Price hikes to help the poor, but the message is lost

Simon Howland and Endy M. Bayuni, The Jakarta Post, Jakarta

The government insists that the massive hikes in fuel, telephone and electricity prices at the start of the year are aimed at helping the poor, and not to make their lives more miserable as critics claim.

While the poor will probably feel the initial pinch as the effects of the hikes work their way through the economy, the government argues that the increases will eventually lead to allowing the masses greater access to basic necessities, such as power and telephone.

The economic arguments may sound compelling, but they have been drowned out by the overwhelming public outcry and mounting protests since the increases were announced on the second day of the year.

Either that, or as some critics would have it, the government has simply failed in its public relations exercise and in communicating effectively with the public about its policies.

Few economists would argue against the economic rationale or theory behind the increases: They should lead to greater economic efficiency in the way that these basic utilities are managed and thus allow more money for their development.

The economists also agree that the benefits of low utility prices have been enjoyed mostly by the wealthy, and not the poor.

Removing or cutting back on the amount of subsidies would hurt the middle class, particularly those in the low to middle-income group, more than the poorest of the poor, who are probably more resilient to changes in the prices of these utilities.

"To say raising electricity and telephone costs hurts the poor is completely absurd," said Mahendra Siregar, an aide to Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti.

"Considering only about half of the population has access to electricity, and a minuscule portion have their own (fixed line) telephone, then how can you say that poor people will be affected?" he asked.

Approximately 55 percent of the population can afford electricity, and of that percentage, households that use less than 450 watts will still have their rates subsidized by the government.

According to state electricity company PT PLN, the 6 percent quarterly increases will enable them to recover from financial troubles and provide more widespread services.

PLN claims that it has been unable to make any new investments since 1998 and the increase in revenue will allow it to resume infrastructure programs aimed at eventually providing all Indonesians with access to electricity.

On the topic of fixed line telephones, the impact on the poor becomes all but irrelevant as only about 5 percent of the population even own them. Therefore the hikes initiated by the state-owned PT Telekomunikasi Indonesia (Telkom) are only a concern for the top socioeconomic groups.

That said, Telkom's economic stability and monopoly over fixed line telecommunications means there is no economic incentive for it to extend access to the low-income bracket. Instead, it may pursue infrastructure improvement because of a sense of social responsibility.

The hike to have the biggest impact on the poor is undoubtedly the fuel increase, but this has to be approached objectively.

The poor will pay more for public transportation and cooking fuel, but the real impact will fall on the shoulders of motor vehicle owners in the middle class who spend up to 10 percent of their income on fuel.

With the fuel subsidy, the more cars you owned and the more fuel you consumed, the more benefits you received. With the cancellation of the subsidy, the potential is there for the benefits to be shared far more evenly.

The government is determined that domestic fuel prices will be on par with world levels by the end of the year.

Wary of the fact that the initial impact of the price increases will still hurt the poor, the government has initiated a program to cushion the blow.

President Megawati Soekarnoputri has allocated some Rp 4.43 trillion ($497 million) of funds in subsidies that will be directed specifically at the most needy.

This is in contrast to the fuel subsidy, the benefit of which goes to those who need the least assistance.

Coordinating Minister for Peoples' Welfare Jusuf Kalla gave out on Thursday the details of how that money would be apportioned. They include subsidies for rice, health care and schooling and the creation of labor intensive projects in other sectors.

"The government is lowering the price of basic necessities and services to alleviate the impact on the majority of the population," Mahendra Siregar said. "In poor areas, for example, the price of rice will be cut from Rp 2,500 to Rp 1,000 per kilogram."

State Minister of Communications and Information Syamsul Mu'arif announced on Thursday the immediate distribution of the subsidized rice, although no specific amount was specified.

Other targets for government benefits include a continuance of family planning measures, such as the distribution of condoms.

There are fears that problems in administering the aid, such as rampant corruption, will prevent the funds from reaching their intended targets.

As unpopular as the price hikes may seem, their ultimate goal is to improve budget efficiency and promote equity.

The swelling government budget deficit caused by maintaining these unfair subsidies can be channeled into other areas and benefit more people than just the wealthy.

"All the (government) money that went into fuel, telephone and electricity went into a black hole," Mahendra said. "By re- directing those funds into public structures, we can leave something behind for future generations."