Pertamina's $6.1b 'graft' stuns Kuntoro

Pertamina's $6.1b 'graft' stuns Kuntoro

JAKARTA (JP): Minister of Mines and Energy Kuntoro
Mangkusubroto said on Friday he was dismayed by independent
auditors' findings that state-owned oil company Pertamina lost
US$6.1 billion in the past two years due to rampant corruption
and gross inefficiency.

"I was painfully surprised to learn of the auditors' findings.
But the reports, because they were made by independent auditors,
should be taken into serious account in reforming Pertamina,"
Kuntoro said.

The conclusion of Price WaterhouseCoopers was jarringly
dissimilar from an audit by the Development Finance Comptroller
(BPKP), the agency assigned to audit state companies, including
Pertamina.

The internal audit agency gave an unqualified verdict on
Pertamina's financial reports for April 1996 through March 1998,
meaning it did not uncover any financial wrongdoing.

Price Waterhouse was assigned last year to audit Pertamina's
financial performance over the period April 1, 1996, to March 31,
1998, as part of the reform measures agreed upon between the
government and the International Monetary Fund (IMF).

"I think BPKP has far faced great difficulties in conducting a
real audit of Pertamina," Kuntoro said of the discrepancy in the
two audits.

He said he might form a special team to follow up and act on
the audit although he, as chief supervisory commissioner of
Pertamina, had yet to receive a copy of the report from the
finance minister.

The executive summary of the special audit of Pertamina, as
excerpted in Kontan economic and business weekly newspaper,
disclosed rampant malfeasance, spanning outright embezzlement,
the markup of prices of procurement contracts, illegal
commissions and gross inefficiency.

Martiono Hadianto, who was appointed president of Pertamina in
January, appeared unperturbed by the report.

"All the findings will become the top priority of my working
program," he told Kontan.

During former president Soeharto's rule, analysts say,
Pertamina was a cash cow for his children, relatives and numerous
other senior officials and politically well-connected
businesspeople.

The company has become one of the prime targets of the
nationwide drive against corruption, collusion and nepotism which
was launched soon after Soeharto stepped down in May 1998.

The Ministry of Mines and Energy reported recently that 159
projects and contracts within Pertamina which allegedly involved
corruption, collusion and nepotism had either been canceled,
renegotiated or revised.

The leakage of the audit report raised eyebrows as
Kuntoro and Pertamina are currently embroiled in a tug-of-war
over a bill which he submitted to the House of Representatives.
One of the bill's aims is to abolish Pertamina's monopoly in the
oil and gas sector.

Pertamina has submitted to the House an alternative bill in a
bid to defend its monopoly rights.

Price Waterhouse said Pertamina incurred significant losses on
procurement transactions due to elements of corruption, collusion
or nepotism and said they were conducted on a basis that lacked a
sound economic rationale.

It discovered that corruption was entrenched in all Pertamina
directorates.

Auditors discovered $2.4 billion in losses incurred at the
Pertamina head office, $2.19 billion at its exploration and
production directorate, $328 million at its processing
directorate, $129 million at the foreign contractors management
body and $380 million at its shipping and communications
directorates.

The report cited examples of how the losses occurred:

*$165 million and Rp 108 billion lost because the long-term
time charter contract rates it paid were 30 percent to 36 percent
higher than the market rates.

*Rp 129 billion lost through questionable investment in PT
Margaraya Jawa Tol.

*Almost $129 million lost in commissions and fees to Permindo
Oil Trading Ltd. and Perta Oil Marketing Ltd. for services that
Pertamina staff could have performed.

*$98.3 million lost due to overpriced purchases of tetra ethyl
lead and catalysts for the Balongan refinery in West Java.

*$116 million lost through the payment of excessive insurance
premiums.

*$400 million lost due to the sale of natural gas at below
market prices to selective customers and industries.

The auditors attributed the gross inefficiency at Pertamina to
root causes which were fundamental, cultural or structural
characteristics throughout the company.

"Pertamina, based on 'guidance' from the government, has
entered into contracts and joint ventures with politically well-
connected individuals, from which it received little, if any
benefit."

It added that Pertamina's management was accustomed to making
decisions based on outdated financial information or without any
financial analysis.

It also found that Pertamina's actual investment amounted to
only 50 percent to 60 percent of the budgeted amount due to the
lengthy and time-consuming capital planning and procurement
processes.

"Pertamina has adopted an unfounded pension scheme and
consequently it has not recorded its committed liability for
future pension payments in its financial statements. The
estimated pension liability as of June 30, 1998, amounted to Rp
293.5 billion," the reports said.

The report warned that Pertamina would be required to make
dramatic changes throughout its organization due to heightened
competition if the bill now before the House is passed.(vin)