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Indonesia to End Energy Subsidies ‘by 2014’
Reva Sasistiya & Yessar Rossendar | March 22, 2010

Spending on electricity and fuel subsidies together are expected to account for 13 percent of the government budget. (Antara Photo) Spending on electricity and fuel subsidies together are expected to account for 13 percent of the government budget. (Antara Photo)
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GoJak
10:56pm Apr 28, 2010

jujubean, you are right in thinking about the public and political fallout of rising fuel prices - just imagine, for example, a major global oil price hike during the process of eliminating the subsidy. Not inconceivable between now and 2014, but it could be enough of a double whammy to kill the whole exercise if the party in power does not have the political stamina to see the policy through.

That said, I note in another news article that the head of the Energy Commission, Teuku Riefky Hars, is seen as someone promising enough to potentially actually deliver.


jujubean
8:36pm Apr 28, 2010

@GoJak. I 100% percent agree with you. I was thinking about the protest and other events that will happen as far as short term. Even if instead of build trains and a metro, they did something like widening the roads, installing proper drainage, or dredging rivers and composting the rubbish, it would be money well spent. Improvised people will get work, and a lot of the reason they are sick (lack of potable water, noise and air pollution) would be linked. Indonesia is in the G20. The money is there, but we know we know it is not there as well...........


GoJak
6:28pm Apr 28, 2010

jujubean - benefits in the short to medium term too - the fuel subsidy alone will cost the government around $6.4 billion just this year alone. Think of the investment possibilities that could reduce people's need to purchase fuel directly - e.g. $6.4 billion is roughly what it would cost to build a six line metro system. So by 2014, you could have at least three cities with their own metros, several high-speed train links, comprehensive bus links, etc. Hell you could even build a massive network of decent bike lanes and encourage people not to use fuel based transport at all.

The key thing is that the most vulnerable need to be looked after - the sick, the impoverished - but targeted rebates would be a better direction to take to address this.

jujubean
10:46pm Mar 22, 2010

Short term, really bad. Medium to long term, good for the people. Giving handouts keeps people in perpetual poverty. Thoughts?

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The government plans to eliminate subsidies for electricity and fuel by 2014 to relieve the burden on the state budget as the country struggles to meet the demand for energy, Energy Minister Darwin Zahedy Saleh said on Monday.

Most consumers would pay market prices for electricity and fuel after the subsidies are scrapped, but Darwin vowed that the government would help low-income consumers, although the form of that assistance had not been determined.

He said being forced to pay market prices for energy would “educate” consumers and encourage them to conserve.

The electricity and fuel subsidies together are expected to cost the government a total of Rp 143 trillion ($15.73 billion) this year, 13 percent of total spending, according to the draft revision of the 2010 budget. Those estimates are based on an assumed oil price of $77 a barrel.

State power company PT Perusahaan Listrik Negara has been mired in red ink for years, mostly as a result of being forced to sell electricity at below cost. The result has been a lack of development of its generating capacity and frequent blackouts.

The company has embarked on a major expansion of its generating capacity that calls for an average investment of $7.6 billion a year through 2018.

Finance Minister Sri Mulyani Indrawati this month said the government had planned to raise electricity rates by an average of 15 percent in July to help PLN.

Opposition lawmakers and members of the business community immediately voiced opposition to the plan.

Sri Mulyani has said the government might be forced to spend an additional Rp 6.8 trillion on electricity subsidies this year if the rate hike did not pass the House of Representatives, raising the budget deficit from 2.1 percent of gross domestic product to 2.2 percent.

Eric Alexander Sugandi, an economist at Standard Chartered Bank Indonesia, said it was possible to transfer the burden of rising commodity prices to consumers and remove the government’s subsidies, but only if done gradually to muffle “possible political resistance.”

Eric noted that the government had gradually cut the subsidies since 2000, causing the prices of fuel and electricity to rise. The political resistance to the moves did not stop the government, with the House eventually relenting, he said.

He said the move would be positive for the state budget because the government could transfer the funds saved to develop other sectors, creating a multiplier effect.

“It will also reduce the state budget deficit and the need for financing,” he said.

Removing the subsidies would also help PLN and Pertamina by generating more efficiency in both of the companies, Eric said.

The government announced in 2008 that it would phase out the sale of subsidized fuel to private cars and restrict it to public-transport providers and motorcycles because the subsidy was intended for low-income consumers. It said the shift would begin next year and be fully implemented by 2014.