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Client Update: Indonesia on the brink of achieving EITI status

28 September 2010

In brief: Indonesia is in the final stages of being accepted as a candidate in the Extractive Industries Transparency Initiative. Disclosure of oil, gas and mining payments begins during the two-year candidacy phase, and companies therefore need to understand the initiative now, as Partner Darren Murphy (view CV) and Lawyer Theresa Tayabali explain.

Background

The Extractive Industries Transparency Initiative (EITI), first announced at the World Summit for Sustainable Development in Johannesburg in October 2002, aims to strengthen governance by improving transparency and accountability in the extractives sector. It is a global standard that supports improved governance in resource-rich countries through the verification and full publication of company oil, gas and mining payments at the country level.

The EITI requires all extractive companies operating in countries implementing the EITI to disclose material oil, gas and mining payments made to the government, and governments to publish what they receive. The process is overseen in each country by participants from the government, companies and national civil society.

Currently, 31 countries are already well underway in implementing the EITI and around 50 of the largest oil, gas and mining companies have publicly stated their support for the EITI. Of course, the EITI needs to be considered in context with other reporting obligations, such as those applicable to US companies registered with the US Securities and Exchange Commission.

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Indonesia

Having announced its intention in December 2008 to work towards EITI compliance, the Government of Indonesia (the world's most populous extractives-rich state) is in the final stages of preparing its application to become an EITI Candidate Country, with news reports suggesting its formal application may be submitted in the coming weeks. The next EITI Board Meeting will take place in Dar es Salam in mid-October, and this may present an opportunity for the Board to assess the application.

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How does it affect you?

The EITI impacts foreign investors into Indonesia in the following ways:

  • Compliance: Companies operating in Indonesia will need to report payments made to the Indonesian government.
  • Level playing field: Companies benefit from a level playing field, as all companies are required to disclose the same information.
  • Improved investment climate: Companies benefit from an improved investment climate as transparency of payments indicates to investors and international financial institutions that the government is committed to greater transparency, improving international credibility and fighting corruption.
  • Reputational risks mitigated: Transparency of payments made to the government can also help to demonstrate the contribution that an investment is making to Indonesia.

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What's next?

If Indonesia becomes an approved EITI Candidate Country, it will then have two years to be validated as a 'Compliant Country' by completing an EITI Validation. This is a process whereby Indonesia's EITI implementation measures are independently assessed. Once it is compliant, it must then undergo re-validation at least every five years, or upon request from the EITI International Board.

Importantly, the process of disclosure and dissemination of oil, gas and mining payments by both companies and government commences during the candidacy phase of the process. The time for companies participating in Indonesia's oil, gas and mining sectors to understand the EITI is therefore now.

For further information, please contact:

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