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).