Abstract

How to achieve sustainability in natural resource-based supply chains has become a pressing question in light of mounting global demands to address the economic and social consequences of natural resource extraction. A major obstacle to sustainability in such supply chains is corruption.

Various solutions to mitigate corruption in natural resource-based supply chains have been put forward. The most prominent are the creation of oversight agencies that are tasked with implementing and monitoring complex regulatory frameworks for the sector as well as relying on "focal companies", big corporations and industry leaders, to self-regulate and transmit good corporate governance practices to their sector.

I argue that both approaches do little to curb corruption in natural resource-based supply chains as they ignore the broader political context. To exemplify this point, I will examine the regulatory framework for subcontracting in Indonesia's upstream oil and gas sector. There the main regulatory agency for the country's upstream oil and gas sector has been both a target and a perpetrator of corruption. Likewise, the capacity of "focal companies" to contain corruption within their supply chains, never strong to begin with due to various legal loopholes, is being greatly reduced as the country's upstream sector moves from cost-recovery Production Sharing Contracts (PSCs) to Gross-Split PSCs.

In this context, the opportunities to curb corruption in supply chains in Indonesia's upstream oil and gas sector remain limited for the foreseeable future. The lesson Indonesia offers, however, is that local political conditions need to be taken into account when designing corruption eradication strategies, rather than administering off-the shelf corruption prevention measures. A potential new approach to combatting corruption based on an analysis of local political conditions will be discussed in the final part of the paper.