Reforming Pertamina and PLN

Reforming Pertamina and PLN

By T.N. Machmud

JAKARTA (JP): One cannot help but applaud the agenda Minister
Purnomo has set himself and his ministry. As he described in The
Jakarta Post on Aug. 21, it will require an all out effort by the
ministry. Restructuring both state-owned oil firm Pertamina,
electricity company PLN and providing the direction needed by
these two important state-owned enterprises is a full-time job in
itself. One significant contribution he could make would be to
help provide the legal framework to realize his five goals and
select the right people to manage the job. Selecting the right
people will be the key to success.

The minister was quoted as referring to Tan Sri Datuk Seri
Azizan Zainal Abidin of Malaysia as an example of a chief
commissioner who devotes his full time to Petronas.

From Petronas' experience, we can testify that Minister
Purnomo is totally correct in that observation. He is also
correct in pointing out that a commissioner of Pertamina should
not have to be a minister. In our system, however, as dictated by
Law No. 8 1971, certain ministers, including the Minister of
Energy and Mineral Resources, are appointed unofficially as
Pertamina commissioners. With the enormous workload carried by
those ministers they cannot be expected to devote much of their
valuable time to Pertamina.

Minister Purnomo also mentioned that improvements in both the
system and operation through the new law on oil and gas may
prevent past practices of corruption, collusion and nepotism
(KKN). He said this is because the new law is expected to
introduce competition both in the upstream and downstream sector,
while increased competition will tighten loopholes normally
involved in KKN.

While this is basically correct, we also need to make sure
that the legal framework replacing the present one also removes
the legal basis that has made KKN possible. These are not limited
to the government's cumbersome tendering rules, which are now
also applicable to the investor community, despite the fact that
projects involving production-sharing contracts are not financed
by the state budget. These are relics from the past created by
the New Order government to create sources of funds that now need
to be erased.

Minister Purnomo's comments go to the heart of the question of
what is good corporate governance. This is favorite jargon among
the elite and a lot of lip service has been paid to it. Yet, when
it comes to applying the concept we fail to act.

One important ingredient of good corporate governance is the
ability to select the right people for commissioners. In
Pertamina's case it indeed does not have to be a minister, but a
professional, someone with a broad background in industry as well
as integrity and credibility.

In countries with a more advanced outlook toward business, a
board of directors may be the equivalent to our board of
commissioners. The individual selected is often a chief executive
officer of an unrelated industry but nevertheless selected in the
expectation that he or she can bring wisdom in dealings related
to many management issues that come to the attention of the
board. It is that kind of wisdom which counts as it comes from
years of experience in the trenches.

Other commissioners may not hail from industry circles at all
but could be selected from the education sector; some may even
come from government.

What is important is that it should be a full-time job. A
major company like Pertamina or PLN deserves that kind of
attention. Yet Law No. 8 1971 shows that the selection of
Pertamina commissioners contradicts good corporate governance.
Because, even if better candidates are available for the job of
Pertamina's Board of Commissioners (DKPP), we miss out on the
opportunity to elect them for office for reasons that the legal
framework prohibits us from doing so. This is sad but true.

No wonder that efforts are afoot to change the legal
framework. Under the proposed new law on oil and gas, now being
discussed in the legislature, Pertamina would revert to becoming
a regular state enterprise (Persero) and the selection of
commissioners would have to be viewed in the light of regulations
dealing with state enterprises in general, where a general
meeting of shareholders, among other things, may determine who is
appointed commissioner. This would appear to be a better process,
as long as the criteria for being elected commissioner is correct
-- and this is where we often go astray and end up appointing
friends of friends of friends.

At the government's behest, a committee was formed called the
National Committee on Corporate Governance. The committee,
earlier this year, issued a Code of Good Corporate Governance.
The code mentions both experience and good character as
requirements for being elected a commissioner by a general
meeting of shareholders.

Minister Purnomo's remarks make us believe that he is
searching in the right direction.

The writer is a retired president and CEO of the oil company,
Arco Indonesia and is now senior advisor at the law firm, Kartini
Muljadi SH & Rekan. He lectures at several business schools in
Jakarta.