Module for Managing Oil & Gas Revenue: Indonesia Sub-National Experience

Managing Oil & Gas Revenue :Indonesia Sub National Experience

IKAT-US: Civil Societies Innovating Together-A Southeast Asian Partnership for Better Governance in Extractive Industries-


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WriterMuh. Rasyid Ridla Ansori

EditorJoko Purwanto

Hamdun MaulanaChitra Retna S. Ambarsari DC

Cover Design and Lay OutKanti

All rights reserved1st Publication, July 2012

This modul is published by Support from USAID and Revenue Watch Institute

Contribution from Bojonegoro Institute and LPAW Blora

Article 33 IndonesiaJalan Tebet Timur Dalam 1M No.10 Jakarta Selatan 12820, Indonesia

Tel/Fax +6221-83787963 • http://www.article33.or.id


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FOREWORD from RWI

“In the Revenue Watch, our mission begins with the knowledge that abundant natural resources offer no guarantee of prosperity for the countries that possess such wealth. We work from this starting point to promote and provide the tools of good governance, effective oversight and full accountability that help leaders and citizens secure lasting benefits from their valuable resources.

We believe that the transformation of oil, gas and minerals in the ground into well-being for the people requires coopera-tion among all stakeholders in producing countries. Revenue Watch and partners know that good resources governance cannot depend solely on active civil society, well-meaning politicians or enlightened companies.”

Karin Lissakers, Director 1

1 The Revenue Watch Institute Annual Report 2012, page 1


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Revenue Watch believes that the good work of all stakeholders, including governments, is what makes the extractive industries good governance works, especially in the era of decentralization where local authorities now have a much more important role in the management of the region’s wealth.

In Indonesia decentralization context, together with partners (Pattiro, Bojonegoro Institute and LPAW), Revenue Watch Institute and LGI (Local Government Initiative) started transparency model pilots in Blora and Bojonegoro districts in 2008. They have been an enlightening experience –not to say a success story. The multi-stakeholders approach has proven to be concretely efficient in promoting better participatory planning and transparency.

These models then inspired our Philippines’s partner, Bantay Kita, who initiated their own pilot project in Compostella Valley in 2010-2011. This pilot involves a transparency team and a unique approach towards extractive industries good governance, exploring different dimensions of the promotion of good governance of extractives at the sub-national level, especially regarding the rights and role of Indigenous People.

This module, which reflects on the experience in Cepu oil block in Indonesia, features the important lesson learnt from the role of the transparency team and from the participatory planning in Blora/Bojonegoro districts. It will then also echo and reflect the experience in the Philippines.

The RWI Asia Pacific team thanks Article 33 Indonesia for developing this module and for arranging with Bantay Kita the study and exchange excursion in Cepu block for Compostella Valley key stakeholders. This cooperation is the best possible start for the IKAT project, A South East Asian Partnership for Better Governance in Extractive Industries, led by Revenue Watch and Indonesian partners in collaboration with civil society partners in Cambodia, Malaysia, the Philippines, Timor Leste and Vietnam. This will make concretely possible for IKAT partners, Article 33 Indonesia and Bantay Kita, to exchange their valuable experience, learn from each other’s and bring knowledge and experience back into their own works.


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Hopefully this module and the exchange of experience will lead towards a better EI governance mechanism for both Blora/Bojonegoro and Compostella Valley, paving the way for more initiatives to promote transparency and accountability in the extractive industries at the sub-national level, in decentralized contexts in South East Asia.

RWI Asia Pacific team

IKAT project: A South East Asian Partnership

for Better Governance in Extractive Industries


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FOREWORD from Article 33 Indonesia

This Module has been prepared to guide the Field Visit and Study Excursion on Extractive Industry Revenue Transparency. Developed from the model implemented during the Cepu Project in Blora and Bojonegoro by PATTIRO, Bojonegoro Institute, LPAW, supported by Revenue Watch Institute, this module represent a handful of knowledge and lesson learned on how resource rich district succeeded on improving its extractive industry governance in according to reap the maximum benefits for its people and avoid the so called resource curse. The model established was one of the first in its kind to be implemented in local level, in Indonesia as well as in global level, therefore the lesson learn would be very important as a source to be replicated in other resource rich regencies and even in other countries at the same level facing the same challenge.

Article 33 Indonesia thank and appreciate all those involved in compiling this module. We realize that this module still has weakness. Therefore, we need critics and suggestions for improvements for the next publications.

It is hoped that a broad spectrum of relevant actors will find this module useful for increasing their capacity on understanding Extractive Industry Governance at local level, and become a champion in this field. In line with A33’s mission, we hope that those champion then will be able to endorse the making of progressive and sustainable policies toward people prosperity as inspired by Article 33 of Indonesia’s Constitution (UUD 45): “Earth’s water and natural resources contained therein is to be used for the greatest prosperity of the people”.

Article 33 Indonesia, July 2012


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TABLE OF CONTENTS

Foreword from RWI vi

Foreword from Article 33 Indonesia ix

Table of Contents x

Reap the Benefit, Avoid Resource Curse: Learning from Blora and Bojonegoro Extractive Governance 1

Sharing Experience I: Oil and Gas Revenue Transparency in Blora and Bojonegoro 11

Sharing Experience II: Sustainable Development Planning in Blora and Bojonegoro 19

Sharing Experience III: Oil and Gas Revenue Management in Bojonegoro 28Session I: Oil and Gas Investment for Sustainable Development 29Session II: Oil and Gas Revenue Distribution to Village Level 34Session III: Sub-Regency Indicative Development Funding Proportion 39

Sharing Experience IV: Local Content Optimization Policy 46Reference 51


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Reap the Benefit, Avoid Resource Curse: Learning from Blora and Bojonegoro Extractive Governance

The decentralization in the past decade has been changing the course of extractive governance in Indonesia. As certain powers have shifted from the central government to sub-national administration, provinces and regencies have acquired greater independence to manage their respective economies, natural resources and political institutions. Unfortunately in many cases, the powers and responsibilities for governing extractive industries were transferred to the regions without the adequate capacities in place, including skilled human resources in government positions. In addition, regulations do not adequately provide the resolution of conflict between citizens, regional governments and the private sector, or among regional governments themselves, or between the central and regional governments.

Indonesia’s ‘big bang’ decentralization in 2001 marked the beginning of sweeping changes that have transformed the country’s political, administrative and public finance systems. The decentralization devolved the authority to manage local development in key areas to the sub-national level. This made regencies the second most important level of government in Indonesia after the national level. Local governments now receive more than 40 percent of total public funds to manage development locally. Local governments also have unprecedented control over their own revenue and spending, and also have primary responsibility for providing services to their citizens. About 10 percent of regional governments receive income from natural resources (according to Indonesia’s Revenue Sharing Law No. 33/2004, six percent of the oil funds will go to the local regencies where the revenue is produced, six percent to surrounding regencies within the same province, and three percent goes to the province).


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However, common problems faced by local governments include limited technical capacity, rent-seeking, large allocations for routine expenditures, poor reflection of policy priorities in the distribution of oil revenues, and weak legislative oversight. This is compounded by the fact that oil wealth is inherently challenging for governments even at their best.

Revenue Sharing Fund from Oil and Gas (DBH Migas)1

As the implementation of decentralization ’big bang’ since 2001 in Indonesia, the fiscal decentralization policy has changed the posture of revenue and government spending. With the issuance of law 32/2004 on Local Governance and law 33/2004 on Financial Balance between Central and Local Government, local authorities has been greater in managing the financial administration. The money seem as ’poured’ into sub-national government through three pipelines namely the Revenue Sharing Fund (DBH), the General Allocation Fund (DAU), and Special Allocation Fund (DAK).

Revenue Sharing Fund (DBH) is a shared fund that consists of two types based on its sources, tax and non tax.2 The non-tax one is derived from natural resource and other types of non-tax such as profit from state-owned companies and other state-assets. In terms of DBH from natural resource (SDA)3, it could be in the form of shared revenue from oil and gas, mining, fishery, and forestry.

In Indonesia, the shared fund from oil and gas is commonly called as DBH Migas. DBH Migas is derived from government entitlement of oil and gas from producing regencies or provinces after deduction of taxes and other levies. The wells

1 Migas is abbreviation of “minyak dan gas” or oil and gas.

2 See Government Regulation 55/2005

3 It used to called as DBH SDA


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could be operating onshore and offshore. In terms of offshore, regencies entitle on the oil-gas shared fund if the wells at the distance of 0-4 miles of coastline, while provinces entitle on the oil-gas shared fund if the well at the distance of 4-12 miles from coastline.

DBH Migas consist of revenue sharing fund from oil and gas. Oil and gas is calculated using different formula.4 In general, revenue sharing fund from oil (DBH Minyak) is 15,5% of government oil equity shared after taxes to local government (See Table 1). Meanwhile, the revenue sharing fund from gas (DBH Gas) is 30,5% of government entitlement after taxes to local government (See Table 2). In addition to that formula (table 1 and 2), different proportion calculation applied to Provinces of Nangroe Aceh Darussalam (NAD) and West Papua in terms of status of special autonomy.5

4 See UU 33/2004 article 14 and Government Regulation 55/2005 article 22

5 Each receive 70% in which for NAD, the 55% come to province, while the 15% is divided into 3% for province, 6% for producing regency/municipal, and 6% for other regencies/municipals in the province. Meanwhile in Papua, of 70%, the 40% come to province, while the 30% is divided into 6% for province, 12% for producing regency/municipal, and 12% for other regencies/municipals in the province.


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Table 1. Formula of Revenue Sharing Fund for Oil (DBH Minyak)

15,5% = 15% + 0,5%

15% 0,5% for basic education

Producing Province Producing Regency/s Producing Province Producing Regency/s

5% for provincial government

6% for the producing regency/municipal goverment

0.17% for provincial government

0.2% for the producing regencies goverment

10% for all regencies/municipals in the province

3% for the related provincial government

0.33% for all regencies/municipals in the province

0.1% for the related provincial government

6% for other regencies/municipals under the related province

0.2% for other regencies/municipals under the related province

Source: Subdit DBH SDA, Directorate of Balancing Fund, Ministry of Finance


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Table 2. Formula of Revenue Sharing Fund for Gas (DBH Gas)

30.5% = 30% + 0.5%

30% 0.5% for basic education

Producing Province Producing Regency/s Producing Province Producing Regency/s

10% for provincial government

12% for the producing regency goverment

0.17% for provincial government

0.2% for the producing regency goverment

20% for all regencies/municipals in the province

6% for the related provincial government

0.33% for all regencies/municipals in the province

0.1% for the related provincial government

12% for other regencies/municipals under the related province

0.2% for other regencies/municipals under the related province

Source: Subdit DBH SDA, Directorate of Balancing Fund, Ministry of Finance


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Related Problems of Oil and Gas Revenue at Sub-National Level

In general, there are at least 5 (five) specific problems of oil and gas revenue management at sub-national as follows:

1. Fluctuations in income Combination of exchange rate, oil prices, and the lifting caused the amount to be paid by the central government

to local governments has always fluctuated. Fluctuations in revenue are a problem because the region still lacks the capacity to manage finances well.

2. Ineffectiveness of expenditure The “lighthouse” development is a curse that often follows the high oil and gas revenue received by regencies/

municipals/provinces.

3. Rampant corruption With the implementation of the policy of central-local fiscal balance through Law 33/2004, the natural resource-

producing regencies start to get funding. Unfortunately, it has prompted local governments to corrupt. Most former heads of oil and gas regencies/municipals/provinces have been suspect, such as corruption Kutai Regent (2008), cases of corruption in Musi Banyu Asin (2009), and cases of corruption in the oil and gas special autonomy funds in Papua (2010).

4. Neglect of non-oil sector GDP is contributed by a very large oil and gas sector. Unfortunately, local government has not had a good plan to

develop economic sectors, especially non-oil and gas sectors. Non-oil GDP is very small compared to oil and gas sector. Conceivably if the gas potencies is up, then the area may become bankrupt and getting poorer.


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5. Social and environmental issues are more massive

Environmental impacts of oil and gas exploration is also not a little. The bigest case occurred in Sidoarjo in wells owned by PT. Lapindo Brantas. When land acquisition for Cepu block is executed in Bojonegoro, horizontal conflicts involving elite officials. Many cases -such as pipes are leaking, land damage, and a dry rivers- cannot be satisfactorily resolved, even causing problems among the people.

Blora and Bojonegoro: Oil and Gas Resource-Rich Regencies

Bojonegoro and Blora are regencies in Province of East Java and Central Java, respectively. Bojonegoro has area of population about 1.3 million in 2010, while Blora about 0.9 million. Bojonegoro and Blora are endowed with big reserves of oil and gas, in particular after discovery of oil-gas reserve in Cepu, a small sub-regency in Blora. Production Sharing Contract (PSC) of Cepu Block was signed in June 2005 by BPMIGAS and Contractors, which consist of Pertamina EP Cepu (Indonesia state-own company) and subsidiary companies under Exxon Mobile. The shares are divided to 50 percent that belongs to Pertamina EP Cepu and the subsidiary of Exxon Mobile (50%). Beside the Cepu Block, there are two other oil-gas blocks, namely Tuban Block and Blora Block.

Oil and gas endowment is a well known history in Blora and Bojonegoro. However, the existence of big reserve of oil and gas is contrast with the high figure of poverty in both areas. According to statistical data in 2010, the poverty in Blora reached 16.3% or 134.000 people, while almost the same happened in Bojonegoro. Literacy in both regencies is about 83% while the average length of school is 6 years for each student. It indicates that most elementary students don’t continue to higher level.


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Blora, the owner of Cepu but low revenue from oil

Blora is a long-time and well known area which has big reserve of oil and gas. The production of oil and gas has been since the occupation of Dutch. In 1980s, Government of Indonesia built oil and gas training center for Pertamina’s employees as well as center of research and development of oil and gas in Blora. Despite of the long history of its oil-gas production, its shared revenue from oil and gas is very small, in which ironically, place Blora as the third of the poorest regency in the Province of Central Java in 2007.

Currently, Blora local revenue is majorly contributed from General Allocation Fund (DAU) (77 percent of total budget in 2010), compared to DBH Migas (0.2% averagely of total budget in 2010 and 2011). DBH Migas only contributes 2.4 billion rupiahs in 2011, increased from 1.6 billion rupiahs in 2010.

Tabel 3. DBH Migas and Local Revenue (in billion Rupiahs)

Item 2009 2010 2011

DBH Migas 0.6 1.6 2.4

Total local revenue 712.9 770.23 940.0


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The oil-gas shared revenue comes from wells owned by Pertamina in which mostly are old fields with decreasing volume of production. The discovery of new reserve in Cepu block doesn’t automatically contribute increasing revenue sharing to Blora. It is due to regulation stipulates that shared revenue from oil and gas is based on the wellheads, in which almost all of Cepu Block’s wellheads reside at its neighbor, Bojonegoro.

Bojonegoro, blessed by the wellheads of Cepu Blocks

Of Cepu Block which is operated by Mobil Cepu Limited (subsidiary of Exxon Mobil), Bojonegoro has some oil potential fields: Banyu Urip with 507 million barrels of oil equivalent, Jambaran with 227 million, Cendana 61 million and Sukowati42.5 million. Compared to its neighbor, Blora only has oil and gas reserve of 7.9 million barrels in Kemuning and Alas Dara. Of this amount, Bojonegoro has 95.89% of reserve based on wellheads, while Blora only has 4.11% of total potential. In terms of shared revenue, it creates gaps of revenue between two regencies.

Currently, with the coming production of oil, the government of Bojonegoro is benefitting the windfall profit through DBH Migas. In 2010, DBH Migas contributes 169 billion rupiahs of total local revenue.


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Dynamic of Civil Society and Lesson Learnt from Blora and Bojonegoro

Since 2007, some local civil society organization has carried out research and technical assistance to help the local government and oversight bodies prepare for revenue from oil and gas before it arrives. Over the first two years of the project, civil society groups have conducted in-depth research about the potential implications of the revenues and trained the local government officials on how to account for the incoming revenues. A multi-stakeholder group lead by government officials, businessmen, religious leaders, and civil society activists, has facilitated a community dialogue to create a community plan for using these revenues. New multi-stakeholder transparency platforms and local regulations encompassing revenues have been developed.

This module present the lesson learnt from experiences of both regencies. Bojonegoro’s experiences are on oil and gas revenue management consist of revenue distribution mechanism, revenue investment scheme for local government saving, and accelerating local economic development by local content optimization policy; and sustainable development funding focus on fiscal year concentration and equity of development budget proportion. Blora’s experiences are on oil and gas revenue transparency focus on transparency team and mechanism; and Local Social-Economic Development (LSED) focus on sustainable development planning process.


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Sharing Experience IOil and Gas Revenue Transparency in Blora and Bojonegoro

All participants would share about oil and gas revenue transparency in Blora. Blora has Transparency Team who actively involves themselves in advocacy and publication oil and gas revenue, both in local level and national level. Currently, the team are working on equity of oil and gas revenue sharing fund. Two important substances are effort in transparency and current achievement of the Transparency Team.

Objective • Understanding oil and gas revenue transparency in Blora• Understanding oil and gas revenue transparency in Bojonegoro• Discussing similar policy (if any) or opportunity to implement similar policy in the

Compostela Valley

Methods • Presentation from resource person• Q&A session • Sharing Philippine’s experiences• Discussion


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Facilitation steps

1. Introduction

The facilitator/moderator introduces discussion objective, flow, and duration. Then, all participants would be allowed to raise question and/or give advice.

2. Resource person presentation simultaneous with Q&A

The resource person present about the experience on policy/mechanism. This step is simultaneous with Q&A in informal flow of discussion.

3. Sharing Philippine’s experience on similar policy or mechanism

Participants from the Philippine share their similar experience followed by simultaneous Q&A in informal flow of discussion.

4. Fill knowledge structure form

The facilitator/moderator guides all participants to fill knowledge structure form. This form would help all participants for structuring knowledge and experience that could be useful for better policy/mechanism implementation in each own region. The filled form should be given back to the facilitator/moderator.


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Knowledge Brief I

Basic Problems Addressed

Basically, Blora and Bojonegoro have been facing many problems in revenue transparency as follows:

a. No access to important data such as oil and gas potency, oil and gas production, PoD, WP&B, and also socialization of exploration operation;

b. Lack of coordination in CSR-CD implementation

c. No access for local government participation in Revenue Sharing Fund (DBH) counting mechanism. Local government has no access to necessary data such as production data, cost recovery data, etc.

d. Local community around oil and gas area has not yet benefit from oil and gas exploitation


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Transparency Process

In order to implement transparency mechanism, there were some steps:

1. Research on transparency mechanism that could be implemented.

This step had been completely done by LPAW Blora and Bojonegoro Institute as local NGOs who pay more attention to transparency. The researches were on:

a. Local problem regarding revenue, CSR, and environment

b. All related policies/regulations

c. Oil and gas revenue flow and transparency model

2. Building transparency model. There were three activities in this step:

a. Learning from other regencies and countries experiences on oil and gas sector especially on revenue transparency mechanism

b. Multi-stakeholders discussion for building model. In this activity, resource person from other countries were involved.

Local actors participated in this activity were:

• Local parliament (DPRD)


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• Related local government agencies (local office of: Natural Resources and Energy/ESDM, Development Planning/BAPPEDA, Environment/LH, Revenue and Finance/DPPKAD)

• NGOs (LPAW, BCC, Yayasan Perak, Mahameru, Pasang Surut, Bojonegoro Institute)

• Journalist association

• Community around oil and gas area

c. Expert meeting for sharpening the model

d. Building consensus about the model

e. Local regulation formulation on the model

3. Advocacy and Campaign had been done by LPAW Blora and Bojonegoro Institute with key stakeholder participation. Cooperative approach had been the way ensure that local government intend to accept and will implement the transparency. Sharpening knowledge and understanding had also been done by expert meeting and workshop. After that, campaign using local mass media had been being done to spread the transparency to public. This campaign also aimed to reach public awareness for supporting the transparency implementation.


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4. Implementation and institutionalization

The activities were:

a. Forming Transparency Team (legalized by regent decree/executive order)

b. Budget advocacy for the team

c. Team’s meeting on working agenda

d. Socialization and publication

e. Facilitation problem in the regency (PPHJ, Old Well, CSR)

f. Advocacy to national government

5. Stakeholder Capacity Building on oil and gas sector

This activity aimed to upgrade stakeholder capacity and also increase their confidence for publishing and sharing about oil and gas sector which has complexity to company and national government.


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Current Achievement

1. Blora Regent Regulation 65/2010 on Transparency Team and Mechanism

2. Working agenda completed are:

a. Publication on: Revenue Sharing Fund (DBH) data, old well, team’s working result, budget. Publications are in leaflet and mass media;

b. Mediation between community and company, discussing community’s complain about PERTAMINA PPGJ Project in Sumber, Kradenan

c. Consensus on problem solving as mentioned in Activity Acknowledgement (Berita Acara as the guidline for problem solving)

d. Revenue Sharing (DBH) advocacy to National Government. The result is Minister Common Understanding Decree (SKB 3 Menteri) on Revenue Sharing Fund (DBH) for Blora. The ministers are Minister of Energy and Natural Resources (MenESDM), Minister of Finance, and Minister of Domestic Affairs).

e. Involve as an expert witness in Judicial Review on Law 33/2004 on Financial Balance Between National and Local Government.


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Lesson Learnt from Blora and Bojonegoro Experiences

1. Revenue transparency mechanism has to be forced to both company and local government. This is not voluntary;

2. Trust between stakeholders is the key for encouraging local innovations. This is a way to make community, local government, and company have willingness to discuss together;

3. Transparency can make company work better because there is an intervention from local government and community with organized team and agenda.


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Sharing Experience IISustainable Development Planning in Blora and Bojonegoro

Blora has been implementing Local Social-Economic Development (LSED) in term of sustainable development. Bojonegoro has also been implementing Local Sustainable Development Plan (RPDB). The important substances that would be shared are roadmap to do the LSED and synchronization between CSR agenda of company and local development agenda of government.

Objective • Understanding LSED in Blora• Understanding RPDB in Bojonegoro• Discussing similar policy (if any) or opportunity to implement similar policy in the

Compostela Valley

Methods • Presentation from resource person• Q&A session • Sharing Philippine’s experiences• Discussion


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Facilitation steps:

1. Introduction

The facilitator/moderator introduces discussion objective, flow, and duration. Then, all participant would be allowed to raise question and/or give advice.


The resource person present about the experience on policy/mechanism. This step is simultaneous with Q&A in informal flow of discussion.






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Knowledge Brief II

The importance of encouraging the Local Sustainable Development Plan (RPBD) model:

1. Anticipating the emergence of the resource curse in Blora and Bojonegoro

Potential resource curse is possible enough to happen, the exploitation of oil and gas have been done for hundreds of years but have not contributed significantly to the regency growth in all sides.

2. Build a higher quality participation in development planning process with more substantive stages.

3. Build investive and sustainable development planning through development of economic base sector (agriculture and SMEs) and improving human resource quality.


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LSED building stages is as follows (see Figure 1 for easier understanding):

Figure 1

Sustainable Development Planning Process in Blora Regency

1. MoU between LPAW (initiator) and Local Government of Blora

MoU is a evidence of joint process between the government and NGOs. MoU also indicates initiator’s assistance to help local governments improve the mechanism for the planning and management of oil and gas is well accepted. Once it became one of the strategies to be friendly with the government.

MoU

Core team building

1st Regency Workshop

Sub-regency Workshop

Participatory Research

2nd Regency Workshop

Technocratic Planning

3rd Regency Workshop

RPBD Advocacy


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2. Formation of the Core Team

Objective: Establishment of a team that will oversee the process of sustainable regional development planning, along with th e initiator (LPAW).

Members: The core team consists of 11 people and consists of related SKPD, parliaments, business groups and the CSO, was established by decree of the Regent.

3. Sub-area Development Workshop I

Objectives:

Figure out the priority issues and problems in 5 sub-area of development

Develop common development vision of sub-area

4. Regency Workshop I

Objectives:

Figure out the priority issues and problems in 5 sub-area of development

Develop common development vision of regency


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5. Participatory Research

Objective: understand development problems deeper through FGD, workshop, interview, and desk study.

6. Regency Workshop II

Objectives:

Sharpen regency issues and the formulation of regency strategic issues

Fix common development vision of regency

7. Technocratic Planning

Objective: Develop a technocratic development planning by establishing working groups. The group consists of 10 members from related local government agencies, academic and experts. This working group smooths the technocratic workshop materials and the results of participatory research, strategic goals, strategies, programs, activities.


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8. Regency Workshop III

Objective: Finalize RPBD document. In this workshop, RPBD document is signed by all stakeholders and will be presented to the regent.

9. Local Budget Advocacy

This stage guides RPBD document as a part of Blora Regency RPJMD 2010-2014. With the agreement in workshop III, Bappeda makes the document as a reference preparation of RPJMD. RPBD documents were also submitted directly to the regent and vice regent, Djoko Nugroho-Abu Nafi, in 2010.

The Local Sustainable Development Plan document is still pure, and not mixed with political interests. Of course the content of the document is very important for the preparation of Mid-Term Local Development Plan for my leadership over the next 5 years. (Djoko Nugroho, Regent of Blora, welcome speech on the submission of Local sustainable development plan documents to the regency)


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Priority Issues

1. Improvement of education and health services basis, as the implementation of human resource development improvement. Education and Health is a basic public service sector that will determine the quality of human resources in the future.

2. Development of economic base sectors (agriculture and SMEs)

Both of economic base sectors should be improved because of their strategic value for community welfare in order to anticipate resource curse and make local government focus on the development of real sector and not get stuck on oil and gas and its derivatives economic fields which are temporary.


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Current achievement

1. The local development does not depend on political agenda of existing regent. The development vision and mission of the regency could be sustain even the regent changing happens;

2. Development priority is clearly stated.

Lesson Learnt

1. Sustainability can be viewed as a continuity of development vision and mission

2. If the development vision and mission is sustain, the development can solve social and economic problem of the regency


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Sharing Experience IIIOil and Gas Revenue Management in Bojonegoro

This activity consists of three sessions. The first session aims to sharing on Oil and Gas Revenue Investment of Bojonegoro’s mechanism to save their revenue for development in the future in the condition where oil and gas potencies have depleted. The second session, all participants will share on Bojonegoro experience of oil and gas revenue distribution at village level. Bojonegoro has been implementing the mechanism called Proportional Village’s Fund Allocation (Alokasi Dana Desa Proporsional). The last session is on accelerating local economic development by Local Content Optimization Policy focusing on utilization of local labor and usage of local material.


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Session I:

Oil and Gas Revenue Investment for Sustainable Development

Objective • Understanding oil and gas investment policy and mechanism in Bojonegoro • Discussing similar policy (if any) or opportunity to implement similar policy in the

Compostela Valley

Methods • Presentation from resource person• Q&A session about the experiences• Sharing Philippine’s experiences• Structuring useful knowledge


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Facilitation steps

1. Introduction



The resource person presents the Bojonegoro’s experience on policy/mechanism. This step is simultaneous with Q&A in informal flow of discussion.




The facilitator/moderator guides all participants to fill knowledge structure form. This form would help all participants for structuring knowledge and experience that could be useful for better policy/mechanism implementation in each own region. The form also would be useful for workshop on last day of Field Visit and Study Excursion. The filled form should be given back to the facilitator/moderator.


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Knowledge Brief 3.1

Oil and Gas Revenue Investment for Sustainable Development

Basic Problem Addressed

• Oil is a nonrenewable natural resource that will be exhausted someday in the future, so we need a strategy to ensure that regency can get revenue in spite of natural resources exploitation and exploration. By logic, the revenue from investment of DBH will replace the revenue from oil and gas if the oil is gone Bojonegoro in the future.

• No policies or regulations that allow local governments to save money. Although local government invests money, it has to be low risk investment.

Legal Text: Local Regulation 11/2011 on Investment in Bojonegoro


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Investment Mechanism

Local government invests monies from oil and gas revenue to 3 (three) banks and 1 (0ne) company as scheduled in the following:

NO INVESTMENT IN AMOUNT (Rupiahs) YEAR

1 BANK JATIM 19.000.000.00020.000.000.00027.000.000.000

201120122012

2 PD BPR BOJONEGORO 4.000.000.0002.000.000.000

20112012

3 PT. BBS 10.000.000.000 2012

4 BPR JATIM BOJONEGORO

500.000.000500.000.000

20122013

Calculation of investment is based on calculation of revenue sharing fund for previous year.


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Current Achievement

• Bojonegoro have investment oil fund 30 Billion IDR in 2011

• Yielding local revenue/PAD by managing separated local fund (devident)

• Added capital for Local-Owned Company

• Endowment fund for development in the future

Lesson Learnt

There are two main activities that should be done carefully in promoting oil and gas revenue investment:

1. Research on return of investment. This can be a basic consideration for calculate how much added-value in balance with regency need;

2. Substance penetration (integrate result and recommendation of action research to local planning and budgeting scheme)


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Session II:

Oil and Gas Revenue Distribution to Village Level

Objective • Understanding Proportional Village’s Fund Allocation (Alokasi Dana Desa Proporsional) in Bojonegoro

• Discussing similar policy (if any) or opportunity to implement similar policy in the Compostela Valley

Methods • Presentation from resource person• Q&A session about the experiences• Sharing Philippine’s experiences• Discussion


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Facilitation steps

1. Introduction


2. Resource person presentation followed with Q&A session.

The resource person presents on the Bojonegoro’s experience on policy mechanism. This step is continued with Q&A in informal flow of discussion.

3. Sharing Philippine’s experience on similar policy or mechanism.

Participants from the Philippine share their similar experience followed by Q&A on informal discussion.

4. Filling out the knowledge structure form

The facilitator/moderator guides all participants to fill out the knowledge structure form. This form aims to help all participants for structuring knowledge and experience that would be useful for better implementation of policy in each region. The form is to be returned back to the facilitator.


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Knowledge Brief 3.2

Oil and Gas Revenue Distribution to Village Level


Bojonegoro have no mechanism to share the revenue in accordance with social and environmental impact of oil and gas exploitation in the villages.

Legal Text: Bojonegoro Regent Regulation 31/2009 on Guidance for Determining Proportional Village’s Fund Allocation Based on Variable Coefficient of Village in Bojonegoro


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Revenue Sharing Distribution Mechanism

Proportional allocation of Village Fund is calculated based on the sub-regency variable consisting of the production of petroleum / gas exploration, production forestry, and mining production. The calculation is as follows:

a. The area of oil/gas

• 12,5% for village producers

• 10% for villages of Ring I (600 m from the location of the head well)

• 7,5% for villages of Ring II (1200 m including impacted area)

• 70% for villages outside producers and Ring I and II

b. Forest Area (PSDH)

• 60%, divided equally to the villages in the forest area

• 40% divided equally to the villages outside forest area


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Current Achievement

Distribution of revenue sharing fund to all villages using the mechanism is well done.

Lesson Learnt

The steps to do in distributing the revenue are:

1. Take oil and gas production of village into account as a variable for determining revenue fund allocation;

2. Develop standard of allocation calculation;

3. Local government release criteria of village:

• village-producer

• Ring I à village is located 0-500 m from well

• Ring II à village is located 500-1000 m from well

• Village surround well


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Session III:

Sub-Regency Indicative Development Funding Proportion

(Pagu Indikatif Kecamatan)

Objective • Understanding Sub-Regency Indicative Development Funding Proportion (Pagu Indikatif Kecamatan) in Bojonegoro

• Discussing similar policy (if any) or opportunity to implement similar policy in the Compostela Valley

Methods • Presentation from resource person• Q&A session about Bojonegoro’s experiences• Sharing Philippine’s experiences• Discussion


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Facilitation steps:

1. Introduction



The resource person present about the Bojonegoro’s experience on policy/mechanism. This step is simultaneous with Q&A in informal flow of discussion.


Participants from the Philippines share about their similar experience followed by simultaneous Q&A in informal flow of discussion.




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Knowledge Brief 3.3

Sustainable Development Funding in Bojonegoro


There is no clear rule for determining development budget allocation to each development field such as infrastructure, agriculture, education, and health.

Legal Text :

Bojonegoro Regent Regulation 2A/201o on Sub-regency Indicative Development Funding Proportion (Pagu Indikatif Kecamatan) in fiscal year 2011

Bojonegoro Regent Regulation 10A/2011 on Sub-regency Indicative Development Funding Proportion (Pagu Indikatif Kecamatan) in fiscal year 2012


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Sub-regency Indicative Development Funding Proportion (Pagu Indikatif Kecamatan)

• Sub-regency may propose programs/activities that directly meet the needs of community

• The sub-regency indicative development fund proportion should refer to programs RPJMD Bojonegoro years 2009 – 2013 with an allocation (2011):

a. Road and bridge infrastructure, 50% of sub-regency development fund;

b. Agriculture, 25% of the sub-regency development fund;

c. Education, 15% of the sub-regency development fund;

d. Health, 10% of the sub-regency development fund;

And allocation in 2012:

a. Road and bridge infrastructure, 50% of sub-regency development fund;

b. Agriculture, 20% of the sub-regency development fund;

c. Education, 15% of the sub-regency development fund;

d. Health, 15% of the sub-regency development fund.


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Current Achievement

There is an mechanism for budgeting local development based on real local need and priority, so the arranged development budget does not depend on political intervention

Lesson Learnt

In order to fulfill local need, local government should propose development priorities with calculated proportion of budget. This have to be legalized by a set of regulation.


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Sharing Experience IVLocal Content Optimization Policy

This sharing activity focuses on optimization of local resources, such as labor and local economic activities related to oil and gas industry in Bojonegoro. All participants would share about Local Content Optimization Policy that has been being implemented by Bojonegoro Government.

Objective • Understanding Local Content Optimization Policy in Bojonegoro• Discussing similar policy (if any) or opportunity to implement similar policy in the

Compostela Valley

Methods • Presentation from resource person• Q&A session about Bojonegoro’s experiences• Sharing Philippine’s experiences• Structuring useful knowledge


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Facilitation steps:

1. Introduction.


2. Resource person presentation simultaneous with Q&A.

The resource person present about the Bojonegoro’s experience on policy/mechanism. This step is simultaneous with Q&A in informal flow of discussion.

3. Sharing Philippine’s experience on similar policy or mechanism.


4. Fill knowledge structure form.

The facilitator/moderator guides all participants to fill knowledge structure form. This form would help all participants for structuring knowledge and experience that could be useful for better policy/mechanism implementation in each own region. The form also would be useful for workshop on last day of Field Visit and Study Excursion. The filled form should be given back to the facilitator/moderator.


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Knowledge Brief 4

Local Content Optimization


Oil and gas industries do not generate added-value for local community

Legal Text: Bojonegoro Local Regulation 23/2011 on Accelerating Local Economic Growth in accordance with Exploration and Exploitation of Oil and Gas in Bojonegoro focus on


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Local Content Optimization Mechanism

Philosophical basis of Bojonegoro local regulation 23/2011 on accelerating local economic growth in accordance with the implementation of oil and gas industry in Bojonegoro is the emergence of the oil and gas area and the burden of social costs include a number of land acquisitions for the Oil and Gas projects. This cause lost of employment or daily economic activity. The people who lose their employment are expected to be absorbed as labor for project. To achieve the expectation, the regulation is issued to strengthen local government authority to implement community’s aspiration by forcing company to use local labor and material in their project.

There are crucial articles regulate local potencies optimization, as following points:

• Article 7, the oil and gas management should use items produced locally in Bojonegoro, only when it is not available, it is permitted to import from outside the town or even abroad.

• Article 8, in doing the activity, the oil and gas industry should involve local companies, BUMD or cooperation in Bojonegoro. There might be only the flag and name, so the local people should also operate. The local company might have joint venture with other companies in implementing whatever projects under this article, there are partnership with the company capable of doing it, but the local company has to be part of 20% of the operation of the contract value so that they are not played.

• Article 9 the workforce is divided into three part, hard labor should be 100% local Bojonegoro. The skilled workers, if there is Bojonegoro local use them, if not it is permitted from outsiders.

• Article 10 so that the classification become objective, the production sharing contractors have to report the company’s need of workforce to the Manpower Office.


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• Article 11, for hard labor, the honorarium should at least meet the minimum requirements of Bojonegoro Regency.

• Article 14 -2 Local companies should be given down payment at least 20% from the contract value.

• Article 15, whether it is local company or cooperation, contractor or partner should give information about the standard operating procedure (SOP) so that the people know about job opportunity in oil company; health, work safety, environment standard.

• Article 16 In Cepu there will be a lot of motorized vehicles and heavy machineries; it must be listed to the Samsat (Bojonegoro regency’s authorized authority) so that it pays the tax in Bojonegoro.

• Article 17A. Usage of non subsidized fuel for all motorized vehicles and heavy and big machineries by KKS Contractor and/or K-KKS partner and oil and gas processor because this is a capitalist company from America, it is not fair if it is given subsidized fuel while we are a poor country. The good thing is Bojonegoro own a small refinery producing 7000 barrels per day.

• Distribute the mining subsidized duel

• Article 17B. All motorized vehicle registered from outside the region and has been used for more than 3 (three) months is obliged to be listed in Bojonegoro area.

• Article 19. All big companies in oil and gas got office based in Jakarta, so they pay the tax to Jakarta. They only do the work in Bojonegoro. Bojonegoro wants to get the share of the tax. Verse 1 articulates that oil and gas company with contract above 1 billion should have office, permit, Tax ID etc in Bojonegoro for optimum benefit to Bojonegoro. Article


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19 also regulated how contactor should anticipate possibility of negative impact such as oil blow up or destruction of public facility due to exploration. Contractor should also give training to local people to be able to work in oil and gas industry in Bojonegoro.

• Article 20. oil and gas industry in one location, the status of land value belongs to BP Migas, so tax flows to the central government. So the local government does not receive anything. In article 20 verse 1, activities outside the oil and gas core business, supporting facility such as dormitory, community center, recreation center, terminal, fitness center, should be built outside the industrial zone, so that all the incomes whatever money spent there become benefit to Bojonegoro.

This regulation requires PSC-Contractors (KKKS) or their partners prioritize the participation of local-owned companies (BUMD or BUMDes), and cooperatives. In carrying out the procurement of services through a consortium with the National Companies and/or with the Multi-National Company, local-owned company (BUMD or BUMDes) or Cooperatives should be able to execute at least 30% of project BUMDes enterprises, or cooperatives, at least be able to work a minimum of 30% based on the size of the contract value. The mechanism to optimize local content:

1. Improve coordination with company (twice a month)

2. Optimize local labor database in respective local government body

3. Develop technical guideline


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Current Achievement

1. Local content optimizing team is well established by the Regent Decree. The team consist of local government, PSC-contractors, and partner of PSC-contractors

2. As result of a big case, the regent issued the IMB and HO for the EPC tender winner agreed to obey the local content regulation. This show how the regulation is well-implemented

Lesson Learnt

1. Local economy is not in the national government domain, so local government can intervene the local economic activities;

2. Business group capacity bulding with the joint operation model (partnership between local and non-local business actors) would create transfer of knowledge, skill, and capital;

3. Local government should localize the flow of money in the regency in order to convert the increase of Local GDP in service sectors


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Reference

Partowidagdo, Widjajono. 2009. Migas dan Energi di Indonesia: Permasalahan dan Analisis Kebijakan. Bandung: Bandung Development Studies Foundation.

Khoirunnurofik. 2002. Perhitungan Bagi Hasil Sumber Daya Alam. Center for Institutional Reform and the Informal Sector (IRIS, University of Maryland.

Abdullah, Maryati & Dwi Cahyani, Ambarsari. 2010. Memahami Aliran Pendapatan untuk Transparansi Migas. Jakarta: PATTIRO-RWI-Local Government and Public Service Reform Initiative.

Hariyadi, Chitra et al. 2010. Minyak Kami Tanggung Jawab Kami: Transparansi Migas untuk Pembangunan Daerah Berkelanjutan. Belajar Dari Blora dan Bojonegoro. Jakarta: PATTIRO-RWI-Local Government and Public Service Reform Initiative.

Local Government of Bojonegoro. 2009. Regent Regulation 31/2009 on Guidance for Determining Proportional Village Fund Allocation Based on Variable Coeficient of Area in Bojonegoro. Bojonegoro: Local Government of Bojonegoro.

Local Government of Blora. 2010. Regent Regulation 65/2010 on Transparency of Oil and Gas Industry Management. Blora: Local Government of Blora.

Local Government of Bojonegoro. 2010. Regent Regulation 2A/2010 on Sub-Regency Indicative Development Budget Allocation in Fiscal Year 2011. Bojonegoro: Local Government of Bojonegoro.


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Local Government of Bojonegoro. 2011. Local Regulation 11/2011 on Investment in Bojonegoro. Bojonegoro: Local Government of Bojonegoro.

Local Government of Bojonegoro. 2011. Local Regulation 23/2011 on Accelerating Local Economic Growth in Accordance with Oil and Gas Exploration and Exploitation in Bojonegoro. Bojonegoro: Local Government of Bojonegoro.

Local Government of Bojonegoro. 2011. Regent Regulation 10A/2011 on Sub-Regency Indicative Development Budget Allocation in Fiscal Year 2012. Bojonegoro: Local Government of Bojonegoro.

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