March 07, 2005

March 07, 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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