Consultation with local leaders helps to improve economic sustainability of natural resource projects. (Image courtesy of Golder Associates)

Oil and gas companies are accepting the business case for sustainable community investment (SCI) as it can help companies secure their social license to operate, add value to shareholders, and engage communities and stakeholders who are affected by the company’s operations. If done well (that is, if it does not promote community and government dependency on company funding and is targeted to citizens’ and government’s visions and needs), effective community investment can be considered a key indicator of a project’s success.

Oil and gas projects are occurring in many countries where active decentralization policies are taking place, such as those in Indonesia. According to the PriceWaterhouse Coopers 2008 publication Exploring the Black Gold: Investor Survey of the Oil and Gas Industry in Indonesia, key challenges oil and gas companies face include confusion over the roles of central, provincial, and local governments; building relationships with local governments and with local communities; and solving problems concerning interministerial coordination.

Indeed, there has been a global trend towards government decentralization in the past two or three decades. In developing countries in particular, oil and gas companies should be aware of the issues and challenges of decentralization, local government development planning, and the implications for their community development funding initiatives.

Recognized as a basic dimension of democratic governance and a process that often spans decades, decentralization involves the transfer of authority and responsibility, resources, and personnel from the national to sub-national governments. In theory, decentralization can promote more efficient provision of public goods and services while considering local citizens’ preferences and needs more closely.

By serving as a focal point for public participation, local government can help strengthen democratic and transparent decision-making processes. This is relevant to the oil and gas sector since responsibilities that affect the sector are often transferred from central to local government – including powers to promote and develop regulations that may influence the costs and operations for oil and gas business.

Indonesia

Indonesia is an example of a country undergoing decentralization. Since 1998, increased autonomy and responsibility for decisions have been devolved to the regency, district, and village governments. New structures of government have been put into place, including direct elections of local representatives and accountability of these representatives to the people through a locally elected parliament. As with other decentralizing countries, responsibilities for addressing economic development have been devolved to the newly formed local governments. These governments have become prime decision-makers and providers of health care, education, water and sanitation, and other forms of infrastructure.

Local government capacity to undertake community planning, budgeting, and program implementation is essential to ensuring these services get to their communities.

However, there is often a lack of clarity on central, regional, and local government roles and functional assignments in service delivery. This can undermine local governments’ ability and commitment to support their community development planning process.

Newly formed local government leadership structures can be weak, with a limited capacity to design and implement development plans. Unaccustomed to the scale of responsibility and financial resources placed at their disposal, they may be reluctant to make decisions or may make choices that do not improve their communities in a meaningful way.

Other challenges pertaining to the resource sector include the lack of transparency and monitoring of fiscal transfers from central to local governments (limiting local government resources), overlapping resource-development regulations, or poor supporting policies and regulations for effective resource-based investment. Conflict can arise when national governments oversee decisions on oil and gas concessions and rights without the informed consent of the local governments and communities affected by oil and gas development. This can negatively impact the ability and rights of local governments to direct development policies or the social and economic welfare of their citizens.

Understanding the challenges

When considering a project in a decentralizing country, oil and gas companies will need to understand the unique and varying challenges that exist to develop and implement SCI policies and strategies that promote synergies between corporate initiatives and local government development goals, providing opportunities for cost-sharing and capacity-building where possible.

This understanding can be supported by two related processes: a) conducting an institutional assessment, and b) engaging in local participatory development planning processes.

An effective institutional assessment identifies administrative and fiscal arrangements between national and local government institutions and main sources of local government revenue (i.e., intergovernmental transfers, local revenue generation, user charges, and taxes). National and local government structures, functions, responsibilities, and management capacity are defined along with nongovernment institutions’ role and capacity in supporting regional and local development within the project area. The analysis should determine policies and programs (for example, national and local poverty reduction as well as economic development strategies and plans) that are supported by international financial institutions (e.g., the World Bank or United Nations); central, regional, and local government and
nongovernment agencies; and sources and sufficiency of funding amounts.

Institutional assessments can draw upon and be integrated with social and economic issues scoping information collected during resource feasibility studies as well as baseline information collected during the environmental and socioeconomic assessment. The results can guide oil and gas companies as to local development needs and priorities, funding gaps, and how best to enhance sustainable development priorities, programs, and funding mechanisms by integrating into initiatives that may already be in place.

In decentralizing countries, local governments are obligated to undertake development planning processes as a mechanism to meet their increased responsibilities to their communities. In this context, new legislation and regulations exist for community participation in local level policy, planning, and program implementation, such as the Musrenbang process in Indonesia. Called “participatory development plans,” this is a process for setting plans to improve the lives of community members. As delineated in Indonesia’s decentralization legislation, each community is expected to prepare a development plan indicating its vision for its own future. These plans can be a guide to an oil and gas company in determining how to fit in and obtain the maximum results from its investment.

The Musrenbang process is conducted based on an administrative model starting from village level, then moving to a subdistrict level and compiled at a regency level, where the Regency Development Planning Agency (Bappeda) systematizes Musrenbang results into a Regency Development Plan document. Bappeda, led by Bupati (Head of Regency), obtains approval from a legislative formalizing of the plans. Taking part in this process can enhance a company’s relationships with local stakeholders. It also helps to obtain a better understanding of community needs, update a company’s information regarding local government policy and plans, and monitor local dynamics.

Local institutions and capacity to support participatory planning are often weak and evolving under newly decentralizing systems. Oil and gas companies can work with professionals who understand the local planning context and who are experienced working with local leaders to help identify a community’s needs and priorities and the best way to meet those needs, including financial issues, timelines, and steps to take. This may involve collaborating with other resource-based companies in the area as well as nongovernment organizations and international development agencies who are supporting government planning capacity.

Working with local government and community leaders whose values, decision-making processes, and interests may differ from corporate approaches and priorities is challenging. However, showing respect for the local priorities and concerns and taking time to develop grass-roots, site-specific approaches to development usually result in more meaningful sustainable development initiatives.