Please Update your browser

Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.

Jakarta Post

No reform in fuel subsidies, Jokowi just forces others to pay the tab

  • Rendi A. Witular

    The Jakarta Post

Jakarta   /   Fri, July 31, 2015   /  05:50 am

A relentless choir of praise ensued when President Joko '€œJokowi'€ Widodo announced in mid-November an end to fuel subsidy allocations '€” the government'€™s biggest ever conspicuous spending nurtured for more than three decades.  

Such a daring reform earned Jokowi an '€œAAA-leader rating'€ from many overseas and domestic business luminaries as the policy would see the reallocation of some Rp 200 trillion (US$15 billion) worth of fuel subsidies for productive spending, such as for roads, dams and ports.  

A market mechanism was thus introduced to determine the prices of once-subsidized Premium and diesel fuels, although the latter still enjoys a small portion of subsidy. These two sources of energy have been mostly consumed by private vehicle owners rather than by public transportation operators, fishermen and farmers.

But as the policy is still in its infancy, it has already been compromised, illustrating that the political will to maintain market pricing cannot be assumed to be sustainable.

After raising fuel prices in November, Jokowi was committed to the market mechanism in December when he reduced the fuel prices thanks to a sharp decline in global oil prices. However, when the going got tough, particularly after Jokowi increased fuel prices for the second time in late March, the commitment was short-lived.  

His subsidy reform rhetoric has taken a toll on the finances of state energy company Pertamina, which has apparently been picking up the tab since February to keep the prices of Premium and diesel fuels below the market prices.  

The government would be unlikely to adjust the fuel prices in August or even in September.  

The company, for example, is still selling Premium gasoline for Rp 7,300 per liter despite its current market price of Rp 9,350, according to the Energy and Mineral Resources Ministry.

Although the increase in global oil prices remains modest, a more than 10 percent depreciation in the rupiah against the US dollar since early this year has put more weight on fuel prices.

In mid-May, Pertamina could no longer cope with the burden and braved itself to unilaterally raise fuel prices, only to be thwarted at the last minute by '€œthose higher up'€.  

While the company has raised the problem with the government since May, it was not until last week that policymakers started to take the matter seriously.  

The government has admitted a whopping Rp 12.5 trillion worth of losses in the company after it was forced to pay the price arrears between January and early July. The figure equals around 30 percent of the company'€™s capital expenditure for upstream development this year.

 A recent interview with Finance Minister Bambang Brodjonegoro suggested that the government has yet to come up with definitive solutions to cover Pertamina'€™s losses.

One proposed solution is for Pertamina to raise the fuel prices next month by more than 50 percent to narrow the losses.

But that is highly unlikely given the politically sensitive nature of fuel prices and the decline in people'€™s purchasing power as indicated by many surveys.

Officials have said that the government would be unlikely to adjust the prices in August or even in September.  

While Pertamina'€™s coffers are already stretched, the government is barred by law from using funds from state coffers to cover the losses as there is no longer any allotment for fuel subsidies this year.

As Pertamina is 100 percent owned by the state, the government will not allow it to go insolvent. A contingent liability '€” a future liability that may incur '€” will therefore be priced into the government'€™s already depleting coffers, exposing a fiscal risk at a time when many are questioning the sustainability of the state budget after tax collection in the first half only reached 38 percent of the annual target.

Although the Rp 12.5 trillion seems to be small compared to the total cost the government could save from easing the subsidies, questions are rife on the level of risk that Pertamina has to bear. Will the government have the courage to raise fuel prices to their economic level if there is a sudden spike in global oil prices and a worsening depreciation of the rupiah? Or will it just simply pass on the burden again to Pertamina?

The drag on Pertamina'€™s finances is also feared to affect the company'€™s capacity to finance the operation of the gas-rich Mahakam block in East Kalimantan after it takes over operations from Total EP Indonesie, a subsidiary of French energy giant Total SA, in 2018.  

More than US$2 billion annually will be needed to maintain the operation of the country'€™s biggest gas field.  

While officials are scrambling to find ways to cover Pertamina'€™s losses and keep fuel prices below their
economic levels, doubts now linger over the credibility and the consistency of the Jokowi administration'€™s policies.  

The reform in fuel subsidies, the only reform worth noting so far, is undoubtedly what defines Jokowi compared to his predecessors.  

It may be something that we all regret should such a reform falter at its earliest stage due to a combination of a lack of forethought, mismanagement and fear of losing more ground in popular support.

The author is a staff writer at The Jakarta Post

Your premium period will expire in 0 day(s)

close x
Subscribe to get unlimited access Get 50% off now