Why is the extractive industry riddled with corruption?
Indications of corruption in the tin trade system and mining licenses (IUP) under investigation by Kejagung raise important questions. If the illegal tin mining operation has been going on since 2015, why was it only uncovered in 2024? Was there really a lack of evidence that the legal process has to wait nine years? Were there certain powerful parties who protected the perpetrators, to allow unlawful activities to continue for years? Will the legal process in this case implicate other culprits who masterminded the whole scheme, including the beneficiary owners? Of course, to answer some of the key questions above, Kejagung must resist external interference from any party in the handling of the case.
The problem is, on this issue, the public in general is still skeptical. Moreover, the position of an attorney general is as a subordinate of the President, meaning it is not an independent law enforcement agency. In several other high-profile corruption cases, for example the corruption in 4G base receiver station (BTS) provision for the frontier, outermost and remote regions by the Communications and Information Ministry, many of the political elites alleged of receiving bribes have yet to face further legal action. Johny Plate, the former communications and information minister, has been sentenced and jailed. However, it should be noted that he was also the secretary general of NasDem Party, which in recent times has had a tumultuous relationship with the Palace.
The modus operandi in mining sector corruption is slightly different from that of government procurement, which is often done through markups. The latter is relatively easier to detect, because the rules of the game are clearer, access to public information is more open, intertwined interests between corrupt actors are easier to trace, the objects involved are tangible, and political opposition is not too strong. On the contrary, the former has more complex management which takes time and requires expertise to comprehend. In addition, the sector is often hampered by weak accountability and transparency mechanisms.
The mining business management regime, whether based on the mining contracts system during the New Order era or mining licenses after Reformasi, has lacked public accountability. The differences lie only in the contractual mechanisms and private sector individuals/entities, as well as the policymakers. The chief modus operandi to commit wrongdoings still persist–manipulating or ignoring regulations, devising clauses in contracts that harm the interests of the state and only benefit businesspeople, cultivating improper ties with public officials, and gaining control of law enforcement authorities through various forms of gratification and bribery.
The mining sector is prone to corruption, due to the still rampant graft in the public sector. Indonesia scored 34 (out of 100) in the latest Corruption Perception Index (CPI), putting it lower than its regional neighbors, which partly explains the extent of the structural problem.
What are the characteristics of the mining sector that make it especially prone to corruption? First, the natural resource sector is directly controlled by the state. As the licensing mechanism is centralized, there exists a corruption loophole when private sector players apply for mining licenses. As there are only two actors involved–government officials and entrepreneurs–the opportunity to commit collusion or hanky-panky is wide open.
Below we see some of the high-profile cases of mining corruption that occurred in different regions, but with many commonalities. (FIGURE-1)
Second, receipts from mining are a major source of state revenue and mining products are key to industrial/manufacturing activities. But, unlike personal income tax, which the citizens must pay and report annually, state revenue from the mining sector is collected based on an agreement between the government and the business players, both in terms of capital and profit-sharing during the drafting of contract clauses. This is where the loophole exists and corruption is likely to take place. In many cases, the contracts agreed upon by the government and business players are intentionally and elaborately structured, resulting in cheap prices and a smaller portion of revenue shared with the state.
Third, there is another inherent problem – namely, the intense uncertainty with regard to the results of exploration carried out by licensed companies. The question is, have they been honest and provided accurate information? Is there any possibility that certain metals/minerals are extracted and processed into goods with high market value, but not reported to the government? In cases like this, the company will gain huge profits while the state suffers huge losses as a result of the fraudulent practices.
Fourth, mining activities are often detrimental to the environment and surrounding communities as they cause loss of biodiversity, pollute the water and land, and cause floods or landslides. This is why there is an obligation on the part of the mining companies to mitigate and rehabilitate the negative impacts of their activities. However, this obligations is often ignored, resulting in huge damage to the ecosystems, which is often irreversible. Poor enforcement of the contract often happens because government officials tasked with the oversight receive gratifications or bribes from the business players.
If we look at the modus operandi revealed by Kejagung investigation, it seems that the collusion in the PT Timah case began from the preparation of the cooperation agreement. This emphasizes the point of vulnerability in which the parties involved can game the system by issuing improper permits and easing various policies to defraud the state, depriving it of vital tax receipts from natural resources extraction and utilization.
In fact, ICW has long investigated the tin corruption case. In its report published in 2017, the graft watchdog noted that there were indications of illegal tin mining which caused up to Rp68.8 trillion in losses of public funds between 2004 and 2015, based on official figures of Indonesia’s tin exports, especially to Singapore, compared to Singapore’s tin import receipts from Indonesia. On closer inspection, there was a huge difference, amounting to 389.678mt (24.9 percent higher than official data), worth an estimated US$5.297 billion (Rp68.8 trillion). This did not include non-receipt of tin royalty payments and corporate taxes from parties running the business. If ICW report is accurate, this means that the practice of illegal tin mining has been taking place long before the 2015-2022 time frame being investigated by Kejagung.