LESSONS LEARNED FROM BOJONEGOROS ON TRANSPARENCY MECHANISM Good Governance for Sustainable Development BY : BOJONEGORO REGENT H. S U Y O T O Presented in the Ford Foundation Meeting on Reversing the Resources Curse Initiative Ghana, 26 August 2013

Introduction Thank you for the invitation, trust, and honor given to me, to share information and experience in developing Oil Transparency Mechanism in Bojonegoro, East Java Province, Indonesia. We all are faced with the same challenges and responsibility on preserving the earth future, finding solutions on global, regional and local issues related to exploitation of our natural resources.

OIL AND GAS POTENTIAL IS LIKETWO SIDES OF COIN BENEFITS: THE INCREASE IN LOCAL GOVERNMENT INCOME FROM OIL AND GAS SECTOR WILL HAVE AN IMPORTANT EFFECT IN DEVELOPMENT OF BOJONEGORO HIGH EXPECTATIONS ON OIL AND GAS REVENUE TO TRANSFORM FROM POOR TO RICH DISTRICT A LARGE OF EMPLOYMENT OPPORTUNITIES ENVIRONMENTAL DAMAGE, INFRASTRUCTURE DAMAGE, HAS THE POTENTIAL TO CAUSE A DISASTER PEOPLE LOST THEIR LANDS FOR THE PROJECT, CONFLICT ON EMPLOYMENT OPPORTUNITIES, CAN BE VULNERABLE TO CAUSE SOCIAL CONFLICT CREATING NEWLY RICH GROUP BUT ALSO NEWLY VULNERABLE/POOR GROUP MUST BE MAINTAINED BY THE GOOD PLANNING, ACCOUNTABLE AND TRANSPARENT SYSTEM

The year I took the office

BOJONEGORO INNOVATION A study of the oil and gas rich regions in Indonesia indicate specific problems occur: Income fluctuation, difficult to plan Neglect of the non-oil sector inefficient spending Corruption Vulnerable on social & environmental issues (conflict)

SHARE ON WHAT THE CHALLENGES THAT WE FACE? WHAT WE HAVE BEEN DOING NOW? THE FUTURE AND SUSTAINABLE SOLUTIONS

Extractive Sector Value Chain Good governance should be implemented in the whole process from the extraction of natural resources. Advocacy choose 2 focus : transparency of income/revenue and development plans Decision to extract/not to extract Awarding of contracts/ licenses Fiscal Terms Extraction prosess Trading of commodities Tax and revenue collection Development project/polici es Revenue Management and allocation PROGRAM FOCUS BOJONEGORO INNOVATION

Oil and Gas Transparency Mechanism Revenue transparency (and related information) oil and gas will make: – Maximize the revenue comes from oil and gas – Facilitate planning (usage revenues, designing policies) – preventing corruption – minimize conflicts Tax and revenue collection Development project/policies Revenue Management and allocation Oil and Gas Transparency Mechanism BOJONEGORO INNOVATION

WHY I NEED TRANSPARENCY To full fill the citizen right To reach out public participation from multi stake holder To eliminate assimetric information as obstacle of development. (Such us the of judgement and the voice of sinical) I don't want make a corruption, and making clean government I don't want get losses trust from public

Participatory Planning & Sustainable Development Sustainable Development and Participatory Planning are use for: – Ensure revenues are invested properly (ensure sustainable development) – Taming income fluctuations – Minimize conflicts, prevent social problems / environmental Tax and revenue collection Development project/policies Revenue Management and allocation Sustainable Development Planning

The Regulation (Policy) Transparency in oil and gas extractive governance (2012) Planning System and regional development (2012) Equity / investment / savings (2011) Optimization of the local economic potential / Local content (2011) Distribution of revenue-sharing funds to the village (2011) CSR governance (2011) BOJONEGORO INNOVATION

The lack of public access to basic information related to revenue sharing, such as: production rate, the amount of investment credit, cost recovery, DMO, and the Gas Tax and Document PSC / PSC (contracts. Lack of capacity and bargaining power of local governments in the lifting reconciliation forum, organized by the Ministry of Energy-SKK Migas and by the Ministry of Finance. Late payment / transfer revenue from center gov to the regions : making delays in some development programs at the local level, which impacted to bad public services Volatility of oil and gas extraction which depends on the market price is a challenge for local governments : make development planning in managing oil and gas revenues for the foreseeable future and ongoing needs. BOJONEGORO INNOVATION

BOJONEGORO INNOVATION

BOJONEGORO INNOVATION -Government take -Dues exploration and production -Pertamina Retention -The Tax (VAT, land tax) -Import Duties -Local tax and retributions -Cost recovery -Government take -Dues exploration and production -Pertamina Retention -The Tax (VAT, land tax) -Import Duties -Local tax and retributions -Cost recovery Net Split 85/15 Tax Rate 44% (tax article 2000) EQUITY TO BE SPLIT CONTRACTOR ENTITLEMENT 26,7857% GOVERNMENT ENTITLEMENT 73,2143%* CORPORATE TAX 35% BRANCH PROFIT TAX 20% 18,75% NET CONTRACTOR SHARE 15% GOVERNMENT REVENUE GOVERNMENT TAKE (NON TAX REVENUE) LOCAL GOV 15% CENTRAL GOV 85% GENERAL REVENUE ALOCATION Source: Indonesian Finance Ministry 19 3 % province related 3 % province related 6 % Cities/distric s related 6 % Cities/distric s related 6 % Othet cities/districs related 6 % Othet cities/districs related LOCAL EITI EITI

BOJONEGORO INNOVATION Multistakeholder Transparency Team Company : MCL, Petrochina, Pertamina Government: Department of Natural Resources, DPPKAD, Department of the Environment, Council Civil : NGO, Community Leader, Sector Designated by the Regents, funded by government Local transparency mechanism is expected to be integrated and mutually inline with a model of transparency in national income (Extractive Industries Transparency Initiative / EITI) The Team have duties and functions: – Requesting information/data, collecting, verification and analysis – Disseminate and publication relating data of revenue collection to public. The team also possible to make policy recommendations to the relevant stakeholders.

SCOPE OF TRANSPARENCY MECHANISM REVENUE INFORMATION & OPERATION (POD, WP&B, AFE) SOCIAL & ENVIRONMENT INFORMATION CORPORATE SOCIAL RESPONSIBILITY FUND INFORMATION Access to document / information related to oil and gas revenues : production / lifting, cost recovery, revenue sharing, profit sharing participating interest, oil taxes. Local oil and gas revenue projections : 1-5 years Analysis and policy recommendations related to oil and gas revenues Publications/reports oil and gas revenues to public Socialization environmental impact of oil and gas operations to the public in the affected area Socialization implementation of security standards and safety environment (HSE Standard) and standard to handling dangerous situations (contingency plan) from oil and gas operations Strengthening local communities on handling danger situation and handling industrial accidents Policy recommendations related to the Public Agency Synchronization: Company planning CSR programs VS government planning programs (avoid double budgeting) Socialization: CSR planning program (needs assessment, budget, objectives and program plans) Monitoring and reporting: implementation of CSR programs Analyst, evaluate and recommendation BOJONEGORO INNOVATION

CHALLENGES AND GOOD PRACTICES Strong Leadership on the implementation Consistently on policy and regulation- and its law enforcement (such us in development planning & budgeting) Building strong foundation and trust between multi-stakeholders BOJONEGORO INNOVATION

CHALLENGES AND GOOD PRACTICES Transparency is easy, only the first step, but the final aim is accountability, responsive government/company/society: – Revenue transparency issue is only the first entry step. Bojonegoro case advance the innovation into other issue: employment, environment, investment, development program and executing its programs. BOJONEGORO INNOVATION

CHALLENGES AND GOOD PRACTICES Establish the innovation is easy, but building its institutionalization is the real challenge: – Mechanism is easy to set up, but preserving the changing in behaviour such us the central government public officer, company operators, is a challenging. Bojonegoro endorse institutionalization through regulation and build broad awareness stakeholders. BOJONEGORO INNOVATION

BOJONEGORO INNOVATION