Toward a fair fuel-pricing system

By Otto Soemarwoto

This is the first of two articles on fuel pricing.

BANDUNG (JP): Fuel oil -- commonly known as bahan bakar minyak, and by its acronym BBM -- is making headlines again. In a bid to reduce the BBM subsidy, the government decided to increase its price, but because of fierce protests the government retreated by announcing the postponement of the price hike.

The dilemma lies in the narrow vision which the government, non-governmental organizations (NGOs), the general public and even the International Monetary Fund (IMF) and the World Bank look at the subsidy system of fuel oil.

The current system is unfair. The more one consumes fuel, for example by driving more kilometers by car, the more one enjoys the benefits of the subsidy. These are the richer people.

Since the subsidy is derived from public funds, the poor are paying subsidies to the rich. The government tried to overcome this unfairness by issuing BBM coupons to the poor, a program which was later changed to cash subsidies.

But considering the still corrupt bureaucracy, this system was bound to fail miserably. What then are the alternatives?

This article is confined to the transport sector, a major consumer of fuel oil. The article also seeks a synergetic relationship between the economy and ecology.

In the transport sector there are many hidden subsidies which are not recognized by the government, the experts, the public and the IMF.

Firstly, car tax does not cover the costs of the construction and widening of roads and bridges, and their maintenance; the production, placement and maintenance of traffic signs and operation of traffic lights; the training and salaries of traffic police, and the maintenance and operation of ambulances and the health costs of traffic accidents.

The government also has to pay for many parking lots, while only a small fraction of the revenue goes to the government's coffers.

It is, hence, ironical that the large amount of public funds spent on the widening of roads often ends up creating more roadside parking places, which increase traffic jams.

A publication of the World Resources Institute estimated that in the United States this subsidy, excluding the health costs, amounted to US$175 billion annually.

No data is available for Indonesia. Assuming this to be only 0.1 percent of the U.S. subsidy, it would still be an annual subsidy for motorists of $175 million.

Secondly, there is the subsidy in the form of external costs. Being external costs they are not borne by the motorists, but by the public. Motorized vehicles produce fumes which cause asthma and contain toxic and carcinogenic substances.

The lead in the fumes is suspected of inhibiting the development of the brains of children and thus reduces their Intelligence Quotient.

The traffic officers, parking employees, street vendors, street musicians and beggars at traffic lights are the ones who suffer most from the air pollution.

The World Bank estimated that for 1990 the health cost for Jakarta alone was $220 million. For the whole country this figure could easily reach $500 million. Because of the growth of the population and car numbers, this health cost has increased steadily.

This is another subsidy for the motorists. To illustrate the magnitude of this subsidy, compare it with the foreign aid of $400 million which is currently being delayed by the IMF, because Indonesia has not been able to satisfactorily meet its Letter of Intent.

Another external cost is related to the effect of roads and parking lots from the increasing frequency and intensity of floods in the rainy season and water shortages in the dry season.

These two effects are interrelated. Roads and parking lots reduce the rate of rainwater infiltration into the ground. On one hand, this increases the volume of the overland flow, causing more floods.

On the other hand the rate of the refill of the ground water is diminished so that in the dry season the river flows are minimized and many wells become dry.

Floods in the wet season inflicting billions of rupiah in damage alternate between water shortages in the dry season, forcing the poor, who are not served by the state water company, to buy water.

Floods and water shortages are also serious sources of diarrheal diseases. Roads also contribute to floods in the countryside which cause many thousands of hectares of rice fields to produce poorly or even to suffer complete failure. Again the ones who pay are mostly the poor people who are subsidizing the motorists.

A third external cost is that roads, parking lots and traffic create areas with higher temperatures than their surroundings, the so-called heat islands.

Even the mountain resort of Puncak, Bandung and other mountain towns are not cool anymore. In Kuala Lumpur the temperature difference between the business center and the city outskirts is close to 5 degrees centigrade. No such data is available for Indonesia.

The higher temperatures increases the need for air- conditioning which in turn accelerates the rate electricity consumption, and also fuel, which increases the amount of subsidy paid by the government.

Air conditioning also works as a positive feedback loop for the heat islands, making them worse. Naturally, the poor cannot afford air-conditioning and just have to bear the heat.

Heat islands also stimulate the development of living organisms, including mosquitoes and flies, hence, they exacerbate infectious diseases and dengue hemorrhagic fever, increasing the health budget of the government and the people. Still more subsidies for the motorists.

Logically, it is these subsidies which should be cut first. This can be done by adopting a stick-and-carrot policy. The stick would be to force the motorists to pay the external costs described above.

Firstly, the tax on cars should be increased significantly and a road tax be introduced. For those who have more than one car, the tax should be increased exponentially.

Secondly, parking fees should also be increased significantly and parking on roads should be banned. This latter step would have the additional advantage of reducing congestion, which would reduce the amount of fuel subsidy paid by the government, and would lower air pollution.

Conversions of lawns to parking lots should be permitted sparingly and the conversions should also be taxed.

The writer is an environmental expert, teaching at Padjadjaran University in Bandung.