EITI and Beyond [Coal Asia Magazine Vol. 45]
Summary of the EITI Report on 2010 & 2011 mineral & coal industry.
The Extractive Industries Transparency Initiative (EITI) or Transparency Initiative to Extractive Industries is a global standard for transparency of state revenue for the extractive sector, including oil, gas, minerals and coal. This is implemented through the Indonesian Presidential Regulation No. 26 of 2010 which requires the presence of a reconciliation report comparing the receipts recorded by the government with the payment undertaken by companies in the extractive industries. The tax revenue is reconciled income tax (PPh), while non-tax receipts are reconciled royalties, sales of mining products (IPM) and dividends. The report issued in June 2014 refers to the years of 2010 and 2011 and relates to about 8.2% of state revenue for each year. The report covers some 32 Coal Contract of Work (PKP2B) companies, 31 Coal IUP (including PT. Bukit Asam), 6 mineral Contract of Works and 15 mineral IUP (Copper & gold, tin, nickel, bauxite). Some 10 to 13 companies failed to comply with key aspects of the reporting over the two year period, and are excluded from the report. On the Government side, the report reconciled revenue comes from the Directorate General of Mineral and Coal, Ministry of Energy and Mineral Resources; Directorate General of Taxes, Ministry of Finance and the Directorate of Non-tax State Revenues, Directorate General of Budget, Ministry of Finance. The report is available (June 2014) in Indonesian and English online at www.eiti.ekon.go.id and EITI can be contacted through twitter @eiti_id.
Receipts from corporate income tax and coal companies that are reconciled byRp.3.964 Billion and USD 3,269 million for 2010, and Rp 5,145 billion and USD4,266 million for the year 2011. Whereas for non-tax receipts, the reconciled amount is Rp 4,317 billion and $ 1,610 million for 2010, and Rp 5,038 billion and USD 2,245 million for the year 2011. Tables 1 to 4 have been prepared from a compilation of the EITI tables as an example of the type of detailed information available (2011).
The royalty non-reporting companies are Koba Tin (2010) and Koba Tin, Telen Orbit Prima, Bhumi Rantau Energy, Bara Kumala Sakti, Tin Indo Intermusa, Golden Great Borneo, Energi Batu Bara Lestari, Cahaya Energi Mandiri, Banka Timah Utama Sejahtera (2011) estimated to have contributed a further $4million in 2010 and$39.6 million in 2011 of non tax revenues. Note that Koba Tin has recently stopped activity. In addition three companies (Karyan Putra Utama Coal, Bangunan Banua Persada Kalimantan, Kartika Selabumi Mining) did not provide authorization to review their taxes at the Dir Gen of Tax, where such taxes are estimates at Rp 18,302 million for 2010 and Rp 18,456 million for 2011.
Payment (2010) of PNBP for forestry permits by PKP2B was $120,000 & Rp 121,218 million, IUP coal was Rp 8,460 million, COW mineral was Rp 10,803 million, IUP mineral was Rp 923 million. Payment (2011) of PNBP for forestry permits by PKP2B was Rp308,668 million, IUP coal was Rp28,196 million, COW mineral was Rp55,780 million, IUP mineral was Rp1,866 million. There is no audit and reconciliation on forestry payments as the Ministry of Forestry is not included in the EITI scope of work (Presidential Decree 26/2010).
The report lists the land rent and royalty Revenue Sharing Funds (Dana Bagi Hasil or DBH) as distributed to the 33 Provinces and 490 Kabupatens in Indonesia for 2010 (Rp 7,752,2230 million) and 2011 (Rp 11,898,220 million). Table 5 as presented here is a compilation derived from the EITI report. There is no audit and reconciliation undertaken as these funds are unilaterally reported by Dir Gen of Fiscal Balancing from the Ministry of Finance and is not included in the EITI scope of work.
The end result of reconciliation showed a significant decrease between the initial differences (Before adjustment) with the final difference (after adjustment). Initial differences ranged from 8% to 326% of the total values for reconciliation, while the final difference ranges from 0.03% to 2.3% of the total value after reconciliation. The differences generally reflect individual accounting systems in companies and various accounting systems in the State Treasury and other government agencies.
The June 2014 EITI report also contains a brief history of the development of mineral and coal industry in Indonesia, profile of the main companies, Report concludes with appendices containing detailed tables of payments made by companies, received by the government and subsequently reconciled by EITI.
The report findings are; (1&2) That reporting of payments to the Mines Department and the recording of payments within the Mines Department needs to be improved in a number of areas. (3) That reporting of annual income tax period, and treatment of income (accrual or cash bases), varies between companies wherein the development of standard reporting forms to the Mines Department may improve the EITI audit process. (4) Some companies make combined royalty and tax payments that is then difficult to audit each separate obligation. (5) The application of currency exchange rate creates some issues for the audit process.
EITI’s civil society representatives recommend the urging that all forms of unreconciled payments to be followed up systematically and transparently through verification mechanisms among institutions which are clear and can be monitored.
The 2010 – 2011 Report does not mention any developments based on the 2009 Report findings and recommendations. This is because the Terms of Reference of the reconciler do not include such reporting in its scope of works. The Report does not include auditing actual verses reported production that may be included in the next EITI report.
Note that the Materiality of the 2009 Report was a minimum US$500,000 royalty payment that would have covered 194 mining companies, but was changed in 2013 to include income tax and a minimum of US$ 2.5 million that then comprised only 53 mining companies for 2010 and 83 for 2011.
Overview ;- The report is a very positive step forward for transparency in the mineral and coal industry.
Going Beyond the Report.
Over the past two years the private mineral and coal industry has undertaken extensive steps towards efficiency to improve productivity and reduce operating costs, with many companies experiencing financial loss or closing. At the same time Government royalties, fees and taxation have remained at pre “hard times” levels, wherein the Government continues to receive its high level of benefits without risk. The mining industry is not only subject to the royalty, taxes and fees audited in the EITI report, but is also subject to an extensive range of other taxes and fees, at the national, Province and District level. One example of such extra costs at the national level is for the constant calls for the Ministry of Education to be more transparent with the levies it receives associated with the hiring of foreigners. Table 6 represents some permits (excluding barging and export inspection) from a typical coal mine in Kalimantan. These permits typically come with a fee, plus further administration cost (company staff to implement, government inspections, socialization etc), and can be further open to extortion practices. The taxes and fees may vary across the country, and those companies that have built value adding processing and have built much needed Indonesian infrastructure (roads, ports, wash plants, air strips) are subject to even further permitting “cost & fee penalties”. It is herein recommended that future EITI scope of work is expanded to cover all forms of sanctioned fees and taxes imposed upon the broader mining industry. If the EITI cannot take on such a proposed new wide scope, then the EITI process may inspire the Mines Department, Ministry of Coordination and Ministry of Finance to develop a similar process. The overall objective is to support a lower cost and more efficient mining industry, plus broader transparency throughout the mining industry.
One common form of mine cost reduction method is for the mine owner and the contract miner, contract suppliers etc, to work together to find cost savings and efficiencies. There is a mutual survival strategy here, for if the mine owner cannot make a profit, then they cannot afford to hire the contractors. The Mines Department realized this with its dropping of the plan to increase IUP coal royalties to 13.5%, while the Tax office also recognized this in the negative way whereby increasing export taxes caused the closure of numerous mineral mines. It is the right time for the Government to meet with mine owners to find efficiencies in the implementation of local taxes and fees, to ensure the government continues to have a viable mining industry employing people and bringing a wide range of benefits to the communities and local government.
Beyond – Expand Government auditing.
There are unsubstantiated claims in the coal industry of very large tonnages of “illegal” coal being exported. Given that there are news reports that only tiny tonnages of processed tin are caught by the Indonesian navy, but there are no public reports of massive coal ships being caught brings doubt upon such claims of illegal coal. Apparently some coal exporters have arranged legitimate delayed royalty payments, and these should not be considered as illegal coal. One government consideration is to limit the number of export ports, with the added increase in production costs and reduced efficiency. There is no guarantee such limited ports will change the potential for illegal coal, as the auditing of the site government reporting process may be the key issue, perhaps one ship documents gets “lost” for every two ships documents that reach the Government ?? Remember the late Suharto era where all people travelling out from Indonesia were required to pay in cash a fiscal tax of Rp 1 million and each passenger received an official receipt. However the Tempo magazine revealed that over the years such cash was delivered to an official, but never made it to the State bank. Here we have correct payment and formal receipts, but official channels “lost” the cash. The Mines Department does have a tonnage reconciliation system in place that does catch out some mines, though this system is not fully transparent. We all look forward and encourage EITI to include actual verses reported production in the next EITI report.
Most exploration and mining companies are required to place assurance guarantees (reclamation, mine closure etc) with the local government, often in local banks. In the past we have seen similar forestry guarantees being used by the Government for loans to the national aircraft construction industry, and subsequently “lost”. The banking laws are improving; however future transparent EITI type processes are encouraged to examine this performance bond area of compliance.
Beyond – Reduce extortion.
Explorers and miners are sometimes subject to local rules that appear to be legitimate, but are thought by some to be rent seeking by local governments. For example the banning of coal trucks from public roads (other trucks not banned) in parts of Sumatra, only to be allowed by arranging for a “special” exemption permit.
Explorers and miners are also subject to the entrepreneurial outlook of local business people with apparently some support by local politically linked parties. One example is found where a local companies assist tugs for passage under the Buntok bridge are “provided”, but apparently not needed by some miners.
Community development is often well managed in a transparent manner by many companies. There are other situations where a mosque fee, head-of-village fee and many small fees are obligatory. A transparent audit process may see if such funds are reaching the community in a suitable manner.
The number of Bupaties and other local officials that are subject to KPK investigations related to the mining and other industries may be seen as a partial reflection on various extortion activities. Over the past year there have been more police & KPK investigations at the district level of mining activities. Some mines have been closed due to non compliance with technical matters, or non payment of approved taxes & fees. The increased conspicuous presence of KPK & police investigations has also seen some reduction in parties trying to extract unofficial fees from the mining industry. It is clearly a good time to build upon this “cleaner” trend for the industry to work with government and come up with solutions for a more lasting efficient and transparent industry. Hooray for EITI for getting the ball rolling in the right direction.