Pertamina's cash-flow problems and domestic fuel stocks
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.