It was not until last December that local governments (provinces, regencies, and cities) in Indonesia were heavily impacted by the fall of world oil prices.
The impact came when the Ministry of Finance outlined the 2015 calculation on oil and gas revenue sharing (DBH) for producer regions. Overall, the amount of the DBH transferred from Jakarta dropped sharply, from Rp 36 trillion in 2014 to Rp 14 trillion (US$10.44 billion).
Some regions suffered a drop of up to 90 percent in their DBH revenue. They include Bulungan Regency in North Kalimantan and Tarakan in East Kalimantan. Both regions received only Rp 10 billion, far lower than the Rp 500 billion they had received the previous year. Meanwhile, Kutai Kartanegara lost Rp 2.5 trillion after its transfer plunged to Rp 700 billion.
The decline in DBH revenue exacerbated the impact from the global economic slowdown. East Kalimantan, a province that relied on DBH revenue for 30 percent of its budget, became the only province in Indonesia to suffer an economic contraction. Its gross domestic product (GDP) decreased by 0.85 percent in 2015.
The shortage of funds forced oil producer regions to review their planning programs. Allocations for infrastructure, e.g. transportation, education, and healthcare, which absorb most of the budget, have been axed. Moreover, some regencies and cities have cut the number of workers in their institutions to save cash. This went along with layoffs of oil and gas workers, especially unskilled ones.
These facts show the significant role of the oil and gas industry for the producer regions and their people. However, the industry—which is now suffering from the fall of oil prices –is often hampered by the attitude of local governments. This ranges from unfriendly policies, the absence of concern and protection for the industry to various demands against oil and gas contractors.
One of the policies highlighted by the industry concerns licensing procedures. This is actually similar to the problem faced by the players at the national level. In the regions, they must apply for a range of permits and business licenses. Obtaining these is time-consuming for contractors and often disturbs their timetables, eventually driving up costs.
An absence of concern and protection can be seen at several local governments. In Kutai Kartanegara, for example, contractor VICO has to fight alone in facing protests by a number of organizations and groups after the company did not renew workers’ contracts as a consequence of efficiency measures.
The government and local legislature blamed VICO for rising unemployment and a lack of sympathy for the workers.
Another disincentive for oil and gas companies is the requirement to directly contribute to the provision of infrastructure, including transportation (roads and bridges), healthcare and education. The requirement stems from the old perspective that the oil and gas sector is an industry generating a lot of money. The fact that oil prices have dropped and companies are concerned about efficiency have not dispelled that perspective.
People living in oil and gas areas share the government’s perspective on this. They even think infrastructure development around their area is the obligation of the company. This perspective is based on people’s impression that they hardly benefit from the existence of an oil and gas industry that has been sucking the wealth out of their land.
As a matter of fact, the production regions enjoy a significant amount of money from the DBH. In 2014, before the oil price declined, Bengkalis, for example, received Rp 2.6 trillion. This is more than half of their budget of Rp 4.6 trillion. Back to Kutai Kartanegara, the richest regency in the East Kalimantan received Rp 3.2 trillion, while budget expenditure amounted to Rp 7.6 trillion.
However, the spending of DBH funds is questioned because the people living near to the production area remain in poverty, and there is almost no improvement in public infrastructure. This is due to improper budget planning and allocation, not to mention corruption. In many regions, government employees’ salaries and facilities account for more than 50 percent of the budget. This is worsened by the trend of local governments opting to beautify their capital cities rather than develop rural and remote areas.
Given this unpleasant situation, it is important for local governments to change their paradigm toward the oil and gas industry. First, it has to be kept in mind that the industry facilities run by the contractors belong to the state. Therefore, instead of creating disincentives, local governments should support and prioritize the sector. This can be done by eliminating problematic regulations, tariffs, and permits. After all, a growing industry means more revenue for the region, not only from the DBH but also from the multiplier effect on other sectors.
Moreover, local governments have to be smarter in spending DBH funds. The money has to be enjoyed by the people living near to the oil and gas areas, so their quality of life improves. Monitoring of the spending needs to be enhanced to avoid misappropriation. By doing this, the government can fulfill its obligations, such as providing public infrastructure, rather than begging the companies to do so.
As for the oil and gas contractors, they can naturally contribute to the public by running corporate social responsibility (CSR) programs. CSR can focus on empowering particular communities, such as providing training for fishermen or women or conducting programs for children's welfare. This would be a lot easier for the company to do than struggling to improve basic public infrastructure.