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Indonesia's Fuel Subsidy Quandary
Written by Our Correspondent
Thursday, 14 March 2013
SBY says it's got to stop
Eliminating subsidies has a tendency to bring people to the streets
Although Indonesian President Susilo Bambang Yudhoyono announced
yesterday that his government would introduce new measures to cut the country's
ballooning fuels subsidy it is unclear what can be done without raising prices
to customers, a political third rail with elections little more than a year
away.
The government, faced with rising deficits, attempted to raise the price
of gasoline by 33.3 percent at the pump in March 2012, only to face thousands
of protesters who blocked the main route to Sukarno-Hatta International Airport
and closed two lanes of the Jakarta inner city toll road, turning over cars and
setting them afire.
Resistance to doing away with the fuel subsidies, targeted in the 2013
state budget to cost Rp193.8 trillion (US$20.84 billion) for a quota of 46
million kiloliters, is as much about politics as about expensive fuel. Last
year, an amalgam of angry labor unions, student groups, protest movements of
various kinds and the opposition Indonesian Democratic Party of Struggle
(PDI-P) all came together to take to the streets and deal Yudhoyono one of the
biggest defeats of his presidency.
At that point the economy was robust and the country was largely
peaceful, with the president's popularity still high. With Yudhoyono's Democrat
Party crippled by scandal, with annual inflation running at 5.31 percent in
January and the government well into the lame duck period of the presidency,
raising fuel prices today is a political impossibility.
Any price rise is certain to be met with opportunistic political parties
who see their path to increased representation in Indonesia's legislature by
bringing people into the street again to protest rising prices. The cause of
trouble for the March 2012 demonstrations wasn't just the opposition. Golkar
and PKS, both of which occupy key cabinet posts in Yudhoyono's administration,
ran out on him as well.
"There are already some options on the table on how to deal with the
subsidy that we think are realistic, but I cannot disclose them right now
because we will be finalizing everything over the next one or two weeks,"
Yudhoyono told a press conference yesterday after meeting with economists. If
such measures would be introduced, he said, the subsidy could would be
significantly reduced within the next two years so that more government revenue
could be used to finance development.
In recognition of the political volatility of the problem, Yudhoyono told
reporters that "We want our subsidy in the future to help households or poor
and almost poor individuals so we must help with the right subsidy. We know the
positive and negative points of the options we take, what are the impacts for
the poor if we increase the fuel price. The point is the subsidy must be
reduced. The policy must be well executed so that the fuel subsidy won't
explode to maintain our fiscal integrity."
In another indication of the volatility, the government has sent mixed
message for the past several weeks, with Jero Wacik, the Minister of Energy and
Natural Resources saying in December that the government didn't intend to raise
prices this year, to be followed by Rudio Rubiandini, the deputy minister,
saying he believed that subsidized prices would be raised by Rp1,500 (US16ยข)
per liter, saving the equivalent of US$6.45 billion to fund infrastructure,
schools and health clinics. The vice governor of greater Jakarta weighed in,
saying the government should cut subsidies and steer the money into developing
a mass transit system for Jakarta, which is plagued with some of Asia's worst
traffic jams. Jero Wacik then reversed himself, saying he supported the Jakarta
initiative although he said it had to be planned carefully.
Indonesia isn't alone in the quandary over how to deal with subsidies. A
2010 study of sustainable energy by the World Bank said that fuel subsidies
across the East Asian region amounted to US$70 billion in 2007. They have risen
significantly since as global fuel prices have been driven up by tensions in
the Middle East and other problems. Crude has largely stabilized at around
US$91 per barrel today. Malaysia, like Indonesia, tried to do away with fuel
subsidies under Prime Minister Abdullah Ahmad Badawi in 2007, which played a
role with angry voters who rewarded the Barisan Nasional with its biggest
election defeat in the 50-year history of the country in 2008.
Each of the east Asian countries have learned to their sorrow that
subsidies, once put in place, are impossible to remove without daring the wrath
of those who receive them. The US$70 billion in subsidies paid by governments
in 2007 would have been nearly enough to finance a sustainable energy path for
the region of US$80 billion, according to the World Bank report.
In the meantime, the Indonesian government has been nibbling at the edges
of the problem, prohibiting government vehicles in the Jakarta conurbation from
using subsidized fuel in June last year, then expanding the prohibition to Java
and Bali last August. Government vehicles in Jakarta will be barred from using
subsidized diesel as well, and sea vessels except for small fishing boats and
remote ferries will be weaned off.
Transport vehicles used in the country's vast plantation industry were no
longer to have access to subsidized fuel as of this month as well and
government vehicles in Kalimantan and other regions are also to be barred from
using subsidized fuel.
BPH Migas, the downstream energy regulator, is also working to collect
data on public transport and fishermen to see where the fuel is going, and
implement a tagging technology to distinguish subsidized fuel from unsubsidized
fuel.
"Price is a driving force to stimulate energy efficiency improvements,
discourage energy waste, mitigate rebound effects, and encourage clean energy
technologies," the report said. "Energy prices should remove fossil fuel
subsidies; (2) internalize environmental costs through appropriate use of a
fuel tax and/or a carbon tax; and (3) provide incentives to invest in end-use
energy efficiencies such as investment subsides, soft loans, consumer rebates,
and tax credits."
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