View Point: Regional governments get 10% share in new & renewed oil, gas concessions

Vincent Lingga,The Jakarta Post, Jakarta | Sat, December 3 2016 | 08:10 am

The energy and mineral resources minister is finalizing a regulation that will entitle regional governments to 10 percent participating interests in new and renewed oil and gas mining concessions in a more concerted effort to address their discontent and gain their cooperation in expediting local permits for oil contractors.

The participating interests must be given to regional administration-owned companies (BUMD) and cannot be shared with or sold to private companies. If BUMDs cannot afford to pay the participating interests the payment can be installed with the revenues derived from the shares.

East Kalimantan province and Kutai Kartanegara regency will be the first to benefit from the new regulation when the Mahakam oil and gas block, which accounts for one third of the country’s natural gas output, ends in December 2017 and the concession will be given to state-owned Pertamina oil company.

It is debatable as to whether the granting of the 10 percent participating interest would be the most effective way to enable regional administrations and local people to get the greatest benefits of oil and gas resources in their areas, given the inadequate financial management-capacity of most regional administrations.

But the new energy and mineral resources minister, Ignasius Jonan, did not want to take the risk of local political turbulence when Pertamina takes over the Mahakam concession from the French-Japanese consortium Total-Inpex later next year.

Most regional administrations still depend on grants from the central government for around 80 percent of their annual budget. And most of their financial accountability reports still get qualified opinions and, in many cases, even disclaimers, from the Supreme Audit Agency.

The government decentralized its mining licensing system in 2001, except for oil and natural gas, to regional administrations. But the law on inter-governmental fiscal relations entitles regional administrations (provincial, regency and municipal governments) to 15.50 percent of oil revenues and 30.50 percent of gas revenues.

Despite the clear-cut revenue-sharing ratio between the central government and regional administrations whose areas hold the resources, and the inadequate competence of most regional governments in financial and investment management, regional demands for a portion of the shares of resource-based companies have been mounting.

The problem is that mining operations, especially in the hydrocarbon sector which is fully controlled by the central government, sometime cause wrong perceptions and too high expectations among regional administrations and local people. Because even though it is the central government that negotiates oil concessions with companies and collects royalties and taxes, it is the people closest to the mining sites that see the dramatic changes in their environmental and economic landscape.

This is one of the main factors why the central government should seriously address the issues of regional governance of natural resources through better-designed policies and continuous capacity-bulding programs, not simply with ad-hoc measures to assuage local disillusionment.

Over the past decade, especially after the fall of the authoritarian Soeharto administration in 1998 and the launching of regional autonomy in 2001, many regional administrations have maneuvered to acquire a sizeable portion of the assets of resource-based ventures in their areas.

Just a few examples of conflicts over the past few years.

In May 2011, East Java Governor Saifullah Yusuf threatened to close access to the West Madura Offshore oil and natural gas block in a strong protest against the central government which turned down the demand of the provincial administration for 40 percent of the shares of the oil and gas field.

Earlier in April 2011, the West Sumbawa regency administration sponsored massive demonstrations against the US$3.8 billion copper and gold mine of PT Newmont Nusa Tenggara (NNT) because it was not allowed to acquire an additional 7 percent of the mine.

In May 2013, the local administration of Tanjung Jabung Timur, Jambi, sealed off 14 of 140 oil and gas wells of PetroChina for several weeks due to disagreements over the amount of licensing fees and corporate social responsibility.

During the democratic era, local communities often use the freedom of expression to make further demands of resource-based companies in their areas, not necessarily because of the companies’ past wrongs but rather they can be more assertive now. They are often prodded and supported by civil society organizations or NGOs.

NGOs represent a crucial link in the new dynamic emerging around the mine sites because they have the time, commitment and financial resources to persuade local people to destabilize mine sites. But some NGOs also have a hidden agenda, using mining companies as their political or economic footballs.

Natural resources are indeed a window of opportunity for economic development. In principle, revenues derived from their exploitation can help alleviate the binding constraints that regional administrations often face when attempting to transform their economies, boost growth and create jobs.

Hence, when members of local communities do not feel like they are benefiting from a national extraction project, conflicts can result.

Unfortunately, the design of power or revenue sharing system has not adequately been supported with institutional capacity building for regional administrations. The decentralization of policy making seemed to have been done in a reactionary manner due to political pressures soon after the fall of the Soeharto, thereby creating opportunities for conflicts and corruption.

Capacity gaps have emerged as there is a sudden demand for extractive expertise in more locations throughout the country.

While some studies have shown real income levels rose in communities living closest to mines compared to other communities in the same country, other studies concluded that local economies were harmed by sudden large increases in public spending.

The National Resource Governance Institute (NRGI), a non-profit organization, has concluded after a series of studies and surveys in several resource-rich countries, including Indonesia, that while many of the good practices required at the national level do matter and apply at the subnational level, one cannot simply cut-and-paste national level solutions into subnational resource governance challenges.

NGRI research has shown that the large, volatile and finite nature of resource revenues can distort economies and lead to wasteful government spending.

The fundamental goal of the governance by regional administrations of natural resources is to transform their shares of the non-renewable resources into assets — human and financial — that will generate future income and support sustained development, especially in coping with weak commodity prices and reserve depletion.