Cutting fuel subsidies<\/p>\n
The state oil monopoly Pertamina disclosed on Monday that a
\nnumber of industrial companies in the Greater Jakarta Area
\nallegedly bought subsidized automotive diesel oil through
\ngasoline stations. Pertamina detected this abuse after learning
\nthat many gas stations near industrial centers had run out of
\nstocks much sooner than they used to, even though there were no
\nreasons for panic buying. It also discovered in its sales records
\nthat many industrial companies, though remaining in production,
\nsuddenly did not use their monthly fuel allocation from Pertamina
\nor sharply cut down their fuel procurement.<\/p>\n
This abuse was one of the widely predicted risks when
\nthe government, afraid of a worsening social and political
\ncrisis, postponed a 20 percent across-the-board fuel price rise
\nin April, opting instead to discriminately increase fuel prices
\nto as high as 50 percent of market prices for industrial users
\nand 100 percent for merchant and fishing ships plying
\ninternational waters. Fuel prices for transportation and
\nhousehold use remained unchanged.<\/p>\n
Even though most analysts and Pertamina itself have been
\naware of the high probability of abuse of the discriminative
\npricing measure since its introduction, we still feel disgusted
\nat the names of big companies being included among the alleged
\nabusers. Their circumventing of the discriminative pricing policy
\nmight not lead them to criminal charges, but many of them are
\npublicly listed companies that are supposed to profess good
\ncorporate governance. Such companies deserve public humiliation.<\/p>\n
But the positive point about the discovery is Pertamina's
\nability to detect possible abuses early on. Hopefully, the
\ncompany will grow on the job, developing shortly a more effective
\nsystem of managing and supervising fuel distribution at different
\nprices so as to minimize these abuses.<\/p>\n
Pertamina has estimated that the April discriminative pricing
\nmeasure will cut fuel subsidies by Rp 3 trillion. Even though
\nabuses may account for as much as 10 percent of the fuel used by
\nindustrial users, the bottom line is still quite positive.<\/p>\n
The dilemma though is that the government has to gradually cut
\nfuel subsidies, which in the current budget are estimated at Rp
\n41.3 trillion (US$3.75 billion at current prices) or almost 14
\npercent of total expenditure, have been rising steadily because
\nof changes in the basic assumptions used in their estimate
\ncalculations.<\/p>\n
The original subsidy estimate assumed that the international
\ncrude oil price would average $24 per barrel and the rupiah rate
\nRp 7,800 per US dollar for the whole year. However, international
\noil prices have always been above $24 and the rupiah rate higher
\nthan Rp 9,000 per dollar since the outset of the budget in
\nJanuary. This has certainly inflated the amount of subsidy due to
\nthe widening gap between Pertamina's fuel production costs and
\nthe government-set prices. One should also remember that
\nIndonesia, despite being a net oil exporter, imports about 20
\npercent of its fuel needs due to a lack of refining capacity.<\/p>\n
Some estimates put total fuel subsidies at Rp 66 trillion for
\nthe whole year if the rupiah rate averages Rp 9,600, much higher
\nthan the original projection of Rp 7,800, and average
\ninternational oil prices hovering at $28 per barrel. But
\nprojecting the rupiah rate amid the heightened political
\nuncertainty is like shooting at a moving target.<\/p>\n
There are only a few options available to cut the mushrooming
\nfuel subsidy and each has its price, carrying with it a political
\nrisk or the risk of being abused. An across-the-board price rise
\ncould create political volcano, recognition of which forced the
\ngovernment to annul such a measure in April. Discriminative
\npricing measures, such as the one imposed on industrial users in
\nApril, are vulnerable to abuse as Pertamina has recently
\ndiscovered.<\/p>\n
Still the government has to choose one of these painful
\noptions, the one with the least cost or smallest risk. Subsidies
\nare a future tax that has to be paid, and the longer such
\nspending is allowed at uncontrollable rates, the more devastating
\nwill be its impact and more painful will be its cure.
\nA blanket subsidy for all kinds of fuel may end up with the bulk
\nof the subsidy being enjoyed by the middle classes and the rich.<\/p>\n
As Pertamina gains experience in managing the discriminative
\npricing policy, the combination of this measure and an across-the
\nboard price increase, but at a moderate rate, deserve serious
\nconsideration. But this measure should be supplemented with the
\ndistribution of direct subsidies to the poor, as the government
\nis doing with the Rp 800 billion saving resulting from the 12
\npercent fuel price rise last October.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/cutting-fuel-subsidies-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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