TEMPO.CO, Jakarta - THE Government must be cautious in facilitating the birth of its proposed oil and gas holding company. Without careful planning, efforts by the Ministry of State-Owned Enterprises (SOE) to merge Perusahaan Gas Negara (PGN) with Pertamina may potentially run counter with the law. After all, the House of Representatives and the Ministry of Energy and Mineral Resources have yet to complete discussing revisions to the Oil and Gas Law.

The Government should wait for these revisions to be concluded to avoid any future legal polemic. Moreover, these revisions concern the management and institutional restructuring of the oil and gas sector. Thus, President Joko Widodo does not need to rush through the government regulation on the formation of an oil and gas holding company, now targeted to be finalized this month.

While waiting for these revisions to be finalized, SOE Minister Rini Soemarno ought to have properly involved the Ministry of Energy in discussions on the planned formation of the oil and gas parent holding company. Several aspects related to the oil and gas business does lie fully within the domain of the Ministry of Energy and Mineral Resources. The involvement of another ministry, apart from ensuring that Rini would avoid unnecessary suspicions, would likely to improve transparency and accountability in the formation of these government-owned parent company.

The parent company’s formation need not be forced if the review is still incomplete. The scope of this study should at least encompass the clear division of roles between Pertamina as the parent company and PGN as part of the holding. This review should include a roadmap for the gas and fuel business from upstream to downstream, including how the parent company would answer future energy challenges. Several of the regulations issued by the Energy Minister Ignasius Jonan also need to be taken into account.

This review must calculate the practically measurable benefits the merger would bring. Merging the oil and gas companies will undoubtedly increase the capital worth of the company, making it easier to get additional funding. From Pertamina’s calculations, the formation of the holding company would increase its investment capacity by US$32 billion, equivalent to Rp416 trillion, over the next 15 years. However, the government should not be blinded by that number.

Having a large capital and investment capacity are not the only solution to one’s difficulties. The challenge lies in how to use that large capital to yield the maximum benefit. Central to this is good governance, management control, efficiency, and supervision. The government must take all these aspects into account before going on to produce the legal umbrella regulating the formation of the oil and gas parent holding.

But that is not all. Each government-owned business has unique financial characteristics. As of September 2017, Pertamina’s income could potentially drop by Rp19 trillion. This would be the result of the government not increasing fuel prices, even though world oil prices are now nudging US$60 per barrel. At the end of 2016, Pertamina’s total debts were Rp157 trillion. An ill-planned formation of a holding company could potentially trigger a cross default, where the financial problems of one company then spread to another.

Prudence is necessary as the process of unifying companies is not a simple matter. One issue is in the transfer of share ownership (inbreng). The government plans to transfer 57 percent of the state-owned series shares in PGN to Pertamina. The value of the state’s capital participation to be transferred is awaiting a decision by Finance Minister Sri Mulyani. This share transfer process must be open and transparent.

The government would be wise to wait until all the legal aspects are completed. Without proper preparations, it would seem as if the government is merely rushing to put on a show.

Read the full article in this week's edition of Tempo English Magazine