Is KKN rife in RI's petroleum industry?

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.