Inefficiency at root of fuel price hikes<\/p>\n
Parulian Sihotang and Alex Russell, Department of Accountancy
\nand Business Finance, University of Dundee, United Kingdom<\/p>\n
Public anger and discontent at the government's New Year's Day
\nannouncement of fuel price rises of up to 22 percent, effective
\nas of Jan. 2, 2003, was predictable and is potentially
\ndestabilizing for the government.<\/p>\n
Of course, it is not only the hike in fuel prices that is
\nstirring the blood, for electricity and telephone tariffs are
\nalso set to rise by 15 percent on average.<\/p>\n
The government's policy of supporting people and business via
\nstate subsidies was rendered unviable by the 1997 economic
\ncrisis, and it is not surprising that the International Monetary
\nFund (IMF) has forced the country to make price increases to help
\nreduce the huge state budget deficit. Indonesians resent the
\ninterference of the IMF in their affairs and view it as being
\nakin to the loss of sovereignty.<\/p>\n
The government needs to demonstrate leadership at this time of
\ncrisis. And stamping out corruption, collusion and nepotism (KKN)
\nshould be the first step, for it is clear that inefficiency and
\nKKN, particularly throughout the Indonesian petroleum sector, are
\nmajor contributing factors in the miserable game.<\/p>\n
Anecdotal evidence of KKN and inefficiency is legion, and is
\nno doubt what prompted the World Bank (WB) to fund a study which
\ndiscovered that the Indonesian oil and gas sector suffered an
\nestimated annual loss of US$1.4 billion in economic efficiency.
\nThis loss was due to the subsidies for the five BBM products --
\nmotor gasoline, kerosene, automotive diesel oil (ADO or Solar),
\nindustrial diesel oil (IDO) and fuel oil. In addition, the study
\npredicted that the amount the government would have to provide
\nfor subsidies until the end of 2005 would be about $36 billion.<\/p>\n
The same study also predicted that, if the subsidies were
\ngradually removed, the government's expenditure would be reduced
\nby about $22 billion over a five-year period, and the value of
\nits additional foreign exchange earnings (due to reduced
\nconsumption of fuel) would be about $11.5 billion. In addition,
\nthe study claimed that, following the removal of subsidies, there
\nwould be a net reduction of about $5 billion in environmental
\ndamages resulting from particulate matter and nitrogen oxides.<\/p>\n
Further, if the lead in gasoline were phased out, there would
\nbe an additional $6 billion reduction in environmental damages
\ncurrently resulting from lead poisoning.<\/p>\n
In the light of this evidence, it is hardly surprising that
\nthe government has decided to end the subsidies. But if this is
\nall that is undertaken, then the decision effectively represents
\na tax on all users of petrol. As mentioned above, public reaction
\nhas been swift and violent at the thought of bearing the whole
\ncost of the lost subsidies.<\/p>\n
To counter this anger, the government must take all possible
\nsteps to eliminate KKN and inefficiency in the industry by
\nrigorously implementing austerity measures, minimizing waste
\ncaused by inefficiency and corruption, and dealing firmly and
\nquickly with conglomerates alleged to have been partly
\nresponsible for bankrupting the economy.<\/p>\n
Clearly, a more efficient oil industry freed from the ravages
\nof KKN will produce oil products at a much lower cost. And since
\nthe oil subsidy is the arithmetic difference between the cost of
\nthe petrol delivered at the pumps and the government-set selling
\nprice, the cost to be borne by the public will be much reduced
\nfollowing such improvements.<\/p>\n
How can efficiency be introduced? In the oil industry, the
\ngovernment should accelerate both the macro and micro
\nrestructuring and redesigning that has been widely reported. As
\nfar as up-stream activities are concerned, the Boston Consulting
\nGroups (BCG) claims that restructuring and redefining would net
\nefficiency gains of about $25 billion on a present-value basis
\nover a four-year period.<\/p>\n
These savings would be the result of: 1) introducing faster
\napproval processes, shorter discovery\/production cycles and
\nincreased production rates ($6 billion); 2) improving industry-
\nwide performance through sharing facilities\/equipment, lowering
\ncosts and adopting new tendering\/procurement processes ($16
\nbillion); and 3) increasing recoverable reserves ($3 billion).<\/p>\n
Within the downstream sector, the World Bank Report 2000
\nclaimed that Indonesia's petroleum refining and marketing sectors
\nwere essentially inefficient due to monopolistic operations. Many
\nof the Indonesian refineries are not competitive by international
\nstandards. Use of fuel within the refineries is unacceptably
\nhigh, product losses exceed international norms, and staffing
\nlevels are excessive.<\/p>\n
For example, Pertamina has nine refineries with a total
\nprocessing capacity of about 1 million barrels a day, and most of
\nthem are inefficient. Operating costs of a typical Indonesian
\nrefinery are nearly double those of corresponding refineries in
\nSoutheast Asia ($2.56 per barrel here compared with $1.31 in
\nneighboring countries).<\/p>\n
The margin surplus for a hydrocracking type refinery in
\nSingapore is $1.41 per barrel, compared to a loss of $0.89 per
\nbarrel for a similar refinery in Indonesia (WB, 2000).<\/p>\n
This evidence of huge sector inefficiency excludes the
\nhundreds of project contracts within the industry characterized
\nby KKN.<\/p>\n
So, as there are comparable international average cost figures
\navailable for all aspects of Indonesia's oil and gas operations,
\nthe government should set the oil and gas industry the task of
\nmatching or bettering these costs. In this way, the government
\nwill be perceived by the public as being serious about
\neliminating KKN-induced waste and inefficiency in the industry.<\/p>\n
The role of auditors in policing the gathering and processing
\nthe cost data should also be clearly defined, which will almost
\ncertainly require some investment for the training of suitable
\nauditors.<\/p>\n
The Indonesian economy stands at a crossroads and the
\ngovernment must not fail the people.<\/p>",
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