Bojonegoro is one of the districts with the biggest oil and gas production in Indonesia, which contributes to 25-30% of national oil and gas production. Its oil reserves are estimated around 600 million-1.4 billion barrels, while the gas reserves are around 1.7-2 trillion Cubic Feet (TCF). As an oil and gas producing district, Bojonegoro faces development challenges, namely the risk of dependence on oil and gas sector, both from the Revenue Sharing Fund (DBH) transferred by the central government as a balanced fund and other sectors that depend on the oil and gas industry. Meanwhile, the oil and gas revenues are volatile depending on the global price and production. Whereas oil and gas revenue are highly relied upon to fund public spending such as the education, health service, infrastructure, and poverty alleviation programs, in addition to being used to add to routine employee expenditure.

To further discuss above matter, PWYP Indonesia-a coalition of 35 civil society organizations which focus on promoting improvement of extractive resources governance, particularly in the oil , gas, and mining sector, held public discussion last (14/2). Attending as a speaker in this forum Head of Regional Planning Agency of Bojonegoro, SKK Migas Jabanusa, PWYP Indonesia’s coordinator, PolGov UGM researcher, NRGI researcher, and the Director of FITRA Jawa Timur.

National Coordinator of PWYP Indonesia, Maryati Abdullah, opened the discussion that took place at the Aston Bojonegoro Hotel by emphasizing the importance of a holistic strategy in revenue management for oil and gas rich district. It is mainly to anticipate the risks of oil and gas volatility, prevent from being trapped in the oil and gas optimization only, develop diversification and formulate development plan with excellent and sustainable indicators.

“We held this forum as our commitment to promote an effective management of oil and gas revenues for the welfare of society. So that, our development is not relied on non-renewable resources. We also encourage such initiatives in other natural resource-rich regions, such as Sumatera, Kalimantan, Sulawesi, and Papua,” said her.

The panel discussion moderated by Meliana Lumbantoruan, Program Manager of PWYP Indonesia, touched various topics, covering  Mid-Term Regional Development Plan of Bojonegoro (RPJMD), oil and gas block management, oil volatility and effective development planning, decentralization politics for oil-producing regions, oil and gas fund management schemes for poverty alleviation and country-best practices in oil and gas fund management through petroleum fund / sovereign wealth fund.

Several critical points on the oil and gas revenue management in Bojonegoro raised in the discussion held in collaboration with FITRA Jatim and with the support of Ford Foundation. I Nyoman Sudana, Head of Regional Development Planning Agency of Bojonegoro, said that the contribution from oil and gas sector to the economic growth of Bojonegoro Regency is significant, where the realization of DBH from oil and gas sector in 2018 reaches 2.2 trillion IDR, while the remaining budget (silpa) of the local budget reached 2.1 Trillion IDR. This is because of the calculation of DBH realization just being reconciled in the 4th Quarter, where the oil price has increased during that period.

I Nyoman added, almost 50% of local economic growth was driven by the oil and gas sector, but unfortunately, the oil and gas economic growth is not optimally enjoyed by the citizen of Bojonegoro. “This sector only absorbs 4.6% of the local workforce in 2018. The figure is low, compared to the agricultural sector which absorbs up to 36% of labor,” said I Nyoman Sudana.

I Nyoman said that the vision of Bojonegoro today is to put forward people-based economy and social culture to realize a faithful, prosperous, and competitive community. Such vision is translated into seven development visions, namely (1) Realizing  a religious values and local wisdom based social order; (2) Realizing a clean, transparent, and responsible governance; (3) Realizing a sustainable improvement of human resource quality; (4) Realizing a sense of security and partisanship for women, children, persons with disabilities, and the poor; (5) Realizing an improved welfare based on people’s economy and creative economy; (6) Realizing regional economic competitiveness based on local potential; and (7) Realizing an equitable and environmentally friendly infrastructure development. Such visions are also elaborated in the annual thematic policies formulated in 2019-2023 RPJMD.

Revenue management also being highlighted in the RPJMD that is currently being finalized. However, I Nyoman stated that it‘s difficult for the local government to predict the local income, the projections are often missed. Consequently, at the end of the year there will be remaining budget like now. Not all the information we need is provided by the central government, such as cost recovery, so we have difficulty in calculating and estimating our revenue from the existing production,” added him.

Dony Aryhanto, Senior Public Relation Manager of SKK Migas Jabanusa, stressed the importance of the Cepu Block to maintain national oil and gas production, including gas development in Jambaran Tiung Biru block operated by Pertamina EP-one of the strategic targets in 2019.

Dony encourages the district to optimize oil and gas revenues, mainly from the DBH, to finance the productive sectors. The revenue must be appropriately managed and should not be corrupted. We must not think that our oil and gas is abundant, so it becomes lazy.

Dony emphasized that SKK Migas has been upheld the anti-corruption principles to maintain the business integrity, “We already have ISO standard accreditation,” said him. Besides its direct income, the facilities of the oil and gas industry are also state assets that must be maintained and managed properly. Dony also emphasized the company’s obligation to allocate Community Development Program funds, which were different from CSR programs. If CSR is assigned as 2.5% of profit, Community Development Program is approved by SKK Migas and included as part of the operating fund.

Community Development Program began since the exploration period. It is not given in the form of cash, cannot be divided but carried out through a program. It’s also only addresses for the affected areas around the oil and gas industry. At the end of his presentation, Dony emphasized that we have to work hard and be grateful and don’t forget proverb “Don’t ask what your country can do for you, but ask, what can you do for your country?”, closed him.

Maryati Abdullah explained that high dependence on the oil and gas sector is likely to occur because of large revenue generated from this strategic sector. Strong capacity and sustainable local development and budget planning are needed for the district to efficiently utilize the revenue for people welfare.

Also, the district needs to prepare some measures to face the volatility of oil and gas revenues—for example through the development of fiscal models that consider various financial risks including the variable of price fluctuations, the capital expenditure, and etc. Such fiscal model is able to project future revenue in the peak period and anticipate a decline of the revenue due to various factors, as shown by the fiscal model developed by PWYP Indonesia for Batu Hijau copper mine, formerly managed by Newmont. “Through fiscal development, the volatility risks can be anticipated and managed properly,” added her.

In order to manage the oil and gas volatility, Maryati emphasized the importance of the good development planning and budgeting process, indicated by the following criteria: adopt the open, participative, and accountable principle in the whole process, have measurable and reliable indicators; address the problem and in accordance with the district context, have continuity with the previous leaders work; have a database; being carried out in accordance with its authority; maximize the economic potential-diverisfy the economy/not solely focus in one sector; have an alignment and accuracy of the framework between objectives, outcome, output, and activities.

One of the challenges in development planning is data availability, which leads to the difficulty to formulate the correct indicators. Political interest also plays a role in hampering the process. Maryati hoped that Bojonegoro can consolidate the democracy well in order to effectively manage the oil and gas revenue for the welfare of the Bojonegoro people, especially in the current situation where Block of Cepu is the most significant contributor to the daily lifting in Indonesia, with the production of 220 thousand barrel oil per day (bopd).

Indah Surya Wardhani, the researcher of PolGov UGM, reminded that oil and gas are strategic resources that requires high technology and specialized skills to manage. Asymmetric information often found between the central government, local government as producing region, and community. “Natural resources management is still centralized,” said Indah. Efforts to redistribute revenues from natural resources have been carried out through the regional autonomy mechanism and negotiations between the local and central government which eventually resulted in some policies such as earmarking, cash transfers, and local content policies.

Indah also highlighted a number of policy initiatives that had been carried out by the District of Bojonegoro, including the Local Regulation (Perda) number 11 year 2011 on Capital Participation in Bojonegoro District; Perda number 23 year 2011 on the Acceleration of Regional Economic Growth in the Implementation of the Exploration, Exploitation and Processing of Oil and Gas in Bojonegoro; Perda number 6 year 2012 on the Transparency of the Governance of Revenue, Environment and Corporate Social Responsibility in the Oil and Gas Business Activities and Perda number 5 year 2015 on the Corporate Social Responsibility and the draft of Endowment Fund Regulation.

“The policy innovation that has been carried out by the Bojonegoro Government needs to be appreciated, but there are some things need to be considered, especially in the practical level,” said Indah. For example, to further assess whether 4% workforce absorbed in the mining sector are all locals. Some studies even found the practice of ID Cards fabrication.

On the other hand, information openness and public participation also need to be improved. According to Indah, many people who live in  the villages included in the ring 1, did not know much about the draft regulation about the endowment fund. “There is not much information about political matters. Many villages around the oil and gas block get funds directly from the company. They feel like they do not need to know about the drafted policy about the oil and gas funds,” explained Indah.

Oil and Gas Endowment Fund and Intergenerational Responsibility

Even though the initiative on the oil and gas endowment fund has been rejected by the provincial government, in fact, that kind of sovereign wealth fund (SWF) will be very useful to eliminate Bojonegoro’s dependence on the volatile oil and gas revenues.

The use of SWF as an investment vehicle has been carried out in various countries, with different investment objectives, for example, to fund development when oil and gas revenues decline, sterilize from foreign currencies, spend on productive sectors (health and education), or for financing during the economic and social crisis.

According to Rani Febrianti, the Researcher of Natural Resource Governance Institute (NRGI), the New York-based international think tank institution, the Bojonegoro’s oil and gas endowment fund will come from the oil and gas DBH and 100% of participating interest, with a period of 30 years plus 20 years of extension, as stated in the draft regulation on oil and gas endowment fund which once proposed by the executives and has been discussed with local parliament. “What can be utilized to meet the fiscal shortages and finance the education and health sector is only the interest,” explained Rani.

The establishment of oil and gas endowment fund, according to Rani, must be followed by a number of prerequisites. First, the fund must have clear objectives (saving, fiscal stabilization, etc), Second, there must be regulations to govern the fiscal aspect, such as the amount of money placed, the amount of money could be spent, and the sanctions. Third, a clear governance and management must be established. Fourth, the transparency principle is being upheld, including the adoption of periodic audit process, as well as the existence of the independent supervisory institution. Fifth, the community is informed about the process of SWF formation and implementation.

Local government is in fact able to use oil and gas endowment fund to diversify the economy. They are able to lessen the oil and gas dependence, stabilize the development, as well as save for intergenerational responsibility.

The Effectiveness of Oil and Gas Revenue Management for Poverty Alleviation

Dahkelan, Coordinator of FITRA Jatim presented the findings of his study on the effectiveness of oil and gas revenues management for poverty reduction in Bojonegoro. Dahkelan said that the oil and gas DBH which on average contributed up to 24% of the local budget (2015-2017) had financed the local program on the poverty reduction. The poverty rate in Bojonegoro has dropped from year to year, although it has not been able to meet the targets set by the RPJMD.

Furthermore, Dahkelan said that the effectiveness of oil and gas revenue management in Bojonegoro is affected by the following policies. For instance, the special allocation funds on the education at the village level, the local capital participation, the special allocation funds in the field of higher education for vocational students, the oil and gas special village funds and the oil and gas endowment fund-through capital participation in the Bank Jatim.

In term of oil and gas endowment fund, Dahkelan explained that the effectiveness of such fund management depends on the governance of its utilization, including the existence of transparency, participation, and accountability principle. It also depends on the development policy regarding the investment, human resource development, as well as economic and infrastructure development.

Furthermore, Dahkelan affirmed that oil and gas endowment fund management  has to be included in the RPJMD in a clear and detail manner. He further suggested that the local government has to formulate local budget plan, in particular from the oil and gas DBH, which takes into account the oil price volatility. Lastly, he stressed the need to accelerate the poverty alleviation program by optimizing the advantages of oil and gas sector as well as increasing the labor productivity in the agriculture, forestry, fisheries, construction and trade sector. “This is particularly important to avoid the development that is trapped in the oil and gas sector,” added him.