Indonesia needs to stop subsidizing the sale of oil-based fuels and gas on the domestic market in order to make it more attractive to investors, the government has been told.
The president of the International Energy Agency (IEA), Leonard L. Coburn, who is here on a visit, said Tuesday that the government's current subsidy system discouraged new investors from entering the downstream oil and gas industry as the subsidies created market distortions.
"It would be better for the government to revoke the subsidies to make the market more attractive," Coburn told The Jakarta Post on the sidelines of a meeting between officials from the Directorate General of Oil and Gas and 14 officials from the IEA.
The subsidy question was raised during the meeting on the grounds that it flew in the face of market principles as it allowed the government to interfere in the market and fix prices.
Coburn also said that by revoking the subsidy, the government would be better able to reduce fuel consumption as people would only use as much gasoline as they could afford.
"In some areas where you have subsidized fuel, you are getting too much consumption. You will get too much, but if your price is changed, you will get less of it," Coburn said.
During the meeting, Coburn also asked why Indonesia's fuel subsidies benefited not only the poor, but also the better-off.
The government currently subsidizes kerosene, gasoline and diesel use by motorists, households and small enterprises. In the case of regular gasoline, for example, the government has set the price at Rp 4,500 as compared to the current market price of Rp 6,000.
The government has set Rp 61.93 trillion this year to subsidize 37.9 million kiloliters of oil-based fuels.
The government is also considering subsidizing gas producers which are willing to allocate part of their production to the domestic market to bring the prices they receive up to economic levels -- a step that has been criticized as it will lead to further market distortions.
Aside from the question of subsidies, the France-based IEA applauded the government's decision at the end of 2005 to open up the retail fuel market. As a result, Shell and Petronas have already opened a number of gas stations in Jakarta.
However, he pointed out, as Pertamina still had a monopoly over the sale of subsidized fuels, the Indonesian retail market was still unattractive to investors, despite the quasi liberalization of the market.
He said that if private-sector investors were only allowed to sell non-subsidized fuels, then the market would be too small as their earnings would not be able to cover their operating costs.
Currently, state-owned oil and gas firm Pertamina still controls the subsidized fuel market, which accounts for almost 95 percent of all oil-based fuels distributed in Indonesia.
Responding to the subsidy issue, Director General of Oil and Gas Luluk Sumiarso said that it would not be easy to abolish the subsidies as higher fuel prices normally meant political suicide in Indonesia.
"However, we have found a way out that avoids having to raise prices. Instead we will reduce the volume of fuels that will be subsidized," Luluk said.
In its 2008 budget estimates, the government has proposed reducing the subsidized-fuels' quota by 1.4 million kl to 36.5 million kl in 2008 from 37.9 million kl this year.