a) Control mechanisms
Control mechanisms can be defined as optical, mechanical, or electronic systems that are used in order to manage and control variables in a desirable way. The functions of control mechanisms generally can be categorized into planning, leading, organizing and controlling. Control mechanisms play an important role in every organization especially in enhancing the predictability of an organization. In PGB, adoption of Corporate Financial Policy (CFP) has been approved by Board with the main purpose of managing financial risk exposures of PGB which includes liquidity risk, foreign exchange risk, and counterparty risk.
The diagram above is showing that the in PGB, Risk Management Department (RMD) is required to report updates regularly to the PGB Management Committee (MC) and it will be further transferred to Board Audit Committee (BAC) in the form of the quarterly Enterprise Risk Report (ERR). In ERR, it mainly includes the overall PGB’s risk profile and status of risk mitigation implementation. Moreover, PGB INTERISK system will record all the updates such as risk mitigation actions, unexpected risk events and risk rating from its business. During this long process, we do find many clues in internal control statement of PGB annual report 2011 that PGB relies on many control mechanisms in its risk management to mitigate its financial risk.
As the gas processing and gas transmission are the core business of PGB, PGB is dealing with many long term projects such as Kimanis power plant project which is expected to be completed in the end of this year or early of next year and development of the LNG regasification plant in Melaka. Hence, sophisticated and proper control mechanisms for PGB are very important in ensuring that the projects are on track as expected without any liquidity problems.
Project Risk Management (PrisMa) system can be considered as a critical control mechanism in PGB to ensure efficient reporting and monitoring. It recorded all the useful information regarding to the project risk management like lessons learnt, independent reviews and risk assessments. In this PrisMa, project managers are needed to update the status of their projects implemented and report them to their respective head of division. After that, all the reports updated will be transferred to General Manager of the Technical and Facilities Development Division (GM, TFDD) every month. By doing this, PGB able to assess the progress of its projects and take immediate actions in order to reduce the risk exposures involved. Project risk management of PGB is closely related to its liquidity risk management because adequate cash and cash equivalents are needed to cover the regular expenses of the projects in long term. However, PGB is less likely to face any liquidity problems in its project risk management as it is holding sufficient cash and liquid marketable assets with assistance from Project Risk Management (PrisMa) system. Furthermore, PGB’s risk management department (RMD) has also developed in-house Growth Risk Matrix in supporting the decision making in new business ventures. In this Growth Risk Matrix, the risk assessments of new business ventures will be listed in table in order to estimate the potential adverse consequences will be incurred. Besides, control mechanisms also have been found in the credit management of PGB which is called as Petronas’s Credit Risk Rating System. The objectives and functions of this system are to examine the credit worthiness of all the PGB’s external customers and assign credit rating for them. Besides, information in the system will be updated every year based on the latest financial position of its external customers. Thus, PGB can discover the signs of financial distress of its external customers at earlier stage and having preparation on such situation and hence reduce its credit risk involved. Besides, credit risk...