Which Way Forward for EITI.

Which Way Forward for EITI.      (Vol 99)

Introduction

The Extractive Industry Transparency Indonesia (EITI) produces an annual report under the Indonesian coordinating ministry for economic affairs (MINCO) that reconciles taxes and fees paid by the companies with those received by the State. This applies to the oil, gas, coal and mineral mining sectors. The EITI reports, along with other EITI news can be found on their web site eiti.ekon.go.id/en/  The most recent report covers the annual year of 2016 and is presented in 4 volumes each of Bahasa and English. The purpose of the report is to provide the public and institutions with detailed information on the mining sector, and thereby hope to stimulate the public to understand the role mining contributes to the district and the nation. The report also provides detailed background on the mining regulations and factors influencing the industry. The 2016 report is planned to be formally socialized in late February – March 2019 (after the Presidential election debate on mining).

This article seeks to support the ongoing development of the EITI program, through encouraging bureaucratic support and expanding the EITI’s scope of work to include recent ESDM regulations. The EITI program and its reports are to be congratulated and supported by the mining industry, government bodies and NGO’s. The EITI program has provided a platform of credible independent transparency for the Indonesian mining industry.

What is EITI?

EITI is set up under Presidential Decree No. 26 / 2010. The multi stakeholder group “Transparency Team” is made up of a Steering Team (comprised of various ministries), an Implementation Team plus a Secretariat. The stakeholders are Government (Coordinating Ministry of Economic Affairs, Ministry of Energy and Natural Resources, Ministry of Home Affairs and Finance and Development Supervising Agency), along with Civil Society Organizations (Publish-What-You-Pay that also represents some 35 NGO’s) plus Companies and Associations (PT. Pertamina Peresro, Indonesian Petroleum Association, Indonesian Coal Mining Association, and Indonesian Mining Association).

Delays.

In 2013 the first EITI reconciled report (for the year 2009) was welcomed to Indonesia with a Coal Asia article by this author. Since then, EITI have been catching up on the backlog of annual reports, but the 2016 annual report (6^th report) appears to have run into delays. The final 2016 report was issued at the end of 2018, close to the two-year delay limitation for EITI’s international compliance.  One would expect that the learning curve is past, and that giant strides within the ESDM to systematically computerize data and improve compliance issues would have made EITI reports faster, broader and thus more pertinent.

It seems one principal cause of delay in preparing the EITI reports is the messy bureaucracy supporting this great EITI program. Very simply; – The EITI body prepares a work plan and budget towards the end of a calendar year for the following years independent audit activities. The ministry of Finance and other bodies then take several months to adjust and approve the program. Around June – July of each year the Government Audit Agency presents an independent financial audit report on about 1,600 – 1,700 mining companies (Laporan Keuangan Pemerintah Pusat – LKPP) of the previous year’s non-tax income from royalty, land tax etc. The EITI secretariat then prepare a scoping report to determine the cut off point for companies to be included in the EITI reconciliation program. For example, the 2016 reporting year’s operation budget allowed for the report to cover only 112 companies that contributed about 94% of reported non-tax income. This is followed by a time-consuming public bid to select an independent auditor for that year’s work program. Then the EITI group prepare the data, that includes individual company letters seeking the approval for the release of tax data from the Government, often with slow response time. Then reconciliation is undertaken, with a certain amount of correspondence / interviews with companies to clarify their reporting. The report is scheduled to be released in the last quarter of the work year.

Perhaps this slow process could be streamlined further by appointing one independent auditor for several years, subject to a fast-annual review process. Another approach to speeding up the process could be for the ESDM to include a letter as a compulsory prerequisite for the RKAB annual process, wherein the letter would authorize in advance for EITI to access company tax records from the Government. Another approach may be for company reports to include additional tables compatible to the updated EITI review format requirements.

Another structural cause of delays and inefficiency is that so many steps require public service action, wherein each meeting, or each year there is a change in the civil servant assigned to some part of the EITI process. These changes can be due to changes of such individual civil servants roll or conflicting schedules with other duties etc. The new civil servant attending to EITI matters on an ad-hock bases is typically not familiar with the EITI program and so their effectiveness can be reduced. Similarly, the civil servant’s personnel may also change, wherein there is lost continuity in managing the EITI process. Stronger commitment and coordination need to be implemented to provide greater continuity to implementation meetings and processes.

The 2016 EITI contents.

Executive Summary (volume 1) makes a number of suggestions to improve transparency, including 1) Contract disclosure (PKP2B & COW) following the Central Information Commission (KIP) decision, 2) The ESDM One Map does not disclose sufficient details on tenement issuance details, 3) provide beneficial ownership data. The summary discusses a number of ongoing challenges, including beneficial ownership, share divestment as well as oil & gas issues, SOE activities, the relationship of the extractive industry to national development, community development and State management of the revenues from the resource sector. The eighth chapter makes a number of recommendations to improve transparency related to beneficial ownership, contract disclosure and further studies on strategic issue of the extractive industry.

The contextual report (Volume 2) sets out government regulations and industry practices that support the extractive industry.  The reconciliation report (Volume 3) sets out information on the data components and reconciliation process.

The attachment of reconciliation report. The volume 4 – Table 1 revenue stream of coal companies pre and post reconciled financial records of Rupia and dollars includes Royalty, Land Rent, Corporate Income Tax, Land and Building Tax, Dividend and Fee transport. This last item of fee transport seems mainly related to the State rail company (PT. KA) serving PT. Bukit Asam.

The volume 4- Table 2 Revenue Stream (not to be reconciled) lists the Rupia, US Dollars associated with the following; – Local taxes and levies, Direct payments to the local government, Corporate social responsibility in kind, Corporate social responsibility in cash, Infrastructure provisions, Forestry fee, Reclamation guarantee fund, Post mining fund. The Table 2 continues with units in thousand tone with Rupia / dollar value for Production volume, Domestic selling volume, export selling volume, province selling volume, DMO coal and other payments to state owned entities.

Big Numbers. “In Central Government Financial Statements (LKPP) 2016, state revenues from oil and gas and mineral and coal sectors contributed Rp159.38 trillion or 10.24% of total state revenues, consisting of revenue from oil and gas sector of Rp107.29 trillion (6.90%) and revenue from mineral and coal sector amounting to Rp52.54 trillion (3.40%).”

“In 2016, the mining export contribution to the total national export was quite significant, amounting to 21%. The mining export was dominated by the export of oil, gas and coal. Oil and gas exports contributed around 8% of the total value of national export while the value of coal export reached 10% of the total value of national export.”

Further considerations.

The rapid development of many regulations may bring up considerations that are not yet incorporated into future EITI scope of works. Perhaps future EITI annual reports may include; –

1. DMO quota transfer mechanism (quota trading). Since the recent 2016 EITI report, the new regulations require each coal company to supply 25% of their production as the Domestic Market Obligation (DMO). Trading in DMO quotas is now formally to be “approved” by the ESDM, wherein there should be a record of tons and sale price along with seller and buyer details. This type of Ministerial prior-approval system may attract misconduct. [Jakarta Post 26 Nov. 2018 – on similar B20 policy matters, “This kind of system, the KPK said, is prone to misconduct”]. Implementation of the regulation may see the ESDM’s approval process being distorted into a system of intermediate broker with commission. The potential broker is presumed to make a profit upon which various taxes should apply. Perhaps the EITI system could reconcile such ESDM “approved” DMO seller & buyer trades, and so reconcile such income & costs, along with identify any middle men that should be properly registered and declare their income and tax.

The trading of DMO quota may also a form of wealth transfer, increasing operational costs (buy DMO quotas) in one mine with reduced profit tax for the district, while increasing the profit (sell DMO quota) in another mine with accompanied increases of tax for that miner’s district.

Historically PT. BA has enjoyed preferential arrangements for selling a very large portion of its coal into the domestic market. The recent changes to the DMO policy (volume & discounted price) now enable PT. BA to use its market position (15% of excess DMO coal – see Coal Asia Vol 98, p31) to influence the price of DMO quota prices and so possibly make a profit of more than the discount to PLN and others.  PT. BA and the ESDM could be considered as having mutual beneficial owners, wherein the International EITI may consider such activity with concern.

2. The limestone tenements come under the management of the ESDM, though most of the “value adding smelting” of the clinker and cement industries come under the minister of industry. The limestone/ cement industry has a substantial business footprint on the “extractive Industry” that could be incorporated in future EITI reviews.
3. Broaden the base to include all tenements with RKAB for production status. This may expand the EITI reconciliation from a hundred to thousands in the coal, mineral and rock sectors. Note that all oil producing companies are included in the EITI program. The ESDM and Finance ministries new computer systems should now be able to handle these many tenements. Within the present limited net of only top companies called upon to be EITI compliant (about 80% of coal production), there are some companies that do not provide complete data and are identified as non-reconciled. Note the November 2018 statement of KPK (deputy chairperson, Laode M Syarif) in the Beneficial Ownership conference was reported as that” about 24 % of (all) mining companies do not have tax numbers and their ownership is unknown. They have debts of around Rp 23 trillion….” This would suggest that mining companies that fall under the EITI cut off parameters (about 20% of coal production) have significant revenue that should be reconciled. We may expect that in the first years to include all RKAB production companies will see many companies not able to fully comply, but this approach then incentivises the EITI and associated Ministries to gradually bring such companies into EITI compliance. The overall financial reconciliation is only part of the objective to advance Indonesia. A broader compliance achievement for all mining companies would be more significant for the “people” in remote mining areas. “Stay small and stay under the radar” should not be a miner’s business strategy.
4. Include all Provinces. At present the EITI coal and minerals program applies to about the largest 100 companies. These are typically registered in the Central Mines Department (mostly with some foreign shareholding) and only 3 oil rich provinces – Riau, East Kalimantan and East Java.

The relationship between the Centralized government (stationed in Jakarta) and the rest of Indonesia is often one where the Provinces feel less equal to Jakarta. This inequality started  in 1810 when the Dutch Governor General Daendels sold land that rightfully belonged to reigning kingdoms to fund his defence of Java against the British. Regional Autonomy took great strides at the end of the Suharto era. Today we see the remote provinces objecting through the Ombudsman of the ESDM (Central Government focus) in selling the provinces nickel concessions to Jakarta based SOE (Aneka Tambang). There is an ongoing need for the Provinces to feel that they are an equal party to the nation of Indonesia. One of the fundamental drives behind the EITI program is to increase transparency in the provinces, and so continue a broader inclusion policy. The ESDM has recently recognized this inequality, and provided increased human capital in each province with some 1,000 mines inspectors for all of Indonesia. It now requires commitment by the Coordinating Ministry of Economic Affairs and other ministries to bring equality of transparency through the EITI process to the provinces.

The EITI multi stake holder group could; –

• Start this broadening-to-all-miners process by listing on its web site details of the 1,700 mining companies included in the LKPP financial report of the Central Government. The EITI’s formal scope of work could then have a policy to gradually increase the number of companies from around 100 to the full 1,700 over a period of a few years.
• Start with pilot programs to introduce EITI into several key mining provinces. The first issue would be to determine who would provide a budget at the provincial level. Then have clear target to include all provinces in the EITI program over a set time frame.

5. Faster completion of EITI report should be considered by the Coordinating Ministry for Economic Affairs to be more relevant for the public seeking transparency and responsible management. A slow (2 year) delay in publishing an EITI report gives poor mining companies time to manage improper business activities, or to close down and disappear before EITI reconciliation can be published. The present declining coal price of low CV coal may see some mines mothballed and staff lay-offs that may impinge further upon good EITI reporting processes. The timely completion of the EITI report within one year could be a larger factor in the Coordinating Ministries for Economic Affairs performance indicators (KPI).
6. PLN is now acquiring coal mines with a publicly stated intention to produce coal “at cost” for lowering their fuel buying costs. If this policy is applied, then we may expect such PLN coal companies will have a form of price transferring that leaves no profit tax for the mining district. Perhaps future EITI reports could specifically review PLN coal mines, just as it specifically reviews the PT. BA – KA relationship.
7. Smelters are now a compulsory part of mineral mining, and many such smelters are licensed under the ESDM. There are long standing complaints from some nickel ore sellers that smelters are not paying a fair international price, suggesting a form of wealth transfer from miner to smelter owner. Perhaps future EITI reports should include various aspects of the smelter industry to improve transparency and ensure good fiscal & tax practices in the smelter industry.
8. Export Insurance is now compulsory for coal, wherein this industry may now come under the EITI scope of Volume 4, Table2 of compulsory non-government fees, similar to community development etc.

Nationalism and EITI.

The ESDM has adopted a policy leaning towards nationalism. One obvious sign are the divestiture programs (Freeport now at 49%). A subtler form of nationalism is reflected by the ESDM’s declining to adopt the KCMI professional accreditation system that is recognised world-wide under CRISCO. Instead the ESDM has developed its own ESDM professional accreditation system. The possible threat to EITI Indonesia may be for MINCO to use its new computer-based system and linkages to the ESDM, and other departments, to develop an in-house reconciliation system, and to then squeeze out the independent global EITI system. Such a potential lack of true independent oversight may be a step backwards for an open Indonesian democracy.

It is understood that the EITI secretariat operational budget for 2019 has been reduced by about 20% from the 2018 operational year. There is also some talk that the EITI office will be moved. There is some talk to reduce the number of companies reviewed under the EITI program from around the top 100 companies to the top 10 companies only. Such an administrative down grading trend is a potential move towards squeezing out the EITI.

Prior to the fall of Suharto, Indonesian saw a marked increase in the number of NGO’s reflecting the educated communities concern that the Government was not meeting the “Peoples” various needs or expectations. We are again seeing a growth in mining and energy related NGO’s and similar informal groups. This trend reflects the community’s pre-election concerns over the future direction of the ESDM, and also shows that Indonesia’s democracy is healthy. The well-functioning EITI is a reflection of a transparent democracy in Indonesia.

The World Bank and a number of high-profile industry leaders championed the formation of the EITI, but now many of these figures are in retirement and the World Bank has stepped back. The EITI needs to find new champions to promote, support and defend the EITI going forward.

Conclusion.

The EITI reports are fascinating and highly recommended reading for all those associated with the mining industry. The EITI reports contribute significantly to the perception of transparency in the mining sector, and so must add to the attractiveness for responsible companies to invest in the Indonesian mining industry. The EITI should be encourage by all parties to improve and expand the roll of the EITI program.

The ESDM has made great effort to spread the wealth generated by mining to the “People” through various means, such as cheaper DMO coal, international freight insurance, B20 fuel etc. The Coordinating Ministry for Economic Affairs could broaden the balance sheet through expanding the number of miners included in the EITI reconciliation process, and respect the “People” by bringing EITI to the provinces.

Which way forward – Will EITI Indonesia shrink, continue unchanged, or grow.