Miners are leaders in anticorruption and top scorers in transparency

Miners are leaders in anticorruption and top scorers in transparency.  (Vol 97)

The Indonesian mining industry is often strongly focussed on issues that are obstructing its business. This article is a reminder that all that past hard work and good cooperation with the Mining Minister has led to a more credible industry that is now more attractive to serious investors. This article draws on the recent international conference on anticorruption that was strongly supported by various ministries, and on the NGO technical reports of Transparency International, plus a recent EMDI seminar.

International Business Integrity Conference (IBIC) 2018.

The IBIC was held in Jakarta on the 4-5^th December 2018 where Government leaders from Ministries charged with combating corruption gave presentations along with some international parties and other parties. Refer to www.iibic.org

Some presentations were quite specific directed to the mining industry. Bambang Brodonegoro (Menteri Bappanas), mentioned that combating corruption can be seen as the leading examples of the application of the EITI and Beneficial Ownership (BO) in the ESDM sector. Laudi Sharif (KPK Commissioner & deputy chairman KPK) mentioned that the ESDM is the first sector to apply the BO program, and other ministries may follow. Cahyo R. Muzhar ; Dir Jen Administrasi Hukum Umun, Kementerian Hukum dan HAM mentioned that the Natural Resource sector is an easier target for BO, as the company is tied to the country, whereas industry, trading etc can simply shift to another country.

Some of the presentations looked at where Beneficial Ownership will be next implemented, particularly for Notaries, various financial institutions, and for subcontractors. The initiative to implement Integrity Management Certification is being developed. All speakers indicated that reducing corruption will take a long time, much effort, bigger budgets, better systems with more government coordination and supervision. All speakers also indicated that corruption will never be completely eradicated, however the overall effect of reduced corruption is to improve the business climate of Indonesia.

Transparency International – Indonesia.(TII)

Transparency International (TI) is a global anticorruption movement with more than 100 chapters worldwide, with an international secretariat in Germany. [ www.transparency.org]. TI Indonesia [www.ti.or.id ] has its Jakarta office in Pasar Minggu, with about 15 active members. TI Indonesia builds awareness about the adverse effects of corruption and working with partners in government, companies and civil society in order to reduce corruption.

TII have produced several recent reports on “Transparency in Corporate Reporting” on a 1) regional, 2) Indonesian national and 3) SOE sectorial bases. The methodology in each case is similar, whereupon the top 100 or so companies are evaluated from publicly available material (typically 2015-2016) for a number of criteria that reflect upon the company’s transparency character.  Each company is then given a rating wherein 100% is best, and 0% is worst. A comparative index (where 10 is very transparent) is developed based on the unweighted average of the 3 categories of PAK (anticorruption program), SOR (organizational structure) and LAN (Interstate reporting).

Report on Assessing Emerging Market Multinationals.

BUMI is the only significant Indonesian coal & mineral mining company within this group of 100 top companies from emerging markets. Bumi scores moderately high (62% against an average of 48%) for reporting on anti-corruption program, very high (81% against an average of 47%) on organizational transparency, and low (3% against an average of 9%) on country by country reporting, and good with 40% (against an average of 30%) rating for reporting on domestic operations.

Overall study results from the top 100 companies suggest that emerging market multinationals could improve their corporate transparency standards, that public listed companies perform better than state owned companies and that country by country reporting remains weak. The report notes that Chinese entities have different standards of disclosure for transparency.

Report on Perusahaan Terbesar Indonesia. [Large Indonesian Companies].

This list includes ten companies with their main business associated with the mining sector, though other Groups (Industry, real estate, cement etc) that may include mining are not reviewed herein.

Company	No.	PAK Anticorruption Program %	SOR Organization Structure %	LAN International Reporting	Total Rating
Timah	3	92	100	0	6.4
AKR Corporindo	5	85	100	0	6.2
Indo Tambang Megah	9	85	81	0	5.5
Aneka Tambang	18	46	100	0	4.9
Tambang Batubara Bukit Asam	22	38	100	0	4.6
Vale Indonesia	31	73	50	0	4.1
United Tractors	35	31	88	0	3.9
Adaro Energy	46	15	94	0	3.6
Golden Energy Mines	79	12	63	0	2.5
Toba Bara Sejahtra	85	4	63	0	2.2

 

The reports overall findings are that most company leaders do not have formal anticorruption commitments, most companies have no regulations about gratitude’s or political contributions, nor forbid facilitation payments. Most companies do not have adequate vendor integrity management programs nor adequate anticorruption training programs for employees and directors. About half the companies have a whistleblowing system. There are a number of aspects relating to the disclosure of subsidiaries that could be further improved.

Report on Strengthening Anti-Corruption Program in Indonesian State Owned Enterprises.

 

SOE mining sector	Rating	Score (PAK, SOR, LAN)	Anti-corruption Program		Organization Structure		Reporting
			Rating	%	Rating	%	Rating	International %	Domestic %
Timah	4	6.4	4	92	24	100	46	0	100
Inalum	21	5.3	48	58	91	0	26	0	100
Aneka Tambang	30	4.9	61	46	30	100	55	0	100
Tambang Batubara Bukit Asam	37	4.6	68	38	32	100	59	0	100

 

The main findings include that the mining and excavation sector scores the highest (5.57) overall average, with Timah the highest at 6.4. The mining sector has the highest score (67%) for anticorruption programs.  The overall weakest component of the anticorruption aspect is the general lack of applying a code of ethics to suppliers. The Mining and excavation sector also score highest in the Organizational Transparency. Overall the weakest component of SOE’s in this category is the general lack of reporting on associated companies in other countries. The report suggest other SOE’s follow the ESDM’s regulations in obliging the company that wants to get a permit to inform the companies list of beneficial owners.

Some key take-away’s from all three reports are; –

1 That the top mining companies are generally preforming comparatively well on transparency management.

2. The general recommendation are that all companies should implement transparency training for directors, staff along with vendor transparency initiatives. There is a lack of regulatory direction to increase transparency with regards to the international connections of local companies.

What next for Transparency

These International Transparency reports make no attempt to relate such research of the top financially successful companies to the thousands of other mining companies. It is likely such thousands of mining companies will have little reliable publicly available data to evaluate for transparency. Perhaps data from the approaching Beneficial Owners program may help further research by adopting a social science approach through a characterisation of owners and directors.

The ministry of State-Owned Enterprises (SOE) issued decision number SK-16/S.MBU/2012 (6 June 2012) revising the indicators / parameters for evaluating the implementation of Good Corporate Governance (GCG) in SOE’s. This decision provides some 113 pages of tables listing the criteria and assigning a score value to each item.  This decision specifically applies to BUMN’s only, but could provide the foundations to be further applied to BUMD’s. Given the publicity and importance of a new BUMD taking on a substantial share of Freeport, then this may be the time to broaden this SOE regulation to be applied to all BUMD’s.

It is now too difficult for International Transparency to collect their data on BUMD’s, as this requires considerable effort to work though the various local governments. Transparency International -Indonesia has conducted a gap analysis between TRAC indicators with the SK-16/S.MBU/2012 concerning the Indicator/Parameter of Assessment and Evaluation towards the implementation of Good Corporate Governance by the SOE. The gap analysis result finds that the Ministry of State-Owned Enterprises—which has a role as the ownership entity—has not included the prohibition of facilitation payments as one of the requirements.

 

The Indonesian mining and excavation sector would appear to score well on the Transparency Index. Perhaps it may be in part that today’s mining industry evolved out of the foreign dominated Contract of Work system, where international stock markets played a strong roll in demanding certain levels of transparency. Indeed, the present mining companies that are listed on the Indonesian stock market also score high on the Transparency Index. Perhaps all SOE’s in the mining and excavation sector could list on the IDX (including Freeport and Inalum), and so form a parallel set of management norms to improve transparency.

 

Expanding ESDM role.

It took the ESDM many years, with regulations, training and threats to implement the Clean & Clear program to ensure all companies were paying their compliance fees. Now the ESDM is to embark on its Beneficial Ownership program, that again may take some time and effort to implement. Perhaps the next target is to widen the transparency compliance issue on contractors and suppliers. Indeed, all contactors to the Mining Industry are required to be formally registered with the ESDM.

The ESDM has developed regulations, training and socialization for technical staff to implement clear technical reporting (Competent Person). It would seem the next issue may be to develop regulations to educate directors and staff on transparency issues. This may come in the form of the nation-wide Integrity Management Certification program (SNI ISO 37001).

 

Future Outcome.

Improving Transparency, and particularly having the Management Certification program for directors and others, along with supplier involvement, is likely to make the mining industry more attractive for sincere investors.

Expanding the ESDM’s role for greater transparency may mean expanding the ESDM’s resources to monitor the mining industry, leading to increased budgets and manpower. As the demands of management supervision increase the miner’s overheads, so would the ESDM’s overheads increase.

These trends towards formalizing improvements in management systems may tend to make continuing in the exploration and mining industry more difficult for many of the hot money players, family companies and non-performing small players. Any player listed on foreign or local stock exchanges may have good management systems in place to make the adjustments to enter the Indonesian exploration industry. We may hope that increased transparency and anticorruption measures may lead to a more responsible exploration and mining industry.

Exploration, Mining Development in Indonesia (EMDI).

EMDI is an exploration industry association that takes note that anticorruption and transparency are among the factors affecting the investment climate for Indonesia.

The recent EMDI seminar (4 Dec 2018) included a presentation by Imaduddin Abdullah for the Institute for Development of Economics and Finances (INDEF) that included a chart from the Global Competitiveness Report 2017-2018 which rated corruption as the most problematic factor for doing business in Indonesia. Speakers at the IBIC acknowledged this perception of slow progress against corruption, and resolved more firmly to tackle corruption. Imadduddin’s presentation goes on to show that domestic investment in the mining sector has recently gained some momentum, though foreign direct investment continues to decline more rapidly than the uptake by domestic investors (source BKPM 2018).

Also, at the recent EMDI seminar, Nathaniel Adams of PT. Nusabima presented graphs sourced from S&P Global that Indonesian exploration budgets (exclude coal & iron ore) were just 14% of the 2012 level, and that most exploration budget expenditure is by foreign companies (largely for gold). Unfortunately, greenfield exploration activity has continued its long downward trend.  Nathaniel concludes that the Indonesian government is making strong progress in re-invigorating the investment climate.

Conclusion.

Much of the hard work has been done to improve the investment climate for the Indonesian mining sector, and more is coming. It is likely a revival of exploration could be led by major companies that 1) have established responsible management systems in place, and 2) can accept working in the ESDM managed environment with its anticorruption systems in place. The remaining hurdle to attract investors is to 1) encourage foreign investment, and 2) to amend the process to take up ground for exploration to be more investor friendly.