Tony Sitathan, Jakarta – A retired stockbroker who once assisted Indah Kiat Paper and Pulp – considered the darling of the paper and pulp industry at one time before being swallowed up in a sea of debt – to go public says the best way to see the upside in any downside is for a company to go public. He may be right, but not when it comes to Indonesia's giant state-owned oil and gas company, Pertamina.
There were intentions for Pertamina to list its three subsidiaries on the Jakarta Stock Exchange (JSX) through an initial price offering (IPO) some time last year. The three subsidiaries are PT Apexindo, PT Medco Antareja and PT Exspan Petrogas Indonesia. Now Pertamina has opted for listing these subsidiaries either this year or next, saying that more time is needed to take into account the socio-economic factors of a public listing in Indonesia. It is also waiting for a complete audit on all its diverse holding companies and subsidiaries, attempting to prove that it has a clean bill of health, before any listing is done.
Iwan Yoniton, a senior broker in Bahana Securities, the state-owned securities firm, said the Pertamina subsidiaries are well established in the oil-exploration business and their shares are expected to be snapped up by the public despite the overall flatness in the JSX. "Pertamina has decided to delay its intended IPO due to several internal factors as well as external market conditions. What is more essential is for Pertamina to improve the way it manages its subsidiaries as well as core businesses," he said.
In fact, time is needed to put Pertamina's house in order. Mismanagement and decades of corruption in the various hierarchies of Pertamina have made it slow to adapt to changes, especially since Indonesia's House of Representatives approved a new oil and gas law, which came into effect almost two years ago.
The state-owned monopolies that regulate the Indonesian oil industry and its contract-fixing roles with independent oil majors will be surrendered to the central government. The new law will replace Oil and Gas Law No 44/1960 and Law No 8/1971 such that executive and regulatory bodies will be formed by the government to take over Pertamina's roles. For instance, the executive body will take over Pertamina's role in dealing with foreign oil and gas contractors, while the regulatory body will manage domestic fuel supplies and distribution.
Hence Pertamina will be transformed into a limited-liability company after two years. "On paper this move by the Ministry of Mines and Mineral Resources looks commendable, but the law did not take into effect the sweeping changes that has to be implemented in order for Pertamina to be transformed into a limited-liability entity," remarked Ted Subianto, a leading lawyer in Jakarta who has an active interest in oil and gas investments in Indonesia. "Also the ASEAN Free Trade Agreement [AFTA] which comes into effect this year has deep bearing on the oil and gas sector in Indonesia, where foreign companies like Petronas from Malaysia are keen to participate in the downstream sector of the oil and gas industry in Indonesia."
But is Pertamina prepared to go the extra mile in its quest to be publicly listed? Yes, according to its chief executive and president director, Baihaki Hakim. He has the unenviable task of restructuring Pertamina and transforming it from an inefficient state-run organization into something resembling a modern corporation with high standards of corporate accountability and social responsibility. He has been given a free hand by former president Abdurrahman Wahid as well as the current president, Megawati Sukarnoputri, to stamp out rampant corruption and inefficiencies that costs the country millions of dollars in foreign currency.
According to an audit conducted by PriceWaterhouseCoopers almost two years ago when Baihaki took the helm of Pertamina, the company had wasted an estimated US$2 billion since the mid-1970s. Most of that was monies that were siphoned off because of kickbacks, insurance-premium scandals, overpricing of supplies and rigging of import quotas, tenders and awards to foreign oil traders.
One of Baihaki's first tasks was to replace and reduce the board of directors and cut the company's workforce by 30 percent. He had to retrench almost 20,000 employees. "It was a painful exercise where even those in senior positions were given the option of early retirement or face an unknown future. And even foreign-based offices in the US and Hong Kong were later closed down," said Daniel Purba, the marketing manager of Pertamina Energy Services, based in Singapore.
This massive streamlining exercise was saved as a blueprint for other national companies to look at in the future. The restructuring exercise, which is still ongoing, Pertamina closed down unprofitable offices and businesses that were unrelated to its core oil and gas services and outsourced to companies that were more qualified to run these services. "Also there were new methods of arranging trade financing as well as curtailing the use of the bank guarantees as collateral ever since a law was passed that prohibited Pertamina from applying for overseas trade or credit loans, [which] was so easily done under the former regimes of presidents Suharto and [B J] Habibie," maintained Dicky Turner, a former director of Pertamina's finance and treasury division.
The Ministry of Mines and Natural Resources also felt that the introduction of competition would help eradicate these competitive inefficiencies, and would lower costs and help prepare Indonesia to meet the challenges set out by its neighbors when AFTA becomes a reality. "This in turn would invite more foreign players active in the oil and gas industries to invest further in Indonesia, long known to have tapped only 20 percent of its vast oil and gas reserves," said a ministry official.
Does this mean more foreign investors and foreign investments are finding their way into Indonesia? In fact, the opposite has happened. "There had been an overall drop in oil exploration investments by at least ... 11 percent as compared to 2001," remarked Agus Wicaksano, a consultant and assistant geologist with PT Multi Harapan, a mining company based in South Kalimantan.
According to the Investment Coordinating Board (BKPM), foreign direct investment (FDI) approvals in Indonesia plummeted by 35 percent to $9.7 billion last year from $15.06 billion in 2001. Although BKPM did not reveal the reasons for the drop, analysts have outlined that legal uncertainties, lingering labor conflicts, security problems and the lack of regulations governing regional autonomy are among the factors that discourage foreign investment in Indonesia.
Who then is to blamed for Pertamina not achieving its target of listing its subsidiaries? Can it ever hope to cross the public-accountability threshold and achieve its goal of being a listed and self-funded corporate company? Right now the new law arguably falls short of the expectations all parties involved in or impacted by the oil and gas industry, but one thing is certain: changes to the old laws governing the industry were required, Drs Hadi Sutanto and Rekan revealed in a report released last year by PriceWaterhouseCoopers.
"Without change in the Indonesian oil and gas industry, Pertamina may have been doomed, foreign investment may have become stagnant or declined, badly needed downstream infrastructure development may not have occurred in a timely manner and many other negative economic events may have occurred," said the report. "Now that change has occurred, whether welcomed or not, the question arises as to how to deal with this change."
For Pertamina now, a more important question is how it can evolve from its status as a corporate juggernaut, given its $10 billion in reported assets, to that of a socially responsible company more concerned with eliminating corporate abuses and eventually winning the confidence of the public. For without public confidence, there can be no public listing in the first place.