Trustee bank set for fuel subsidy payments

Leony Aurora, The Jakarta Post, Jakarta

The following is the third of a series of articles to mark the liberalization of the country's downstream oil and gas sector later this year.

The government is considering applying a new system that utilizes a trustee bank instead of the ministry of finance to handle all subsidy payments to industry players after state oil and gas firm PT Pertamina's monopoly ends in November.

The bank, which will receive funds from the ministry, will pay fuel subsidies periodically -- possibly monthly -- after receiving reports from the Downstream Oil and Gas Regulatory Agency (BPH Migas) on the volume of fuel products distributed by each company, the agency's director of fuel products, Adi Subagyo Subono, said recently.

"The bank will cover the payment, even if it has not received payments from the finance ministry," said Adi.

He added that such a system would ensure that companies that distributed subsidized fuel products -- kerosene, diesel and premium gasoline -- throughout the archipelago would do it in a timely manner.

The trustee bank proposal, however, would still need approval from the finance ministry, Adi said.

"The bank will, of course, receive a fee for its services, which means there'll be additional costs," he added.

At present, after verifying the cost and fees involved in distributing subsidized fuel products, the government, through the finance ministry, disburses 90 percent of the funds to Pertamina each month. The remaining 10 percent will be given at the end of the year after an audit is completed.

The monthly fuel subsidy payment is often delayed and the full-year audit to get the remaining 10 percent can take more than a year to complete.

In May, amid rising global oil prices, Pertamina suffered a cash-flow problem and cut back fuel imports as payment from the government was stalled, resulting in long queues at gas stations and fuel scarcity in many parts of the country.

After November, the government plans to apply a tender system for the importation of subsidized fuel products, where companies compete to supply fuel for the lowest price for a contract of up to a year.

Pertamina will continue to distribute fuel products produced by refineries in Indonesia, and at present provides some 70 percent of subsidized fuel consumed by the country.

The latest draft of a ministerial decree to regulate the public service obligation (PSO) states that the government will guarantee that business entities distributing subsidized fuel be paid periodically and on time.

Adi said that an independent auditor, which would report to BPH Migas, would conduct the verification on the amount of subsidized fuel distributed by companies -- Pertamina and others -- when the new PSO system started.

"BPH Migas would appoint the auditor through a tender," said Adi.

The auditor's job would be less complicated than currently as it would only need to verify sales volume, he added.

Energy observer Kurtubi said the planned payment mechanism involving a trustee bank would indeed prevent cash flow problems in subsidized fuel distributors.

He suggested, however, that the government provide Pertamina with initial working capital sufficient to cover one month of fuel imports. "The system of Pertamina paying for fuel imports first and the government reimbursing it after should be reversed," he said.

Kurtubi urged the government to reconsider opening the market for players other than Pertamina, questioning whether fuel subsidies could indeed be channeled through a private entity.

"The government should fix its pricing policy first. After fuel prices follow market prices, then it can invite other players to participate," he said.