Raising citizen awareness on subsidy cuts

Raising citizen awareness on subsidy cuts

By Christopher Lingle

HONG KONG (JP): Reductions of subsidies for any goods or
services are always a delicate political issue. Such was the case
of the government decision to delay raising prices by 12 percent
planned for 1 April after massive demonstrations against cutbacks
on government subsidies on the sale of refined petroleum products
(Bahan Bakar Minyak, BBM).

In fact, educating the general public on some simple and basic
facts might reduce further unrest in response to subsidy cuts now
planned for October.

Based on an expected windfall from oil exports that could
amount to Rp 11 trillion ($1.3 billion), Coordinating Minister
for the Economy Rizal Ramli announced that the plan to raise fuel
prices by an average 12 percent from October will be reviewed. In
all events, the government has little choice since it is bound by
its agreement with the International Monetary Fund to reduce
subsidy spending.

A good first step is to make clear to all citizens that the
primary beneficiaries of BBM are not the poor. Many of the
beneficiaries are those whose income places them in the middle
class or higher. However, most of the financial gains go to
industries.

For example, households consume only 20 percent of kerosene
while the remaining 80 percent goes to industrial users. Since
many of the companies receiving advantages from BBM are
exporters, foreign buyers of their products constitute a large
but undeserving group of beneficiaries.

In this form, BBM constitutes a form of "corporate welfare".
And it actually can be seen to harm the poor because public funds
are diverted from programs that might offer substantially greater
benefits to lower income groups, such as improved public
transport systems.

From an economic point of view, there are opportunity losses
from not being to sell the refined products on global markets for
higher prices. Such sales would mean that there would be more
dollar earnings that would assist in propping up the beleaguered
rupiah and strengthening the overall economy.

And then because of large price differentials in neighboring
countries, there is a large temptation for smugglers to buy at
low subsidized prices in Indonesia and sell offshore for
considerable profits.

These returns are high even when factoring in the bribes that
must be paid to corrupt officials with Pertamina, the fiscal
authorities, customs officials or naval personnel.

It is bad enough that smuggling benefits corrupt officials and
criminals, such operations result in Indonesian taxpayers
extending a subsidy to foreigners who buy from the
smugglers. Why should Indonesia be so generous to outsiders?

Regardless of street demonstrations or denunciations by
certain groups, steps must be taken to reduce BBM and eventually
eliminate it. This is an important step towards the central
government being able to gain control of its budget by reducing
an important source of its deficits and mounting debt.

It is also a condition in the letter of intent signed with the
IMF that allows a delay for no more than three months. After that
time, the government must cut its development budget, something
that would have a negative impact that will fall
disproportionately upon the poor.

In the meantime, delaying the price increases means that the
subsidy burden on the central government will be in excess of Rp
1 trillion per month. In the current budget, BBM subsidies for
refined petroleum products will cost the government Rp 22.46
trillion, an increase from Rp 18.3 trillion in the previous
budget. This compares with Rp 8.36 trillion for non-BBM subsidies
on items like food, electricity, and others.

Artificially low prices for motor vehicle fuels also have dire
environmental consequences. A large amount of the air pollution
that plagues Jakarta and other large cities is due to the low
prices that encourage waste and create dependency on private
vehicles instead of encouraging use of public transit systems.

There is a widespread public misconception that foreign
companies are exploiting most of the wealth and profits from
Indonesia's oil and gas industry. However, state-oil company
Pertamina takes an average of about 85 percent of the profits and
many of these funds have simply disappeared through corruption.

For example, Pertamina and military officials reportedly
smuggle subsidized fuels to other countries. And so it is a
small group of Indonesians who are exploiting natural resources
while returning very little for the good of the public at large.

As it is, BBM has the perverse effect of rewarding the
wealthy, damaging the environment, reducing costs for rich
enterprises, and providing benefits to foreigners at the expense
of locals. Professors and students should be denouncing BBM as a
source of corporate welfare and transfers to the rich.

Politicians should also improve their communication skills and
develop enough political will to inform their constituents about
how they will benefit from this important policy change.

The writer is Global Strategist for eConoLytics.com
(CLINGLE@eConoLytics.com).