Pertamina's cash-flow problems and domestic fuel stocks

Vincent Lingga, The Jakarta Post, Jakarta

Is the government so strapped for cash that it failed to pay Pertamina Rp 23 trillion (US$2.42 billion) in fuel subsidies for the first quarter?

"No, we are by no means facing a liquidity crisis. In fact, the state budget thus far has booked a surplus of some Rp 10 trillion," asserted State Treasury Director General Mulia P Nasution last week.

However, Pertamina spokesman Abadi Poernomo had earlier disclosed to the media that the state oil company might soon have to default on some of its $1.64 billion in trade debts if the government did not soon reimburse the subsidies Pertamina had advanced during the January-March period.

Poernomo added that banks had refused to open new letters of credit (L/C) for the company to import oil, warning that national fuel stocks could fall below the minimum buffer level of 22 days' supply.

Strangely though, Pertamina's major creditors, including Bank Mandiri, Bank BNI and Bank Rakyat Indonesia, denied that they had any credit problems with Pertamina.

Another Pertamina official, this time from its public relations department, also denied that the company's crude oil suppliers had any problems with its L/Cs.

So, why then did the state oil monopoly resorted to such damaging disclosures? Doesn't Pertamina, as a state company, realize that such statements could jeopardize its own creditworthiness and even heighten the government's sovereign risk?

The fact is, however, a threat of fuel shortages always works wonders for Pertamina in collecting from the government.

The latest case occurred early last week when the government rushed to pay the company Rp 4.1 trillion (US$431 million) to provide it with access to a new credit line.

The payment was made one day after Pertamina warned through the media that the country might face a severe fuel shortage in May or June if the government did not reimburse the company for the overdue fuel subsidies.

The issue centered around the mechanism by which the government pays domestic fuel subsidies in respect of the difference between the prices at which Pertamina is required to sell fuels and their actual production costs.

Until mid-2004, the government reimbursed Pertamina for the subsidies that the company had advanced only after the Supreme Audit Agency or the government comptroller had audited Pertamina's domestic fuel sales accounts.

The audit requirement was deemed necessary to ensure that the amounts claimed by Pertamina in respect of the fuel subsidies were reasonable, given the company's reputation as a notorious "den of rent-seekers". Past experience also shows that quite a large proportion of subsidized fuels ends up being sold to industrial users or being smuggled overseas.

A consequence of this is that the reimbursement process often takes several months. But this was not too much of a problem in the past for the state oil monopoly as oil prices until the end of 2003 mostly averaged below $30/barrel.

However, with oil prices rising steeply since early 2004, domestic fuel subsidies have increased so sharply that Pertamina's cash-flow situation no longer allows it to give the government credit for the fuel subsidies for more than one month.

The finance minister therefore decided in mid-2004 to expedite the reimbursement process by making monthly payments of 90 percent of the subsidies paid by Pertamina if oil prices averaged below $33/bbl and 95 percent if oil prices exceeded $33/bbl. Reimbursement no longer requires an audit, but only verification.

Under this arrangement, only between 5 percent and 10 percent of actual fuel subsidy spending is subject to independent auditing, a process that takes several months. The government, for example, has yet to reimburse Pertamina for Rp 3.87 trillion in subsidy spending for the last quarter of 2004, pending the completion of an audit.

The problem, however, is that since early this year oil prices have been hovering above $45/bbl and monthly fuel subsidy spending has not been about Rp 3.3 trillion as the government had estimated for the whole year, but will reach as high as Rp 8 trillion.

Pertamina says that it needs at least $800 million a month for oil imports, which now account for almost one third of daily domestic consumption of about 178,000 kiloliters, if oil prices remain in excess of $45/bbl.

As Minister of Energy and Mineral Resources Purnomo Yusgiantoro revealed last week, the government had not reimbursed Pertamina for about Rp 23 trillion in fuel subsidies that the company had advanced in the January-March period.

Even though Pertamina has said its cash-flow situation was no longer adverse after the Rp 4.1 trillion payment made early last week, and the issue seems to have disappeared from the media radar screen, the tussle over the mechanism for fuel-subsidy reimbursement still leaves some worrisome questions.

If the government is not facing a liquidity problem, as Treasury Director General Mulia P Nasution asserted, why was it so seemingly unaware of Pertamina's cash flow situation that it fell behind in its payments to the company.

One may also question the true state of Pertamina's credit standing with oil suppliers overseas, such as Aramco, from which the state monopoly has been buying crude since the late 1970s. Why is Pertamina, given its position as an oil monopoly, state- owned company and an established, bulk buyer, unable to get trade credit of three months from its crude suppliers?

Without a better reimbursement mechanism, similar problems could recur, and Pertamina might once again resort to threats and brinkmanship in its dealings with the government.

But whatever the new mechanism Pertamina and the government decide on, it must not jeopardize the company's cash flow situation while at the same time ensuring that the amount of Pertamina subsidy spending that is reimbursed is really based on actual fuel sales to eligible consumers.