Transparency – as clear as mud.

Introduction.

I recently conducted a simple mineral processing test to gauge the rate of settling for waste water from a mineral enrichment plant. The murky mixture of silt, clay and water settled in a graduated glass cylinder with the mud quickly falling to the base, much of the mixture became cloudy, while the top water gradually became transparent. With steady conditions, the separation process continued with the amount of transparent water increasing. Any disturbance of the steady conditions tended to stir up the mixture, decreasing the transparency. I find this to be a good analogy of our exploration and mining industry. There are outright illegal muddy players out for a fast buck. There are some questionable players out there who feel the “grey” legal and administrative conditions are suited to their cloudy mode of operation. Fortunately there are patient players who apply good corporate governance and encourage transparency to support a responsible industry.

The Cambridge business English dictionary defines Transparency as “a situation in which business and financial activities are done in an open way without secretes, so that people can trust that they are fair and honest”. The dictionary goes on to give examples of the term transparency in matters related to privacy, accountability, work practices, marketing, stakeholders, ethics and well being. These examples are particularly pertinent for Indonesia’s recent history where Corruption, Collusion and Nepotism (KKN) are still foremost in the “peoples” minds. We can aspire for Indonesian laws, regulations and practices to incorporate practical provisions to enhance transparency.

Where is EITI going?

I recently visited the Extractive Industries Transparency Initiative (EITI) Jakarta office located at Kementarian Negara BUMN building, 18^th floor on Jl. Medan Merdeka Selatan No. 13. EITI come under the coordinating ministry for economic affairs and are jointly funded by Indonesia and the World Banks multi donor fund. Essentially EITI collect the tax and royalty data from the mining industry (oil, gas, coal, minerals) and compare that with the funds actually received in banks for the government. This is then audited by an independent party and the report published on the EITI open web site such that the public can then take various informed actions.

I had a pleasant chat with some of the EITI management wherein they confirmed the Indonesian affiliation was formally “suspended” due to the incomplete 2012-13 Indonesian report. Their current schedule is to submit the first draft report for the 2012-13 periods to EITI international in October 2015. If they fail to meet this deadline, then Indonesia may be expelled from the international EITI, with subsequent loss of international credibility. Such a loss of credibility may further impact on Indonesia’s credit rating, and certainly detract from responsible companies seeking to invest in Indonesia, though less concerned players may be attracted!!!

The EITI management indicate that they have collected about 30-40% of the data to date, but are behind schedule due to the Lebaran slow down. Some of the operational difficulties include;

• Lack of enthusiasm from the mines department, wherein their administrative staff is focused on a number of prominent public issues, and EITI is apparently given a low priority rating.
• Some branches of central or regional governments have not yet adequately committed to, or implemented their obligations to support the EITI program, or are reluctant to correspond with EITI.
• Difficulty to have reliable access to some mining companies, particularly as a number of IUP companies have out of date or false contact details (including those with C&C status).
• The authority to control IUP’s has moved from the Regions to the Provinces, however much of the data is still with the Regions, with little cooperation between some of the parties over such issues.
• Letters of authorization from the mining companies to allow EITI access to government tax records is slow, and sometimes complicated by changes of directors in the mining companies, or that some companies of 2012-13 are no longer active.
• The decline in commodity prices has resulted in demoralization of some of the companies plus changes in management with little incentive to comply with EITI requests.

Discussion also drifted towards popular gossip, with speculation that some very rich and politically well connected domestic players may not fully support the EITI process. Such player’s ultimate objective may be short term financial gain along with long term increased control over the industry, through broadening their business and weakening government compliance.

The EITI team appears to be worn down by the bureaucracy of administration, due to the tardy interaction between the different governments entities associated with the operation of EITI. Also the EITI seems to know little about the coal mining industry, and even less about the mineral mining industry.

In discussion I suggested;

1- That the EITI web site ( www.eiti.ekon.go.id  ) could be improved with a monthly progress reports including a matrix of companies and process steps, plus government agencies and process steps. This may allow the public to become more involved with the EITI process, and therefore become more supportive of transparency. Perhaps monthly publication may encourage company shareholders, directors or staff to more openly support EITI compliance within their own company, or NGO’s and communities to become more active in urging their local government towards timely compliance.

2- That the EITI may not need to get complete compliance from all target companies and agencies, but the report may be produced on time, including clearly displaying the incomplete aspects – to reflect an appropriate level of compliance. Non-compliant companies or agencies could be “name & shamed” while compliance companies and agencies can be supported.

Furthermore ;

1- The EITI may take this opportunity to lobby such that the proposed revisions to the mining law include provisions to streamline ongoing IETI compliance. For example all renegotiated COW’s, annual renewal of C&C plus new IUP’s include signed agreements that provide for the companies A) commitment to compliance with the IETI process and  B) prior approval to access tax & royalty data from the appropriate government agency.

2- The EITI could become more active in the coal & mineral mining sector, attending industry functions, preparing articles for a wide range of publications, including Petromindo’s Coal Asia magazine etc.

3- There is some speculation that some of the recent successes of the Philippines nickel raw ore exports may actually be vessels first visiting illegal Indonesian nickel mines, and then passing by Philippine mines to re-label the cargo’s origin before heading for export. If EITI was widely adopted throughout ASIA, then such practices may be more readily detected.

ASEAN and Transparency

The ASEAN Capital Markets Forum (ACMF) Implementation Plan introduced the Corporate Governance Scorecard in 2011 for its member nations of Indonesia, Malaysia, Philippines, Singapore, Thailand, and Viet Nam. The scorecard hopes to raise corporate governance standards of publicly listed companies (PLCs) in ASEAN countries and increase their visibility to investors. The scorecard is premised on the OECD Principles of Corporate Governance of rights of shareholders, equitable treatment of shareholders, role of stakeholders, disclosure and transparency, and responsibilities of the board. The assessment of PLCs through the scorecard relies primarily on information from annual reports and company websites plus other sources of information.  Only information that is publicly available and easily accessible and understood is used in the assessment. To be given points on the scorecard, disclosure must be unambiguous and sufficiently complete. To be assessed and ranked, most of this information should be in English. The scorecard is silent on the number of Public Listed Companies (PLC) that were excluded from the survey.

The nature of public information varies with each country. The Indonesian National Committee on Governance Policy revised the local standard of good corporate governance in 2006. In 2013, the Financial Services Authority (OJK) of Indonesia in cooperation with various parties, such as the National Committee on Governance Policy, the Indonesian Institute for Commissioners and Directors etc, developed a corporate governance road map of Indonesia to further improve the country’s corporate governance framework. The road map, which will begin implementation in 2014, various aims include the “strengthening the corporate governance framework and regulations”.

The 2013-14 scorecard summarized Indonesia’s corporate compliance “as an encouraging improvement over the previous year, however the implementation of global practices in corporate governance is still a challenge for the future. Indonesia’s average achievement level of 54.55 points is still unsatisfactory compared to other participating countries. The concentrated ownership commonly found in family-owned PLCs appeared to contribute to the poor disclosure of ownership structure. The quality of annual reporting by some PLCs was good. Disclosures of key risks, financial indicators, and board meeting attendance can be considered excellent. However, companies still faced challenges in disclosing whistle-blowing, biographical details of directors” etc.

Transparency and Government.

The Constitution Chapter 14, Article 26 on the National Economy and Social Welfare clause states “The land, the waters and the natural resources within shall be under the powers of the State and shall be used to the greatest benefit of the people.” It is clear that the greatest benefit of the people is best served through a high degree of transparency to the “people”, rather than reports to the Government on behalf of the people. This is confirmed with the Mining Law (4/2009) principal and objectives (Article 2) statement “Minerals and/or coal mining shall be managed based on the principals of (c ) participation, transparency, and accountability”, and the 2015 draft new oil and gas law includes similar principals of transparency for the exploration, exploitation and business processing.

However, we find little implementation of the objective and principals of transparency within the body of the Mining Law. Article 10 on the stipulation of the WP “shall be carried out in a transparent, participative and responsible manner”. Article 85 requires the Government to announce the plan on mining for special mining areas & licenses (WIUPK ) to be publicly announced. Article 105 (4) provides for the “Corporate Body …. shall submit report Minister, governor or regent/mayor on sales proceeds of excavated minerals and/or coals in accordance with their authority”, wherein the next step is to make such information available to the public. Article 65 on setting out the business license requirements is typical of much of the law, wherein compliance is required with administrative, technical, environmental and financial requirements where such provisions shall be later regulated by government. Transparency is left to be implied in the cloudy pages of implementing regulations. Similarly Article 95 on the obligations of IUP & IUPK holders lists good mining practices, finance in according with Indonesian accounting system etc, but does not specifically support the principal objective of transparency. Chapter 19 on development, supervision and public protection does not specifically include the concerns of transparency as a means for the public to gauge the Government’s performance of its obligations.

The proposed revision of the Mining Law is expected to formalize the shift of responsibility for monitoring and implementing the mining law from the Regents to the Provinces. Much of the technical, financial and administrative data associated with the thousands of IUP’s lies with the Regents, and transferring such data to the Provinces is likely to be a tedious affair. Under the Mining Law (Article 129) the Regents are entitled to a share of the regional tax, and non tax revenues. We may expect the clean Regent governments to fully support greater emphases on transparency, while the “cloudy” Regents may be less supportive of transparency, and Regents that strongly oppose such transparency need to consider their reputation does not turn to mud!

The draft new oil & gas law is proposing the State Owned Enterprises (SOE) of Pertamina and other Government agencies have effective control over upstream (exploration and production) and downstream (distribution and marketing) aspects of the oil & gas industry. The “people” of Indonesia, as the ultimate shareholders of such institutions, need the new laws and regulations to include safeguards through public transparency to counter the tendencies for Corruption, Collusion and Nepotism (KKN) in such a closed business environment.

Recommendation;

The apparent misappropriation of funds by the past director of Berau coal is one of several examples of poor corporate governance issues that have severely reduced Indonesia’s reputation, and the reputation of the Indonesian mining sector. The large number of IUP’s that did not achieve C&C status may in part be due to such company’s poor corporate compliance, included possible cases of false addresses, puppet directors etc. The mining law makes specific reference to compliance with land rights, environment and other non core exploration and mining activities, however corporate compliance requirements (Mining Law 4/2009 Article 65) are typically referred the implementing regulations. The revision of the mining law may take this opportunity to review and include aspects of transparency compliance into the mining law, to provide a stronger base for good corporate governance and clean Government.