Reforming Pertamina

Reforming Pertamina

President Abdurrahman Wahid continues his cleanup campaign on
state companies which, under former president Soeharto's rule,
were exploited as cash cows for his family members and cronies.
And the target this time is the biggest of them all. He appointed
on Monday Baihaki Hakim, former president of PT Caltex Pacific
Indonesia, as the new chief executive officer of state Pertamina
oil and natural gas monopoly to replace Martiono Hadianto.

Contentiously though, Ainun Naim was appointed the new
director of finance. He is a lecturer at Yogyakarta's Gadjah Mada
University and is reportedly close to Minister of Finance Bambang
Sudibyo and People's Consultative Assembly Speaker Amien Rais.
But his five other appointees to the board of directors are all
career executives of the oil company.

The President specially instructed Baihaki to clean up the
corruption and collusion-plagued Pertamina, improve its
efficiency, expand its oil production capacity and make it an
internationally competitive oil company.

This is a tall order even for Baihaki despite his solid
technical background in the hydrocarbon industry. His long
experience has mostly been with the subsidiary of international
oil major Caltex, which is well-known for its established
organization and management system. He is now entering a
bureaucratic labyrinth, which for more than 30 years was held
hostage to the vested interests of the Soehartos and their
cronies.

The PricewaterhouseCoopers audit on Pertamina, made last year
at the request of the International Monetary Fund (IMF),
uncovered how the oil company was allegedly pillaged by the
Soehartos and their cronies. The auditors concluded that
Pertamina lost almost US$5 billion between April 1996 and March
1998 alone due to outright corruption, inefficiency and collusive
procurement contracts.

Martiono Hadianto, who was appointed by then president B.J.
Habibie to Pertamina's helm in December 1998, had canceled or
amended most of the questionable deals, but it will take a much
longer time and require the full support of the political
leadership to wholly reform the corrupt system.

Baihaki will certainly face a tough job in overhauling the
bureaucratic labyrinth in place at Pertamina, but he is taking up
his assignment with advantages which his predecessors did not
have -- a strong mandate and the full support of the President,
who has been determined to clean up the government and state
companies in light of establishing a system of good governance.

Baihaki will not face any contradictory goals which could
often distract and discourage even a highly professional manager.
He will have the freedom to bring about changes, introduce
transparency to the relationship between the government and
Pertamina and follow up the recommendations of
PricewaterhouseCoopers.

But this condition, though quite necessary, is not enough to
ensure the smooth execution of Baihaki's mission. The reform he
is about to implement, notably the drive to root out corruption
and collusion, will be politically feasible only when the top
leadership can secure the approval and support of other
government entities whose cooperation is critical to success.
Hence, it is most imperative that President Abdurrahman remains
steadfast with his reform platform, and not be swayed by
lobbyings from political parties which supported his election. It
is also crucial that Pertamina's books are audited annually by
independent accountants and not by the allegedly corruption-
tainted Development Finance Comptroller (BPKP) as it has always
been.

The task of increasing Pertamina's oil production, which now
accounts for a mere 5 percent of total production capacity,
requires the government to give the company management broader
financial autonomy. This means allowing Pertamina to invest the
bulk of its profits in oil and natural gas exploration, its core
business. Thus far, the high risk hydrocarbon exploration sector
has been dominated by foreign oil contractors partly because a
greater portion of Pertamina's earnings have been earmarked for
the state budget.

Baihaki's mission to make Pertamina internationally
competitive amid the increasing tendency of megamergers between
giant oil companies needs legislative support to allow the state
company to form strategic alliances with multinational firms and
to open the downstream petroleum industry, currently under
Pertamina's monopoly, to foreign investors. The new Pertamina
chief has less than three years to gear up for a fiercer
competition from other companies in Malaysia, Thailand and
Singapore under the ASEAN free-trade area.