Pertamina Reform Requires Clarity

The recent appointment of a professional figure to head state-owned oil and gas giant Pertamina may have been a move by the government to shield the company from political intervention.

However, creating a politics-free environment for a strategic firm such as Pertamina goes beyond the appointment of a nonpartisan director.

The new president director Elia Massa Manik, stated, as quoted by The Jakarta Post, that he had no affiliation with any political party. His remark was essential on account of the risk of political cronyism despite years of efforts to improve good corporate governance in state-owned enterprises/

Limiting political interference by appointing professional figures to fill top management positions has long been the key prescription for Pertamina to improve its performance. It started in 1988 when the country no longer picked candidates with military backgrounds to fill the top post at Pertamina and turned to professional figures as a part of an apparent response to alleged corruption in the firm.

However, looking at years of professional leaders taking the helm at Pertamina, concerns about intervention with political motives remain high.

Appointing professional figures is one thing. Yet, it needs to go along with the second prescription - that is creating a framework on the role of the state oil firm.

State oil companies are formed for specific notices of the respective governments, including serving as the arm the state in challenging the domination of multinational firms or becoming a took for wealth distribution, such as through fuel subsidies. Pertamina has experienced several changes to this kind of role, which has also drawn its relationship with the state as the shareholder.

In the early years of its establishment, Pertamina had a strong role in the oil and gas industry, as highlighted in a 1971 law. The company was the backbone of Indonesia during the petro-state period, in which oil money was the main source of the economy. Also under the 1971 law, Pertamina was the arm of the state in controlling natural resources.

It had the exclusive right to perform activities for Indonesian fields and had the authority to sign production-sharing contracts with other oil and gas companies working as contractors. This was a period when Pertamina was addressed as "a state within a state" and was entangled in various interests creating cronyism linkages.

In 2001, the Oil and Gas Law was approved and paved the way for drastic change at Pertamina, terminating its authority in dealing with oil and gas contractors, placing it in a similar position to other oil and gas contractors working for Indonesian fields.

Its authority was handed over to state oil and gas regulator BP Migas, now the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas). The law signifies deregulation policy toward Pertamina and reflects the Norwegian model of a state oil company that draws a clear line between business-commercial functions and regulatory functions in the oil and gas sector. It was believed that separating those functions could assist Pertamina in eradicating corruption and political cronyism and improve its efficiency and competitiveness.

Yet, the 2001 law has been challenged at the Constitutional Court. The drafting of a new law has been ongoing since a court ruling stated BP Migas was unconstitutional in 2012. However, the end of the tunnel is yet to be seen.

Amid ongoing legal uncertainty in the industry due to prolonged deliberation over a new oil and gas bill to replace the "unconstitutional" 2001 Oil and Gas Law, the direction of Pertamina is unclear.

The government is maintaining its approach of installing professional figures to head Petamina in an apparent attempt to limit political intervention. However, the functions to be set for the company are still unclear.

The newly appointed president director, Elia, and previous chief Dwi Soetjipto have track records of leading the merger of stationed enterprises, which are respectively plantation firms and cement firms. The appointment of Elia as the new chief of Pertamina has led some to the assumption that the government wants to conclude its plan to establish a holding firm for oil and gas state-owned enterprises.

The latest plan is to put another state company, Perusahaan Gas Negara (PGN), under Pertamina. The realization of this plan would mimic the pas merger of Permina-Pertamin, the embryo companies of Pertamina, in the late 1960s and a convincing sign that the government wants a stronger role from Pertamina to help it fulfill particular domestic agendas.

However, it is necessary to recall that statistically national oil companies around the world tend to perform less efficiently than private firms, particularly due to the set tasks from the government. In recent days, several of the government's policies have shown the possibility of bigger roles for the state company domestically, such as through the awarding of expiring oil and gas blocks and the one-price-fuel policy to spur growth, particularly in the eastern part of the country.

It is indeed the pleasure of all citizens to see Pertamina grow and compete with other oil companies. Giving priority to Pertamina to work on big-producing fields is acceptable to some degree.

However, we have learnt that putting all our eggs in one basket may result in a conflict of interest, corruption and cronyism.

For a country like Indonesia with its dynamic and progressing democratic system, it is time the country strengthens its institutional structure for the oil and gas industry to stay on track with regard to the reform agenda. This structure should divide policy, commercial-operatic, national development, monitoring and regulatory functions.

Giving Pertamina the commercial-operating function would allow it to work on oil and gas fields in Indonesia and abroad. Meanwhile, the other functions should be under other government arms, including ministries and development agencies. Unless this approach is taken, Pertamina will fall as a political instrument and the reform agenda will have to go back to the start.

Write this piece, which was published on print edition on April 4, 2017. Also on:

http://www.thejakartapost.com/academia/2017/04/04/pertamina-reform-requires-clarity.html