EITI Scoping Study - All Documentsdocuments.worldbank.org/curated/pt/613591468025507438/... · 2016-07-13 · 3. Once a country has gone though all the steps above, it may be deemed

DRAFT

Implementing the EITI in Indonesia

EITI Scoping Study

David W. Brown

EITI Senior Adviser, Indonesia June, 2008

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Executive Summary

Indonesia is considering becoming a signatory to the Extractive Industries Transparency Initiative (EITI), an international initiative voluntarily entered into by resource rich countries. Governments that sign up to the EITI require firms operating within their jurisdiction to report the amount of oil, gas and mineral revenues that they have conveyed to government, and also require government agencies to report how much of these revenues they collected from these firms. The reporting, comparison, and dissemination of this information is overseen by a multi-stakeholder committee made up of government, civil society and companies. This scoping study has been written to assist the government officials who would lead the EITI in Indonesia, should the nation elect to join the Initiative. It is also intended for oil, gas and mining companies with operations in Indonesia, and interested Indonesian citizens, whose full and equal participation would ultimately be required in order for the Initiative to succeed.

More than a year of intensive consultations with Indonesian stakeholders shows that they have developed a significant appreciation of the benefits that would flow from EITI implementation. These benefits include: the natural leadership of the Initiative that would be assumed by Indonesia were it to join the EITI community; improvements in the oil, gas and mining investment climate; revenue enhancement and improved public resources management; decreased corruption; increased trust between various elements of Indonesia’s state, business community and civil society; improved government access to finance capital; and the advantages associated with meeting the global standard on transparency and accountability in resource-rich countries. However, there are also challenges that Indonesia would have to overcome to successfully implement the EITI. These include: the technical challenge of keeping track of Indonesia’s largest extractive industry revenue stream - production sharing oil and gas; overcoming residual suspicions that EITI is an initiative of foreign origin; learning to engage in new ways of working across agencies and with the private sector and civil society; dealing with confidentiality provisions now written into Indonesian law. The report identifies the largest extractive industry revenue streams that could be the most appropriate candidates for inclusion in an Indonesia EITI program. These are: production sharing oil and gas, Domestic Market Obligation oil, corporate income taxes (paid by all extractive sectors – oil, gas, minerals and coal), branch profit taxes (paid by oil & gas sectors only), Value Added Taxes (paid by all extractive sectors), Withholding Taxes (paid by all extractive sectors), import duties (paid by all extractive sectors), and mineral royalties (paid by the mineral and coal sectors only). More information on these and the remainder of known revenue streams conveyed by extractive industries producers to government is available in the World Bank report, Understanding Revenues Paid to the Indonesian Government by Oil, Gas and Mining Companies. EITI is ordinarily implemented by a National Multi-stakeholder Steering Group. The most likely scenario is that the group would be led by the Coordinating Minister for Economic Affairs, who would be assisted in this role by the Minister of Energy and Mineral Resources and Minster of Finance. Other members in the group from government could include the heads of those sub-agencies and government agents who actually receive or handle large extractive industry revenue flows. This includes: the Executive Agency for Upstream Oil and Gas Business Activities’ Division for Economics, Finance and Marketing; the Ministry of Energy and Mineral Resources’ Directorates General of Oil and Gas and of Minerals and Coal; the Ministry of Finance’s Directorates General of Budget, Tax, and Treasury, and the National Oil Company’s Overseas Marketing and Refineries Divisions. Representing industry could be the heads of the Indonesian Petroleum Association, the Indonesian Mining Association, and the Indonesian Coal Mining Association. Consistent with international best practice, civil society organizations could be allowed to select their own representatives to serve on the Steering Group. Determining the precise scope of the EITI process will ultimately be the responsibility of the Steering Group. However, this report makes some recommendations. EITI in Indonesia could cover both the

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oil & gas and minerals & coal sectors. It could focus on the largest revenue streams, specified two paragraphs above. It could be most useful if revenue information were reported and published in disaggregated form (with each major type of revenue stream conveyed to the government by each firm both reported and published). Revenue distribution from central to provincial and district governments could also be published, at a level of detail that matches that used for national level revenue flows.

With respect to timing, once EITI is endorsed by government, a figure to lead the process (like the Coordinating Minister for the Economy) emerges and/or is appointed, and operations of a Steering Group receive regulatory sanction, from that point forward it would be reasonable to expect that it would take two to three years for Indonesia to complete a first reporting, reconciliation and publishing cycle. Various institutions within government have shown signs of wanting to lead the EITI or provide support. The Anti Corruption Commission is overseeing the drafting of an EITI Presidential Regulation, which it is hoped would be put into force, although it is not the Commissions intention to actually lead the Initiative in Indonesia. The Ministers of Energy, Finance or the Coordinating Minister for the Economy would all be appropriate figures to champion/lead the process.

With respect to financing the Initiative, it is always hoped that implementing states will pay for implementation. But in practice this does not often happen. In general, it is the international community that tends to step up to pay for the first round of reporting, reconciliation and publication. The international community has demonstrated in various ways that it has high hopes for Indonesia’s implementation of the EITI, and widespread financial support is expected to materialize to ensure that the nation has adequate resources at its disposal in order to fully succeed.

Some in government ask whether Indonesia needs to join the EITI, in view of the fact that a degree of reporting and auditing of extractive industry revenue streams by government already takes place. It is true that in Indonesia that some oil, gas and minerals benefit streams are reported by some producers to some government agencies and that this information is sometimes made public in a highly aggregated form. But a great deal more could be done to disclose the variety and amounts of taxes, royalties and production sharing conveyed by oil, gas and mining firms to government. With respect to auditing, many government agencies audit many companies. But most of the results of these audits are secret, and standards and accuracy are not guaranteed. In summary, this report suggests that Indonesia could benefit greatly from implementing the EITI. The implementation of EITI would compliment existing government initiatives, and would yield substantial benefits in terms of enhanced accountability, an improved investment climate, and a more informed dialogue and higher levels of trust between stakeholders regarding resource revenue management.

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1.0 Introduction

The Extractive Industries Transparency Initiative (EITI) is an international initiative voluntarily entered into by resource rich countries. Governments that sign up to it require firms to report the amount of oil, gas and mineral revenues that they have conveyed to government, and also require government agencies to report how much of these revenues they have collected from these firms. The reporting, comparison, and dissemination of this information is overseen by a multi-stakeholder committee made up of government, civil society, and companies. EITI is designed to enhance the investment climate in nations that implement it, and ensure that more public funds are available to promote development. It is also intended to combat the “resource curse,” whereby the discovery and production of oil, gas or minerals may in some countries further impoverish them, because of the economic, political and security imbalances that accompany such processes. The notion that extractive firms should publish what they pay to governments arose from various international civil society organizations at the turn of the millennium. Building on that idea, then-UK Prime Minister Tony Blair launched the EITI in 2002, adding some additional ingredients - that governments should also publish what they receive from extractive firms, and that the two sets of figures should be cross-checked. The intended audience for this report is Indonesian government officials, who would be the ones to either directly decide, or else contribute to a decision, on whether or not Indonesia will join the EITI. The report is also intended for oil, gas and mining companies with operations in Indonesia, and interested Indonesian citizens, whose full and equal participation would ultimately be required in order for the Initiative to succeed. 1.1 What EITI entails The core of the EITI is the reporting-reconciliation process, which at its most simple entails: 1. The submission of templates by each oil, gas and mining firm, including those that are state-owned, reporting the amount of all revenues paid to, and all production shared with, government. 2. Submission of templates by each relevant government agency reporting how much revenue and/or volumes of product it collected from each oil, gas or mining firm. 3. Hiring of an independent reconciler to crosscheck the figures in (1) & (2), and identify and explain any discrepancies. 4. Publication of the results of (1), (2) & (3). 1.2 Institutional processes for EITI at the country level Implementation at the country level entails three stages. At the first stage, the country shows interest. The second stage starts with the achievement of candidacy and entails working toward full compliance. The third stage marks the achievement of full compliance. 1. With respect to showing interest, steps taken include the host government:

Publicly signing up to EITI, usually at the Ministerial level or above. Committing to work with civil society and companies on EITI implementation. Appointing a senior individual to lead EITI implementation. Publishing a fully costed work plan containing measurable targets, and a timetable for

implementation.

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2. With the achievement of the steps above, the country reaches candidacy. At that point, additional steps will be taken by the country to achieve full compliance with EITI. These steps would include, but not be limited to, the following:

The establishment of a National Multi-stakeholder Steering Group (SG) with appropriate regulatory backing.

The augmentation of government & civil society skills and knowledge, so as to enable them to fully participate in EITI.

The execution of the reporting-reconciliation process (see Section 1.1 above). The making public of the results of the reporting-reconciliation process, supported by a

communications program. The bringing in of an external validator two years after assuming candidacy, and every two

years thereafter, to evaluate progress.1

3. Once a country has gone though all the steps above, it may be deemed by validators to be fully compliant with the EITI. Indonesia is considering whether to sign up to the EITI, and has completed none of the steps above. 1.3 EITI countries In the last five years, 22 countries have achieved full EITI candidacy. They are:

Africa: Cameroon, Congo, DRC, Equatorial Guinea, Gabon, Ghana, Guinea, Liberia, Madagascar, Mali, Mauritania, Niger, Nigeria, Sao Tome e Principe, Sierra Leone

East Asia: Mongolia, Timor Leste Central Asia: Azerbaijan, Kazakhstan, Kyrgyz Republic Latin America and Caribbean: Peru Middle East: Yemen

An additional seven nations have endorsed the EITI, but not yet entered into full candidacy. They are: Botswana, Chad, Cote d’Ivoire (Africa); Norway (Europe) Bolivia, Columbia, Trinidad and Tobago (Latin America and Caribbean). 1.4 Outline of the report The remainder of this study is organized as follows. Section 2 lists the benefits that Indonesian stakeholders say they believe could arise from implementation of EITI. Section 3 lists the various obstacles that might have to be overcome in the implementation process. Section 4 identifies most known revenue streams conveyed by oil, gas and mining companies to government, and which of these are the largest and therefore most deserving for inclusion in an Indonesian EITI process. Section 5 lists government, industry and NGO entities that could potentially given seats on an EITI national Steering Group. Section 6 makes recommendations with respect to the possible scope/coverage of EITI in Indonesia. Section 7 points to some of the key milestones and possible timing of implementation. Section 8 summarizes engagement with government to date. Section 9 discusses resources for implementation. Section 10 examines the extent to which extractive industry revenue transparency already exists in Indonesia, and relevant auditing mechanisms that the government has put into place.

1 The EITI Secretariat maintains a list of approved EITI validators.

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2.0 Benefits

Consultations with Indonesian stakeholders show that they have developed a significant appreciation of the benefits that could flow from EITI implementation. They include:

1. Establishing Indonesian leadership in the world community: Indonesia is the world’s most populous resource-rich nation. Successful implementation of EITI is an area where Indonesia could clearly demonstrate world leadership. An editorial published in the Jakarta Post by the EITI International Chairman asks for Indonesian help in developing methodologies for tracking equity oil and gas, and for keeping track of revenue sharing with local governments. 2. Improved investment climate: EITI adds predictability for extractive sector investors – especially in terms of helping potential investors understand what revenues they would be expected to pay. In this way, EITI will lower transaction costs for market entry, and this could help turn around negative investment trends. In late September 2007, the World Bank and the IFC sponsored an oil, gas and mining investment climate discussion where the linkages between EITI and improved investment climate were clearly established. The proceedings will be published in the near future. With respect to positive international examples, Nigeria secured a new $4 billion gas investment on the strength of the nation’s implementation of the EITI. 3. Improved extractive revenue regulations: EITI gives government a tool for assessing the efficiency of its revenue management. Government revenue could be enhanced by EITI. Nigeria’s EITI program recommended changes in oil revenue formulas and oil license auctioning procedures. Because the recommendations were acted on, the government earned an additional $2.2 billion. 4. Tool for education: Indonesian government officials outside the Ministries of Energy and Mineral Resources sometimes express regret that they do not better understand the extractive sectors. EITI would improve the understanding of participating officials. 5. Improved public resources management: EITI may help improve the management of public funds. The largest extractive industry revenue stream in Indonesia is the proceeds earned from the sale of production sharing oil on the world market. But these revenues fell from Rp125 trillion ($14 billion) in 2006 to only Rp94 trillion ($10 billion) in 2007. This marked decline is not easy to understand, in view of the fact that production fell only slightly that year, while prices and the (unrealized) opportunity for the state to earn oil revenues rose considerably. Greater efficiencies in the management of production sharing oil could be achieved as a result of EITI implementation. 6. Decreased corruption: By providing a public statement of payments and revenues, EITI makes significant non-payment (or leakage or non-receipt) of revenues easier to detect. 7. Trust building: EITI will increase the faith that Indonesian citizens hold in their government, will help local communities better understand what industry and local governments are doing to help them, and will build trust between all stakeholders. 8. Access to capital: Some donor agencies (like the International Finance Corporation and the Asian Development Bank) are now starting to require countries to endorse EITI as a condition for receiving energy and mining loans. Some Equator Principles banks are also moving in the direction of requiring producers to endorse EITI before they receive loans. Support for EITI could boost Indonesia’s chances for access to funds from these and other sources in the future. Support for EITI may also lower sovereign borrowing rates: The interest rate paid by the Nigerian government on new loans fell half a percent after its implementation of EITI. 9. An independent, international standard: The EITI has internationally agreed criteria and indicators. The Initiative is supported by an independent board which includes representatives of EITI-implementing countries. By implementing the EITI, Indonesia would be meeting the global standard on transparency and accountability in resource-rich countries.

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3.0 Overcoming challenges

Consultations with Indonesian stakeholders also show that there are potential challenges that might need to be overcome during the course of EITI implementation in Indonesia. They include: Complexity of tracking oil and gas volumes: In most implementing nations around the world, EITI tracks the amount of revenues paid by producers to government. In Indonesia, however, the largest benefit stream is not conveyed in the form of currency, but rather in volumes of production sharing oil and gas conveyed by producers to government. Keeping track of such volume flows is not as straightforward as keeping track of monetary flows. Moreover, there is not much of a body of EITI related-experience on which to draw in this respect. Having said that, Indonesia, the originator of the production sharing system, could arguably develop new systems to keep track of such revenue flows in the context of EITI, if it chose to do so.

Initiative of foreign origin: Because EITI is a movement which was, at least initially, conceived in the developed world, and is still substantially funded from there, some Indonesians suspect that EITI is an initiative designed by rich countries to harm developing nations like Indonesia.

New ways of working: EITI is a multi-stakeholder and cross-sectoral initiative. Incentives are often not in place to encourage officials to cooperate with those from other directorates general within their agencies, or other agencies, let alone the private sector and civil society.

Confidentiality considerations: Officials may have a range of objections based in part on the fact that there are confidentiality provisions written into Indonesian law. For example, the Oil and Gas Law of 2001 prohibits producers from disclosing information of a technical or financial nature without the approval of the Ministry of Energy and Mineral Resources or the Ministry of Finance, respectively, although in practice the Executive Agency for Upstream Oil and Gas Business Activities serves as the gatekeeper for such disclosure. Similarly, tax law prohibits the disclosure of information on the amount of income taxes paid by individual corporations without their permission. Further elucidations of these two laws have, however, been inserted into a Presidential Regulation on extractive industries revenue transparency now being drafted by lawyers under the supervision of the Anti-Corruption Commission. If the draft Presidential Regulation were to go into force, these prohibitions would not apply to submissions of information that were made as a part of normal EITI reporting.

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4.0 Principle benefit streams

EITI typically does not focus on all revenues conveyed by industry to government, but more typically on those benefit streams which are the largest. This section outlines what are in probability the largest benefit streams conveyed by industry to government in the oil, gas and mining sector, but also mentions some of the smaller streams.

4.1 Primary oil & gas benefit streams

The single largest oil and gas benefit stream conveyed by producers to government, by far, is the volume of production sharing oil and gas surrendered by producers to government, known as “equity oil” and “equity gas.” This benefit stream accounted for three quarters of all government revenue received from extractive companies in 2006, but inexplicably fell to only two-thirds in the following year, 2007. Equity oil and equity gas are discussed in section 4.1.1 below.

Another large benefit stream is Domestic Market Obligation (or DMO) oil. Of the smaller share of equity oil that producers are allowed to retain, they must sell up to a quarter of that share back to government appointed buyers at extremely low prices. This constitutes a substantial benefit to government. DMO oil is discussed in section 4.1.2 below.

There are about another two dozen other types of taxes and duties paid by oil, gas and minerals producers, some large, which by virtue of their size would merit inclusion in an EITI program, and some quite a bit smaller, which might perhaps be best left out, at least initially. Extractive industry taxes and duties – large and small - are discussed in the remainder of sections 4.1 and 4.2 below. Section 4.3 summarizes the largest extractive industry revenue streams.

4.1.1 Government share of equity oil and gas

Oil and gas producers are required to share with government a large percentage of their oil and gas production.

2 This is referred to as “equity oil” and “equity gas.” The percentage of equity oil and gas

shared with government differs for each Production Sharing Contract. Producer-government after tax oil split percentages generally range from 15-85 to 35-65, while after tax gas split percentages range from 30-70 to 40-60.

Government share of equity oil: In the case of oil, the share split between the contractor and the government is specified in the Production Sharing Contract. In practice there will be small variances in the amounts given to the government (or “lifted”) each month, with over or under liftings occurring compared with the actual contractual share split. The precise share split for any forthcoming month is based on a rolling average of the monthly share split over the previous 12 months.

At year end, there is an operations meeting between the Executive Agency for Upstream Oil and Gas Business Activities (BP Migas) and each firm that is party to a particular Production Sharing Contract, where a re-calculation of the government’s lifting entitlement takes place based on actual prices, production and costs for the full year. A cash settlement is made to compensate for any under or over lifting that occurred in that year, by not later than April of the following year. Nearly all oil producers load the government’s share of equity oil into tankers owned by the National Oil Company (Pertamina). From there, one of two things happens, Pertamina either (1) takes the oil to overseas markets and trades or sells it – either through its overseas marketing division or through agents designated by its overseas marketing division or (2) Pertamina takes the equity oil to Indonesian refineries (over which it has an effective monopoly), and these refineries pay a fixed price for the oil known as the Indonesian Crude Price or ICP. In the case of payments from overseas buyers for equity oil, these are reported to be conveyed to a Pertamina account in the state-owned Bank National Indonesia (BNI) known as the Crude Oil

2 Oil and gas tend to co-exist within the same geological formations, so almost all contractors produce

a mixture of oil and gas, with relatively higher amounts of one or the other.

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Account. Pertamina later conveys funds from that Crude Oil Account to an Indonesian Central Bank (Bank Indonesia or BI) account under the control of the Ministry of Finance’s Directorate of Non-Tax Revenue, known as Account 600.000. Payments from Pertamina refineries for equity oil are made directly to Account 600.000. Government share of equity gas: Unlike equity oil, there is no physical separation made between government and contractor equity gas shares. All gas is delivered in an undifferentiated form to customers either by shipping it as Liquid Natural Gas (LNG), or by transporting the gas through pipelines to buyers in places like Singapore. In some but not all of these cases the customer is instructed to send payment to a bank (currently Bank of New York, but soon to be HSBC in New York) acting as a trustee, which then transfers proportionate shares of the cash to the government and the contractor based on instructions from BP Migas.

In other words, purchasers pay for the gas they receive (whether in gaseous form through undersea pipes, as is the case with Singapore for example, or in liquefied form on ships loaded at one of two LNG plants, often destined for markets in Northeast Asia). Payment is typically not made directly to the contractor, but rather to an escrow account in New York. The managers of this account then pay out the producer’s share directly to the producer, and the government’s share to a BI Account 600.000 under the control of the Directorate of Non-Tax Revenue.

4.1.2 Domestic market obligation (DMO)

After oil producers convey to the government its share of equity oil, of the remaining share of oil that producers are then permitted to keep, they must ‘sell’ to government appointed buyers an additional quarter. This is known as domestic market obligation oil or DMO oil. DMO Oil: Each Production Sharing Contract specifies the DMO oil provisions which apply to each producer. Producers are required to set aside up to 25 percent of their share of equity oil for use by domestic refineries.

3 This DMO oil is picked up by Pertamina at the producer’s terminal (following a

similar process to that described above for equity oil). The producer will receive full ICP price for DMO Oil during the first five years of production and after this receive a much lower price, as little as 20 cents per barrel in the case of early Production Sharing Contracts. The amount received has increased somewhat over time, with the exact amount varying contract by contract (even if within the same Production Sharing Contract generation). Newer contractors are thought to be required to sell their DMO oil to Pertamina at about 20 percent of the world price. Whether paid 20 cents a barrel, or 20 percent of the world price, oil producers take a substantial loss on DMO oil. Although Pertamina pays producers a greatly reduced price for the DMO oil that it purchases from them, it must then convey to Account 600.000 in BI the full ICP price for that oil. Thus, Pertamina must pay to government the difference between the cheap price that Pertamina pays contractors for the DMO oil, and the full ICP price. Moreover, Pertamina’s refining capacity is so low that it must now import around 60 percent of the oil that the nation consumes, but then sell some of that back to consumers at a deep discount. Although Pertamina has a near-monopoly on the sale of petroleum products to Indonesian consumers, this appears to be no great advantage, as it must sell kerosene for cooking and gasoline and diesel for transportation at artificially-low government-mandated domestic prices.

3 Some sources have maintained that DMO oil is not sold only to Pertamina-controlled domestic

refineries, but also on the world market in some cases.

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To cover its losses from (a) paying the ICP price for equity and DMO oil and refining it, (b) importing crude oil at full world prices and refining it, (c) importing refined petroleum products at full world prices and (d) in many cases having to sell at least some of (a), (b) and (c) at depressed domestic prices, Pertamina received a government subsidy of about $7 billion in 2007. The state electricity producer Perusahaan Listrik Negara or PLN also received a state subsidy of about $3 billion the same year.

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With rising world oil prices, the revised 2008 budget recently submitted by the Ministry of Finance indicates that the subsidy to Pertamina will rise to $12 billion per year in 2008, while that to PLN will rise to $6 billion, assuming world oil prices of $95 a barrel. In other words, government energy subsidies are, conservatively, set to increase by about 80 percent in the coming year, which will place the government under increased fiscal strain. There is no mechanism in place to independently guarantee that the amount of the subsidy to Pertamina (or for that matter to the national electricity company PLN) is not more than what is required. The Financial Auditing Board (BPK) alleged in 2005 that Pertamina over-stated the money due to it from fuel subsidies during 2004 by more than $400 million. Although Pertamina was the proclaimed as the most profitable company in Indonesia in 2007, with profits on the order of US$2.5 billion, it has not produced an audited annual report since 2005. DMO Gas: Gas producers will soon be required to convey up to a quarter of their equity gas share to domestic entities, though to which entity or at what price has yet to be determined. The concept that a Production Sharing Contract (PSC) should be subject to a Domestic Market Obligation (DMO) for gas was introduced in the 2001 Oil and Gas Law, which states that the Gas DMO could be up to 25 percent of a contractor’s share of equity gas. The Constitutional Court later reviewed this law and ruled that the words “up to” should be deleted, so in effect the gas DMO must be 25 percent of the producer’s share, and not lower. An implementing regulation is still awaited to put this into effect. In practice some contractors have for many years been effectively obliged to sell some of their equity gas to local firms at prices which are considerably lower than international prices. Contractors describe such arrangements as “private and business to business,” although in reality, they appear to have be imposed on these producers at the time their PSCs are drawn up. The required sale of gas to domestic entities can be regarded as a benefit stream, in view of the fact that many of the beneficiaries of this cheap gas are the national electricity company PLN, or one of several state-owned fertilizer plants. All such sales represent a loss to contractors and a corresponding gain to either state firms or state-selected firms. The size of this benefit has changed over time. In the early 1990s the domestic price of gas was only about 10% below international levels, while today domestic gas prices on some older contracts are more than 50% below international levels. 4.1.3 Larger oil and gas taxes

In addition to equity oil and gas, and DMO oil, taxes and duties which constitute a relatively substantial portion of the revenues paid by oil and gas producers, and are probable candidates for inclusion in EITI could include:

Corporate Income Tax (PPh 25 and PPh 29): A corporate income tax is paid by oil and gas producers at a rate of 30 percent, but in some older Production Sharing Contracts the rate applicable is up to 45 percent. Corporate income tax is paid to Account 600.000, which is controlled by the Directorate for Non-Tax Revenues in the Ministry of Finance.

4 PLN pays the full Indonesia Crude Price (ICP) to Pertamina refineries for the petroleum products it

purchases, and is later compensated from the state budget for the costs PLN incurs from generating electricity from full price petroleum and selling that electricity to Indonesian consumers at artificially low domestic prices.

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Branch Profit Tax: An additional tax equal to 20 percent of corporate income tax is also paid to government. If a firm pays the old corporate income tax of 45 percent, then its branch profits tax will be 20 percent of that amount, or an additional nine percent. Some oil producers domiciled in foreign jurisdictions that have bilateral tax treaties with Indonesia are reported to pay branch profit taxes of only ten, not 20 percent. Like corporate income tax, the branch profit tax is paid to the Ministry of Finance’s Directorate for Non-Tax Revenues Account 600.000. Withholding Tax on Foreign Payments of Dividends, Interest, Royalties, and Fees for Services and Rentals (PPh 26): A prepayment of 20 percent is made on all conveyances of dividends to foreign-domiciled entities, interest paid to foreign-domiciled lenders, royalties paid for foreign copyrights and for using special processes that are patented overseas, and for payments for services provided by or equipment rented from foreign-domiciled companies. This tax is under the regulatory authority of the Directorate for Tax Regulation II, in the Directorate General of Tax, in the Ministry of Finance. However, it is paid to the Directorate General of Treasury, also in the Ministry of Finance. Withholding Tax on Domestic Payments of Dividends, Interest, Royalties, and Fees for Services and Rentals (PPh 23): A prepayment of 15 percent is made on all conveyances of dividends to Indonesia-based entities, interest paid to Indonesia-based lenders, and royalties paid for Indonesian copyrights and for using special processes patented in Indonesia. For payments for services provided by Indonesian firms, a tax prepayment of between 6 and 1.5 percent is made. For equipment rented from Indonesian companies, a tax prepayment of between 10 and 3 percent is made. This tax is under the regulatory authority of the Directorate for Tax Regulation II, but is paid to the Directorate General of Treasury. Withholding Tax on Salaries of Employees (PPh 21) – A prepayment of up to 35 percent of the salaries of employees is under the regulatory authority of the Directorate for Tax Regulation II, but made to the Directorate General of Treasury. Value Added Tax (VAT): A VAT of 10 percent is due on most payments to vendors onshore and offshore, which contractors may then claim back by submitting an invoice to BP Migas, which in turn passes along instructions to the Directorate of Non-Tax Revenues to reimburse the contractors.

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VAT is under the regulatory authority of the Directorate for Tax Regulation I, but is paid to the Directorate General of Treasury. Import Taxes: Revenues paid on the import of goods are a blend of three separate taxes or duties: o A VAT on the value of imported goods of 10 percent, payable to the Directorate General of

Treasury. o A 2.5 percent withholding tax (PPh 22) on the value of the imported good, payable to the

Directorate General of Treasury. o An import duty of variable percentage based on the type of good that is being imported, payable

to the Directorate General of Treasury.

The revenue streams described above are thought to represent the largest (in terms of value) that are conveyed by oil and gas companies to Government. To understand how these revenue streams

relate to one another (on the oil side), see Chart 1 on the following page.

5 Under Production Sharing Contracts signed before 1994, no Contractor paid VAT until the project

had commenced the production stage. Under PSCs issued between 1994 and 2001, the view of the Directorate of Tax Regulation I is that if the language of the contract explicitly exempted the contractor from paying VAT at the exploration stages, then that exemption would be respected, but for contractors not so exempted, they would pay, although they would eventually be reimbursed by the Directorate for Non-Tax Revenues. For all PSCs issued after 2001, VAT is paid, but then reimbursed by the Directorate of Non-Tax Revenues. Although VAT is under the regulatory authority of the Directorate of Tax Regulation I, it is paid to the Directorate General of Treasury, and (in some cases, as noted above) reimbursed by the Directorate for Non-Tax Revenues.

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CHART 1 VALUE ADDED TAXES

HOW THE LARGEST PUBLIC REVENUES ARE SPLIT OUT WITHHOLDING TAXES

FROM A BARREL OF OIL AND WHERE THEY END UP & IMPORT DUTIES

CONTRACTOR'S SHARE OF OIL

CORPORATE TAX &

BRANCH PROFIT TAX

DMO OIL DMO FEE

ICP MINUS DMO FEE

ICP

NOTE:

OIL/REVENUE IN KIND FLOW

ICP

REVENUE ONLY FLOW (NOMINALLY

OVERSEEN BY BPMIGAS)

FIRST TRANCHE PETROLEUM (FTP) OPEN MARKET PRICE

IS PART OF GOVERNMENT EQUITY

COST

RECOVERY

EQUITY OIL

TO BE SPLITBARREL OF OIL

EQUITY

GOVERNMENT

EQUITY

PERTAMINA

REFINERY

DMO

PERTAMINA

REFINERY

EQUITY

PERTAMINA

OVERSEAS

MARKETING

DIVISION

TREASURY

A

C

C

O

U

N

T

6

0

0

.

0

0

0

SOLD ON

WORLD

MARKET

CONTRACTOR

TAXES

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4.1.4 Smaller oil and gas taxes and fees

Taxes and duties which constitute a relatively smaller portion of taxes paid by oil and gas producers, and could therefore be possible candidates for exclusion from an EITI program, include:

Fees for Hiring Expatriates (DPKK): A charge of US$1,200 per annum for each expatriate hired by an oil and gas company paid to a Ministry of Manpower account, ostensibly to fund manpower training programs. Signature and Production Bonuses: These two bonuses are paid by contractors at the time of the signing of their Production Sharing Contacts, and again at the time that production of oil or gas begins. These bonuses are paid into an account in the Directorate General of Oil and Gas, in the Ministry of Energy and Mineral Resources. Equipment and Services Bonus: This is a bonus paid by some but not all oil and gas companies. Sometimes it is paid in kind (for example, in the form of donation of computers). If paid in cash, this bonus is believed to be paid to the Directorate General of Oil and Gas. Data fees: These fees relate to the purchase of seismic and other data from PT. Patra Nusa Data, a state-owned company, and are paid to the Directorate General of Oil and Gas. Joint Study fees: To support bids for new acreage, many firms elect to carry out “joint studies” with one of four universities nominated by the Directorate General for Oil and Gas. Fees are said to be paid to the universities for their services and are negotiated directly with them like any other vendor. Fee for Training of Indonesian Nationals (IWPL): These are fees conveyed mainly to overseas training providers nominated by BP Migas, to pay for the training of Indonesians who work in the oil and gas sector. Scholarship funds: Funds paid to BP Migas in an amount based on a Contractor’s production level. A consortium consisting of Contractors and BP Migas nominates BP Migas and possibly other individuals to pursue educational activities in overseas locations using these funds. General Working Advance Fund: Each Production Sharing Contract is required to maintain a float of $75,000 with BP Migas to fund various activities. The fund is operated on a petty cash basis. An example of a type of expenditure that would be covered by this fund would be per diem payments to BP Migas officials for field and business trips taken in association with the contractor. Performance Bond: A bond put up by newer Production Sharing Contractors, held by the Directorate General of Oil and Gas, and intended to be returned to oil and gas contractors, unless they fail to fulfill their exploration objectives during the first three years of their contract period. Retirement Contributions: Firms are all required to join and contribute to the state-run workers’ social security program, called Jamsostek. This fund is said to provide basic retirement, work accident, and continuing disability coverage to Indonesian workers.

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4.2 Primary mineral benefit streams

The largest revenue streams conveyed by mineral producers to government are thought to be:

Corporate Income Tax (PPh 25 and PPh 29) - under the regulatory authority of the Directorate for Tax Regulation II, but paid to the Directorate General of Treasury.

Mineral Royalty – a royalty based on a fixed percentage of the price of minerals or coal, and paid to the Directorate of Mineral and Coal Enterprises Development, in the Directorate General of Minerals and Coal, in the Ministry of Energy and Mineral Resources.

Withholding Tax on Foreign Payments of Dividends, Interest, Royalties and Fees for Services and Rentals (PPh 26) - under the regulatory authority of the Directorate for Tax Regulation II, but paid to the Directorate General of Treasury.

Withholding Tax on Domestic Payments of Dividends, Interest, Royalties, and Fees for Services and Rentals (PPh 23) - under the regulatory authority of the Directorate for Tax Regulation II, but paid to the Directorate General of Treasury. Withholding Tax on Salaries of Employees (PPh 21) - under the regulatory authority of the Directorate for Tax Regulation II, but paid to the Directorate General of Treasury. Value Added Tax (VAT) - under the regulatory authority of the Directorate for Tax Regulation I, but paid to the Directorate General of Treasury. Import Taxes - Consisting of: o A VAT of 10 percent on the value of imported goods, paid to the Directorate General of

Treasury. o A withholding tax of 2.5 percent on the value of imported goods (PPh 22), paid to the

Directorate General of Treasury.

o An import duty of variable percentage based on the type of good imported, paid to the Directorate General of Treasury.

Like oil and gas companies, mining firms also pay many minor taxes and fees. Some of these are the same as those lesser taxes and fees paid by the oil and gas industry, such as Fees for Hiring Expatriates and Retirement Contributions. Others are unique to the mining industry, such as Dividends paid by private firms to state minority shareholders, Dead Rent, Forestry Fees and Land and Building Taxes.

4.3 Largest benefit streams in the oil, gas and mining sector

In view of the fact that the EITI process in Indonesia has not yet begun, and industry and government stakeholders have not yet formally indicated the relative size of benefit streams that are paid and received, it is difficult to know which are the largest streams in some cases. Nevertheless, based on dozens of interviews with oil, gas and mining companies, it can be surmised that there are perhaps about ten large benefit streams which might logically be included in an EITI process. Two of these, equity oil and gas and DMO oil, are massive, and have accounted for perhaps 80 percent of all extractive revenues paid and collected in Indonesia in some years. In addition to these are nine royalties and taxes which are thought to represent a sizable portion of the remainder of payments to government by oil, gas and mining companies. These benefit streams, and the government entities that initially receive them, are listed in Table 1 on the following page.

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Table 1: Large benefit streams that could be included in an Indonesian EITI program - and the government entities which initially collect them

Description of benefit stream Sector Initial government recipient of these benefit streams Mining Oil & Gas

Equity oil and gas X Pertamina, Overseas Marketing Division or Refineries Division

Domestic Market Obligation oil X Pertamina, Refineries Division

Minerals royalty X Energy and Mineral Resources, DG of Minerals & Coal, Directorate of Mineral & Coal Enterprises Development

Corporate income tax (mining) X Finance, DG of Treasury

Corporate income tax (oil and gas)

X Finance, DG of Budget, Directorate of Non-Tax Revenues

Branch profit tax X Finance, DG of Budget, Directorate of Non-Tax Revenues

Withholding tax on foreign payments of dividends, interest, royalties, and fees for services and rentals

X X Finance, DG of Treasury

Withholding tax on domestic payments of dividends, interest, royalties, and fees for services and rentals

X X Finance, DG of Treasury

Withholding tax on imported goods

X X Finance, DG of Treasury

Withholding tax on salaries of employees

X X Finance, DG of Treasury

Value Added Tax X X Finance, DG of Treasury

Import duty X X Finance, DG of Treasury

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5.0 Key stakeholders

A main feature of EITI, or any national process that emulates it, is the formation of a National Multi-stakeholder Steering Group (SG) which oversees the process. Key stakeholders in government, the private sector and civil society who would ideally be given seats on the Steering Group are presented below.

5.1 Government stakeholders

According to a Presidential Regulation for extractive industries revenue transparency currently being drafted by the Indonesian Anti-Corruption Commission, government membership in a National Multi-stakeholder Steering Group would be given to five senior figures, the Coordinating Minister for the Economy, the Minister of Energy, the Minister of Finance, the Chairman of BP Migas, and the CEO of Pertamina.

In addition to these senior officials, it is recommended that qualified representatives from eight other government sub-agencies or divisions of state-owned firms be given, if not seats, then certainly some sort of advisorial attachment to the Steering Group (SG) or the EITI Secretariat which will endeavor to support the SG. The main reason for inclusion of these additional eight is that they represent the full range of government sub-agencies (or agents) at the national level who are the initial recipients of large extractive industry benefit streams. They are:

Executive Agency for Upstream Oil and Gas Business Activities (BP Migas), Division for Economics, Finance and Marketing: (1) This Division produces secret quarterly reports which calculate the value of the largest petroleum benefit streams conveyed to government, including equity oil and gas and DMO oil. The replication of these calculations would constitute one of the most challenging tasks of EITI in Indonesia, so the advice of this Division to the SG would be helpful. (2) The placement of a representative of this Division in the SG or the Secretariat would also be important because of the Division Head’s stated willingness to promulgate a regulation whereby contractors would be able to independently report to the SG their conveyances to government, without violating secrecy provisions. (3) Finally, it would be helpful to have this Division advising the SG in view of the fact that BP Migas receives several benefit streams from oil and gas contractors. If the SG were to decide that these payments should be included in EITI reporting templates, then BP Migas would itself become a reporting entity, and the Division would therefore ideally have some sort of attachment to the SG for that reason as well.

Ministry of Energy, Directorate General of Minerals and Coal: (1) The advice of the Directorate General to the SG would be useful, as the Directorate General maintains the most complete information nationwide on large, nationally-licensed mineral and coal producing firms in Indonesia - the principle candidates for inclusion in EITI from the mining sector. (2) The Directorate General is also the recipient of minerals royalties, which after income taxes is the second largest benefit stream conveyed to government by mineral and coal producers. The Directorate General would be a reporting entity, and therefore should be given representation in either the SG or the Secretariat for that reason as well.

Ministry of Energy, Directorate General of Oil and Gas: (1) The Directorate General of Oil and Gas has made transparency a part of its work plan, and recently published a book detailing the 45 most active Production Sharing Contracts in Indonesia, including who owns these licenses, the maps of where production is located, annual costs of production, and how much oil and gas is being produced (although not how much revenue is being paid by them). In view of this commitment to transparency, it could be useful to have a representative of the Directorate General of Oil and Gas either in the SG or the Secretariat to assist other parts of government less experienced in transparency. (2) In addition, the Directorate General receives several forms of official payment from oil and gas contractors. Should the SG decide that these payments would be included in the EITI process, then the Directorate General would be a reporting entity, and should be given representation in either the SG or Secretariat for that reason as well.

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Ministry of Finance, Directorate General of Budget: Within this Directorate General is the Directorate of Non-Tax Revenues, which oversees the account(s) into which are paid the vast majority (in terms of value) of the nation’s extractive revenues, including proceeds from sale of the government’s share of equity oil and gas as well as corporate income taxes and branch profits taxes paid by oil and gas firms. The Directorate would therefore be a crucial government-side reporting entity, should Indonesia decide to join EITI. The Directorate General of Budget or the Directorate of Non-Tax Revenues should be given representation in the SG or Secretariat.

Ministry of Finance, Directorate General of Tax: Within this Directorate General are the Directorates of Tax Regulation I and II. The former has regulatory control over Value Added Taxes. The latter has regulatory control over income taxes paid by mineral producers, as well as withholding taxes on interest, dividends, royalties, and service and rental fees paid by oil, gas and mineral producers to foreign and domestic entities, on salaries, and on imports. The Directorate General is thought to maintain reliable information on the amount of each one of these revenue streams paid by each oil, gas and mining firm, and for this reason would be an important government-side reporting entity, and should be given representation in the SG or the Secretariat for that reason.

Ministry of Finance, Directorate General of Treasury: Treasury is the ultimate recipient of many extractive industry tax streams, including income taxes paid by mineral producers, as well as import duties, VAT, and withholding taxes paid by both mineral producers and oil and gas companies. Treasury could therefore be an important government-side reporting entity, and could be given representation in the SG or Secretariat for that reason.

Pertamina, Overseas Marketing Division: The Marketing Division is responsible for handling the portion of government equity oil that is destined for overseas markets, for selling that oil (or designating a firm to sell it), and for sending the proceeds from these sales to the Bank Indonesia Account 600.000, under the control of the Ministry of Finance’s Directorate for Non-Tax Revenues. The Marketing Division is therefore the initial recipient of a significant share of the largest single extractive industry revenue stream in Indonesia – government equity oil. The Marketing Division could be asked to fill out EITI templates specifying the volume of those receipts as well as the amount earned from their sales and conveyed to the government. In view of this important reporting role, the Marketing Division should be given representation on the SG or Secretariat.

Pertamina, Refineries Division: The Refining Division is believed to be responsible for receiving that portion of the government’s share of equity oil which is not sold overseas. The Refining Division is said to pay the Indonesian Crude Price for this oil, and send these monies to Bank Indonesia Account 600.000 under the control of the Ministry of Finance’s Directorate for Non-Tax Revenues. In addition, the Refining Division also receives most, if not all, DMO oil, for which it pays contractors a token amount. But it conveys the difference between what it paid the contractors and the full ICP price to the Account 600.000. For these reasons, the refining division is both a major recipient of and payer of benefit streams, and should be a reporting entity if the government decides to pursue EITI, and given representation in the SG or Secretariat for that reason.

5.2 Industry Stakeholders

The three main extractive industry sectors in Indonesia that have established interest groups are: (1) oil & gas, (2) minerals, and (3) coal. Each of these three sectors could potentially be represented in a Steering Group by their interest groups or else by their largest firms.

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5.2.1 Oil and Gas The Indonesian Petroleum Association (IPA) is the interest group that represents oil and gas producers in Indonesia, both international and local, and private and state-owned. A potential limitation of the IPA is that it is so consensual in nature and so deferential to government that its willingness to articulate a clear position on behalf of its membership, separate from that of government, cannot be guaranteed. Thus, representation could instead be given to some of the large private foreign and domestic oil and gas producers. One seat might be offered to a large foreign oil and gas producer (such as Chevron, Exxon, Total, or BP – all of which currently serve on the EITI international board as members or alternates, or have in the past), along with a second seat for a large Indonesian producer (like Medco). 5.2.2 Minerals The Indonesian Mining Association (IMA) is the interest group that represents mineral producers, both international and local, as well as private and state-owned. A seat on an EITI SG could be offered to either to the IMA, or else one of the two largest producers of Indonesia’s largest revenue producing mineral - copper. The two largest copper producers are Freeport and Newmont. The former is a vocal supporter of EITI in Indonesia, while the latter has signed up for the initiative at its headquarters. 5.2.3 Coal The Indonesian Coal Mining Association (ICMA) is the interest group that represents coal producers, both international and local, as well as private and state-owned. A seat on an EITI SG could be offered to either ICMA, or else to the country’s largest coal producer, Bumi Resources (of the Bakrie group). 5.3 Civil society The Indonesia branch of the Publish What You Pay (PWYP) Coalition is now the leading civil society supporter of extractive industry revenue transparency. It could elect two or three persons to represent civil society on the EITI SG.

5.4 International stakeholders

The UK Department for International Development sponsors, the World Bank hosts, and both provide supervision and back-up to an EITI Senior Adviser who has worked for more than a year in Indonesia. When and if the Indonesian government decides to endorse the Initiative, the EITI Senior Adviser could serve in (or as) the EITI Secretariat, until such time as a CEO is chosen to lead the Secretariat. In addition, the Asian Development Bank, Australia, Belgium, Canada, the EU, France, Germany, Italy, the IMF, the Netherlands, and Norway all support EITI to varying degrees around the world. EITI is also supported by international NGO’s like Publish What You Pay and the Revenue Watch Institute. Technical advice or financial support can be sought from any of these stakeholders.

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6.0 Scope and sequencing

This section evaluates whether EITI in Indonesia could have a specific sectoral focus, what the scope could be for any reconciliation work, and the possible level of detail of information that could be reported. All of these decisions would be ultimately need to be taken by the multi-stakeholder working group.

6.1 Sectoral focus

Because of the size and complexity of Indonesia’s oil, gas and mining sectors, the first round of EITI reporting and aggregation might focus only on nationally-authorized firms.

On the oil and gas side, there are 48 firms that have entered into Production Sharing Contracts with the government, spread across 190 production blocks, some with several co-licensees. It would make sense to limit the first round of EITI reporting and reconciliation to firms with actual Production Sharing Contracts.

On the mining side, there are 41 metals firms with Contracts of Work, of which 13 (or fewer than a third) are in production and 78 coal firms with Contracts of Work, of which 39 (or half) are engaged in coal production. In addition, approximately 2,500 district mining licenses have been granted (some claim as many as 10,000). The latter are said to account for the majority of production of some industrial minerals. However, these firms are so numerous, regulated so irregularly, and so few convey revenues to the national level, that to include them in the first round of EITI reporting and aggregation would be exceedingly difficult. However, at a minimum, work should start on a national database with the names of known district level licensees, the commodities for which they are exploring and producing, their owners, the provinces and districts in which they are located, and the area covered by the concessions granted to them. This database could be made public along with, or even ahead of, the first EITI report.

The oil & gas and mining industries have both shown similar levels of interest in EITI, so there is no reason to exclude either out of hand.

6.2 Benefit streams to be considered

It will ultimately be the decision of the Steering Group to decide which benefit streams to include and exclude. But it might make sense to focus in a first round of EITI reporting on the largest benefit streams paid by firms. These are listed in Table 1, above.

6.3 Level of detail to be reported

An important decision to take in any EITI implementing country is whether firms should be required to report the size of each of the individual revenue streams they pay to government (disaggregated reporting), or report them grouped together (aggregated reporting).

Since oil & gas and mineral producers already disaggregate the individual benefit streams that they convey to the government for accounting purposes, no additional difficulty would be entailed if firms were to report benefit streams in disaggregated form for the purposes of EITI. In fact, to aggregate these figures prior to submission would actually create extra work for firms. Leaving figures in a disaggregated form would also make it easier, more efficient and less costly for the independent reconciler to cross-check any discrepancies between reports of benefit streams paid by industry and received by government.

In consultations with oil and gas and mineral firms, no objections were stated to disaggregated reporting. The Executive Director of the Indonesian Coal Mining Association (ICMA) was alone in raising a “slight objection” to the submission of disaggregated figures.

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6.4 Sub-national payments

As carried out in most parts of the world, EITI tracks the largest payments by firms to government. In most countries, the largest payments made by firms tend to be made to national governments, not local ones. Indonesia appears to be no exception to this rule. In Indonesia, it would make sense to exclude payments to local governments, at least in a first round of the EITI process, unless the decision were taken to try to capture all payments by firms to government, in which case payments to local governments would be included as a matter of course.

Although it is not typically the responsibility of EITI to cover such matters, Indonesian stakeholders from government, industry and NGOs all show a strong interest in making inquiries about the sharing of extractive revenues by the national government with provincial and local governments. This would not be that difficult to do. A single directorate in the Ministry of Finance, the Directorate of Non-Tax Revenues -- which would in any event need to be involved in EITI as it oversees the BI accounts into which the proceeds from the sale of the government’s share of equity oil and gas, as well as oil & gas producers’ corporate income and branch profit taxes, are paid -- is responsible for making the calculation for the amount of selected revenue streams that will be shared with provincial and district governments. Spreadsheets maintained by the Directorate of Non-Tax Revenues of disaggregated payments of extractive revenue benefit streams to each provincial and district government could be published alongside the regular EITI report.

6 For the sake of consistency, revenue distribution from central to provincial and district

governments could be published at a level of detail that matches that used at the national level.

6 However, with respect to keeping track of the amount said to have been received by each of the

35 provincial and 400 district governments from the Directorate of Non-Tax Revenues, and what these monies were spent on, this would constitute a layer of complexity and difficulty that would almost certainly confound a first round of EITI reporting and aggregation.

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7.0 Timing

Assuming that the EITI were endorsed by government, that the endorsement were accompanied by appropriate legal or regulatory sanction (such as the Presidential Regulation currently being drafted under the supervision of the Anti-Corruption Commission), and assuming the emergence or appointment of a figure to lead the process, then the following work plan could be achievable. Year One (short term)

Target 1 (months 1- 2): The non-governmental members of the Steering Group (SG) could be selected by their respective constituencies.

Target 2 (months 1 – 2): The SG could begin to meet.

Target 3 (months 3 – 4): The SG could draw up and budget a work plan which could identify the tasks and resources required to implement EITI in Indonesia. At this point, EITI candidacy would be achieved.

Target 4 (months 3 – 4): The SG could come up with a subcommittee structure, for example, with subcommittees on reporting and aggregation, on communications and public consultation, and on government relations.

Target 5 (months 5 – 7): The SG could decide on the scope of EITI (as outlined in Section 6, above).

Target 6 (months 5 – 7): The SG could identify and secure internal and external resources for implementation (as outlined in Section 9, below).

Target 7 (months 8 – 10): The SG could begin the process of recruiting an Independent Reconciler.

Years Two to Three (medium term)

Target 8 (months 11 – 13): The SG could hire an Independent Reconciler (IR).

Target 9 (months 14 – 17): The IR could provisionally design reporting templates, and modify and improve them in consultation with government, industry and civil society stakeholders.

Target 10 (months 18 – 20): The capacity of government and industry counterparts to fill in reporting templates could be built by the IR.

Target 11 (months 18 – 20): Reporting templates would be submitted to the IR by industry and government.

Target 12 (months 21 – 23): Government and industry templates could be analyzed and reconciled by the IR, and the first EITI report written.

Target 13 (months 24 – 25): The EITI report could be reviewed by the Financial Audit Agency (BPK).

Target 14 (months 26 – 28): The findings of the EITI report could be publicly released in a series of local and national workshops, and through various placements in the media.

Target 15 (month 29): An external validator could be brought in to evaluate progress.

These various steps in implementation are graphed on the following page.

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Chart 2: Possible timeline for EITI implementation in Indonesia

Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Target 1

Target 2

Target 3

Target 4

Target 5

Target 6

Target 7

Target 8

Target 9

Target 10

Target 11

Target 12

Target 13

Target 14

Target 15

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8.0 Institutional assessment

The likeliest institutional home for an EITI Steering Group would be a government agency. Because the oil & gas and mining sectors are highly state controlled, industry tends to look to government to take the lead on policy matters, and EITI is no exception to this rule. As for civil society, capacity is not yet at a sufficiently advanced point where it can lead, although its representatives would ideally be included as full and equal members of Steering Group (SG). In short, a government agency is needed to take responsibility for and lead an EITI SG.

Although the government’s Anti Corruption Commission is taking forward discussions on a draft Presidential Regulation on extractive industries revenue transparency, it is generally believed that the logical institutions to lead the Initiative would be either the Coordinating Ministry for the Economy, the Ministry of Energy and Mineral Resources or the Ministry of Finance.

8.1 Anti-Corruption Commission

The Vice Chairman of the Anti-Corruption Commission (KPK) is overseeing the work of lawyers who are drafting a proposed Presidential Regulation to sanction an extractive industries revenue transparency process in Indonesia. According to the current draft, five seats will be given to the Coordinating Minister for the Economy, the Minister of Energy and Mineral Resources, the Minister of Finance, the Head of BP Migas, and the CEO of Pertamina. Each of these can be represented in Steering Group meetings by named subordinates, who include the eight heads of relevant sub-agencies or divisions within state-owned companies named in section 5.1 above. On the Steering Group, three seats are given to private industry, and three seats for civil society leaders, or a total of eleven seats.

The first draft of the regulation has been approved in principle by the two most senior officials with direct regulatory authority over the oil and gas sectors and mining sectors, respectively, the Directors General of Oil & Gas and of Minerals & Coal, both from the Ministry of Energy and Mineral Resources. The Anti Corruption Commission will continue to take forward discussions on the draft Presidential Regulation with relevant government, industry and civil society stakeholders, until a relevant Ministry steps forward and agrees to assume responsibility for leading the Initiative.

8.2 Ministry of Finance

The participation of the Ministry of Finance in an extractive industries revenue transparency undertaking would be crucial, as various Directorates General within the Ministry are the ultimate recipients of nearly all extractive industry revenue flows in Indonesia. The Minister has repeatedly assured representatives of the international community of her strong support for the EITI. During a meeting with the Executive Director of Transparency International – Indonesia in the summer of 2007, the Minister of Finance appointed the Director of Non-Tax Revenues as the EITI point person in her Ministry.

8.3 Ministry of Energy

The Minister of Energy has in the past given strong signals that he would endorse the EITI. Middle and upper level officials in the Ministry of Energy continue to make statements to the press, to the Parliament and to international forums that they support EITI. In October, 2007 discussions with the International Chairman of EITI, the Minister of Energy and Mineral Resources said he was willing to consider endorsing the Initiative, but wanted first to ask President for permission to do so, and requested that EITI provide him with a briefing on the Initiative before that happened.

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That briefing took place on 26 February 2008. At the end of the briefing, the Minister assigned his Inspector General to become the focal person in the Ministry for the EITI. The Inspector General was further instructed by the Minister to:

Organize two sessions in the near future, one with oil & gas and another with mining stakeholders, to familiarize them with EITI and to seek their views on the Initiative;

Organize comment and input into the draft EITI Presidential Regulation;

Come up with a recommendation as to whether the Minister of Energy should take the EITI to the President.

The Inspector General is now in the process of sounding out colleagues in the Coordinating Ministry for the Economy and the Ministry of State Enterprises as to whether they will join him in organizing the sessions with oil, gas and mining stakeholders.

8.4 Coordinating Ministry for the Economy

The Coordinating Ministry possesses the structural power to convene the two most EITI-relevant ministries in the Indonesian government, the Ministry of Energy and Mineral Resources and the Ministry of Finance. For this reason, the Coordinating Ministry for the Economy would be an excellent home for EITI.

A briefing was delivered to the Coordinating Minister on 5 March 2008. The Minister appointed his Deputy for Energy, Mineral Resources and Forestry, to seek information on three points: (a) the possible composition of an EITI Steering Group; (b) what step-by-step implementation of the Initiative would look like; (c) how much the Initiative could end up costing. Answers to these three questions were conveyed to the Deputy, who subsequently indicated an intention to organize a coordination meeting (Rapat Kordinasi) on the EITI with the Ministries of Energy and Mineral Resources, Finance and Planning. Active discussions took place over the course of April, 2008 with several figures in the Coordinating Ministry regarding the future status of the coordination meeting and/or possible endorsement of the EITI by the Coordinating Minister. On 8 May 2008, the Coordinating Minister for the Economy called a meeting with the Ministers of Energy and Mineral Resources and of Finance to discuss EITI. The decision was taken that the Coordinating Ministry should lead the EITI, and assume the chairmanship of an EITI Steering Group, contingent upon approval from the President On 14 May 2008, the Coordinating Minister sought to meet with the President to obtain approval for both a public endorsement of EITI, as well for the development of a Presidential Regulation on EITI. It remains unknown whether that meeting took place, if it did whether EITI was discussed, or if it was discussed what decision was taken. On 16 May 2008, the Coordinating Minister asked his staff to draw up a Ministerial Regulation on EITI with language pertaining to the formation of an EITI Steering Group and a Secretariat, but at the last minute a decision was taken not to sign the regulation. The next day the Minister took up his new post as Governor of Bank Indonesia. On 22 May 2008, the President signed into effect a 130-page Instruction which includes a commitment for a joint Ministry of Energy and Mineral Resources - Ministry of Finance regulation on transparency in the management of oil, gas and mining by June 2009.

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9.0 Assistance

Some capacity constraints may affect stakeholders who could be involved in the implementation of EITI. Technical and financial assistance could be used to address these possible skill shortages. Four major areas have been identified where financial and technical resources could be useful: (1) the running of a Steering Group; (2) the establishment of a Secretariat to support the Steering Group; (3) the hiring of an Independent Reconciler; (4) communication of findings.

9.1 The establishment and running of a Steering Group (SG)

The Presidential Regulation being drafted by a team of lawyers who work under the supervision of the Anti Corruption Commission sets out clearly the responsibilities for a National Multi-stakeholder Steering Group in running an EITI process in Indonesia. Bringing together senior officials for meetings once every two months over the course of two to three years will entail expenses. Making sure a Steering Group is well-funded will be important, in light of the fact that the SG will approve a budgeted work plan, oversee the work of an Independent Reconciler and communicate the first round of report findings to the nation. Relatively early on in the process, some members of the SG may also need to travel to successful EITI implementing states in Central Asia or West Africa to learn first hand how EITI is done, and such a trip (or trips) will entail considerable expense.

DFID has budgeted $10,000 to cover the costs of Steering Group meetings in 2008, and $50,000 to cover the cost of a learning trip for government and civil society figures to observe an EITI implementing state, also in 2008. Expenditure of these funds will be triggered by the government’s formal endorsement of EITI.

9.2 The establishment and running of the Secretariat

The SG would probably meet about every two months to refine and make important decisions. To ensure that meetings are set up and run smoothly, and that the decisions to be approved (or amended) are well conceptualized ahead of time, a Secretariat is required. According to the draft Presidential Regulation, a CEO will be hired through a competitive process to run such a Secretariat. An adequately large space will need to be secured for a Secretariat, complete with furnishings, telecommunications and computing facilities, and support personnel. DFID has budgeted $60,000 to cover the costs of running the Secretariat in 2008. Expenditure of these funds will be triggered by the government’s endorsement of EITI or an equivalent national process.

9.3 The work of the Independent Reconcilers

The core of EITI is the reporting-reconciliation process, and this requires the work of highly professional, skilled auditors. Auditors do not only collect reports from industry and government and reconcile them, but they usually have to work with these stakeholders to ensure that they are satisfied with the reporting templates, and in many cases around the world, assist government in filling out the templates.

The World Bank’s EITI Multi Donor Trust Fund (MDTF) guarantees that, upon its formal adoption of EITI, that there will be sufficient funding and future commitments to the MDTF to accommodate Indonesia's first national reconciliation. The MDTF recognizes that this will be a substantial sum, and has observed that if Indonesia’s program turns out to be anything like Nigeria’s, implementation may cost on the order of US$2 million. Given the complexity of Indonesia's revenue system and the fact that it also has a substantial mining industry (which Nigeria lacks) the MDTF recognizes that this costing may well be conservative. The MDTF is well positioned at this point in time to provide this support to Indonesia, and has several donors who are willing to provide additional support to the MDTF, again in the event that Indonesia adopts the initiative.

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9.4 The communication of findings to the public Once the first set of reports have been submitted, reconciled, and the results written up and published, the results should be actively communicated to the public. At a minimum, this would entail a series of regional workshops and a national workshop, where adequate time is given to both clearly present the findings to the public as well as receive questions and comments. Other avenues to communicate results to the public could include newspaper advertisements, radio and TV talk shows, and other less traditional forms of media. Communication would ideally be overseen and funded by the Steering Group or the Secretariat. Funding could be sought from the MDTF.

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10.0 Public domain data; existing financial audit schemes

Several in government have asked whether Indonesia really needs to join the EITI, in view of the fact that some degree of reporting and auditing by government already takes place. Officials in both the Ministry of Energy and Mineral Resources and the Ministry of Planning have pointed to the need to evaluate the extent to which there is public domain data on extractive industries’ revenue payments and receipts in Indonesia today, and to assess existing public audit schemes for oil & gas and mining and how effective they are. 10.1 Government reporting The Ministry of Finance publishes some extractive industry revenue figures, but in a highly aggregated form. See Table 2 below, which shows that extractive industry revenues made up almost a third of all revenue collected by the government of Indonesia in 2006. The main extractive industry revenue stream, constituting almost three quarters of all such revenue, is so-called “oil and gas non-tax revenue.” This is believed to refer to the surrendering of Equity Oil and Gas by producers to the government. Table 2: Extractive industry contributions to the Indonesian National Budget

Type of revenue or expenditure 2006 2007

Oil and gas non-tax revenue 158.1 124.8

Oil and gas tax revenue 43.2 44.0

Mining non-tax revenue 3.6 5.8

Total extractive industry revenue 204.9 174.6

Total government revenue 636.2 707.8 Notes: All figures come from the Indonesian Ministry of Finance. Figures are realized and audited. All figures are in trillions of Indonesian Rupiah. Although exchange rates fluctuate, a rule of thumb is that 9,000 Indonesian Rupiah = 1 US dollar.

As shown in Table 2 above, most of the remaining quarter of Ministry of Finance published extractive industry revenue figures is a single line that refers to the various type of taxes paid by oil and gas companies, including income taxes, branch profit taxes, value added taxes, withholding taxes and import duties. With respect to the mining sector, the Ministry of Finance only releases figures for non-tax revenues (mineral royalties) paid by mining companies to government. However, mining income taxes constitute a much larger stream of revenue than do mining royalties. Until 2006, BP Migas shared with the US Embassy information on who owned shares in each of the nation’s approximately 190 Production Sharing Contracts, and how much oil and gas each produced. This information was then reproduced in the Embassy’s Petroleum Report Indonesia. In 2007, BP Migas stopped sharing such information with the Embassy. The Ministry of Energy and Mineral Resources’ Directorate General of Oil and Gas published a 2005 profile of the 45 most active Production Sharing Contracts, including who owns these licenses, the maps of where production is located, annual costs of production, and how much oil and gas is being produced (although not how much revenue is being paid by them). 10.2 Industry reporting Oil, gas and mining producers prepare detailed internal monthly reports summarizing their production, sales, and liability to pay some taxes and royalties.

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Oil production is reported continuously to government, along with monthly recalculations of production shares expected to be conveyed to government. Gas production shares are calculated quarterly. A quarterly calculation is also done to advise independent trustees on how to split gas revenues between contractors and the government (after deduction of pipeline and marketing costs). An annual cash settlement based on final production of both oil and gas is done at year end by a multi-agency committee. However, none of this is reported to the public. Coal producers pay royalties quarterly in arrears, and pay corporate tax of one percent of sales every month. This is reported on a quarterly basis to the Directorate General of Minerals and Coal in the Ministry of Energy and Mineral Resources, but is not public information. District licensed mines pay royalties as production leaves the mining area and this is said to be reported monthly to district governments, but such information is not public. Minerals producers pay royalties quarterly in arrears and may pay monthly installments of corporate tax. Monthly reports are conveyed to the Ministry of Energy and Mineral Resources’ Directorate General of Minerals and Coal, as are more comprehensive quarterly and annual reports. These reports are not public. Only Freeport and Newmont put their conveyances to government in the press. The Government never confirms or denies the numbers that Freeport and Newmont claim to have paid but provincial governments sometimes go to the press because they see discrepancies between what they are being given/told by the Central Government and what Freeport and Newmont announce. Oil, gas and minerals companies that are listed in overseas stock exchanges report revenues paid to governments worldwide as a single aggregated figure in their annual reports. For those listed in Indonesia, revenues paid to the government of Indonesia are reported as a single aggregated figure. 10.3 Auditing by government The Financial Auditing Body or BPK is one of the nation’s two supreme audit authorities. With some exceptions, BPK can audit almost any government agency or company that it wants to, operates totally independently, and publicly discloses the findings of all its audits once it has reported them to the Indonesian parliament. A new law was passed in November, 2006 which augmented BPK powers. In 2002 BPK conducted an audit of the Pertamina-owned Singapore based firm, Petral, which markets some of the government’s share of equity oil, and imports refined petroleum products into Indonesia. The findings of the BPK audit are now being used to inform a court case against officials in Petral, and pending before an anti-corruption inter-ministerial working team chaired by the Indonesian Attorney General called Timtastipikor. BPK in 2006 conducted audits of the cost recovery practices of five Production Sharing Contracts. The basic thrust of these audits was to assess the extent to which items claimed as cost recoverable should, in fact, have been cost recoverable. In 2007, BPK audited both the cost recovery dimensions of, as well as the sharing of equity oil with the government by eleven additional Production Sharing Contracts. In practice, these reports should be public. In reality, they are not easy to come by. The Finance and Development Supervision Body or BPKP is the second of Indonesia’s two supreme audit agencies. A Director in the Ministry of Energy has asked how EITI would differ from the work of the BPKP’s Team for the Optimalization of Government Receipts (OPN).

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The OPN is led by the two senior-most officials from the Coordinating Ministry for the Economy, but most of the work is done by the BPKP itself. OPN is charged with increasing government receipts, but its main focus is on non-tax revenues. On the oil and gas side, OPN has also conducted audits of 40 of the largest oil and gas producing blocks (Indonesia has about 190 oil and gas blocks, with only about a quarter in production). These oil and gas audits touched upon cost recovery, corporate tax, and branch profits tax, although not withholding taxes. On the mining side, OPN’s major accomplishments have been in the coal sector, where the tax and royalty payments of 25 large coal producers have been audited. (Indonesia has about 80 large nationally-licensed coal companies, but many of these are not yet in production). All in all, the sweep of OPN’s work is impressive. Although it does not cover each type of large revenue stream of each major firm in each major extractive sector, a lot appears to have been accomplished. A major limitation is that BPKP audits are confidential. They can only be publicly released with the consent of either the government entity that requested them (in most cases, either the Ministry of Energy or BP Migas) or the company audited. The results of BPKP’s audits of the energy and mining industry have in large measure not been followed up. This lack of follow up may be attributable to the fact that the audit results are secret, which insulates them from mechanisms of accountability. The Executive Agency for Upstream Oil and Gas Business Activities (BP Migas) also audits many if not most Production Sharing Contracts each year. Detailed production and financial figures -- down to not only the PSC level, but even to the actual block level -- are maintained by the BP Migas’s Deputy for Finance, Economics and Marketing, and are published in the form of a secret quarterly report. This report, however, is neither audited nor is its accuracy confirmed. Indeed it has been affixed with a disclaimer and an adverse opinion from the Financial Audit Agency (BPK) because inappropriate accounting policies are used, or policies that are not consistent with local or international standards. BP Migas’s Deputy for Economics, Finance and Marketing also leads an interagency working group whose purpose is to harmonize figures maintained by Bank Indonesia, BP Migas, the Ministry of Energy and Mineral Resources, the Ministry of Finance, and Pertamina on the volume and value of equity oil and gas and Domestic Market Obligation oil conveyed by producers to government. The team maintains they have come across instances where companies have reported conveying higher volumes of oil to government than the government reported receiving, but never the reverse. The findings of this team are not public, but they are shared on a quarterly basis with local government representatives, to help counteract suspicions that local governments now seem to harbor with respect to being shortchanged where oil, gas and mining revenue sharing are concerned. 10.4 Adequacy of current levels of reporting and auditing In Indonesia, some oil, gas and minerals benefit streams are reported by some producers, typically to some government agencies, and this information is sometimes made public by the agencies, though rarely in sufficient detail to be particularly illuminating, and in no cases is its accuracy guaranteed. In short, the amount of taxes, royalties and production sharing conveyed by each oil, gas and mining firm to government, and collected by government, is for the most part not public knowledge. With respect to auditing, many government agencies audit many companies. But most of the results of these audits are secret and their accuracy is not guaranteed. In short, EITI would break new ground in Indonesia.

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Glossary

Anti-Corruption Commission (KPK)

Indonesian government body for combating corruption. The Commission is overseeing the work of lawyers who are drafting a proposed Presidential Regulation to sanction the carrying out of an extractive industries revenue transparency process in Indonesia.

Bank Indonesia (BI) Indonesia’s central bank. The proceeds from sale of the government’s share of equity oil makes its way to BI Account # 600.000, which is under the control of the Directorate of Non-Tax Revenue of the Ministry of Finance. Oil and gas producers also pay corporate income taxes and branch profit taxes into this same account. BI Account #600.000 is, by many orders of magnitude, the single largest repository for extractive industry revenues in Indonesia.

Bank Nasional Indonesia (BNI)

One of several state-owned banks in Indonesia. The government’s share of equity oil sold by Pertamina to overseas buyers is reportedly conveyed to a Pertamina account in BNI known as the Crude Oil Account, before some portion of these same funds are then paid back out by Pertamina to BI account # 600.000.

Benefit Stream Any tax, royalty, fee or production sharing officially conveyed by an oil, gas or mineral producer to a government, or an agent of a government.

Branch Profits Tax A tax equal to 20 percent of corporate income tax paid by oil and gas producers to BI Account # 600.000, which is under the control of the Directorate for Non-Tax Revenues.

British Petroleum (BP) An oil and gas producer which is developing Indonesia’s newest large gas field in Papua, and building an LNG plant there. BP was an early strong supporter of EITI, and a past member of the EITI International Board.

ChevronTexaco Producer of approximately half of Indonesia’s oil, in Riau province on the island of Sumatra. ChevronTexaco currently serves as an alternate member on the EITI International Board.

Coordinating Ministry for the Economy

A ministry with power to call meetings with, and coordinate between, the two most EITI-relevant ministries in the Indonesian government - the Ministry of Energy and Mineral Resources and the Ministry of Finance. In principle, the Coordinating Ministry for the Economy would be an excellent home for EITI.

Corporate Income Tax A corporate income tax is paid by oil, gas and mineral producers at 30 percent, although for oil and gas producers with early generation Production Sharing Contracts, the rate is as high as 45 percent. Oil and gas producers pay corporate income tax to BI Account # 600.000, which is under the control of the Directorate for Non-Tax Revenues in the Ministry of Finance; mining producers pay corporate income taxes to the Treasury.

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Cost Recovery A certain amount of dollars per barrel of oil, or per million cubic feet of gas, intended to cover production costs, exploration costs and capital expenditures, which producers are permitted to retain once they enter the production phase, after which the remainder of that barrel of oil or million cubic meters of gas will be subject to production sharing and taxation.

Data Fee Fees for the purchase of seismic data from PT. Patra Nusa Data, paid by oil and gas companies to the Directorate General of Oil and Gas in the Ministry of Energy and Mineral Resources.

Domestic Market Obligation (DMO) gas

Gas producers will soon be required to convey a quarter of their total gas production to the domestic market, though to whom or at what price has yet to be determined.

Domestic Market Obligation (DMO) oil

In addition to giving to the government a large share of equity oil, producers are also required to set aside up to 25 percent of their own equity oil, normally for use by Pertamina’s domestic refineries, although there are also indications that such oil may also at times be sold on the world market by Pertamina’s Overseas Marketing Division. The producer will receive full ICP price for DMO oil during the first five years of production and after this receive as little as 20 cents per barrel for it, in the case of early generation Production Sharing Contracts.

Extractive Industries Transparency Initiative (EITI)

An international initiative voluntarily entered into by resource rich countries. Governments that sign up to the initiative require the reporting of oil, gas and mineral revenues conveyed by industries to government, as well as collected by government from industry.

EITI Secretariat The EITI Secretariat is the first point of contact for all organizations involved and interested in the EITI. It is an independent Secretariat based in Oslo, Norway.

EITI Trust Fund A multi-donor trust fund, administered by the World Bank used by many donors to channel support to EITI-implementing countries.

EITI Board The key decision making body for the EITI, headed by an elected Chair. The membership of the EITI Board is determined at an EITI Conference, held every two years.

Equipment and Services Bonus

A bonus paid by some but not all oil and gas companies, sometimes in kind (for example, in the form of donation of computers), and sometimes in cash, to the Directorate General of Oil and Gas, in the Ministry of Energy and Mineral Resources.

Equity Gas Gas producers are required to share with government a large percentage of their production. This is referred to as equity gas. The percentage of equity gas that goes to government differs for each producer, and is specified in the Production Sharing Contract. Producer-government gas split percentages generally range from 30-70 to 40-60.

Equity Oil Oil producers are required to share with government a large percentage of their production. This is referred to as equity oil.

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The percentage of equity oil that goes to government differs for each producer, and is specified in the Production Sharing Contract. Producer-government oil split percentages generally are 15-85 but may be set at 35-65 for marginal oil fields.

Executive Agency for Upstream Oil and Gas Business Activities (BP Migas)

A government body created in 2001, whose responsibilities include the drawing up and signing of production sharing contracts, the setting and annual adjustment of the cost recovery, and the approval of annual production plans of and the importation of capital equipment by contractors.

ExxonMobil World’s largest oil company. Developer of Indonesia’s largest new oil field in a decade, on the border between Central and East Java. Full member of the EITI International Board.

Fee for Hiring Expatriates (DPKK)

A charge for each expatriate hired by an oil, gas or mineral producer, paid to the Ministry of Manpower.

Fee for Training Indonesian Nationals (IWPL)

A fee paid to overseas training providers nominated by BP Migas for the training of Indonesians who work in the oil and gas sector.

Finance and Development Supervision Body (BPKP)

A state agency under the direct control of the President which serves as the government’s internal auditor.

Financial Audit Agency (BPK) An independent high level institution theoretically on par with the presidency, the Parliament, and the Supreme Court, which functions as the external auditor of government institutions.

Freeport McMoran The largest copper and gold producer in Indonesia, and the country’s largest taxpayer.

General Working Advance Funds

A petty cash account of US$75,000 maintained by each Production Sharing Contractor to fund various BP Migas activities.

Import Duty An duty of variable percentage based on the type of good that is being imported, under the regulatory control of the Directorate General of Customs, but paid to the Directorate General of Treasury. This is one of three types of revenue paid on imports. The other two are the withholding tax on the value of imported goods and the value added tax.

Independent Reconciler One or more individuals, often from a reputable accounting company, who work with government and industry stakeholders to design EITI reporting templates, attempt to reconcile those templates after they have been submitted, and then report on findings.

Indonesian Coal Mining Association (ICMA)

An interest group representing all coal producers in Indonesia, foreign and domestic, private and state-owned.

Indonesian Crude Price (ICP) A reference price which Pertamina is required to pay to Account #600.000 in Bank Indonesia for all DMO oil and equity oil that Pertamina refineries consume, as well as for all government equity oil that Pertamina markets overseas.

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Indonesian Mining Association (IMA)

An interest group representing all metals and mineral producers in Indonesia, foreign and domestic, private and state-owned.

Indonesian Petroleum Association (IPA)

An interest group representing all oil and gas producers in Indonesia, foreign and domestic, private and state-owned.

Joint Study Fee Fee paid by oil and gas companies to one of four Indonesian universities nominated by the Directorate General for Oil and Gas to assist companies in producing studies to support their bids for new acreage.

Liquid Natural Gas (LNG) LNG is natural gas processed into liquid form, so it can be transported in ships. Indonesia currently has three gas liquefaction plants, two already built in East Kalimantan and North Sumatra provinces, and one being built in Papua province.

Medco Indonesia’s largest private domestic oil and gas producer.

Mineral Royalty A royalty based on a fixed percentage of the price of a given metal or mineral, paid to the Directorate for Mineral and Coal Enterprises Development, of the Ministry of Energy and Mineral Resources.

Ministry of Energy and Mineral Resources

The Ministry that regulates the oil, gas and mining industries. Many government stakeholders in Indonesia would prefer that the Minister of Energy and Mineral Resources head any extractive industries revenue transparency process in Indonesia.

Ministry of Energy and Mineral Resources, Directorate General of Minerals and Coal

The Directorate General that regulates the minerals and coal sector. This Directorate General contains the Directorate of Mineral and Coal Enterprises Development, which is the recipient of mineral royalties.

Ministry of Energy and Mineral Resources, Directorate General of Oil and Gas

The Directorate General that regulates the oil and gas sector. This Directorate General is the direct or indirect recipient of a number of smaller oil and gas benefit streams, including signature and production bonuses, data fees and performance bonds. Transparency is a part of this Directorate General’s work program.

Ministry of Finance The Ministry of Finance is the initial or ultimate recipient of nearly all extractive industry revenue flows in Indonesia. The participation of the Ministry of Finance in an extractive industries revenue transparency undertaking will be crucial.

Ministry of Finance, Directorate General of Budget (DG Budget)

The Directorate General of Budget contains the Directorate of Non-Tax Revenues, which is the ultimate recipient of the proceeds from the sale of the government’s share of equity oil and gas, as well as corporate income taxes and branch profits taxes paid by oil and gas producers. The participation of the Directorate General of Budget in EITI would be essential.

Ministry of Finance, Directorate General of Customs (DG Customs)

The Directorate General of Customs has regulatory control over duties paid on goods imported by oil, gas and minerals producers.

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Ministry of Finance, Directorate General of Tax (DG Tax)

The Directorate General of Tax oversees the Directorate of Tax Regulation I, which has regulatory control over Value Added Taxes. DG Tax also oversees the Directorate of Tax Regulation II, which has regulatory control over corporate income taxes from mineral producers, and withholding taxes paid by oil, gas and mineral producers on (a) dividends, interest, royalties, and rental and service fees conveyed to foreign and domestic entities, (b) salaries of employees, and (c) the value of imported goods. The participation of the DG Tax in EITI would be helpful.

Ministry of Finance, Directorate General of Treasury (DG Treasury)

The participation of the Directorate General of Treasury in EITI or a national equivalent initiative could be important because it is the ultimate recipient of most if not all of the extractive industry tax streams that are under the regulatory oversight of the Directorate General of Tax (see above).

National Multi-stakeholder Steering Group

A steering group made up of representatives of government, industry and civil society which oversees EITI (or equivalent) processes in implementing countries. A Presidential Regulation on extractive industry revenue transparency now being drafted by the Anti Corruption Commission refers to such a steering group as a Badan Pengawas (Oversight Body).

Newmont A mining company which has already endorsed EITI at its headquarters level, and which runs Indonesia’s second-largest copper mine on the island of Sumbawa.

Performance Bond A bond put up by newer Production Sharing Contractors, held by the Directorate General of Oil and Gas, and intended to be returned to contractors unless they fail to fulfill their exploration objectives during the first three years of their contract period.

Pertamina The Indonesian national oil company. Its Overseas Marketing Division handles most of the overseas marketing of the government’s share of equity oil, and in this sense is the initial recipient of one of the largest extractive industry revenue streams in Indonesia. Pertamina’s Refining Division is the recipient (and payer for) all volumes of government equity oil and gas and DMO oil that are not sold or traded abroad by the Overseas Marketing Division. In short, Pertamina serves a state function, and its membership on the steering group of EITI (or Indonesian equivalent initiative) would be necessary.

Pertamina, Overseas Marketing Division

Sells or trades that portion of the government equity oil not consumed by Indonesia’s refineries, and in this sense is the initial recipient of the one of the largest extractive industry revenue streams in Indonesia.

Pertamina, Refining Division The recipient (and payer for) all volumes of government equity oil and gas and DMO oil not sold or traded to overseas buyers.

Presidential Regulation The highest level regulation in Indonesia that can go into force without approval of the Indonesian parliament. KPK attorneys argue that this is the optimal level of regulation for the sanctioning of an EITI or equivalent process in Indonesia.

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Production Bonus A lump sum paid by oil and gas producers, at the time that production begins, to the Directorate General of Oil and Gas, in the Ministry of Energy and Mineral Resources.

Production Sharing A practice where oil and gas is divided according to a predetermined formula between the producer and the government. In Indonesia, production sharing oil and gas are referred to as “equity oil” and “equity gas.”

Production Sharing Contract (PSC)

A 30 year contract signed between oil and gas producers and the government, in which the formula for the sharing equity oil and gas with government is specified, along with the DMO oil price that government will pay to the producer, and where exemptions from selected taxes and duties are laid out. PSCs are considered secret.

Publish What You Pay (PWYP) Coalition

An international coalition of more than 300 NGOs that supports extractive industry revenue and contract transparency, and the EITI. Indonesian civil society formed a national PWYP coalition in November, 2007 with 45 members.

Retirement contributions Oil, gas and mining firms are all required to join and contribute to the state-run workers’ social security program Jamsostek. This fund is said to provide basic retirement, work accident, and continuing disability coverage for Indonesian workers.

Revenue Sharing Indonesian law specifies that a fixed percentage of certain types of oil, gas and mineral revenues must be shared with producing provinces and districts. Revenue sharing formulas include, but are not limited to, the requirement that 15 percent of the proceeds from sale of the government’s share of equity oil must be shared with the producing province and all districts within that province, as must 30 percent from the sale of the government’s share of equity gas, and 64 percent of the mineral royalty. In Aceh and Papua the share of revenues distributed is significantly higher.

Scholarship Fund Funds paid to BP Migas in an amount based on a contractor’s production of oil. A consortium consisting of the contractor and BP Migas is said to nominate BP Migas and possibly other individuals to use these funds to pursue educational activities in overseas locations.

Secretariat A Secretariat is set up to support the work of the EITI Steering Group, so that the latter need only meet periodically to make necessary decisions.

Signature Bonus A lump sum paid by oil and gas producers at the time of the actual signing of their Production Sharing Contracts, to the Directorate General of Oil and Gas, in the Ministry of Energy and Mineral Resources.

Steering Group See “National Multi-stakeholder Steering Group.”

Total Indonesia’s largest gas producer. Total currently serves as an

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alternate member of the EITI International Board.

Transparency International – Indonesia (TI-I)

The Indonesian branch of Transparency International. TI-I made a strong effort to educate Indonesian NGOs about EITI in 2007.

Value Added Tax (VAT) A tax of 10 percent on most payments by oil, gas and mining companies to vendors onshore and offshore, and on imports, paid to the Treasury.

Withholding Tax for Domestic Payments of Dividends, Interest, Royalties, and Fees for Rentals and Services.

Conveyances by oil, gas and mining companies of dividends to domestic entities, interest to domestic lenders, royalties to holders of domestic patents, and fees to domestic providers of services and rentals, is taxed at rates ranging from 1.5 to 15 percent, and such taxes are paid to the Treasury.

Withholding Tax for Foreign Payments of Dividends, Interest, Royalties, and Fees for Rentals and Services.

Conveyances by oil, gas and mining companies of dividends to foreign entities, interest to foreign lenders, royalties to holders of foreign patents, and fees to foreign providers of services and rentals, is taxed at 20 percent and paid to the Treasury.

Withholding Tax for Salaries of Employees

Oil, gas and mineral producers pay a tax of up to 35 percent on the salaries they pay to their employees. The tax is paid to the Treasury.

Withholding Tax on the Value of Imported Goods

Oil, gas and mineral producers pay a tax of 2.5 percent on the value of most imported goods. The tax is paid to the Treasury. This is one of three revenues paid on imports. The other two are import duties and the value added tax.