Warung in the Shop [Coal Asia magazine Vol. 53]

Warung in the Shop

 Manipulation for theft by employees from their company is well known within most industries, but is rarely openly talked about. There are people within the exploration and mining industry who may exploit any and every opportunity to set up a warung didalam toko (small store within the bigger shop). This is a typical Indonesian expression that refers to parasitic free enterprise within a company, usually at the expense of good margins for the host business. This type of activity is not limited to the exploration and mining industry, but can be found in all forms of enterprise, government agencies, NGO’s and anywhere there is an opportunity for such-minded people to seize any form of personal advantage.

Company Stores.

The most straight forward manner of establishing a warung may involve purchasing, from over pricing the vegetables for the mess to kick backs on multi-million dollar mine trucks. However such sums can become more significant the higher up the organization structure those involved are sitting. The ex-president director of Berau Coal is still resisting an arbitration award to repay some US$173 million from land compensation and other payments. Some time back we saw Cement Padang resist handing over their business to the Central Government in line with the acquisition by Cemex, the Mexican firm – the ensuing tussle revealed that the local politicians had apparently arranged a number of methods to direct funds out of the State Owned Enterprise to their “interested parties”. Most responsible companies have established suitable corporate policies, checks and balances, standard operating procedures and effective governance criteria, varying from a strict set of purchasing procedures and audit controls, to corporate training programs, etc.

It is also not unusual that such warung’s are established outside the shop, but are actually related to certain members of company management. There are a number of cases where the company has gone for tender to three apparently separate contractors, but the selected contractor has improper links back to the company. In some cases a more thorough company due diligence on such suppliers has revealed improperly established businesses, operating out of a house with a hand phone. One variation on this form of warung in the geological industry is where a consultant prepares a geological or engineering report where the shop provides a bonus for a more “favorable” report, and some of this bonus can find its way back to selected company personnel. I have seen reconnaissance reports by consultants incorrectly portray large amounts of good quality of coal, whereas others may be tempted to stretch formal reserve reports to meet IPO optimization. Fortunately most reliable banks and established industry financiers have a list of reliable geological and engineering consultants. Some financiers go one step further to have consultants’ technical reports cross checked by one or two further well known independent consultants.

Another common variation on the warung is through a form of nepotism, typically derived from the HR department engaging related parties. This can be people from the same family, village, ethnic background, school or religion, etc. This form of warung can be more common when hiring local people to fulfill community relations requirements. The HR excuse is often that they are hiring people who can ‘get things done’ and ‘can be trusted’, but this can get out of hand. In one friend’s case the HR department hired a family of brothers (without telling the company) and then arranged for promotions and pay increases. Such hiring can also extend to “ghost” employees or local officials’ family members and friends. In some cases a thorough check on the individual’s CV, and phoning referees, may identify such nepotism.

Often the leakage to a warung is not significant, and the offender is dismissed in a quiet manner to avoid corporate embarrassment. In practice most companies estimate the option for legal prosecution is too high compared with the likelihood of recovering the legal costs. The cost can sometimes be measured in relation to unrest within the company or surrounding community. Fortunately many loyal company staff are happy, and work with more pride in the company when people of poor character/habits are dismissed.

Industry Shops.

The warung in the shop can extend to peripheral industries that use the exploration and mining sector as its vehicle for their business opportunities. During the recent mining boom in coal, nickel and bauxite, a number of banks extended finance to small mining companies. However the deal makers were people with connections to key bank figures (warung) and once the loan was disbursed the mining companies evaporated leaving behind a useless pile of documents and reports for the bank (shop). Some banks with mining bad debts rationalize that the proportion of such bad debts is not significant, and are too embarrassed to highlight the issue.

In some cases the warung is far bigger than the shop. It is common knowledge that a variety of local government officials were seeking huge sums as a signing fee for issuing IUP’s and even more fees to authorize annual renewal permits, or permits to advance the project to production status. Industry gossip vaguely put the combined such cost at about 30 – 70% of the cost of overheads of a project. The difference from stealing from within a company, and from within the government is that KPK becomes involved where it perceives the State has a resulting loss. While such signing fees may not appear to cause any direct loss to the government, such payments are often not declared for income tax, creating a loss for the government. We now see many are under some form of investigation by the KPK, with many related to the mining industry.

It is reported that this insidious warung activity extended all the way up to the Minister and Commission VII. The KPK is now investigating the Mining Commission VII (2014) for encouraging the Minister to collect fees on their behalf. It would appear the KPK is trying to send a message to all levels of government officers by not only pursuing those actively engaged in warung activities, but also those who knew about such improper activities but did not report on them.

Nothing New.

From the book “Hard Rock Epic” by Mark Wyman on the 1860’s history of the Western USA, gold miners fashioned responses to the uncertainties over pay from the mine owners in far off Eastern USA, where dividends were prioritized over wages. One risky method was leasing, “Lessees were given either a specific part of the mine to work, or a limited time period….where the mine owner received a predetermined royalty from the output”. On occasion this system was extended to bankrupt mining companies, with the approval of the creditors, as a chance to recover unpaid wages, etc. Sometimes the miners worked hard and failed, other times the miners would “suddenly” find a high grade ore patch and make good money. We may assume in some such cases the miners had found the good gold earlier but simply covered it up until the opportunity arose for them to lease the mine. Another response for the “unpaid or underpaid miner was high-grading…it was the individual miners opportunity to get even with the thieving corporation by appropriating ore for himself”. “High-grading worked only in rich mines, where miners could remove enough ore from the property to bring satisfactory returns from the local illegal assayers”. I have worked in several Indonesian alluvial gold mines, where theft from the gold room was a constant battle of wits between management and warung workers. Such dubious practices were readily seen in Indonesia’s recent history of mining, with PT. Timah Tbk onshore tin reflecting a leasing operation, and PT. Aneka Tambang Tbk as a likely example of high grading.

The 1860’s Western USA high-grading “was an almost universal practice, management’s best efforts were severely limited by the lack of legal enforcement”. Today it would seem the opposite. Indonesia’s mining industry was recently undergoing a near universal practice of government compliance inspections that requires fees for signing, approval, travel, meal allowance, etc, from all levels of government. Indeed some mines were inspected by so many government agencies and with such frequency that one wonders if some form of new tourism industry was being developed. The recent introduction of the KPK into the Indonesian mining industry has seen a dramatic decline in such compliance visits and is generally viewed by industry as the beginning of the end of the warung in the government shop, or at least until the warung becomes more creative !

Combating Warungs.

Many smaller exploration companies reduce overheads by having limited checks and balances on their spending. There is a great reliance on selecting trusted people to handle the money, and this can often be a key family member, a person from a different sociological / ethnic background than most of the staff, or an outsider (including expatriates). Larger exploration and mining companies tend to go the next step and install sophisticated purchasing procedures linked to state of the art financial software. Selecting the right people to be involved with the money side of the business usually requires a more thorough recruitment process, including having independent head hunters do extensive background checks and psychiatrists interview candidates. However annual performance reviews tend to be lower keyed, and people can change, or the circumstances about them can change.

Experienced financial managers or directors can sometimes spot the presence of warungs based on their intimate understanding of the company workings, changes in people’s behavior or through gaining a deep trust of employees who may alert the managers of suspicious activity. There is great value for the company to keep such experienced and trusted managers on, even past their due date for retirement.

We saw Nathan Rothschild become concerned with the accounts of a coal company listed on the Indonesian burse and linked to the London stock exchange and maneuvered to change directors. This exposed the warung set up by the past president director and lead to various court cases. Clearly the roll of the independent director and that of the commissioners needs to be more broadly reviewed and developed within the mining industry. Furthermore, it appears the supervisory roles of  the Indonesia and London stock exchanges were inadequate to protect the public investor.

Most people that set up warungs are just motivated by greed, and may not be overly concerned if they get caught.  Maintaining good morals in the face of “everyone is doing it” is difficult for most people, particularly if they are occasionally further pressured by family circumstances such as a sudden need for hospital fees for a relative or such. I look forward to the “mental revolution” where poor morals fade away and Kartini’s dream of a moral society wins.

Watch this space.

The government is preparing to stimulate the economy by making large capital injections to State Owned Enterprises (SOE’s), including the mining sector, with some US$550 million earmarked for Antam. There is a large pot of money to be spent, and this must be a large temptation for the warungs in and around the mining industry. This will be an intriguing story to follow between the SOE’s management, KPK and the ever creative warung operators.