On Friday, the Indonesian government raised the price of fuels by 28.7 percent. International prices for oil have risen sharply over the last few years and maintaining a constant low price for fuels has been a drain on the nation's coffers.

The economic and social consequences of the decision are significant. Obviously, the price of transportation will increase.

Subsequently, the price of goods and services that rely on transportation will also increase. This will include many of the essential goods and services that Indonesia's poor struggle to afford even at today's prices. The impact, therefore, will be particularly severe among the economically disadvantaged in Indonesia.

Despite this negative impact, the decision to increase fuel prices is appropriate, equitable and inevitable. The reality is that it is the wealthier strata of Indonesia's society that uses more fuel and fuel-dependent goods than Indonesia's poor. Consequently, the subsidy, as it is currently structured, is of greater advantage to the rich than the poor.

It seems ridiculous that a country with so many people that are disadvantaged is diverting money that could be used for development, health, education and the delivery of core government services toward a subsidy that benefits the wealthy. Undoubtedly, a better use for the money would be to enact policies that aim to improve the lot of Indonesia's poor.

A further issue with the fuel subsidy is that its level is dependent on world oil prices. The resources required to maintain the subsidy fluctuate each year as a result of factors totally beyond the government's control.

There are very few governments in the world that would be willing to have a large part of their fiscal policy determined by world oil prices. The pursuit of such a policy is economically negligent and the decision to remove the subsidy on this basis should also be applauded. Other policies, that provide greater certainty and control in the use of the government's money, can be better targeted at achieving strategically advantageous policy outcomes.

In order to counteract the impacts of the petrol price rise the government has proposed a direct cash transfer (BLT) to Indonesia's poor. While this policy should be welcomed, it cannot be seen as anything more than a short-term and, in the fullness of time, meaningless gesture. The BLT will provide immediate assistance to poor people affected by the price rise. However, in the face of rising prices for everyday goods and services, the reality is that this assistance will soon be forgotten.

Therefore, it becomes important for the government to develop strategic policies for the use of its financial windfall resulting from the subsidy reduction. Amid the hype surrounding the decision to increase prices, the long-term policy options have been infrequently discussed in policy circles and the media. Positive impacts from the decision to increase petrol prices are totally dependent on the policies that can now be pursued by the government as a result of its substantially improved financial position.

It seems there are a number of options for the use of the financial windfall that are relatively uncontroversial and will accrue substantial long-term benefits.

Perhaps the most important strategic use of additional money is for a substantial investment in public education. In the long-term, all Indonesians will realize benefits accruing from investments in education. Time and time again such expenditure has been shown to have undeniably positive impacts on living standards, particularly among the socially disadvantaged.

As part of an expanded education program, the government needs to pour more investment into the tertiary education sector. Indonesia's universities suffer from underinvestment and inefficiency. Yogyakarta alone has countless universities and higher education institutions.

Several resources could be used to rationalize these numerous organizations to ensure that universities offer greater quality rather than quantity. A significant emphasis should be placed on the improvement of teacher and medical training. Investments in these areas will assist the government in the delivery of better quality social programs in the future.

The government also needs to take steps to improve social assistance directly targeted at Indonesia's poor. Rather than direct cash transfers, this assistance would be better focussed on improving access to essential services through investments in hard and soft infrastructure.

Rural development programs that improve access to efficient and sustainable farming technologies need to be expanded. Such programs have the effect of reducing the already significant pressure on food prices. The windfall from the subsidy, through investment in such strategic programs, is sufficient enough to provide a limited social safety net for Indonesia's poorest.

There are several other issues that need to be taken into account in further reducing the fuel subsidy.

Should the subsidy reduction occur in the form of a large reduction, as occurred in 2005, or should the government consider a staged subsidy reduction over an extended period of time? Given that inflation is already high and is under increasing pressure as a result of higher food prices among other things, it may be better to articulate a plan for a staged reduction in the fuel subsidy.

One-off subsidy reductions, such as the 28.7 percent price increase, have a relatively large inflationary impact when compared with smaller staged reductions in the subsidies that give individuals and businesses more time to adjust to changing conditions. The staged approach, while having the same policy effect, may mitigate the impact on Indonesia's poor.

Another pressing issue is how maximize Indonesia's domestic oil production. Indonesia has significant oil reserves but the government needs to provide more incentives for oil drilling companies. The state-owned oil firm Pertamina is still inefficient and its services are poor.

There is little choice but to end Pertamina's monopoly to maximize business efficiency, consumer welfare and government revenue.

It is urgent for the government to think strategically about the policy issues surrounding fuel subsidies and not just let itself be preoccupied with direct cash transfers and other short-term measures.

The writer is a visiting advocacy officer at the Indonesian Consumers Foundation (YLKI).

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