Indonesia's Lone Ranger

Baihaki Hakim is cleaning up Pertamina, the state oil giant

Surrounded by silver models of oil refineries and tankers in his Jakarta office, Baihaki Hakim matter-of-factly describes his battle to turn a dictator's money machine into a modern company. Baihaki is president-director and CEO of state-owned Indonesian State Oil & Gas Co., or Pertamina. He ticks off his myriad challenges: First, he must stamp out billions of dollars in graft that he says distorted Pertamina's operations. Then he needs to sack cronies of former President Suharto and dismantle a bloated bureaucracy. The latter will involve laying off almost a third of Pertamina's 24,000 employees. And most important, Baihaki must tussle with parliament and restive provincial forces for control of Indonesia's fossil-fuel resources.

If he succeeds, Baihaki and his team of reformers could win credit not just for saving an oil company but for saving a nation. Pertamina, with its $15 billion in revenues, is big enough to resuscitate Indonesia's economy, which has been flirting with collapse for the past three years. If Pertamina were to realize its full potential--and stop profits from ending up in the wrong hands--it could generate more than $1 billion a year in new profit-sharing, fees, and taxes for the government. But if the rescue of Pertamina fails, foreign investors could completely lose faith in the restructuring of Southeast Asia's most populous and troubled nation.

Just 13 months after being appointed by President Abdurrahman Wahid, Baihaki is already credited with doing much to cleanse Pertamina of its Suharto-bred corporate culture--from issuing its first-ever financial report to axing contracts with parasitic middlemen to changing bidding procedures. The endless effort is exhausting. "You can't expect a bad monopoly to perform like a normal business," Baihaki says with the confident Southwestern American twang he acquired during a year of training in Texas. "Sometimes, I feel like I'm the Lone Ranger here."

Besides being the national petroleum company and owner of all of Indonesia's wells, Pertamina regulates the oil-and-gas industry. Critics charge that this setup let Suharto's children and cronies divert millions of dollars a year into their own pockets. They set up hundreds of companies that worked as suppliers, agents, and partners of Pertamina. Those companies, says Attorney General Marzuki Darusman, defrauded Pertamina of billions of dollars over the years. In 1999, a PricewaterhouseCoopers audit found that Pertamina lost a total of $6 billion in 1997 and 1998 because of graft and inefficiency. "The problems are so complicated," says Wilson Nababan, head of Indonesian credit agency CISI Raya Utama, "it would take 100 Baihakis to clean up Pertamina."

Still, if ever there was a time to try, it is now. Suharto is out of power, the cronies who milked Pertamina are out of government, and the army generals who protected them are busy fending off accusations of human-rights abuses. Parliament, meanwhile, is debating deregulation of the petroleum industry, and the International Monetary Fund is forcing Indonesia to lift fuel subsidies.

Indeed, Pertamina's first true test will come with an initiative to remove subsidies on gasoline, diesel, and kerosene that have kept domestic prices at less than half of international rates. The test began on Apr. 1, when prices for industrial customers rose an average of 108%. The real pain will come Oct. 1, when consumers start paying higher prices. An attempt to raise fuel prices was the final act that drove Suharto out of power, and many people question whether Wahid and Baihaki can pull the rate hikes off.

DEADLINE. At the same time, Baihaki must overcome an effort in parliament to strip Pertamina of its prerogatives. "The perception is very strong that Pertamina was treated as a cash cow for decades," Baihaki says. Under the proposed Oil & Gas Law, Pertamina would lose legal ownership of all of Indonesia's oil and gas wells and be reduced to a mere producer, refiner, and retailer of fossil fuels. The legislation would give back to the government 85% of the production-sharing contracts that Pertamina currently holds in Indonesia with international oil companies. In the past, much of the revenues from those contracts went missing.

Baihaki's plan is to rehabilitate Pertamina in time to convince parliament that the company can now be trusted as custodian of the country's most precious resource. But if parliament does strip Pertamina of its role as the keeper of Indonesia's petroleum assets, Baihaki won't be unprepared. Recently, he announced a blueprint to overhaul Pertamina into a globally competitive oil producer that will bid against its current contractors, including Exxon Mobil (XOM ), BP Amoco (BP ), and Unocal (UCL ), for concessions in Indonesia and elsewhere. Baihaki plans to raise the capital required to do this by selling a 51% stake in an international initial public offering within five years. Foreign investors, he reasons, would then hold the company to global standards of transparency.

But Baihaki has a long way to go before he can make Pertamina sufficiently clean to attract foreign investors. Says Pertamina Finance Director Ainun Na'im: "The way people robbed this company was not simple." One impenetrable drain is through a cartel of 30 ship-leasing companies that Baihaki calls "a kind of mafia." Making matters worse, Pertamina is at the heart of a bitter power struggle between the central government and the governments of petroleum-rich provinces. Since the Regional Autonomy Law, which took effect on Jan. 1, is unclear about who controls the resources, provincial authorities are claiming oil concessions as their own.

Meanwhile, armed militias on outlying islands have used the law as an excuse to attack Pertamina's contractors. Exxon Mobil Corp. has shut natural-gas production in the restive province of Aceh, and Caltex has slashed production of crude oil by 40,000 barrels a day in Riau province. Wahid says the closure of Exxon Mobil's facility is costing the government $100 million a month, while Caltex estimates the loss to the government in Riau at more than $300 million a year.

Whatever happens in the political sphere, everyone agrees that Baihaki has made great strides in reforming Pertamina. His first move was to install a new management team made up of Indonesian professionals drawn from multinationals that operate in Indonesia and from local universities. The team promptly embarked on what industry sources call a "search and destroy" mission in areas where costs, from crude oil imports to insurance, were suspiciously high. As a result, says Na'im, management cut costs by more than $1 billion in the year ended on Mar. 31, and it hopes to save $300 million more over the next 12 months. "There is a sincere belief that Pertamina's culture is changing and that it can continue to change," concludes Brian W.G. Marcotte, president of Unocal Indonesia Co., one of Pertamina's contractors.

Baihaki's first coup was changing the bidding procedures for the various kinds of crude--280,000 barrels a day--that Pertamina imports to make up for a shortfall at home. Soon after he arrived in February, 2000, Baihaki began to suspect that the bids were being rigged in favor of the Singaporean branch of an Indonesian-owned oil-trading company, which routinely won contracts by bidding just 1% under the lowest bid. "I wondered why this guy got the same contract every day forever," says Baihaki. "It was just a rig-up."

So three months ago, Baihaki changed procedures. Instead of taking bids on a single fax machine, which made it easier for someone to manipulate them, bids now come in on three separate fax machines in a room that is locked until the tender closes. With truly competitive bidding going on, Pertamina is saving an average of 10 cents per barrel, or some $1 million a year, on crude imports.

Then Pertamina took a buzz saw to its insurance operations. That became possible after Suharto's friend Mohamad "Bob" Hasan was arrested on unrelated corruption charges last year and removed from the board of commissioners of PT Tugu Pratama, Pertamina's insurance subsidiary, which covers operations under the company's production-sharing contracts. Na'im, an accounting professor until he became Pertamina's finance director a year ago, began scrutinizing Tugu's books. He discovered that Tugu had added a 5% markup to insurance policies purchased from foreign insurers, making the policies more expensive for Pertamina--and giving someone an opportunity to profit. "There were a lot of brokers, and not all of them added value," says Na'im. By January, he managed to eliminate the 5% surcharge as well as reduce premiums for Pertamina and its foreign contractors by an average of 54%, saving a total of $20 million this year. Hasan did not respond to a fax from BusinessWeek requesting comment.

By eliminating brokers and other middlemen, Na'im says he also managed to save $1 billion last year on the cost of procuring imported heavy equipment during the year ended on Mar. 31. That includes new pipes, pumps, and other gear used in hundreds of oil and gas fields. Petroleum industry sources say Pertamina long bought low-quality equipment for high prices, allegedly filling the pockets of those involved in procurement. Next, Baihaki wants to renegotiate the rates Pertamina pays to lease tankers. Pertamina is required by law to lease tankers locally, and last year that cost $711 million. Baihaki has asked government permission to let foreign leasing companies bid. He expects to save 15% a year if they can.

FRAUD CHARGES. While he revamps operations, Baihaki is also seeking action against those he suspects of looting Pertamina. The company has delivered to the Attorney General's office a stack of documents on 159 suspicious contracts between Pertamina and other Indonesian companies, at least 22 of which could result in legal action. In an interview, Attorney General Darusman said five of those contracts involved Suharto's daughter Siti Hardiyanti Rukmana, or Tutut, and former Minister of Mines & Energy Ginandjar Kartasasmita, and that his office is pressing criminal charges against both of them for fraud. A spokeswoman for Tutut's holding company, Citra Lamtoro Gung Persada, said Tutut wasn't available for comment. Ginandjar denies the charges.

A company named in one of the five cases, PT Ustraindo Petrogas, won a contract with Pertamina in 1992 to salvage the last few drops of crude oil from supposedly dry Pertamina wells in South Sumatra. According to documents, the contract was awarded without bidding, and--lo and behold--the wells turned out not to be dry. Even so, Ustraindo even received a subsidy of $2 a barrel, says Darusman. Total loss to the government: $25 million. On Mar. 31, Darusman issued an arrest warrant for Ginandjar on corruption charges stemming from the Ustraindo contract. Other officials were also charged. Muchyar Yara, Ginandjar's attorney, rejected the charges on grounds that Darusman "has no legal authority."

The company is still a long way from turning the page on a history of corruption, collusion, and nepotism. "There are enormous legal problems there," says Darusman. "We're just scratching the surface." Still, the progress Baihaki has already made should earn plaudits for Indonesia's Lone Ranger.

By Michael Shari in Jakarta

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