The discourse on the dichotomy between public interest and regulatory capture has always been an interesting tool to examine the value of a legislation or regulation in a specific jurisdiction. The public interest theory assumes that regulators should serve the best interest of the public as it is their duty to represent the interests of the people. Excellent regulators are deemed to be those who master available information and use them appropriately to ensure and advance the public interests. Contrary to the regulatory capture theory, the public interest theory upholds that the objective of regulations is to enhance social welfare and protect public interests against the actions of private interests, namely of companies. It assumes a benign government that is tasked to maximise consumer welfare. As endorsed by Plato, governmental policy-makers constitute ‘public individuals’, working to shape the best policy choice for some polity whose interests are under their hands. Such a paradigm derives from the modern rhetoric of public life but has been frequently challenged and criticised as ‘naive’ or ‘unproductive’.
On the other hand, the regulatory capture theory argues that regulators may be influenced or captured by interests – other than those of the public – to which the regulation is intended to regulate. These interests are often deemed as ‘special interests’ and the widespread occurrence has yielded a belief that regulatory capture cannot be prevented. The regulatory capture theory was first apparent in the 1950s when the regulatory agency, tasked to represent the public, was criticised for derailing from its targets. Economists focusing on the political process then continued and expressed their doubts on the concept of ‘public interest’. For instance, Stigler rejects the idea of a benevolent public agent who forms regulations for the public interests. He supports that regulations shall be ‘acquired’ by the industry and designed to benefit them. The regulatory capture theory further insists that regulators are subjected to pressures and incentives that thus direct regulatory choices to satisfy the interests of the regulated industry. The profitable nature of a particular sector may result in the existence of regulatory capture, especially in a sector that possesses high economic value. Political actors who already possess a dominant position in the industry, tend to take their role as regulators as an opportunity to feed their own interests. It has grown to become a common phenomenon, infiltrating any jurisdiction, especially those enriched with natural resources.
Indonesia is a fitting example of how regulatory capture has successfully entered its most profitable sectors. It possesses several regulatory concerns that may facilitate the existence of regulatory capture, such as the difficulty in guaranteeing public participation, lack of transparency, and the public’s imbalanced access to information. Although not all legislations and regulations are considered to have failed to involve the public, those regarding matters of high economic value are inevitably prone to substances that are biased toward the regulated industry, considering that several legislators and regulators hold power in corporations in such sectors.
As a country that adopts the practice of constitutional democracy, laws and regulations guaranteeing that law-making procedures are in accordance with Indonesia’s democratic principles have been enacted; all containing provisions calling to ensure public participation and transparency. Provisions regarding public participation during the law-making process is primarily governed in Law No. 12 of 2011 concerning Establishment of Laws and Regulations which amended Law No. 10 of 2004 as it was deemed insufficient to respond to the interests of the public regarding rules on the establishment of laws and regulations. Article 5 of Law No. 12 of 2011 explicitly mentions the transparency principle as one of the fundamentals of the law-making process. The transparency principle must be implemented from the beginning of the law-making process – starting with the planning of the law. Subsequently, Article 96 paragraph (1) of Law No. 12 of 2011 provides mechanisms that can be utilised to guarantee public participation and transparency, which include the provision of verbal or written recommendations by the public. In the same vein, Article 16 paragraph (3) of President Regulation No. 61 of 2005 concerning Procedure for Arranging and Managing the National Legislative Program stipulates that academicians and experts from organisations in the social, political, or other relevant fields can be invited to attend and provide an opinion at the consultation forum. These aforementioned provisions showcase how Indonesian law has provided a vast space for the public to participate in the law-making process.
The fulfilment of the provisions above has shown to be challenging in Indonesia. In connection with regulatory capture, the lack of public participation, transparency, and imbalanced access to information allows for legislation or regulations to be shaped to satisfy private or special interests, imperilling the integrity of the law-making process. They further extend to the violation of rights of the public who are guaranteed to participate and involve themselves in the legislation as well as the regulation-making process. The satisfaction of these rights requires active efforts from the government and constitutes one of its many obligations, but may be impeded if such a government is more attracted and motivated to satisfy private and special interests instead.
Indonesian regulations that reflect special interests are increasing due to the misuse of the delegated legislation procedure, in which its process has facilitated the exclusion of public participation and transparency. The delegated legislation mechanism aims for efficiency as it allows for the executive agency to further govern technical matters as mandated through a statutory law. These provisions are often dynamic and therefore are created by the executive agency instead as a way to ease the job of the legislative branch. However, delegated legislation becomes problematic, as contrary to the legislative process, its execution is done behind closed doors without the participation of the public albeit it being utterly indispensable to ensure direct accountability and restrict the executive body’s discretion. When private and special interests come into play, regulations made through the delegated legislation mechanism become products of regulatory capture.
In the case of Indonesia, regulatory capture is much more pertinent in its energy sector, particularly coal-fired power plants, which has been deemed to be one of its most lucrative industries. Indonesia is responsible for the tonnes of supplies of coal each year used to generate coal-fired power plants, which is inseparable from the coal industry. In 2022, Indonesia produced 614 million tonnes of coal, making up 98.2% of its target. Its contribution to the national economy is further evident by the fact that it predominantly contributes to the non-tax state revenue from the energy and mineral resources sector. In 2017 for instance, the coal sub sector alone provided Rp. 40.6 trillion, which partly contributed to the non-tax state revenue which increased significantly by 62% to Rp. 129.07 trillion (US$9.53 billion). While in 2021, the mineral and coal sector provided Rp. 124.4 trillion.Footnote16 Ultimately, the coal sector is heavily depended upon for electricity purposes, namely to operate coal-fired power plants. Although Indonesia’s President, Joko Widodo, has called for the immediate reduction of the development of coal-fired power plants, the provision from the ESDM contradicts such an objective. In its Decision No. 188.K/HK.02/MEM.L/2021 concerning the Ratification of State Electricity Company (hereinafter, PLN) Electric Supply Business Plan for 2021 to 2030, at least 13,819 MegaWatt or almost 14 Giga Watt of electricity generated from coal-fired power plants can be built within 2021 to 2030. It is still predicted that coal will remain the main energy source to generate electricity in Indonesia until 2050.
Despite its evident economic benefits, the adverse environmental impacts resulting from the operations of coal-fired power plants cannot be ignored. These impacts may come temporarily or even stay permanently in communities near the coal-fired power plants. The emission of pollutants from such coal-fired power plants is further detrimental to the surrounding air and the solid wastes it produces are often not handled properly. With respect to Indonesia’s environment, Greenpeace noted that the emission of coal-fired power plants contain hazardous chemical elements such as mercury and arsenic. It is recorded that active coal-fired power plants have resulted in around 6,500 deaths per year. It further referred to an analysis conducted by Harvard University which estimated that if coal-fired power plants that are planned to be built begin to operate, Indonesia will experience deaths amounting to around 15,700 every year. At this rate, the transition to renewable energy is necessary. Indonesia can no longer be overly dependent on generating electricity from coal-fired power plants. To resolve this, regulations and legislation that strictly regulate business actors in the coal-fired power industry should be prioritised.
The promising prospects of the coal-fired power plant industry, however, lure the involvement of elite and politically exposed persons (hereinafter, PEPs) to seemingly having the urge to influence the formulation of regulations relating to the coal industry. In fact, it has been observed that 40 out of 90 companies have politically exposed persons within it and this has grown to become an accepted norm in the coal-fired power plants industry. The effect of this has been emphasised by the Corporate Political Engagement Index which conveys that companies within the power plants industry scores very low in terms of transparency regarding political donations, corporate lobbying activities, and regulations governing the practice of ‘revolving door’ as well as the lack of information concerning mechanisms that are taken to internally control the company’s political activities.
An example of the influence of PEPs is illustrated in the issue concerning the potential harm of Fly Ash and Bottom Ash (hereinafter, FABA) and Slag. Previous research has shown that FABA and Slag cause human health and the environment. However, the government contends otherwise and thus FABA and Slag are classified as non-hazardous materials in regulations. This argument relies on the scientific measures that has not yet settled and effectively implemented in Indonesia. In fact, environmental problems are left unanticipated and even remedy for the victim remain unresolved while obligation to the corporation is clearly reduced in which coal industry-related politician benefits from the profit difference before and after the changing criteria of hazardous waste. This indicates that the regulatory making process seems to give a nod to specific groups rather than public interest in which a regulatory capture might occur.
In connection to the coal-fired power plant industry, the increasing potential of regulatory capture is further substantiated by the number of politicians in Indonesia who are notably active in the coal-fired power plant businesses. Some even hold the position of legislators as well as regulators and were involved in the making of regulations regarding the coal-fired power plant industry. This essentially demonstrates a conflict of interests as such legislators and regulators can exert their influence to then shape legislation and regulations that would benefit their businesses in the coal-fired power plant industry. The environmental impacts of the coal-fired power plant industry that form the public interests are ignored. The infiltration of these private interests consequently yields regulatory capture, which will ultimately undermine the legislative and regulatory institutions that were initially aimed to represent the interests of the public.
While research regarding regulatory capture has been conducted, they essentially address the essence of regulatory capture, rather than applying the theory in the context of the energy sector, particularly with respect to the coal-fired power plant industry. Although Upadhyaya has previously explored how regulatory capture had influenced electricity prices, the research is different from the current paper as it did not specifically focus on the energy sector nor the coal-fired power plant industry and is not a legal research. A research on the existence of regulatory capture in the Indonesian coal-fired power plant industry is essential, taking into account how impactful the industry is – not only to the economy, but also to the public. As previously mentioned, the impacts of the coal-fired power plant industry are related to environment and health, and without a legislation / regulation that favours the public welfare, such consequences will continue to persist and affect the Indonesian population.
Considering these circumstances, it is therefore of utmost importance to shed light on the indications of regulatory capture in the Indonesian coal-fired power plant industry. To do so, this article will assess the possibility to prevent such a capture from further metastasizing the Indonesian natural resources law-making process. It utilises the doctrinal and normative approach method, which assesses statutory provisions and legal theories as well as opinions from legal scholars to identify the elements and factors of the public interest theory and regulatory capture. Furthermore, the analysis of this article depends on a case study that takes into account real-life phenomenon and issues of regulations concerning the coal-fired power plant industry. From such an analysis, it subsequently examines the existence of regulatory capture in Indonesia’s policies concerning coal-fired power plants.
The structure of this article is arranged as follows: First, it reviews the theories of public interest and regulatory capture through a literature study. Second, it seeks to identify the elements and factors of each theory to further identify its differences. Third, it proposes several solutions to prevent or resolve regulatory capture by also adopting recommendations that have been made by academicians. Finally, Part 4 of this article addresses whether there are any indiciations of regulatory capture in policies regarding Indonesia’s coal-fired power plants industry.
Author: Iman Prihandono & Ekawestri Prajwalita Widiati
Journal: Regulatory capture in energy sector: evidence from Indonesia
