Toward a fair fuel-pricing system

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.