The week in review: The fuel-policy uncertainty
Vincent Lingga, The Jakarta Post | Sun, 01/22/2012 7:00 AM
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For such an important policy reform that has been on and off the national agenda since late 2007, the debates on the need to limit subsidized-fuel sales that dominated the nation’s attention this week seemed pointless and a waste of time and energy.
As early as December 2007 then chief economics minister Boediono, who is now the Vice President, announced after a Cabinet meeting that the government was preparing a program which would restrict the sales of subsidized gasoline only to public transport vehicles, motorbikes and fishermen, thereby forcing private cars to use fuel sold at the commercial rate.
But the program, which would have been phased in initially in Jakarta, West Java and Banten provinces, was eventually buried under the indecisiveness of the government and opposition from the House of Representatives.
Tens of billions of dollars of taxpayers’ money continue to be converted annually into carbon emissions by private car owners. The government revived the idea in June and again in October 2010 but the plan was again shelved in February 2011, two months before it was supposed to be implemented, due to what the government said were technical reasons.
That plan was indeed technically unfeasible as it would have caused chaos in fuel distribution due to the institutional incapacity of both the government and Pertamina to prevent abuse as well as a lack of infrastructure because not all filling stations were equipped with high-octane fuel supply tanks.
Faced with such technical difficulties, the government should have gradually raised fuel prices, a scheme that has often been implemented in the past without serious risks of abuse. But nothing was done due to the lack of leadership of the Susilo Bambang Yudhoyono administration, already notorious for its indecisiveness. The narrow-minded House also supported the misguided energy policy.
Hence, fuel and electricity subsidies ballooned to more than Rp 250 trillion (US$28 billion) last year, or over 30 percent higher than the original budget allocation, the bulk of this largesse was enjoyed by middle class and high income citizens.
The government and the House again revived the plan to reduce fuel subsidies during the debates on the draft 2012 budget in the second half of last year and stipulated in the 2012 State Budget Law that fuel subsidies should be limited at Rp 210 trillion and set 37.5 million kiloliters as the ceiling for subsidized fuel sales, down from over 40.4 million kl last year.
Alas, the pathetic government failed to learn from its failure of last year. The 2012 budget law only stipulates that the sales of subsidized fuel should be reduced through restrictions. The stipulation does not mention anything about price rises.
Hence, the government announced early this year that starting in April, the use of subsidized fuel would be limited to public transport vehicles, motorcycles and fishermen, while private passenger cars will have to use high-octane (nonsubsidized) fuel or liquefied natural gas for vehicles (LGV) or compressed natural gas (CNG).
No one in the government or the House seemed to be rational enough during the 2012 budget debates to realize that such a program would encounter even more complex technical problems related to the installation of converter kits to vehicles and the inadequate supply of such kits.
Moreover, even in Jakarta there are fewer than 16 gas stations selling LGV and CNG.
Minister of Mineral Resources and Energy Jero Wacik admitted on Wednesday that the fuel-restriction scheme would lead to technical complications, signaling that the government might opt for a much simpler scheme – raising the fuel prices.
The problem, though, is the alternative scheme first must be approved by the House because the law allows only for a reduction of fuel subsidies through restrictive use, not outright price rises.
Proposing an amendment to the law for such a painful reform would again plunge the government into a rowdy political fracas, pointless debates and even bouts of political turbulence.
But that is democracy. We nevertheless still think a gradual price rise, even at the risk of some social unrest, political turbulence and slightly higher inflation is still better than allowing this “fiscal cancer” to grow.
The tens of billions of dollars burnt off on our streets every year have been a missed opportunity to invest in health, education and infrastructure.
This year also may be the last opportunity to usher in such a painful, yet badly needed, energy reform, because next year all politicians will start gearing up for the legislative and presidential elections in 2014.
Even amid the hurly burly of the debates about the fuel subsidy issue and the sharp criticism by most analysts of the government’s indecisiveness, Indonesia’s government credit rating got another boost on Wednesday as Moody’s Investors Service followed an earlier decision by Fitch Ratings in December to upgrade the country’s sovereign rating to investment grade.
The next the day, Investment Coordinating Board Chairman and Trade Minister Gita Wirjawan announced an 18.4 percent increase in realized foreign direct investment last year to $19.28 billion.
However the government should not allow the higher ratings go to its head because the country is still struggling with poor infrastructure, bad governance and corruption.
The biggest impact of the rating upgrade will be felt mostly in the financial market, not in the real sector such as manufacturing.
In fact, the government could have its rating downgraded again if fuel subsidies are not held at a manageable level because the key factor for the upgrade is prudent fiscal management.
As early as December 2007 then chief economics minister Boediono, who is now the Vice President, announced after a Cabinet meeting that the government was preparing a program which would restrict the sales of subsidized gasoline only to public transport vehicles, motorbikes and fishermen, thereby forcing private cars to use fuel sold at the commercial rate.
But the program, which would have been phased in initially in Jakarta, West Java and Banten provinces, was eventually buried under the indecisiveness of the government and opposition from the House of Representatives.
Tens of billions of dollars of taxpayers’ money continue to be converted annually into carbon emissions by private car owners. The government revived the idea in June and again in October 2010 but the plan was again shelved in February 2011, two months before it was supposed to be implemented, due to what the government said were technical reasons.
That plan was indeed technically unfeasible as it would have caused chaos in fuel distribution due to the institutional incapacity of both the government and Pertamina to prevent abuse as well as a lack of infrastructure because not all filling stations were equipped with high-octane fuel supply tanks.
Faced with such technical difficulties, the government should have gradually raised fuel prices, a scheme that has often been implemented in the past without serious risks of abuse. But nothing was done due to the lack of leadership of the Susilo Bambang Yudhoyono administration, already notorious for its indecisiveness. The narrow-minded House also supported the misguided energy policy.
Hence, fuel and electricity subsidies ballooned to more than Rp 250 trillion (US$28 billion) last year, or over 30 percent higher than the original budget allocation, the bulk of this largesse was enjoyed by middle class and high income citizens.
The government and the House again revived the plan to reduce fuel subsidies during the debates on the draft 2012 budget in the second half of last year and stipulated in the 2012 State Budget Law that fuel subsidies should be limited at Rp 210 trillion and set 37.5 million kiloliters as the ceiling for subsidized fuel sales, down from over 40.4 million kl last year.
Alas, the pathetic government failed to learn from its failure of last year. The 2012 budget law only stipulates that the sales of subsidized fuel should be reduced through restrictions. The stipulation does not mention anything about price rises.
Hence, the government announced early this year that starting in April, the use of subsidized fuel would be limited to public transport vehicles, motorcycles and fishermen, while private passenger cars will have to use high-octane (nonsubsidized) fuel or liquefied natural gas for vehicles (LGV) or compressed natural gas (CNG).
No one in the government or the House seemed to be rational enough during the 2012 budget debates to realize that such a program would encounter even more complex technical problems related to the installation of converter kits to vehicles and the inadequate supply of such kits.
Moreover, even in Jakarta there are fewer than 16 gas stations selling LGV and CNG.
Minister of Mineral Resources and Energy Jero Wacik admitted on Wednesday that the fuel-restriction scheme would lead to technical complications, signaling that the government might opt for a much simpler scheme – raising the fuel prices.
The problem, though, is the alternative scheme first must be approved by the House because the law allows only for a reduction of fuel subsidies through restrictive use, not outright price rises.
Proposing an amendment to the law for such a painful reform would again plunge the government into a rowdy political fracas, pointless debates and even bouts of political turbulence.
But that is democracy. We nevertheless still think a gradual price rise, even at the risk of some social unrest, political turbulence and slightly higher inflation is still better than allowing this “fiscal cancer” to grow.
The tens of billions of dollars burnt off on our streets every year have been a missed opportunity to invest in health, education and infrastructure.
This year also may be the last opportunity to usher in such a painful, yet badly needed, energy reform, because next year all politicians will start gearing up for the legislative and presidential elections in 2014.
Even amid the hurly burly of the debates about the fuel subsidy issue and the sharp criticism by most analysts of the government’s indecisiveness, Indonesia’s government credit rating got another boost on Wednesday as Moody’s Investors Service followed an earlier decision by Fitch Ratings in December to upgrade the country’s sovereign rating to investment grade.
The next the day, Investment Coordinating Board Chairman and Trade Minister Gita Wirjawan announced an 18.4 percent increase in realized foreign direct investment last year to $19.28 billion.
However the government should not allow the higher ratings go to its head because the country is still struggling with poor infrastructure, bad governance and corruption.
The biggest impact of the rating upgrade will be felt mostly in the financial market, not in the real sector such as manufacturing.
In fact, the government could have its rating downgraded again if fuel subsidies are not held at a manageable level because the key factor for the upgrade is prudent fiscal management.
