Is Petronas abandoning bumi vendors or are bumi vendors ASKING FOR TOO MUCH?

Despite the denials from none other than the Petronas CEO, allegations that the national oil company has been side-lining Bumiputera companies continue to take media limelight.

That MTEM’s accusation of Petronas neglecting local vendors when dishing out contracts and failing to carry out its responsibility to contribute to the growth of Bumiputera entrepreneurs is arguably perceived negatively by many.

This writer is fully conscious of this political backdrop and of the fact that Pakatan Rakyat (PR) leaders and lawmakers have criticised Tun Dr Mahathir Mohamad who recently told the state oil firm to embrace the pro-Bumiputera New Economic Policy (NEP) and to be more Malay-friendly.

This writing however, attempts to highlight the precarious situation Petronas finds itself in, much to the chagrin of the Advisor perhaps. More importantly and outrightly, this short piece is in fact seeking for a clarification from Petronas’ leadership of the actual state of affairs especially in regard to the Vendor Development Programme.

Under Section 7 the PDA 1974, Petronas is bestowed with the power and authority to regulate and award license to any company that wants to participate in the upstream oil and gas  business activities in Malaysia.

By virtue of being the sole custodian of hydrocarbon reserves and sole authority to regulate and award business licenses in the upstream oil and gas sector, Petronas is also entrusted to develop local oil and gas industry and vendors.

Petronas VDP

The Petronas Vendor Development Programme (VDP) was established to produce competitive and capable Bumiputera techno-preneurs in manufacturing of products/components for high and medium scale technologies within the oil and gas industries. The intention of implementation of Petronas VDP is only for the sectors that Bumiputera entrepreneurs have little or no involvement yet.

If we looked at the intention of Petronas VDP as mentioned above, we would find it as a great idea to support Bumiputera entrepreneur involvement in high and medium scale technologies. While the intention is noble and brilliant, as usual in Malaysia, the Achilles heel of any created system or invention has always been due to weak implementation and the wrong attitude of its beneficiary and implementer.

Having said that, the remedy to this problem should be by improving the implementation and eliminating any loophole that causes the abuses. Not by abandoning the entire VDP programme altogether.

The new Petronas leadership under Tan Sri Shamsul Azhar Abbas, has apparently decided to phase out the VDP programme altogether instead of improving the implementation.  In 2010 (when TS Shamsul assumed the presidency of Petronas), there were more than 30 vendors under the VDP with about 10,000 employees. All were Bumiputera-owned companies.  In 2013, only 11 vendors remain in the programme.  While we take note that those who failed to perform should not be retained in the programme, we would like to ask why no new companies were admitted and given the opportunity to be developed under the VDP? Petronas owes an explanation as to why it has failed to come up with a concrete plan and roadmap to make this programme a success.

In lieu of the VDP, Petronas has introduced various new procurement and supply chain sourcing initiatives such as the Global Frame Agreement (GFA) scheme, and Master Price Agreement (MPA) scheme, in addition to large scale award of what are termed as “Pan Malaysia” contracts.

Global Frame Agreement

The Global Frame Agreement (GFA), while legally not contravening the Petroleum Development Act 1974, has betrayed the spirit of the Act, which is also the legal instrument that makes Petronas the sole custodian of upstream oil and gas industry in Malaysia.

In order to facilitate the GFA, Petronas has established a  fully-owned international procurement company, Prime Sourcing International (PSI) with a mandate to  serve Petronas Group of Companies and other customers in oil and gas related industries. The procurement services provided by PSI cover  a very wide range  of  oil and gas equipment  and materials drilling tubulars, line-pipes, structural steel, pipe fittings,  and practically any mechanical, electrical and instrumentation equipment. To legalize procurement via PSI, it has been awarded licenses by Petronas (its parent company) for the various product and services that cover the scope above.  PSI then signed these various GFA with the foreign manufacturers.

So now with the existence of PSI and the GFA  mechanism, oil and gas operators such as Shell/ Exxonmobil/ Murphy Oil in addition to Petronas owned subsidiaries  could  bypass the local vendors and buy direct from the foreign manufacturers. Looking from foreign manufacturers perspective, they could bypass the local vendors and deal directly with the end user.

This policy shift began in May this year. Most of the local vendors affected are Bumiputera entrepreneurs. While we note that there are few local Bumiputera vendors who act as mere “mailbox” or middleman for the foreign manufacturers, in general most of these vendors have started to move up the value chain by increasing value added services such as providing skilled engineers and technicians to their oversea principals, logistic support, final assembly etc. Now with the gradual implementation of  GFA and establishment of  PSI,  these local and predominantly Bumiputera vendors risk losing their business  which could lead to job retrenchment.

Master Price Agreement

In addition to the Global Frame Agreement (GFA), Petronas has also introduced the Master Price Agreement (MPA) with local vendors.

MPA is an agreement between Petronas subsidiaries (such as Petronas Carigali) and local companies (not necessarily Bumiputera) to supply certain equipment or materials for a period up to 5 years at fixed price. While the strategy might be good from pricing perspectives as Petronas or its subsidiary could hedge the price for next five years, the way that vendors are selected to participate in this programme is questionable.

An example is under the   license category for “unfired pressure vessel”. There are more than 10 companies that are licensed to supply pressure vessel of various thickness; however only a few are selected to participate under the MPA. The question is why? More transparency and disclosure is both in order and commendable.

Conclusion

Initiatives such as Global Frame Agreement (GFA) and Master Price Agreement (MPA), and the gradual phase-out of the VDP apparently take place at about same time. It is hard not to suspect or placate grouses that these are deliberate.

Petronas could rationalize that such initiatives are implemented to improve efficiency, to reduce cost  et cetera.  They however have to prove that this is indeed the case, qualitatively and quantitatively. They have to show the numbers of how much money has been saved, how many days of tendering and procurement processes has been reduced etc. They need to show how the quality of the deliverables by the service and equipment providers has improved by not going through the local vendors. They need to show what value has PSI brought to the local oil and gas industry. They also need to show that these moves will not cause business losses and job losses, especially among the Bumiputera vendors.

It is arguably pertinent that Petronas considers its procurement strategy pre-2010. While we note that there were frame agreements and price agreements prior to 2010, they were not as rampant as they are today, and normally were utilized in product categories where no local providers have capability. In order to provide fair opportunity, all licensed vendors should be invited to participate in competitive bid each time the need arise. Tender evaluation criteria must be made transparent to all bidders and the public.

Petronas should also minimize utilizing its own subsidiary such as PSI as it causes unfair competition to other local companies that hold its license. Again a case of a ‘crowding-out effect’ by a GLC albeit a sole owner or monopoly of sort.

Last but not least, Petronas should review the Vendor Development Programme (VDP) with the intention to improve its implementation and plugging all its loopholes so that only genuine Bumiputera companies benefit. Phasing it out under the pretext of ineffectiveness raises the smell of a rat on Petronas’ intention to develop local oil and gas vendors especially Bumiputera vendors.

Dzulkefly Ahmad is the director of PAS Research Centre