Cutting fuel subsidies

The state oil monopoly Pertamina disclosed on Monday that a number of industrial companies in the Greater Jakarta Area allegedly bought subsidized automotive diesel oil through gasoline stations. Pertamina detected this abuse after learning that many gas stations near industrial centers had run out of stocks much sooner than they used to, even though there were no reasons for panic buying. It also discovered in its sales records that many industrial companies, though remaining in production, suddenly stopped using their monthly fuel allocation from Pertamina or sharply cut down their fuel procurement.

This abuse was one of the widely predicted risks when the government, afraid of a worsening social and political crisis, postponed a 20 percent across-the-board fuel price rise in April, opting instead to discriminately increase fuel prices to as high as 50 percent of market prices for industrial users and 100 percent for merchant and fishing ships plying international waters. Fuel prices for transportation and household use remained unchanged.

Even though most analysts and Pertamina itself have been aware of the high probability of abuse of the discriminative pricing measure since its introduction, we still feel disgusted at the names of big companies being included among the alleged abusers. Their circumventing of the discriminative pricing policy might not lead them to criminal charges, but many of them are publicly listed companies that are supposed to profess good corporate governance. Such companies deserve public humiliation.

But the positive point about the discovery is Pertamina's ability to detect possible abuses early on. Hopefully, the company will grow on the job, developing shortly a more effective system of managing and supervising fuel distribution at different prices so as to minimize these abuses.

Pertamina has estimated that the April discriminative pricing measure will cut fuel subsidies by Rp 3 trillion. Even though abuses may account for as much as 10 percent of the fuel used by industrial users, the bottom line is still quite positive.

The dilemma though is that the government has to gradually cut fuel subsidies, which in the current budget are estimated at Rp 41.3 trillion (US$3.75 billion at current prices) or almost 14 percent of total expenditure, have been rising steadily because of changes in the basic assumptions used in their estimate calculations.

The original subsidy estimate assumed that the international crude oil price would average $24 per barrel and the rupiah rate Rp 7,800 per US dollar for the whole year. However, international oil prices have always been above $24 and the rupiah rate higher than Rp 9,000 per dollar since the outset of the budget in January. This has certainly inflated the amount of subsidy due to the widening gap between Pertamina's fuel production costs and the government-set prices. One should also remember that Indonesia, despite being a net oil exporter, imports about 20 percent of its fuel needs due to a lack of refining capacity.

Some estimates put total fuel subsidies at Rp 66 trillion for the whole year if the rupiah rate averages Rp 9,600, much higher than the original projection of Rp 7,800, and average international oil prices hovering at $28 per barrel. But projecting the rupiah rate amid the heightened political uncertainty is like shooting at a moving target.

There are only a few options available to cut the mushrooming fuel subsidy and each has its price, carrying with it a political risk or the risk of being abused. An across-the-board price rise could create political volcano, recognition of which forced the government to annul such a measure in April. Discriminative pricing measures, such as the one imposed on industrial users in April, are vulnerable to abuse as Pertamina has recently discovered.

Still the government has to choose one of these painful options, the one with the least cost or smallest risk. Subsidies are a future tax that has to be paid, and the longer such spending is allowed at uncontrollable rates, the more devastating will be its impact and the more painful its cure. A blanket subsidy for all kinds of fuel may end up with the bulk of the subsidy being enjoyed by the middle classes and the rich.

As Pertamina gains experience in managing the discriminative pricing policy, the combination of this measure and an across-the board price increase, but at a moderate rate, deserve serious consideration. But this measure should be supplemented with the distribution of direct subsidies to the poor, as the government is doing with the Rp 800 billion saving resulting from the 12 percent fuel price rise last October.