NRGI president Daniel Kaufmann recently visited Indonesia, where he met with editors from Tempo magazine. What follows is a reproduction of the resulting news story, “Good Governance Means the Rule of Law, Not the Rule of Man Prevails,” posted here with Tempo’s permission.
Measuring the social and economic development of a country has been done countless times, by means of various accepted formulas. But only in the last decade has the understanding of good governance as the key to effective development been seriously and intensively studied and researched. Based on 40 data sources, and produced by 30 organizations worldwide, since 2002, the Worldwide Governance Indicators have been applied to 200 countries to measure the country’s level of governance. This has provided watchdog groups with the necessary tools to monitor policy and initiate reforms, which also helps to immeasurably assess perceptions of corruption among businesses, public officials and politicians. Much of the work can be attributed to Dr. Daniel Kaufmann when the studies were initially conducted at the World Bank Institute, where he worked. For the past two years, Kaufmann has headed the Natural Resource Governance Institute (NRGI), which pioneered the Resource Governance Index to measure the transparency levels of countries in managing their extractive industry.
Kaufmann was in Indonesia recently to meet with public figures in government, the business community and members of the local civil society, and to be the keynote speaker at a panel discussion on ‘The Impact of Low Oil Prices on Indonesia’s Reform Agenda’ which was co-organized by the NRGI and Tempo English magazine. He was recently interviewed by journalists Hermien Y Kleden, Sadika Hamid, Gusthida Budiartie and Edward Stephens from the Tempo Media Group.
How crucial is good governance for the effective management of natural resources?
To give you the magnitude of this challenge, in 1990, 20 percent of the very poor in the world lived in resource-rich countries. Today, one billion people are poor and live in the middle of abundance. In 15 more years, if governance does not improve, half of the world’s poor will be in resource-rich countries, as countries that are not rich in natural resource will have made more eff ort (to improving governance).
How many countries can claim to carry out good governance in their extractive industries?
Only 20 percent have satisfactory (governance), but it does not mean that they have reached nirvana. Some are on their way, not doing too badly, and one of them is Indonesia. It is not ranked as well as Chile, but it is not Equatorial Guinea either.
Indonesia is ranked 14th on the Resources Governance Index. Some reformists say that we might not even be that good.
One has to look at those (listings) in perspective. This (research) covers only aspects of transparency, not the whole issue of management and governance downstream. In patterns of disclosure, it rated on a number of aspects relatively well. However, there is one component where Indonesia does not rate well, which is the overall enabling governance environment. There has been little progress in terms of the rule of law and corruption. And, last but not least, a few weeks ago Indonesia was suspended from the Extractive Industries Transparency Initiative (EITI).
How did that happen?
Because there were no reports. There are questions about Indonesia’s commitment to this important initiative.
How can that be corrected?
The real experts are in Indonesia. I can just offer a few suggestions from our international experiences. To come back aboard the EITI train will be obviously one important aspect and I do know that there are people in government who want that. It is extremely helpful for countries that are reforming to be fully integrated in this international framework. We are cautiously optimistic. But there has to be a major political commitment from the top.
Speaking of political commitment, Indonesia has taken a long time to decide on the legal framework of extractive commodities. How do you see this impacting on our quality of governance?
This is the moment to seize the opportunity and get it done. In that context, Indonesia should be very specific and get it to the ground level rather than at 30,000 feet, to clarify the roles of the ministry vis á vis the regulator—more or less in this case, the SKK Migas (oil and gas regulatory body), and vis á vis the producer, the state-owned enterprise —which is Pertamina—to have complete clarity and a modern, good division of responsibility while modernizing, corporatizing Pertamina.
Which management model—based on your international experience—would work best for Indonesia’s extractive sectors?
There are a number of options. Indonesia should weigh the different pros and cons and options and have them debated. I see a lot of duplication of roles and activities that need to be clarified.
What are the experiences of other countries that we might be able to replicate?
Petronas in Malaysia has evolved from being immature to a very significant player and they are doing (business) more efficiently. Petrosal in Brazil could serve as a model for SKK Migas down the road. They play the role of a regulator, with the appropriate degree of independence, yet it is still considered a state-owned enterprise—and it does not take any production or extraction type of role. Sometimes the danger is that one mixes too many things in one organization, and so in that sense, Petrobras is interesting.
So it does not matter if a state oil enterprise also becomes the regulator?
No. It is important to learn from the general models but we need to always ask: is it applicable (or not) for our own country?
Indonesia has a huge problem of elite capture. What is the best way to push towards that independence?
At a very simple level, create economic and political competition. Let other investors and the private sector come in. That is what happened in the case of Chile.
You mean Codelco?
Yes, Codelco. It’s a huge state-owned mining company, but it competes very much with the others. It is subject to the rigors of the market, to competition, to a very market-oriented corporate structure, how the leadership is selected. To a large extent it is depoliticized. You also have to subject them to political competition, with a vibrant democracy and civil society—NGOs, think-tanks and academics—getting involved and, obviously, a free press to make these people accountable.
Indonesia is already quite competitive. But the regulatory framework is still ineffective when governing state-owned entities; and there is continuing corruption...
You don’t solve it overnight. But transparency is really important in these two parts of competition, which is much more difficult in some of the countries such as in the former Soviet Union.
Could privatization be an answer to increasing transparency?
It can, but it is tough to do it well. Countries like Russia got it relatively wrong because it ended up with capture by the oligarchs. Meanwhile, other countries, particularly in eastern Europe, did it in a much more competitive way. You have to work out the ways of privatization. There is also the issue of national strategic priorities, so some countries decided—for very legitimate reasons—that their natural resources are the patrimony of the people and some state involvement is really important
in that.
To what extent should big natural resources companies be held accountable?
Big oil companies could help by embracing transparency, which they have not fully done, and by helping the public and the citizens know how much they pay in terms of revenues. Look at how American petroleum institutes are still fi ghting against transparency, as opposed to the big mining industry who say that they have to be more transparent.
You have extensively researched about good governance for around two decades. How do you defi ne it?
Good governance is where the rules of the game and the institutions of the country are such that they are for the benefit of all. In concrete terms, it means a functioning of the rule of law, not rule of man. There should also be a functioning system against corruption; a public sector that delivers both good policies and public services to their population; an effective regulatory framework; and, very importantly, there is voice and democratic accountability and the ability to monitor and replace the leadership by the population.
Are you optimistic about good governance in Indonesia?
I am enormously optimistic about Indonesia! You have now a much stronger democratic base and a voice of accountability. Other countries do not have it. That allows you to have more transparency, to push the political competition for the problems that are needed, and to tackle other issues.