Pertamina: The Wishbone of the Country?

by Kevin Evans and Protus Tanuhandaru

The long awaited, yet still much higher than expected increases in fuel prices have finally been put into effect. While economists lecture the country ad nauseam that fuel prices even now are barely half the average across the world, this is cold comfort to those on low incomes and whose businesses are dependent upon cheap fuel just to stay competitive.

Too cold is to know that one cause for the scale of the increase is due to the antics of those who work for the state oil company Pertamina. Smuggling and hoarding are just some of the extra curricula activities of these staff whose task is supposedly to ensure the availability of fuel at reasonable prices. None of these misdemeanors, however, will come as anything as a surprise to a public so sickened by rumors of such malfeasance.

For the current management team at Pertamina, the acid test to rehabilitate their company now befalls upon them. And it should begin, inevitably, with their collective resignation. To date, ruefully, we have not seen any public evidence indicating that the current management team members are willing to be accountable for the appalling nocturnal activities that are taking place during their stewardship of Pertamina.

The bewildered, besieged managing director spoke bravely of sacking errant staff—and of how surprised he is in knowing that such behavior does exist in Pertamina. Unfortunately for him, sacking a few low level “blue collar” workers and others located far from Pertamina’s Central Jakarta HQ is far too little and far too late for a public demanding an end to such criminal behavior.

The frostbiting cold can only be thawed by replacing those at the top of Pertamina’s pyramid, not at the bottom. Corporate trust, just like political one, is a powerful yet fragile commodity. Being trusted by your constituents (in politics) or stakeholders (in business), you can achieve much. But when this trust is abused and therefore lost, you become a crippling burden to your organization’s future, exactly resembling the dilemma now facing Pertamina. With trust and credibility evaporated, the current management team can never steer the reforms necessary to revive Pertamina’s long term prospects, regardless of their “technical expertise”.

Sensibly, they should be replaced by genuine outsiders—people untainted by the stench of self-interest and cozy collusion that now envelop the public’s perception of Pertamina.

The challenges that beset Pertamina are quite fundamental. First of all, it has to regain some basis of public trust, given that it is after all a publicly owned enterprise, by coming clean with its state of affairs by using transparency as a key tool. Pertamina’s website, which should display what the public are entitled to know, contains embarrassingly little information. And what is available instead is in corporate terms ancient history—notably the insipid 2002 financial and operational performance.

More substantively, Pertamina needs to engage the wider public by explaining why it is that today it actually produces less than it did almost 40 years ago when it was founded. Pertamina’s production remains stagnant, producing only 100,000 barrels per day or even lower. How much exploration has the company been really involved with over the past few years? More critically, why have levels of exploration been so low?

Other basic problems that undermine Pertamina’s capacity to be a professional business model have to be readdressed. The beleaguered manager of Pertamina is indeed correct to justify that the problems of Pertamina are not all “internal”. Unfortunately, given his and his company’s current dire circumstances, such insights carry no legitimacy and are merely seen by a cynical public as attempts to shift the blame. Ironically, had such intellectual leadership been demonstrated from the time of his appointment, it might be that some of the problems now besetting the company could have been in a state of redress.

Among the problems that confront Pertamina is the nature of its relationship to the government bureaucracy. Here the term “state-owned enterprise” is rather problematic given that Pertamina’s cash-flow is largely contingent on disbursements from the Ministry of Finance—a department that has a key interest in ensuring the stability and security of the State Budget, especially when it is already in deficit. Under these circumstances, basic business imperatives such as investment and growth, which are critical for Pertamina’s long term survival, represent a very low priority for the Ministry.

As a result, Pertamina is financially straight-jacketed, forced to funnel whatever it can salvage into short-term quick fixes rather than longer-term real-growth-oriented ones. This renders it unable to raise its already low productivity because its investment has been used to sustain daily operations, guaranteeing low levels of investment in long term productive expansion. Compared to Petronas, assuming that they both have roughly similar income, Petronas’s Return of Asset (ROA) is five or six times higher than Pertamina’s.

The Ministry of Finance, however, cannot be held entirely liable for hampering Pertamina’s performance. Ambiguity in terms of responsibility for policy development, regulatory enforcement and authority for production confounds the dilemma Pertamina is currently confronting.

To have the Ministry of Finance no longer controlling Pertamina’s coffers is but step towards transforming Pertamina into a real business. In addition, residual regulations that make Pertamina responsible for activities not relevant to its main function as an oil company should be transferred from Pertamina. Next Pertamina should be provided with the standard levels of autonomy and accountability of a productive enterprise. Finally the company should be liberated from other fuzzy mandates such as supporting the budget or being a social entity.

Doing this will definitely move Pertamina from what it is now— that is a Soviet-styled Directorate General for Oil Production transformed into a genuine corporation. However, such transformation requires Pertamina to adopt “good corporate governance principles,” reforming its internal management culture, operating procedures and integrity systems.

In the near term, this will require a full independent audit on its assets, financial status, and ongoing contracts—sweeping through the thicket of vested interests that have subverted Pertamina to its current pathetic state where it appears hopelessly susceptible to so many forms of “loopholes”.

To substantiate this further, the company needs to devise a serious strategic blueprint. This should include, but not be limited to: increasing efficiency, maximizing the use of its assets, assets recovery plan, expansion strategy, and renegotiating, renewing or concluding contracts.

In the medium-term, the goals are to restructure Pertamina’s portfolio, consolidate all sub-companies affiliated to Pertamina, find new and/or alternative energy (non-hydrocarbon) and adopt benchmarks to go international in securing energy resources for Indonesia.

While these two are in progress, Pertamina should seek potential investment partners that will enable it to expand its resource and wider asset base and production.

At the same time we need to accept that implementing such a blueprint will be impossible if the parliament and government cannot reach sensible and vested-interest-free agreements on how state resources (national budget) are to be allocated to finance Pertamina’s investment.

Perhaps instead of contending who is right or wrong, they should form a joint inquiry to contemplate how to achieve a common end in anticipating global oil conditions and making Pertamina a genuine and major contributor for Indonesia.

Having Pertamina structured and managed as a proper commercial entity should definitely cut the unnecessary overhead costs, make it compete with others, and thereby deliver better goods and services. It will certainly be possible to hold its managers to account.

In this situation, the government should play the standard role of shareholders who allow the executive directors of Pertamina to work professionally and accountably, without undue interference. The role of regulators should only be that–to regulate and not to sit as part of the senior management team of a producer. Here the old adage that umpires should not become players is a good one to apply, and especially useful when we consider that it is the fog of ethical confusion, ambiguity and conflicts of interest that has led Pertamina to the very sad state it is in today.