Transparent Reporting & EITI.[Coal Asia Vol.64 ]

Transparent Reporting & EITI.

Introduction.

The recent news item of local governments overstating their estimates of the rice harvest in order to gain benefits from additional fertilizer allocation, or other reasons is not a new event. There is a tendency for all government and related agencies to want to over report on performance to ensure ever increasing budget allocation, for status or to encourage promotion etc. Some NGO’s may be tempted to select their data sets to “prove” their political outlook of warming planet, species degradation, drug abuse or whatever.  Under regional autonomy the districts found it difficult to ascertain the credibility of many of the mineral & coal exploration & mining company’s resource reports. The mining regulations had anticipated this through imposing a requirement that geologists/ engineers should have at least 3 years experience. However in practice, many company reports highly overstating their resources in order to justify contractor expenses, ease ongoing permits, or attract financing. Unfortunately some were outright false reports. This questionable reporting issue highlighted the need for greater credibility in professional reporting, and has now resulted in the ESDM preference to receive reports from KCMI accredited geologists & miners. The JORC committee, VALMIN and similar institutions have evolved reporting codes, along with the concept of competent persons to support greater transparency in the private sector of the exploration and mining industry.

EITI report.

The Indonesian EITI report 2012 – 2013 (Report) was released in late 2015 by the Coordinating Ministry for Economic Affairs. The report is presented as 4 volumes in Indonesian and in English at the web site http://etit.ekon.go.id . This is the third such report for Indonesian EITI and shows an evolving format for report presentation. The report adheres to two professional standards, that of a financial audit and that of transparency. This article looks at some of the transparency aspects.

This Report introduces a new Contextual report to “provide an overview on the Indonesian extractive industry so that Indonesian society could understand better the EITI reconciliation report”. This much expanded 2012 – 2013 report is apparently more costly to produce and certainly provides much useful information. The EITI chair persons press release (25 Jan 2016) by Clare Short reflects on the evolution of EITI “from a narrow set of rules focused on revenue reconciliation to a Standard covering all aspects of the extractive industry chain”. The ongoing direction of EITI is not to impose bigger and more complex reports, but that “EITI is not an end in itself but a means to achieve reform and improve accountability in our member countries”. Such reform is to strengthen government and company transparency and accountability.

There are many similar reports that combine financial and transparency for public reporting of mining companies on various international stock exchanges. These typically adhere to the KCMI/ JORC or similar codes of report presentation. The JORC code was developed over many years wherein the most recent version has an important reporting transparency concept “if not, why not”, to deal with items not reported upon. Indeed the degree of transparency of any report can be determined to some extent by what it fails to report clearly upon. This article looks at some of the transparent aspects of the recent EITI 2012 – 2013 report in relation to the sections on coal and minerals (excluding oil & gas and distribution to the provinces), and thereby provides a stimulus to improve professional reporting, and for people to read and participate in the EITI process.

Cut Off.

The EITI reconciliation process applies a cut off for “companies that contributed 80% of revenues from corporate income tax, and companies that paid over Rp 25 billion royalty to the state”. Apparently all oil & gas producing companies are within this cut off, but all non producing companies are apparently excluded. Similarly the big miners are included, but small miners & explorers are excluded from the EITI process. Note that the first EITI report of 2009 applied a $500,000 cut-off. The current Report does not explain why the cut-off has been changed, or explain the aspect of the exchange rate. So we must ask “if not why not ” rather than simply assume the Scoping Study set such limits in order to fit a time schedule and cost structure for preparing the report

Outside the Report it understood the ESDM apparently has good records of the Clean & Clear companies that have paid their land tax (PBB) etc. Even a non reconciled list of such companies and taxes received by the ESDM would allow for greater transparency in determining 1) which companies were just outside the cut-off, 2) their general contribution towards the State and districts, and 3) the total income for the state through PBB etc would be significantly higher than the limited number of reconciled companies, 4) the broader list may encourage more people to follow and provide feed-back on the EITI process.

Balanced Reporting.

The oil & gas portion of the report provides lifting / production volumes of oil & gas, whereupon the reader may cross check product against royalty and taxes. However similar transparency of each coal & mineral company’s product is not shown.  Confidence in transparency is enhanced when we can cross check one set of data (financial) with a different set (production), and compare to other data sets (EITI, ESDM, Statistics etc).

It is also not possible to use this Report to cross check on the NGO claims of significant (56.3 million ton) of illegal coal as reported in Vol. 2 (p101). Similarly it is not possible to use this Report to see if companies producing significant amounts of minerals were overlooked, as may be suggested by the ESDM Vol. 2 tables showing Aneka Tambang production at 227,620t (2012) and 475,686t (2013) of bauxite, but a further 30 mill ton (2012) and 46.5 mill ton (2013) was produced from Riau, Riau Is, C. Kal and W.Kal by unnamed parties. The production tonnage is further clouded wherein volumes are not derived from the same data set as the EITI financial audit, as Vol 2. provides mineral tonnage as sourced from the ESDM (table 23) and Department of Statistics (Chart 20). Indeed this Report highlights that various government institutions (ESDM & Dep. Statistics) provide different volumes of coal & mineral production, reflecting a core issue of transparency in data collection and presentation.

Extractive Industries & EITI definitions

PP 26/2010 is the legal bases for EITI operation, and defines “Extractive Industries as all activities that take natural resources straight from the bowels of the earth in the form of minerals, coal, and natural gas”(Google translate). The Report is limited to the oil & gas plus mining (coal & minerals) industries. The Report acknowledges that the scope of the extracted commodities in the mining sector is vast and gives some examples that include quartz sand, limestone for cement and rocks etc.(Vol. 3 p93). However the Report excludes the industries of the cement industry, geothermal industry and water industry that are all extractive industries that fit this definition, and are likely to contribute significantly to the economy and employment. Perhaps the construction industries use of rock and sand could also be interpreted as complex minerals. We may ask why so many of these industries & extraction companies were excluded from the Report [If not, why not].

PP 26/2010 defines “Revenues earned from the Extractive Industries is all state revenue derived from tax revenue and non tax revenue that is recognized as value adder net assets sourced from Extractive Industries”(Google translate). The Report states that it is directed to the upstream industries only of exploration and ore production. However small parts of the report include audits related to refined tin, but less clear on other refined metals of nickel, copper, manganese, zircon base metals etc. The government is now emphasizing the mining industry cannot be undertaken unless they encompass the downstream smelter aspects of production. We may ask why the downstream industries were excluded from the Report [If not, why not].

Fees & Deposits.

The report reconciliates a number of well defined government fees from the mining and forestry ministries, and now includes infrastructure provisions. The Report mentioned (Vol. 3 p340) that it could not reconcile the CSR component of funds as the definition of CSR is too broad and not clear cut. This is transparent reporting [If not, why not seems to be satisfied].

The Report does not mention, nor attempt to list, the numerous small government compliance fees, such as explosive license fees, heavy equipment registration fees, expatriate manpower education fund or welder’s certification fees etc.  The report defines a cut-off for materiality reporting revenue streams as “we consider a significant contribution to be anything above 1% of total revenue of each subsector in the extractive industry”. The Report does not state these actual amounts, wherein the reader needs to derive their own calculations, being 1% from Rp 87.25 trillion is Rp 875.8 billion for 2012, and from Rp 125.56 trillion is Rp 1,225 billion for 2013. A more transparent report would state such numbers to ensure the reader did not make misunderstandings, particularly as this report is aimed at a very broad public audience. Note also the US $ exchange rate underlying some of these figures is not defined.

The Report mentions the infrastructure expenditure, but this amount is less than cut-off, and is thus not audited. The MoEMR applies a fee for some public information services (Vol 2. P53). However the Report’s cut-off precludes the total of such fees received each year, and how this fee is allocated / spent. Certainly there are calls from both the oil & gas and mining industries to free up historic data and compilation maps etc to stimulate the exploration sectors. If such fees were to be transparently audited, then the public and politicians could review the benefit of such apparently small sums verses the public good of providing more free information through the MoEMR web site. An extensive list of the numerous small government fees, and their unaudited amounts would enhance transparency and provided the public with a greater understanding of the extent the mining industries compliance.

The Report is required to inspect payment obligations including reclamation and post mining guarantees (Vol 2. P74). The Report (p75) explains “There is no publicly accessible list on the total amount of reclamation guarantee funding that has been deposited, made available by either the DG Minerals and Coal or local governments”. And ‘concluded that the monitoring of reclamation activities implemented by license holders was not adequate, and thereby information on progress in reclamation activity implementation based on plans that had been made by the license holders could not be obtained”. This is transparent reporting. [If not, why not seems to be satisfied].

Forestry.

The Report (Vol 2. p20) quotes from the Forestry Ministry that “in 2012 there were 920 thousand hectares of forest used for extractive activities and 730 thousand hectares in 2013”. The Report goes on to refer to the “Civil Society Against Mining Corruption there are 274 IUPs operating in conservation forest areas and another 274 in protected forest areas.” The Civil Societies web site, give a table showing mining permits granted in protected forest (4.1 million Ha) and conservation forests (2.1 million Ha) areas used for mining, based on 2014 research. The difference in areas poses the issue that if the Civil Societies data is more correct, then it is implied the forestry fees collected should be greater. This is a good example of transparent reporting, where the reader can cross check with other NGO sources to form an opinion of the validity of the Report.

References.

Throughout the Report there are numerous links to various web sites that compliment the Report. Unfortunately some of the links appear to no longer work or have since been updated with modified current values (eg Vol.2 p35 on revocation of IUP’s). Such reference to third party web sites is a common approach to reporting; however stricter professional reporting requires the authors to retain their reference material. This is brought out in the book The Climategate Emails, edited by John Costella (2010) wherein some climate scientists first hid, then lost their data to support their warming earth climate model. Their lack of the climate data set excluded other scientists to be able to confirm the warming model and undermined the transparency of the model. As a result various government agencies withdrew further grants to such scientists. Perhaps EITI can retain a copy of third party reference material on its own web site, and provide appropriate links for long term public access.

Format and Content.

The format of the Report is excellent, with a well set out index, definitions, appendix and logical text. The report is split up into 4 volumes, with volume 1 being an overall summary, volume 2 gives the context of the report (legal framework, governance mechanisms etc), volume 3 provides the reconciliation between payments by companies and received by government, and volume 4 provides the tables supporting the reconciliation process. The Report covers a wide range of topics, and strikes a reasonable balance between detailed information and compilation into a readable report. There is much information that can be used by a wide range of readers for understanding the Indonesian mining industry.

There are a number of clear recommendations, particularly at the end of volume 3, and there are also a number of comments buried in the text expressing concern that there was inadequate consideration for the acquisition of data etc. This reminds the reader that the editing of the Report is likely to be subject to a certain amount of political and social pressure, particularly as Indonesia works best when a group of diverse people can work together with less friction and common goals. Indeed many private company stock exchange reports appear well presented, but also need to be read with a similar consideration as to the nature of the company owners and the purpose of the report.

Other pressures bought on preparing reports are the time and budget restraints plus the human resources limitations. This is partially reflected with the number of mining companies that did not fully comply with the EITI reporting compliance, and may be reflected in the EITI scoping study that set a high level for materiality.

Conclusion.

 

• In all reports it is up to the reader to determine which parts of a report are good and not so good. How believable is this year’s prediction for the rice harvest, or how many people were employed in the mining industry etc. By looking for what the report does / does not say is often a guide to the stronger and weaker parts of a report.
• Overall reporting is improving throughout Indonesia, but it takes vigilance by the public, professional associations, NGO’s and the authorities to maintain this trend towards more transparent and complete reporting.
• EITI is clearly on the right path to encourage the principals of EITI to be incorporated in the regular procedures of the ESDM. The present plan to revise the 2009 mining law may take this opportunity to incorporate some of the EITI concepts and needs into the new law.
• Foreign investors, whether they be private enterprises or state companies will tend to implement more responsible and compliant management strategies in EITI countries, which is good for Indonesia. Domestic exploration and mining companies can more readily resist inappropriate management strategies, when EITI compliance applies.
• The Report for 2012 – 2013 is an excellent report, worth taking the time to read it, and has resulted in Indonesia’s suspension status with EITI being lifted.