalition of international organizations that are

transmitted to domestic actors to be accepted and

adopted by the state. That is, there is intellectual

hegemony that helps to make transparency in the

extractive industries possible. There is a political

process involved until this idea can be accepted,

regardless of whether there is another agenda behind

the global campaign of extractive industry sector

transparency, both in the global political perspective

and in the ideological perspective that rides this idea.

Transparency is a collective spirit of striving to

improve the governance of extractive resources in

Indonesia. In addition to data disclosure, transparency

requires political will and incentives to be able to

apply evenly throughout the extractive industry

decision chain. Transparency in this extractive

industry is globally institutionalized in the Extractive

Industries Transparency Initiative (EITI).

EITI (Extractive Industries Transparency

Initiatives) is a global standard for transparency in the

extractive industry sector. British Prime Minister

Tony Blair is getting the initiative of transparency in

the extractive industries (Extractive Industries

Transparency Initiative), or EITI, in the forum of the

World Summit for Sustainable Development,

Johannesburg, 2002 (Clayton and Sadler, 2014). The

following year, the G-8 published a declaration

entitled "Fighting Corruption and Improving

Transparency," which prioritizes transparency in the

extractive industry (World Bank, 2010). A wave of

transparency ultimately creates a global coalition of

ICOACI 2019 - International Conference on Anti-Corruption and Integrity

elements from governments, corporations, civil

society organizations, investors, and international

financial institutions.

The main objective of EITI is to strengthen

government and company systems by encouraging

public discussion and community participation in the

management of Extractive Industries. In each

implementing country, EITI is supported by a

coalition between government, companies, and civil

society (CSO). In its implementation, the EITI

standard was established as a working guide for

implementing countries. The 2016 Standard is now in

force, which requires EITI to implement member

countries to submit an Annual Report.

EITI standards have been implemented in 51

countries in the world. Initially, the concentration of

EITI was in countries that have a dependency on

extractive industries and weak governance of these

natural resources (governance). In the early 2000s,

the countries implementing EITI were only from

energy-rich developing countries, especially African

and South American countries. At present, several

developed countries or G8 are also implementing

countries of EITI, namely: the United States, the

United Kingdom, and Germany.

The main part of this standard is the process by

which a comparison is made between payments to the

government by companies in this sector and

government revenue (Interview with Edi Effendi

Tedjakusuma, Ph.D.). The results of this process

called reconciliation to become a report and published

to the public. The process that uses an Independent

Administrator is carried out under the supervision of

a multi-stakeholder group or so-called -multi-

stakeholder working group (MSWG).

4 EXTRACTIVE INDUSTRIES

TRANSPARENCY INITIATIVE

(EITI) INDONESIA

In Indonesia, the transparency initiative of state

revenue from extractive industries began in 2007

when the Minister of Finance, Sri Mulyani, expressed

support for EITI to representatives of Transparency

International Indonesia. The Deputy Chair of the

KPK at the time, Erry Riyana Hardjapamekas and the

Deputy of the KPK for Prevention Waluyo, reviewed

the legal basis for its implementation. The

Presidential Regulation on EITI was then discussed

by the Ministry of Energy and Mineral Resources

(ESDM). The following year the Coordinating

Minister for the Economy at the time, Boediono,

chaired a coordination meeting for EITI. In 2010,

Indonesian President Susilo Bambang Yudhoyono

signed Presidential Regulation no. 26 of 2010

concerning Transparency of State Revenues and

Regional Revenues obtained from Extractive

Industries.

The State of Indonesia was formally accepted as

an EITI implementing country candidate in October

2010 in Dar-Es-Salaam, Tanzania, at the EITI Board

Meeting (EITI Organization, "Southeast Asia

Warming Up to EITI," accessed 24 June 2019,

https://eiti.org/blog/ southeast-asia-warming-up-to-

eiti). The criteria compliance EITI must be achieved

by Indonesia within two and a half years. In

implementing the EITI, the Government of Indonesia

is committed to disclosing all taxes, royalties, and

fees received from the oil, gas, and mining sectors.

The Indonesian EITI implementation activities

are currently coordinated under the office of the

Deputy for the Coordination of Energy, Natural

Resources, and the Environment, the Coordinating

Ministry for Economic Affairs. To assist with the

implementation of EITI in Indonesia, an EITI

Indonesia Secretariat office has been formed under

the agency.

The legal basis for EITI in Indonesia is

Presidential Regulation (PerPres) No. 26/2010

concerning Transparency of State Revenues and

Regional Revenues Obtained from Extractive

Industries signed by President Susilo Bambang

Yudhoyono on April 23, 2010. Presidential

Regulation No. 26/2010 prioritizes the principles of

improving public welfare, good governance,

transparency, sustainable development as well as the

involvement of various stakeholders such as

government agencies, NGOs, CSOs, and the business

community following the principles and criteria of the

EITI (EITI Organization, "Prinsip-Prinsip EITI",

accessed 24 June 2019, https://eiti.org/document/eiti-

principles).

The multi-stakeholder group in Indonesia is

embodied in a team organized under PerPres No.

26/2010, namely the Transparency Team. The

Transparency Team consists of a Steering Team and

an Implementation Team chaired by the Coordinating

Minister for the Economy. The team members

consisted of the Minister of Energy and Mineral

Resources, the Minister of Finance, the Minister of

the Interior, the Head of the BPKP, and Prof. Dr. Emil

Salim, the Minister of Environment and Forestry at

that time who had a big part in the idea of

transparency in the extractive industry by the

Indonesian government (EITI Indonesia, "Perpres No

26 Tahun 2010", accessed 25 June 2019,

eiti.ekon.go.id/perpres-26-2010/?aid=262&sa=1).

The development of EITI in Indonesia cannot be

separated from the history of the entry of a Non-

Governmental Organization (NGO) called Publish

What You Pay (PWYP) in 2007. PWYP Indonesia is

The Extractive Industries Transparency Initiatives Challenges of Transparency in the Extractive Industry Sector

affiliated with PWYP International, which aims to

encourage mining companies to open their payment

data to the government. PWYP was initiated by

George Soros by combining five previous NGOs that

had already been established, namely Global Witness,

CAFOD, Oxfam, Save the Children UK, and

Transparency International UK (Oranje and Parham,

2009). PWYP was also formed in the World Summit

for Sustainable Development Together with EITI's

founding initiatives to accompany the spread of EITI

in various countries. PWYP Indonesia itself was

given the right to elect three members in the EITI

Indonesia implementation team.

The IMF advised the Indonesian government to

adopt EITI to strengthen the government's fiscal

policy and in August 2008 finally, on December 2008

the Indonesian government stated its commitment to

carry out the stages of becoming an EITI candidate

country (EITI Organization, "Southeast Asia

Warming Up to EITI", accessed 23 February 2017,

https://eiti.org/blog/ southeast-asia-warming-up-to-

eiti). The World Bank then played its role in

implementing EITI in Indonesia since then. The

World Bank facilitates and prepares all the necessary

costs needed in the process of implementing EITI in

Indonesia through the mechanism Multi-Donor Trust

Fund (MDTF) (Susan, 2011).

Presidential Instruction No. 5/2008, which places

the transparency points of the oil and mining industry

revenues in 2008 as well. Boediono, who at the time

was leading the Coordinating Ministry for Economic

Affairs, encouraged the Presidential Instruction to

leave. This Presidential Instruction then led to the

birth of Presidential Regulation No. 26 of 2010,

which started the implementation of EITI in

Indonesia.

EITI Indonesia began to publish reports so that

the requirements to get the title was candidate

country fulfilled. In addition to EITI, the Report is

also a measure of best practice for extractive industry

companies. Timely reporting and the absence of

discrepancies between reports reported and actual

conditions are at least an indicator of the best

practices of an extractive industry company and EITI

itself (Interview with Edi Effendi Tedjakusuma,

Ph.D.). Every year, Indonesia must publish a report

containing information about state revenues from

extractive industries. EITI Indonesia has published

five reports starting from 2009, 2010-2011 reports,

2012-2013 reports, 2014-2015 reports published on

28 February 2017. And 2016-2017 reports published

on 27 December 2018. EITI reports can be

downloaded at www.eiti.ekon.go.id, which can be

accessed by all levels of society according to the

principle of transparency.

The publication of the EITI Report is quite long

with the current year because the EITI standard

stipulates that the publication of the EITI Report is a

maximum of two years from the current year. Data

reconciled in the EITI Report is data that has been

audited and published in the Central Government

Financial Report (LKPP). LKPP publications are

carried out in the following year from the audited

calendar year. After being published, LKPP can only

be used as data for the EITI Report.

Reports that are open to the public contain

Contextual reports and reconciliation reports. An

open report, subjectively, is also a measure in best

practice EITI as well as extractive industry

companies (Interview with Edi Effendi Tedjakusuma,

Ph.D.). Contextual Report is a report that contains an

overview of extractive industry governance in

Indonesia which can be an important reference for the

community, namely, extractive industry governance,

processes licensing and stipulation of oil and gas

working areas and mining areas, management of

extractive industries in Indonesia, management of

state revenue from extractive industries, State-Owned

Enterprises (SOEs), and environmental and social

responsibilities. The Reconciliation Report is a report

that shows reconciliation information from the

company that reports payments to the government in

the form of taxes, royalties, and in-kind, while

government agencies report state revenues obtained

from extractive companies. The two reports were

reconciled (compared) by independent

administrators, in a process overseen by

representatives from government, industry, and civil

society organizations.

In the report, there is a scope of the report. The

scope of the report is also a measure in the best

practices of EITI and extractive industry companies

because it will increasingly show the transparency of

EITI and the extractive industry companies. One of

the important things in the scope of the report is the

determination of materiality for the EITI

Reconciliation Report. Materiality is the basis for

determining whether a production unit can be

categorized as a reporting entity or not. Materiality

for the EITI report uses a certain value limit based on

a type of revenue that is considered sufficient to

represent the contribution to the country. For oil and

gas, the limit of materiality value is if the contractor

and its partners deposit the government's oil and gas

share above zero, which means 100% of contractors

and partners who contribute to state revenue for oil

and gas will submit a report. While for the mineral

and coal sector, the materiality is based on each

mining production unit that deposits royalties to the

state during the year determined by the materiality

limit by the decision of the Implementation Team

Meeting.

Within the scope of the 2016 EITI Report, for

example, it was determined that the materiality limits

ICOACI 2019 - International Conference on Anti-Corruption and Integrity

of the EITI reporting companies are the largest

companies that contributed 94% of the total

cumulative National Non-Tax State Revenue (PNBP)

in 2016. There are 112 largest mineral and coal

companies that contributed 94% to total National

PNBP that will become reporting entities for the 2016

EITI Report. In the 2015 EITI Report, 123 mining

companies are EITI reporting entities contributing to

93.6% of the total National PNBP. Of the 123

companies, 85 companies reported, and 38 companies

did not report. The limited database in the mining

sector is the most hindering the process of collecting

company reports. Determination of 112 reporting

companies for the 2016 EITI Report, it is expected

that the level of difficulty in data collection can be

minimized, and the reconciliation process can be

optimized.

The scope for the Contextual Report contains

references to the latest information in the extractive

industry sector and is not only limited to information

in 2016. Some things that must be discussed in the

2016 EITI Report include the latest issues regarding

licensing simplification, Beneficial Ownership,

implementation of Law No. 23 of 2014 concerning

Regional Government, and the latest development of

regulations concerning Revenue Sharing Funds

(DBH). In accordance with the scope, the 2016 EITI

Report must also discuss current challenges and

issues related to governance in the extractive

industry, such as: the implementation of the gross

split scheme, the current status of the revision of the

Oil and Gas Law and the Mining Law, the Domestic

Market Obligation (DMO) of coal, the progress of the

planned stock divestment mining companies, BUMN

Mining Holdings, and other recent extractive industry

issues.

The advantage of Indonesia to implement

transparency according to the EITI Standards from

the perspective of the government is that transparency

will facilitate the process of communication and

information to the public. Through published

information, the public can find out how far the

government records and manages extractive industry

sector utilization. From a business standpoint,

transparency will provide equal information to all

parties. With the same information, business people

will compete healthily to provide optimal benefits for

the country. From the perspective of the community,

transparency can provide information to the public

about the natural resources extracted from the region.

Communities can monitor whether management is

appropriate and provide fair benefits.

EITI can prevent corruption because it is one of

the initiatives that support the Presidential Instruction

on Corruption Prevention and Eradication Action

(PPK) together with other agencies, namely the

Corruption Eradication Commission (KPK), the

Presidential Staff Office, (KSP), and other agencies.

EITI ensures transparency occurs. With transparency

through the issuance of the EITI report, it can be seen

whether there is a difference between the amount that

companies pay to the government and the amount that

the government receives from companies. The public

is also given a tool to help control state revenues from

extractive industries.

EITI can improve the Extractive Industry

Governance in Indonesia, because, in the report, EITI

presents several findings and recommendations for

improving extractive industry governance in

Indonesia. The recommendations contained in the

report are determined based on observations of

several obstacles encountered during the preparation

of the report. The recommendation is expected to be

a reference for all stakeholders who are in direct

contact with oil and gas and mining management.

One example of the 2012-2013 EITI Report

recommendations is the use of an integrated payment

and reporting system because there is still an error in

recording the account in the General Accounting

System (SAU) at the Ministry of Finance. The error

is caused by the taxpayer not depositing the Non-Tax

State Revenue (PNBP) properly, such as the use of

bank deposit slips that are no longer applicable,

resulting in incorrect input. This causes a difference

between the amount of state revenue at the SAU and

the Institutional Accounting System (SAI) at the

Directorate General of Mineral and Coal. The

government then published the Simponi application

in response to EITI recommendations for the use of

an integrated payment and reporting system so that

there is no mistake in recording state revenues.

Reporting entities for the EITI Report are the

Central Government, Local Governments, and

extractive companies. In the 2014 EITI Report,

companies that were required to report were 71 oil

and gas sector companies and 120 mineral and coal

sector companies. For government agencies that must

report are seven agencies namely the Directorate

General of Oil and Gas and the Directorate General

of Mineral and Coal (Ministry of Energy and Mineral

Resources), the Directorate General of Budgeting, the

Directorate General of Taxation, the Directorate

General of Treasury, and the Directorate General of

Fiscal Balance (Ministry of Finance), and SKK

Migas. Local governments must provide reports on

Revenue Sharing Funds (DBH), namely the

Provinces of Riau, East Kalimantan and East Java as

representations of energy-rich regions in Indonesia.

The Extractive Industries Transparency Initiatives Challenges of Transparency in the Extractive Industry Sector

5 THE CHALLENGES OF THE

EXTRACTIVE INDUSTRIES

TRANSPARENCY IN

INDONESIA

The challenges that Indonesia needs to pay close

attention to in managing extractive industries are

related to the consistent implementation of policies.

In various forums, it was revealed that legal certainty

and business certainty in Indonesia are often

questioned so that investors must take these risks into

account in their investment decisions. One form of

policy inconsistency is the issue of licensing and

overlapping land. This is still happening today with

all the problems. Uncertainty about this policy is the

weakest thing done by the government, so the practice

of transparency and integrity in this aspect is

impossible to do.

The potential for corruption in this aspect is quite

large, both by the government and companies. From

the company side, the weakness of this aspect

requires the company, indirectly, to prepare more

budget to maintain the permits and land. For

companies, certainty in doing business, including

consistent implementation of regulations and

policies, is necessary to make long-term business

planning. Uncertainty about this policy presents a

subjective domain in the extractive industry (the

objective domain is a report) and increases risk,

thereby reducing investment interest, which

ultimately impedes economic growth.

Besides, the role of state enterprises in managing

extractive industries is too high. Government control

over the management of natural resources is often

exercised by state-owned companies. This causes

inequality in many aspects. The government should

provide equal treatment for players in the extractive

industry to create a conducive business environment.

Just as before, in this context, transparency and

integrity are also impossible to do. This condition, by

companies, is considered a condition that is

"maintained" so that the profits for the government

and companies that are close to the government are

greater than other private companies. This aspect also

becomes the ground for the emergence of great

corruption, especially when it is supported by policy

uncertainty by the government. Both of these

challenges are still the homework of the government

and CSOs in monitoring so that transparency and

integrity in the extractive industry sector are no

longer impossible to do.

EITI Indonesia did not touch this realm because

EITI only worked on the objective aspect (report). In

an objective context, the government and companies

can be said to have carried out transparency and

integrity in this sector, because they have provided all

information requested by EITI. The biggest problem

of extractive industries is not finished in the report

alone, because the main problem is in the field not in

the report.

6 CONCLUSIONS

Indonesia is a country that has abundant oil and gas

and mineral resources, but Indonesia needs to

increase transparency and accountability in managing

these resources. This is important to be done so that

the utilization of these resources can be optimized for

the interests of the people and can also support more

sustainable development. For this reason, the

government needs to continue to improve the existing

extractive industry policies and management.

EITI can be said to be quite successful in the

objective aspects so that transparency and integrity in

the extractive industry sector are created, but EITI's

authority in Indonesia may also need to be added

because the biggest problems of extractive industries

are in the field not in the report. The subjective side

of the extractive industry sector is still a big

homework for the government, companies, and

society because, on this subjective side, transparency

in the extractive industry sector is still an impossible

part to realize.

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The Extractive Industries Transparency Initiatives Challenges of Transparency in the Extractive Industry Sector