Stamping out corruption on the energy sector in Indonesia

Throughout the 2014 campaign for the presidency, Joko Widodo, the eventual winner, stressed the need to bring new blood into a system widely perceived as broken and corrupt. With Widodo now in the driver’s seat, the optimism and hope that often follow a change in leadership is coming to a head during his first year of office. The big questions on everyone’s mind are whether the grand promises made on the campaign trail by the media-savvy former furniture salesman will be kept, and whether he will be able to shake up the status quo enough to achieve meaningful, positive change. Only months into his four-year term, a sense of cautious optimism has prevailed in the energy sector, with the new administration showing little hesitation in replacing key energy officials. Policymakers, meanwhile, continue to send encouraging messages.

Top Priorities

With the spectre of high-profile corruption scandals and controversial regulatory changes still hanging over the industry, the energy sector has been paying particular attention to Widodo’s post-election agenda. Known as Nawa Cita – Sanskrit for “nine programmes” – the blueprint includes bureaucratic reforms, corruption eradication and sweeping changes to economic policy. Among the nine priorities in the Nawa Cita are a number of targeted goals that could directly affect the energy sector: improve good governance, eradicate corruption, boost productivity and global competitiveness, and achieve economic independence, among other measures, by reducing reliance on energy imports.

Although the growing cost of energy imports is the primary impetus in the drive for economic independence, many of the other reform priorities, either directly or indirectly, deal with corruption. Early in his first term, President Widodo took aim at the energy sector’s most influential institutions by replacing a number of top officials. In October 2014, he installed reformer and former activist Sudirman Said as minister of energy and mineral resources, who promptly gave the ministry a major shake-up, starting by making all top directors reapply for their jobs. In November 2014, the president appointed new bosses at oil and gas regulator SKK Migas and at state energy champion Pertamina, which also saw its board completely reshuffled. Replacing the heads of top ministerial, regulatory and state-owned companies with well-regarded and loyal individuals may be common practice for new leaders the world over, but in Indonesia the swaps in these key positions send a particularly strong message of change, in light of a recent string of graft cases at these institutions.

Corruption Trial

In August 2013 Rudi Rubiandini, then head of SKK Migas, came under investigation by the Corruption Eradication Commission (KPK) due to allegations of bribery. Rubiandini was caught accepting $700,000 from an executive of a Singapore-based oil trading firm that was vying for a tender to sell oil. A very public trial played out over the next few months in which numerous other parties were implicated in the wrongdoing, and in late 2014 the case culminated in a seven-year sentence for Rubiandini on charges of graft and money laundering. During the court case, special prosecutor Andi Suralis accused Rubiandini of receiving money from several of his subordinates in 2013, several of whom were also eventually convicted on charges relating to bribery and money laundering.

Seeking to set a very different precedent, Widodo appointed Amien Sunaryadi to replace the acting chairman of SKK Migas in November 2014. As a former deputy chairman tasked with designing the institutional system of the KPK, Sunaryadi is well positioned to translate the new administration’s anti-corruption rhetoric into reality.

Only months after Rubiandini was convicted, the minister of energy and mineral resources, Jero Wacik, stepped down in September 2014 after being named as a suspect in a case involving extortion and kickbacks worth around $840,000. According to the KPK, Wacik, who was a senior official in the former ruling Democratic Party, was charged with extorting hundreds of thousands of dollars from mining companies from 2011 to 2013.

Stepping in to fill the position was Sudirman Said, the former deputy president-director of state oil company Petrosea and co-founder of the Indonesian Transparency Society. Said wasted no time in making his mark by replacing the director-general of upstream oil and gas, Edy Hermantoro, within a month of his arrival, after the unit received a poor performance grade from the Presidential Working Unit for the Supervision and Management of Development. Appointed in his stead as acting chief was Naryanto Wagimin, the director for upstream oil and gas at the Directorate-General of Oil and Gas.

New Reform Team

Going one step further, Said appointed a team to manage oil and gas reforms in November 2014, tasked with overhauling practices and procedures within the ministry. At the same time, he sent a request to the board of finance and development supervision that it perform an audit of the management of oil and gas permits.

The purpose of the new team is threefold, according to Said. Its first task is to review the permit process from upstream to downstream. Second, the team is to recommend a reorganisation of oil and gas institutions, including SKK Migas and BPH Migas, and of the way in which they liaise with the Directorate-General of Oil and Gas. The third priority is to hasten the revision of the Oil and Gas Law with the aim of eliminating rent-seeking, at every stage of permitting process and across the oil and gas business.

Also in November, Widodo dismissed all directors of state company Pertamina and named Dwi Soetjipto as the new CEO. The move is significant in that Pertamina’s trading division, Petral, buys crude and fuel on international markets to ship to Indonesia. As evidenced by the trial of Rubiandini for his involvement in trading contracts, the unit has become a target for the reform team as the government seeks to curb the influence of a so-called energy mafia.

Boosting Transparency

Among the key transparency initiatives with which the new Pertamina board was tasked were to review Petral and its purchasing system, and to prevent “leaks” in the distribution of subsidised fuel along the supply chain.

Since Petral is registered offshore in Hong Kong and maintains trading operations in Singapore, it is not subject to the same reporting standards as locally listed public entities. Yet it is responsible for large volumes of international transactions, including imports of up to 500,000 barrels of oil a day. Increasing transparency from within would therefore go a long way towards reducing opportunities for belowboard transactions. In December 2014 the government reform panel recommended that Petral continue its operations as a business entity but that it no longer be allowed to handle tenders for the procurement and sale of crude oil and petroleum products for its parent company, Pertamina.

These corruption cases are not limited to the energy sector (other officials have been sentenced by anti-graft courts, including the ministers of religious affairs and sports) and have contributed significantly to negative perceptions of Indonesia’s business climate. Despite the ongoing efforts of the KPK, corruption remains a major concern for investors looking to do business in Indonesia. Transparency International (TI), which rates 175 countries on perceptions of corruption in their public sectors, put Indonesia at 107th in 2014. By way of comparison, China was 100th and Russia 136th, the top three being Denmark, New Zealand and Finland. In the Asia-Pacific region, Indonesia ranks in the lower echelons at 17th of 28 nations, placing it between Vietnam (18) and China (16). While this is far from a favourable showing, in recent years the country’s performance on TI’s corruption perceptions index, where a score of 100 indicates a “very clean” public sector, has improved, rising from 1.9 in 2003 to 34 in 2014.