The Corruption Eradiction Commission (KPK), is currently investigating a scandal surrounding a resource-based company in Buol, Sulawesi, which implicates a number of company executives.
The company, according to the KPK, was seeking a permit to extend its operations in oder to compete with another resource-based company owned by a celebrated former graft convict. The case implicates a powerful business tycoon close to the ruling party.
On several occasions the KPK has stated its intentions to refocus its resources on several strategic areas, including prevention and enforcement of anticorruption laws in resource-based industries. The Buol case could mark the start to the strategy.
This is a serious wake-up call for both the industry and the government; that the existing current business licensing practices should be thoroughly revisited.
Indonesia is bestowed with abundant natural resources, waiting for development for the nation’s welfare. However, when we include governance and social matters, such as rights to land, a messy regulatory regime, security affairs, and calculate the cost of interacting with social affairs, the prospect for development of natural resource companies, e.g. mining and plantations, could be no longer be appealing.
The Fraser Institute Annual Survey of Mining Companies 2011 surveyed 93 jurisdictions for their mineral potential combined with the investment climate.
Interestingly, Indonesia is placed among the top 10 for mineral potential, but among the bottom 10 for policy potential. What a contradictory fact.
The Policy Potential Index is a composite of government policies, e.g. uncertainty concerning the regulations, uncertainty concerning native land claims and forest status, infrastructure, political stability, labor issues, land data and security.
On paper, at least Indonesia has a friendly investment law. The resource-based industry also has an export orientation strategy and now serves as the backbone of Indonesian exports.
Sustainable practices have also been common in managing natural resources, with a growing adoption of international sustainable certification, servicing both established markets in developed and developing countries.
What are the governance problems of Indonesia’s natural resources industries?
First are the lengthy and uncertain procedures to obtain necessary permits. There are different permits, licenses and approvals to be obtained from various government authorities on incorporation of the company, land ownership, conversion of forest status, operational licensing, export licensing, etc.
Investors, either MNCs or small companies may need to undergo a quite lengthy and costly process to obtain complete licenses. This is where irresponsible government officials could exploit companies seeking shortcuts.
Second, an investor has to consider the governance challenges. The natural resource industry regulatory environment has been government-heavy with more revoking power and less dispute resolution.
The regulatory regime gives government officials unprecedented power to revoke licenses, even for some trivial and unintentional ones. We have no system in place for typical notification, remedy and appeal procedures.
I believe that there is an important role that should be taken over by the industry associations to voice industry concerns against an adversary investment climate and unprofessional government officials. We cannot rely on companies working individually to say no.
What the Buol case is showing is that these companies sometimes have no options for obtaining their business licensing properly on time, other than to play by the current rules of the game set by irresponsible public officials.
This is where industry associations should step in and work hand in hand with line ministries, regional governments and other stakeholders, conducting business process reengineering, simplifying processes for obtaining (or rejecting) business licenses, and mitigating any potential misconduct.
The Indonesian government, for example, has been using Doing Business reports from the International Finance Corporation of the World Bank to see what the problems are. This is a good start because the government has set a target to upgrade the investment climate in terms of ranks in the Doing Business reports.
However, the reports tend to spot the forest, and often fail to see what lies beneath the trees, such as various permits, licenses and approvals on land ownership, conversion of forest status, operational licensing and export licensing.
The ease of doing business is not only limited to the ease of incorporation of a company, but the important ones are, after incorporation, how to secure the necessary licenses and approvals, which seem unlimited.
For a start, I would recommend the industry associations see the role of an association similar to the role of a political party. Neumann (1981) stated that there are four roles of political parties: aggregation, education, articulation and recruitment. The aggregation and articulation roles are something that a good industry association needs to have, to be able to reform the unfavorable business climate.
The Indonesian Chamber of Commerce and Industry (KADIN) needs to take the lead together with resource-based industry associations, i.e., the Indonesian Mining Association (IMA), the Indonesian Petroleum Association (IPA) and the Indonesian Palm Oil Producers Association (Gapki) in instigating changes and fostering good business governance.
The association should then aggregate the needs and express the industry’s concerns to the government for immediate solutions.
An association needs to formulate and articulate industry interests into a policy proposal submitted to the government to be a public policy. We can see that while some resource-based industry associations object to some government policies, i.e. export duty for palm oil exports and mineral commodities, or even the export ban for minerals, most of the articulations were less than strong.
The associations expressed soft reactions, and will not be capable of challenging unfair policies. We cannot expect an individual company to voice rejection to a certain policy, but it should be taken by the association and the articulation should send strong signals that the policy is unfavorable.
We need to rethink engagement practices that foster more collaborative approaches to regulatory-making at a macro level, and business licensing approval at a company level.
This is the role that should be taken by industry associations, in conjunction with line ministries and regional governments that grant lincenses, and if the association needs a stronger push for reforming the unfavorable business climate, an anti-corruption institution such as the KPK could be invited to further boost a two-tier reform on the business and public sector towards creating ethical corporate conduct in a good business environment.