Mon, 07 Mar 2005

Managing fuel prices

About 30 members of the House of Representatives have asked the legislature to exercise its right of inquiry into the government decision to raise on March 1 fuel prices by an average of 29 percent.

The wave of protest demonstrations against the fuel policy, have continued in several cities, though they seem to be dwindling in intensity. Some non-governmental organizations have filed a class action lawsuit against the government at the Central Jakarta District Court.

All these actions were predicted, given the inadequate preparations by the government to build up a national political consensus on the painful price hikes. But the protests, heated debates and outright opposition to the fuel price hike also simply demonstrate the work of democracy.

This is what democracy is all about.

The government cannot simply launch a policy and sit back and relax, hoping that all things will run normally and problems will take care of themselves. The government should instead work hard to "sell" its policy, reaching out to the people, and, in the process, listening to different views before finally deciding on the best option or taking corrective measures, if necessary.

As long as the street demonstrations are orderly, and the government is able to maintain adequate supplies and smooth distribution of basic commodities, the panic market reaction, as reflected in the abnormally steep rise in the prices of several food commodities and transportation fares, should recede soon.

The market will return to a new equilibrium within the next few weeks after it fully absorbs the impact of the higher fuel prices on the various sectors of the economy. Certainly, the prices of most goods and services will rise. It is totally wrong to deceive the public into believing otherwise. But the rate of the price rises would be proportional to the role of fuel in their respective production costs.

Even though most points of arguments in favor or against the fuel price policy should have exhaustively been treated a few weeks before the March 1 measure, the current debates are nonetheless healthy as they will enlighten the public of the whole perspective of our overall energy policy.

Take, for example, the bone of contention among House members to have the fuel production costs of the State Oil Company Pertamina, which still holds a monopoly in fuel, independently audited. This point simply makes sense, especially because of the lingering public perception that virtually all state companies have yet to establish good corporate governance practices.

The ruling by the Business Competition Supervisory Commission that was disclosed on Thursday may strengthen the House demand and embolden public pressures for an independent audit of Pertamina's production costs.

The Commission ruled after more than eight months of examination and investigations that Pertamina directors and commissioners were guilty of colluding with its financial advisers and bidders for the sales of its two very large crude carriers in mid-2004, thereby costing the state up to US$50 million in losses.

It is nevertheless a great comfort to observe President Susilo Bambang Yudhoyono personally leading the communication campaign to ensure a smooth, orderly phasing in of the new fuel price policy.

His impromptu visit to the West Java regency of Rengas Dengklot, on Wednesday morning, without the trappings of elaborate official protocol, to monitor the impact of his policy on the people is the right kind of action needed to keep the government apprised of the public's and market's reaction to the unpopular, yet sorely needed, reform move.

As Susilo himself is a good communicator, he should continue reaching out to the people, talking honestly in simple layman's terms to them and appealing for their understanding about the sacrifices they have to put up with for the long-term good of the economy.

Susilo and his Cabinet ministers still need to launch a nationwide campaign to explain the big picture of our fuel problems: How artificially low prices would eventually cause a massive disruption in the supply of energy, hinder the development of alternative energy resources, which are quite abundant in the country, and increase the state budget deficit. The deficit would become unmanageable and lead to spiraling inflation. They need to explain how subsidized fuels have so far been enjoyed mostly by the well-to-do families; how the wide differences between domestic and international fuel prices have been exploited by profiteers -- smuggling cheap fuels overseas.

The phasing out of fuel subsidies is a good moment to educate consumers about the economics of commercial energy, to make them realize that, sooner or later, in one way or another, they will have to pay for that fuel -- based on economic realities -- or suffer supply disruptions.

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