Is KKN rife in RI's petroleum industry?

By Parulian Sihotang and Alex Russell

JAKARTA (JP): Indonesia's remarkable economic growth rate over the past 30 years has been predominately fueled by the proceeds of the exploitation of its oil and gas wealth which, arguably, is the birth right of every Indonesian citizen.

Indeed, on average over 42 percent of Indonesian domestic revenues, and 48 percent of all export income, can be directly attributable to oil and gas output. In 1999/2000, however, the worrying statistic for Indonesians is that oil and gas revenue fell by over 50 percent from the previous year's figure.

The fact that only 9.7 years worth of recoverable reserves appear to be left for future generations must add to their anxieties over the state of the industry (BP-Amoco Statistical Review of World Energy, June 2000). This concern is shared by no less an august body than the World Bank which attributed the below par performance of the industry to poor management (World Bank Report, June 2000).

The Report adds, "If it is to operate in a commercially, economically, socially and environmentally viable manner, the sector needs to be substantially reformed urgently given the issues at stake, the fallout from the regional crisis and the adverse conditions in the global oil industry".

It is unthinkable that this decline can be allowed to continue. In order to gain deeper insights into problems plaguing the sector, and to recommend solutions to the problems, research specialists in oil affairs from the University of Dundee, Scotland, sought the views of key players and strategic decision- makers in the Indonesian petroleum sector.

Petroleum experts were invited to respond to a series of questions and 26 of them were interviewed in-depth on the issues. The 101 respondents in the survey conducted from April to August this year included top executives of foreign oil companies, top government officers/auditors, public accounting firms and other notable experts from the industry.

The results are startling, thought-provoking, challenging to the management status quo and may pressurize the government and the industry into establishing favorable policies to safeguard the future of the industry.

Most respondents stated that corruption, collusion and nepotism (KKN) are primarily responsible for unacceptable and unaccountable managerial practices in the petroleum industry over the last 30 years.

If these views are correct they are clearly prima facie evidence of malpractice of national proportions, which demand the immediate introduction of government management disclosure practices, which are transparent and auditable, at both the policy and operational levels.

This notion of transparency is the first and main prerequisite for establishing accountable managerial control of the Indonesian oil industry. But respondents also argued that the management of petroleum operations should be based on mutual trust between the government and foreign / private operator companies.

Second, the government-led management of the petroleum industry should be more responsive to the legitimate rights of all stakeholders in the industry, including those of the population.

Third, all petroleum companies, foreign and domestic, need to be directly accountable for their activities and they should systematically report the results of their operations to the government.

Consequently, Pertamina's role as the manager of petroleum activities, as stipulated in Law 8/1971, would need to be abolished and that responsibility should be delegated to independent government special units known as the "implementing body and regulatory body" in the new oil and gas law draft.

Respondents identified foreign oil companies, suppliers / contractors, parent companies and the central government of Indonesia as being the main beneficiaries from the petroleum revenue, whilst locals and regional government fail to enjoy a reasonable share of the oil largess.

This finding adds credibility to the struggle by the local population and regional government for their fair share of oil revenues, as illustrated in the CPP Block and Arun LNG cases between oil companies and the local people/regional government in the provinces of Riau and Aceh.

Why are projects associated with exploitation of Indonesian oil and gas properties seen as unattractive propositions by venture capitalists? Most respondents or 54 percent argued that KKN is the main cause.

Further, the bureaucracy associated with the requirement that production sharing contractors must comply with the tendering and procurement procedures established by the government -- despite the fact that production sharing contractors do not use any government money to fund their operating activities -- was seen to be a barrier to investment.

Interference or control by Pertamina over foreign oil companies was put forward by 27 percent of respondents as being another major factor preventing inward investment. Other factors identified included (1) heavy administration and cumbersome process in projects and contracts approval, (2) rigid government / Pertamina supervisory role and style, (3) direct and indirect interference from other governmental agencies and (4) personnel rules and regulation imposed on oil companies' expatriates.

So what should the government do to reform the petroleum sector? The following are the respondents' opinion in order of urgency and importance: the government should (1) introduce more incentives for exploration, appraisal and development activities, (2) set more generous fiscal terms especially on marginal and remote working areas, (3) eliminate overlapping control by various levels of government authorities, (4) give more control to the oil companies, (5) de-monopolize Pertamina's role especially in the down-stream industry, (6) eliminate government tendering/procurement rules on production sharing contractors, and (7) abolish personnel rules and regulations imposed on expatriates.

Although respondents identified regional government and local people as being legitimate stakeholders of the petroleum industry, central government was identified as the preferred co- signatory to petroleum operation agreements.

One top executive of an oil company argued that "It is a real danger for the investors that every regional government might issue their own regional regulations on tax and other duties to be imposed on oil companies. It is going to be a real disincentive for investment coming into the region ".

The evidence from the survey and interviews indicate that the petroleum industry needs to be substantially reformed. The claims relating to KKN need to be taken seriously and steps taken to eradicate such practices if the claims are substantiated.

There must be speedy completion and implementation of the new oil and gas law now under discussion between the government and the legislature. The law should impose accountability and transparency regulations for the governance of petroleum operations. Any successful resolution of the issue of regional autonomy over oil and gas affairs must be sensitive to the need to promote investment in the petroleum sector.

The writers, who were involved in the above survey, study at the Department of Accountancy and Business Finance, University of Dundee in the United Kingdom.