Governance of Extractive Industries in
Southeast Asia
(scoping study for IESR)
Jakarta, Indonesia
17 April 2013
Energy Analytics & Consulting
The “resource curse” and EI governance
• Extractive industries (EI) a key source of income for many developing
economies
• Yet resource-abundant countries often perform more poorly in economic
terms: the “resource curse”
• High economic rents from EI lead to greater incentive for misappropriation
and corruption
• EI windfall profits provide government with opportunity to derive political
benefit of expanded public sector without the political costs of increasing
tax rates
• Over-reliance on EI revenue can create weak political and economic
institutions
• Governance is central to how effectively countries use their resources
• Growing emphasis on EI transparency by organizations such as the
Extractive Industries Transparency Initiative (EITI)
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Objectives and Methodology
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Objective
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Evaluate the governance of extractive industries in South-east Asian
countries
Methodology
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Develop a number of case studies from South-east Asian economies
Apply assessment criteria for transparency and accountability,
quality of regulatory framework and economic efficiency and equity
considerations
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Case studies
Countries
Crude Oil
Natural Gas
Indonesia
Coal
Copper
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Gold
Malaysia
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Philippines
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Vietnam
Cambodia
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Timor Leste
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Myanmar
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Assessment criteria
• Transparency and Accountability
– Transparency
– Accountability
– Corruption and Regulatory Capture
• Quality of regulatory framework
– Regulatory clarity, coherence and certainty
– Administrative Capacity
• Economic efficiency and equity
– Revenue sharing arrangements
– Incentives for investment
– Environmental and socio-political externalities
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Key Challenges to EI Governance
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Lack of regulatory clarity, uncertainty in interpretation and implementation of
policies and regulations
Poor administrative coherence, with overlapping jurisdictions between
different levels of government and across different ministries and agencies
Decentralization not matched by administrative capacity building at regional
and local level
Small scale mining and its attendant problems (externalities, H&S,
sustainability)
Regulatory agencies sometimes captured by interest groups (not unique to
developing countries)
Transparency and Accountability (“rule of law”) in Southeast Asia reflect
political and social culture of each country
Performance in economic efficiency (maximizing net present value of
mineral resources) and equity (distribution and investment of resource
rents) varies across countries in Southeast Asia
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Political Economy of EI
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Between Host Country (HC) and Foreign Investor (FI)
– Aspects of resource nationalism with unintended consequences, often a function
of price cycles or political cycles (elections)
– HC subject to populist pressure to capture more of the resource rent than
originally agreed with FI
– “Resource trap”: while HC can always extract short run gain, country is hurt in
the long run as investment risk premium demanded by MNCs increases
– “Creeping nationalization” not only in non-OECD countries (such as Bolivia or
Venezuela); also includes OECD countries (e.g. Britain in the North Sea, US in
Prudhoe Bay)
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Within HC
– Resource rents reduces cost of poor governance, as transfers (both legal and
illegal) can “buy” important constituencies and powerful interests
– Large resource rents can subvert rule of law and lead to the “resource curse”
(Southeast Asia has generally avoided the worse symptoms)
– Economic efficiency and equity can be compromised at great cost to HC
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Good EI Governance: Fundamentals
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For HC-FI relations, encourage “self-enforcing” contracts for PSCs, leases,
royalties, taxes and technology transfer regulations
– Contracts should flexibly allow for a change in the payoff structure such than
neither party gets an “undue” share of windfall profits or adverse outcomes
– Other mitigation actions: political risk insurance, JV agreements to alleviate
political pressure on FI
– Focus on long run benefits, despite electoral or commodity price cycles
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For economic efficiency in HC, promote stabilization of revenue streams
– Allow full operational autonomy to state-owned EI enterprises to run as
commercial enterprises (e.g. Petronas)
– Establish sovereign wealth funds (SWFs) for large resource rents with
transparency and credible commitments to economic development objectives
– Ensure policy coherence and clear jurisdiction guidelines across ministries of
energy & mineral resources, finance, planning and trade & industry
– Practice equitable distribution of employment and resource rents across national,
regional and local stakeholders
– Have separate and equitable regulations for the local, small-scale sector where
possible, with local autonomy and self-governance guidelines
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Case Studies: Details
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Coal in Indonesia
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Largest exporter of thermal coal (with low calorific value)
– Comparatively small level of domestic consumption
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Decentralization program starting 1999 has created challenges for EI
governance
Transparency:
Stakeholders required to play an active role in the regulatory process, but
effectiveness of public consultation process in question
– Recent roll-backs in mineral policy, such as the mineral processing requirement,
opposed by those outside government
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Indonesia’s decentralized governance structure has resulted in increased
opportunities for regulatory capture as transparency and accountability are
compromised.
Overlapping authority and conflicts of interest exist in dealing with illegal
mining problems
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Coal in Indonesia(2)
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Quality of regulatory framework:
Inadequate alignment between central governmental agencies and local
governments
High degree of uncertainty as to interpretation and enforcement of regulations
Lack of institutional capacity at the local government level
Economic efficiency and equity:
Small-scale mining lacks economies of scale and hence needs to be curbed.
A longer operation period would create incentives for maximizing resource
value, but the new mining law has reduced the duration of mining leases.
Recommendations
An institution that coordinates extractive industry regulations should be set up
Indonesia should raise the transparency with which regulations are
formulated.
There is a need for very clear guidelines as to the extent of the local
government’s regulatory authority.
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Coal in Vietnam
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Leading supplier of anthracitic coal in the Asia-Pacific region.
Despite several reforms, the coal sector suffers from lack of transparency
and inconsistency in the interpretation of regulations
Transparency and Accountability
There is evidence of stakeholder consultation but it is unclear whether their
inputs were considered when formulating Vietnam's new mineral law
New mineral law requires that exploration and mining rights are auctioned,
improving transparency in how licenses are handed out
Increasing illegalities in recent years, resulting from unclear laws, poorly
equipped local governments, and collusion and corruption.
Economic efficiency and equity
Marginal cost pricing is an implicit subsidy to inefficient mines and could be
manipulated as mining company is better informed of costs than regulator
Vietnam has been experimenting with different tax formulae in an attempt to
optimize on revenues, but frequent changes in taxation policy can have a
detrimental impact of investor confidence in the sector.
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Coal in Vietnam (2)
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Quality of regulatory framework:
Regulations governing the extractive industry and coal often lack clarity
Frequent lack of coordination amongst government entities which result in
regulations that conflict in their objectives or duplicate effort.
The Mineral Law 2010 does not address the issue of uncertainty brought
about by the devolution of authority between the centre and the provinces.
Regional governments lack the institutional capacity to administer their new
responsibilities and lack of accountability for their actions.
Recommendations:
Vietnam needs to have a formal process for stakeholder consultation.
Regulatory coherence can be improved by setting up a formal institution
that aligns policies with Vietnam’s broader development objectives.
Vietnam should clearly designate the extent of regulatory authority that local
government regulatory authorities have.
Raising the transparency of the regulatory process will reduce the potential
for corruption and regulatory capture.
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Natural Gas in Malaysia
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Malaysia is a significant producer and exporter of natural gas
PETRONAS has ownership rights of all gas resources in Malaysia
Transparency and accountability
Transparency has been increasing, but there remains very little
transparency with respect to how the government spends the revenue.
Accountability is very limited, since PETRONAS is not directly accountable
to Malaysian citizens and enforces the same rules that it itself is bound by.
The governance structure lends itself to a risk of regulatory capture, but the
empirical evidence generally suggests that this has not occurred.
Quality of Regulatory Framework
PETRONAS generally has a good reputation for governance and has strong
administrative and technical capacity.
The absence of a distinct regulator has meant that many of the relevant
procedures (e.g. the process for production-sharing) are not encoded in law
Malaysia provides a favorable business environment with low levels of
regulatory uncertainty, but this may entail a lack of regulatory flexibility.
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Natural Gas in Malaysia (2)
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Economic efficiency and equity
Production-sharing contracts help maximize rent extraction from exploration
and production, without noticeably diminishing incentives for investment.
The revenue-sharing is lopsided in favor of the federal government
Policies encouraging a high savings rate, macroeconomic and revenue
management policies to counter the Dutch disease, and economic
diversification policies have enabled Malaysia to avoid the resource curse.
Recommendations
Increased transparency is needed on spending of natural gas revenues
A regulatory body that is independent from PETRONAS should be set up
The Petroleum Regulations should include guidelines on many of the
relevant procedures not encoded in law. This will increase regulatory clarity
A more equitable revenue-sharing scheme between the federal and state
governments is recommended e.g. by increasing the royalty rate
The policy of using gas revenues to support fuel subsidies, which are
distortionary and have resulted in a fiscal deficit, should be reconsidered,
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Natural Gas in the Philippines
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The Philippines consumes all of the gas it produces.
Gas production has increased steadily since 2001 when the Malampaya
gas project began operating.
Transparency and Accountability
Transparency is enhanced by the use of public bidding procedures, but
transparency is lacking in the collection and disbursement of gas revenue.
The regulatory process is characterized by a certain degree of
accountability, with multiple stakeholders involved.
Quality of the regulatory framework
Lack of clarity is not generally an issue, but poorly defined property rights
and territorial jurisdiction have sometimes been problematic.
There exists a certain amount of regulatory coherence
Delays and lags in policy formulation and implementation are problematic
Regulatory certainty has been enhanced by broad stabilization provision in
the model service contract but this has constrained the flexibility of the
government to adjust and tweak regulations.
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Natural Gas in the Philippines (2)
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The service contracts allow the majority of proceeds to accrue to the government, but
constrains the ability of the government to increase rent when profitability is high and
has a high cost recovery limit of 70%.
The provision of fiscal stability creates positive incentives for investment
There is evidence to suggest that the management of the Malampaya funds has not
always been socially optimal.
An effective environmental impact assessment process exists
The recent switch away from direct negotiations towards public bidding is likely to
increase transparency and competition in the bidding process.
Recommendations
To increase transparency, the Malampaya Fund should be included in the National
Budget and procedures for parliamentary oversight should be introduced.
The stability assurance should be narrowed and limited only to fiscal laws.
A progressive fiscal regime should be adopted, so that higher profitability leads to a
higher government share of net proceeds. The cost recovery limit should be reduced
Equity in revenue-sharing needs to be improved and the dispute over whether 25% or
40% of the Malampaya revenue should accrue to Palawan province should be rapidly
resolved in accordance with the laws.
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Oil in Timor-Leste
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Timor-Leste is ranked 52nd in the world in terms of oil production
Timor-Leste is the 3rd country to be awarded EITI status, but the benefits of
EI transparency have been eroded to an extent by high corruption
Transparency and accountability
Timor-Leste looks to public consultation before enacting laws, but many
organizations lack the capacity to effectively critique government proposals
The Open Budget Survey 2010 ranks Timor-Leste below average in terms
of budget transparency and reporting on financial activities
Timor-Leste has been having more frequent charges of corruption leveled
against high-standing civil servants.
Economic efficiency and equity
Timor-Leste manages its petroleum wealth via a Petroleum Fund
established in 2005, but in recent years has overdrawn from the fund
The recent revision of the Petroleum Fund Law takes on more risk,
weakening the sustainable spending rule
Timor-Leste does not yet have a supreme audit institution
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Oil in Timor-Leste (2)
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Quality of the regulatory framework
Regulations governing Timor’s petroleum sector are quite intricate
especially regarding revenue collection.
Timor-Leste has not yet enacted a law on expropriation.
The justice system is in transition so the legal foundations are an uncertain
and changing mix of Portuguese, Indonesian, United Nations interim
administration, and Timorese jurisprudence.
Government employees often lack administrative experience.
Recommendations
Transparency should not be the only criterion to judge good governance.
Timor-Leste needs to build up its regulatory capacity ensuring that
personnel are technically adept
The country needs to simplify its regulations to ensure that compliance
cannot be circumvented due to lack of understanding
Changes to the regulatory fund need to be deliberated over keeping in mind
the guiding principles for creating the fund.
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Oil in Cambodia
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Cambodia does not produce any oil and production is not expected to
commence before at least mid-2013.
The regulatory structure is highly centralized, with the Cambodian National
Petroleum Authority (CNPA) in charge of all petroleum operations.
Transparency and Accountability
Details of the contracts, revenue-sharing arrangements and signature
bonuses are not disclosed.
Accountability in the governance of Cambodia’s oil industry is very limited,
with the CNPA directly accountable only to the Prime Minister
Corruption exists to a very severe degree in Cambodia, and there are
conflicts of interest at the higher level of the governance of the oil sector.
Economic efficiency and equity
The model production-sharing contract is skewed in favor of the investing
company and the guaranteed revenue is only 16% of gross production.
Open bidding has not been conducted since the initial 1991 bidding round.
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Oil in Cambodia (2)
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Quality of the regulatory framework
The 1991 Petroleum Regulations are over 20 years old and outdated.
It is uncertain when a new regulatory will be established
Significant delays in the process for approval of production permits further
increase uncertainty.
There are legal and technical capacity constraints in the ability of the CNPA
to directly regulate and govern the petroleum industry.
Recommendations
Increased parliamentary oversight and the use of public consultation
procedures are recommended to increase accountability.
Cambodia should accelerate the process for adopting and implementing of
the new legislative framework to replace the 1991 Petroleum Regulations
Cambodia should consider modifying the production-sharing contracts to
capture a greater revenue share and reduce exposure to oil price volatility
It is recommended that Cambodia return back to an open bidding process
for awarding petroleum blocks
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Oil in Myanmar
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Oil production in Myanmar has steadily increased in the last decade
Since 2011 there has been growing foreign investor interest in the sector
Transparency and accountability
Details of the contracts and signature bonuses are not disclosed. Revenue
transparency is absent and the technique for recording oil revenues in the
national budget significantly understates the amount of revenue received.
Accountability in the governance of Myanmar’s oil industry is very limited
Corruption exists to a very severe degree in Myanmar and conflicts of interest
have led to special provisions given to military spending of oil revenue.
Quality of regulatory framework
Petroleum regulations are very outdated and unlikely to be implementable.
There is little regulatory clarity due to the absence of a workable Petroleum
Act, which has been a key barrier to foreign investment in the oil sector.
The absence of a comprehensive legislative framework and the general lack
of transparency create regulatory uncertainty and increase risks for investors.
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Oil in Myanmar (2)
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Economic efficiency and equity
The model PSC in Myanmar is geared towards maximizing the rent
accruing to the government through features such as progressive profitsharing and limited cost recovery.
It is not clear whether incentives such as tax holidays and exemptions from
export duties are sufficient to encourage foreign investment
There are legitimate concerns that the petroleum revenue generated is not
always equitably shared within Myanmar.
Recommendations
Increased parliamentary oversight, greater public consultation and
increased revenue transparency are recommended.
A comprehensive and updated legislative package is urgently needed
Given that considerable unexplored or partially explored petroleum
resources still exist, Myanmar should consider increasing the revenue share
of the contractor companies to encourage greater foreign investment
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Copper in Indonesia
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Indonesia ranks as the eight largest copper producer globally and Asia’s
second-biggest copper producer after China
Transparency and accountability
Indonesia has established a system whereby stakeholders are required to
play an active role in the regulatory process.
The decentralized governance structure has resulted in increased
opportunities for regulatory capture
Overlapping authority and conflicts of interest in dealing with illegal mining
problems pose significant concerns
Quality of regulatory framework
Indonesia’s latest mineral regulations lack clarity on issues such as the
basis for calculating the price to be paid to a divesting foreign investor
While the Ministry of Energy and Mining Resources has overall
responsibility, there are coordination problems with other ministries.
Regulatory uncertainty is a major problem that investors face in Indonesia.
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Copper in Indonesia (2)
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Economic efficiency and equity
The new mining law has reduced the duration of mining leases to the
detriment of efficient exploitation of resources
Revenue from mining is shared between the central and sub‐national
governments but it is unclear whether this arrangement is optimal.
The blanket requirement for mineral raw materials to be processed in
Indonesia rather than being exported in a raw state is economically inefficient.
Recommendations
Indonesia should raise the transparency with which the regulations are
formulated.
Staff involved in the regulatory process need to be adequately trained and
compensated well enough to be prevented from gaming the system.
An institution that coordinates the regulations that affect the extractive
industry should be set up.
There is a need for very clear guidelines as to the extent of the local
government’s regulatory authority.
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Copper in Myanmar
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Myanmar’s mining regulations have not produced the desired investment in
the minerals sector, with copper output in 2010 nearly 69% of its 2006 level
Transparency and accountability
In the past, evidence of public consultations seemed missing but Myanmar
has been seeking to make improvements in this area
The vague nature of Myanmar's mining law allows for the mining sector to be
plagued by several illegal practices.
The poorly-worded mining law allows expropriation of privately-held land.
The country’s mineral law allows the Chief Inspector of Mines to delegate her
own powers to junior inspectors raising the possibility of regulatory capture.
Economic efficiency and equity
Given that the government has the discretion on deciding whether a project is
small or large-scale leaves open room for negotiations and bribery and can
reduce the economic efficiency of the extractive industry
There is little evidence to suggest that the environmental impacts of copper
mining have been accounted for.
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Copper in Myanmar (2)
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Quality of regulatory framework
Regulations often lack clarity or contradict each other.
Myanmar’s mining law and its annexes are extremely short on standards of
good mining practice, procedures to ensure their implementation and
avenues for any public or individual recourse should practices fail.
Myanmar does not seem to have a systematic mechanism to develop,
monitor, and evaluate regulations.
There is no centralized regulatory oversight body with ‘whole of government’
responsibility for policy, making for poor policy coordination
Recommendations
Myanmar needs to regularly revisit and update its regulatory policies.
The country should set-up a formal institution that ensures alignment of
regulatory policies.
The environmental impacts of mining need to be taken into consideration.
Myanmar should raise the transparency with which the industry is regulated.
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Gold in the Philippines
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The Philippines is well-endowed with gold, but remains a small producer.
The key regulation for mining is the 1995 Mining Act, but this was suspended by
a recent Executive Order pending new legislation
Transparency and Accountability
While there is some transparency, information on specific mining projects is
confidential, fuelling local opposition to gold mining projects.
Multiple stakeholders are involved but in practice decision-making is
concentrated in the central government. However excluded groups have been
able to challenge the regime through the courts, and civil society.
Quality of the regulatory framework
Att least twenty statutes and regulations govern various aspects of mining and
property rights are often poorly defined, leading to a lack of clarity
There is significant overlap of jurisdiction between the various agencies in
mining, and regulations often overlap and contradict each other
Regulatory certainty due to frequent policy lags has been cited by mining
companies as a strong deterrent to investing in the Philippines
Administrative capacity is limited
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Gold in the Philippines (2)
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Economic efficiency and equity
The revenue-sharing arrangements in gold mining are skewed towards
mining companies
The direct contribution of gold mining (and mining in general) to the
economy has been limited, and spillover benefits are comparatively low.
Few of the benefits from gold mining accrue to local governments and
indigenous communities affected by mining operations.
There is evidence that the negative environmental and social externalities of
mining are significant and not effectively taken into account
Recommendations
A more devolved decision-making process would lead to accountability
A new legislative framework to replace the 1995 Act needs to be adopted
The revenue-sharing arrangements in the Philippines should be modified so
that the government captures a greater share of the mining revenue
Equity in revenue-sharing should be emphasized to a much greater degree
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Gold in Malaysia
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Malaysia is a tiny gold producer on the global stage
The state governments possess all minerals within their territory
Transparency and Accountability
Transparency in revenue sharing between federal and local governments is
very limited, but there is somewhat more transparency in other respects.
Gold mining governance is characterized by decentralization, but provisions
for direct public participation and consultation are weak/non-existent.
Illegal gold mining operations have been an endemic problem in recent years
in the jungles of Gua Musang and Jeli in the province of Kelantan.
Quality of regulatory framework
Federal laws and State Mineral Enactments are clear and coherent
Policy alignment is a challenge, although Malaysia continues to attempt to
resolve the issue (for instance by setting up a National Mineral Council).
Regulatory uncertainty is limited, though there is some policy uncertainty
since not all states are enthusiastic about encouraging gold mining
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Gold in Malaysia (2)
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Economic efficiency and equity
The flexible royalty regime allows the State government to extract the maximum
rent possible, although it can increase investor uncertainty.
Because state and federal revenue are clearly distinguished at the outset,
equitable revenue distribution is much less of an issue
Measures to encourage investment in gold mining have been effective
There has been particular concern in recent times over the use of cyanide in
gold mining and the consequent health effects. There is limited public
participation in the Environmental Impact Assessment (EIA) process.
Recommendations
Provisions for direct public participation in governance should be improved to
enhance accountability and to strengthen the EIA process
Coordination issues could be addressed by setting up a consolidated
governance regime applicable for the entire country
A progressive royalty regime should be adopted to increase state rents from
gold mining, and some guidelines should be introduced limiting the extent to
which the royalty rate can be varied so as to address investor uncertainty.
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