The demise of Indonesia's upstream oil and gas regulatory agency: an alternative perspective.

• Author: Davidson, Jamie S.
• Position: Report

In late 2012, Indonesia's Constitutional Court declared the law on oil and gas unconstitutional, ruling that the independent regulatory agency (IRA) that the law created interfered with the state's direct control over the country's resources as mandated in the Constitution (Article 33). The controversial decision stunned the foreign investor community and Indonesia's political establishment. At the time of the ruling, BP Migas, as this regulatory agency is known in Indonesia, (1) had been in operation for about ten years and was responsible for over 300 contracts in the oil and gas sector cumulatively worth billions of US dollars. Since the body's disbandment immediately called into question the legality of these contracts, Indonesia's then President, Susilo Bambang Yudhoyono, hastily ordered the formation of a similar agency. This time, however, rather than try to support the agency's independence by placing it under the authority of the president, as was the case with BP Migas, Yudhoyono had little choice but to situate the new body under the auspices of the Ministry of Energy and Mineral Resources.

This turnabout was a serious blow to reform-oriented coalitions that had been seeking to liberalize Indonesia's economy in the wake of the 1997-98 Asian Financial Crisis (AFC) and, conversely, a victory for their opponents, namely, economic nationalists. After all, the decision put the programme of institutionally restructuring Indonesian governance akin to an Organisation for Economic Cooperation and Development (OECD) prototype regulatory state in doubt. It also threatened a key sector to the vitality of Indonesia's economy. Although it is no longer the powerhouse that it was in its heyday of the 1970s and 1980s, in 2010 oil and gas still contributed 20 per cent of total government revenue. (2) It stands to reason that opponents attacked BP Migas the way they did because the sector contained riches and resources worth capturing.

While the magnitude of the decision brought unwanted attention to Indonesia as a place to be wary of for foreign investors, it also piqued the interests of scholars. To date, there have been two approaches to explaining the dissolution of BP Migas. By focusing on the decision of the Constitutional Court, one has attempted to uncover juridical tensions or inconsistencies in the Court's ruling. (3) Another has concentrated on the combined rise of the social and political force that political Islam and resource nationalism represents in the post-Soeharto state, since representatives of these forces were responsible for filing the case against the 2001 law and BP Migas at the Court in the first place. (4) Both of these perspectives yield important insights, but taken together they remain unsatisfactory. For example, the juridical vantage point cannot explain why the justices ruled against the oil and gas law in this instance, but not in prior cases in 2003 and in 2007. Similarly, the social forces argument overlooks two key elements: first, an institutional analysis of BP Migas itself and the caustic debate over its performance amid declining oil production figures that worried officials at the Ministry of Energy and Mineral Resources; and second, the changing political potency of President Yudhoyono.

Thus, this paper argues that to better understand the disbandment of BP Migas--which put billions of dollars of foreign investment in Indonesia at risk and countless more future investments--we need to deploy an analysis of the sector in which the IRA was embedded. A national-level analysis that lacks the specificity to explore fine-grained issues of sectoral governance is inadequate to the task at hand. (5) However, this narrower perspective then should be complemented by broad political examination of trends that extend beyond the plaintiffs in the 2012 case. By looking at these political patterns diachronically over the three cases (2003, 2007 and 2012), I show how the Court's decision-making calculus changed over time. Here key variables included the waxing and waning of Yudhoyono's political potency and the changing identities of the plaintiffs in the different cases. Through such a comparison we can better appreciate the magnitude of Yudhoyono's changing political fortunes and the social and political gravitas that political Islam possesses.

Finally, this paper contributes to the growing literature on obstacles to reforming Indonesia's political economy as a regulatory state premised on an OECD template. This type of state--conceptually located in between a hollowed out, neoliberal state and the robust developmental state of East Asia--promotes deregulation and privatization with the institutional capacity to regulate these liberalizing activities capably. While these attributes may seem paradoxical, they form the core of an encompassing governance model where the state intervenes less via taxing and spending along the lines of Keynesian redistribution than through technocratic rule-making that supports of the functioning of markets and the private sector. (6)

In this debate, one camp emphasizes that competing coalitions of interests and power account for the beguiling and contradictory outcomes of post-Soeharto reform efforts in key sectors. (7) Another gives more credence to institutional deficits and inadequacies. (8) I suggest that on their own each remains necessary but insufficient. By integrating informal with formal factors into the analysis we gain a more nuanced, contextual understanding of the challenges and prospects of institutional reform in contemporary Indonesia. In so doing, we hope to come to grips with the institutional diversity, multiple systems of governance, and competing interests embedded in developing economies that deviate from the regulatory state ideal type, especially when compared to its idealized OECD counterpart. (9) If these transplanted institutions at best rest on wobbly foundations in their new homes--in what are often monolithically labelled as weak states--it behooves us to take the analytical complexity of formal and informal institutions, pressures, and webs of asymmetrical power relations seriously when accounting for the performance, legitimacy or survival of newly established IRAs in inhospitable environments.

New Order Governance of Oil

It is not an exaggeration to say that the energy sector was the engine that drove the political economy of the New Order. The tremendous revenues garnered especially from oil but also the wide fluctuation of this windfall over time had an enormous impact on how President Soeharto governed the country's economy. (10) Upon consolidating his position via the massacre of hundreds of thousands of communists, or those suspected thereof, throughout late 1965 and 1966, Soeharto was convinced by close associates to pursue a programme of liberal policies drawn up by a group of economists, later to be known as the Berkeley Mafia, (11) as a means to rectify the economic devastation that Sukarno, Indonesia's first president, had helped to create in the first half of the 1960s. Tellingly, one of the first laws President Soeharto passed was Law 1 of 1967 on foreign investment. The implementation of these International Monetary Fund (IMF)-endorsed, open economy policies, coupled with generous aid packages from non-communist, Western allies, are credited with reining in the runaway inflation the New Order had inherited from Sukarno's regime, closing gaping budget deficits and jumpstarting the economic growth for which Soeharto's regime can take credit. (12)

Nevertheless, the first oil boom of 1973 represented a sea-change in New Order economic governance. Notably, it encouraged state intervention in the economy, thereby eroding the influence of the Berkeley Mafia's market orientation. Prior to the 1973 oil boom, for instance, oil ranked behind foreign aid and the forestry and mining sectors as revenue earners for the regime. In 1969, oil and gas contributed 20 per cent of government tax revenues and accounted for about one-third of total commodity exports. By 1974, however, a year following the boom, their earnings had risen to 58 per cent of revenue and almost three-quarters of commodity exports. (13)

This commodity boom made an unimaginable amount of money (specifically, foreign exchange) available to the regime, or what Benedict Anderson describes as "riches undreamed of hitherto". (14) The state oil company, Pertamina, clearly benefitted from the oil boom as it was rapidly transformed into a massive conglomerate. However, the state-owned enterprise (SOE) was poorly managed. To begin with, it served as a cash cow for Soeharto's allies, including many generals. While some revenue generated was invested productively by the government, including an extensive school building programme in the country's outer islands and agricultural development on the politically key island of Java, much of its funds were squandered. The corruption was tolerated in part because Pertamina was seen as the pribumi (native) answer to the control of the private economy by wealthy Indonesians of Chinese descent, although many generals partnered with these very same businessmen and traders in business. (15) Yet the profligate spending and excessive short-term borrowing on international markets by the SOE's head, General Ibnu Sutowo, nearly bankrupted the firm in the mid-1970s. The regime was forced to spend billions on bailing out the company, especially to shore up the confidence of the country's foreign creditors. Structurally speaking, however, the second oil shock of the late 1970s gave the policy of dirigisme a brief reprieve. (16)

Tumbling oil prices in the early 1980s then slowed Indonesia's fast growing economy appreciably. (17) From 1981 to 1986, for example, the average annual rate of growth was less than half that from 1973 to 1981. (18) As the country's terms of trade worsened, it was earning far less from its (mainly oil)...