Fuel Subsidy

I have very clear position of this fuel subsidy issue.

The subsidy has to be reduced.

We have several reasons to answer why we should reduce the subsidy. But the ultimate reason of it is to accelerate the development of Indonesia.

Company Approach

I will elaborate this ultimate reason by using an explanation called Company Approach. Let us assume this Republic as a company. To run the company, we divide expenditure to become two types: Operating Expenses (OPEX) and Capital Expenses (CAPEX). The purpose of OPEX is to make sure the company can run the operational activities. But it only gives short term effect to the company lifespan. In this case we can classify fuel subsidy as part of the OPEX. Fuel is used by people to support daily operation, transportation, and production.

Now we have CAPEX. Company spends CAPEX for development of itself. Company buys machines or builds new factory to extend its capacity of production so it can sell more products and hire more peoples. The Republic of Indonesia has its own CAPEX. Its state budget allocates several amounts of fund for hard infrastructures: building roads, bridges, electricity, or schools and soft infrastructures: education, health, and communication.

The bad news is Indonesia has limitation of budget and the law prohibits government to spend the total expenditures more than 3% of Gross Domestic Product (GDP). So, it is like choosing priority, which one is more important: spend more in OPEX or CAPEX?

Indonesia posted impressive result of growth of its economy last year: 6.5%. The best in SE Asia. But many analysts said that we should have been better than that. Why is that? Indonesia is lack of infrastructure. Or just say that we are in the infrastructure crisis. The crisis causes imbalance of development in some areas in Indonesia. Fuel price in Papua has reached Rp18,000/ltr. Pontianak Orange is more expensive than Mandarin ones. Land transportation cost in Indonesia is higher 50% than average SE Asia countries. Worse, the shipping cost is 150% higher.

We now successfully brand ourselves as middle income country. But there is a threat called “Middle Income Trap”, the situation where middle income country could not elevate itself to higher level because of lack infrastructure and investment.

So, by considering these good momentums: investment rating upgrade, trust from foreign investors, and membership of Indonesia in G20, it is the time for Indonesia to focus more in development. We have to spend more in CAPEX instead of prioritizing OPEX.

Supporting Reasons

To add the above explanation, there are several reasons that also make this subsidy cut reasonable.

1.       The rising of world oil price

The government cannot tolerate more with the skyrocket increase of world oil price. Thanks to Iran-Israel-US conflict which contributes to this increase. I will explain how big the amount of subsidy that should be bear by government.

First, we have to calculate the fuel/gasoline price first in normal condition, without subsidy. We use Mid Oil Plat’s Singapore (MOPS) as a basis. Currently MOPS = US$ 138/barrel.

Refinery and distribution cost are 10% of MOPS, so the cost will be = 1.1 x 138 = US$ 151.8/barrel or Rp 1,442,100/barrel.

If we convert the amount to liter = Rp 1,442,100/159 = Rp 9,070/liter.

So the normal fuel price without subsidy is Rp 9,070/liter.

Now we calculate net domestic demand of fuel.

Total domestic fuel demand is 56 million-kiloliter/year or 153,425 kiloliter/day.

While our crude oil production is 900,000 barrel/day or equals to 143,100 kiloliter/day.

Normally, Indonesia could get 20% of crude production for fuel and it equals 28,620 kiloliter/day.

So, there is deficit of fuel (net domestic demand) amounting 139,115 kiloliter/day, in which we have to import it.

How much money should government prepare in a year?

139,115 x 1000 x 365 x (9,070-4500) = Rp 232,050,204,500,000 or Rp 232 trillion.

How much money that has been allocated in state budget (APBN) 2012? Only Rp 124 trillion.

If we push to keep allocate Rp232 trillion, how much deficit of budget that will be occur?

1.       State Budget 2012 approved (ICP US$ 105/barrel)

Gross Domestic Product = Rp 8,120 trillion

State Revenue = Rp 1,293 trillion

State Expenditure = Rp 1,419 trillion

Deficit = 1.5 % of GDP

2.       State Budget 2012 (MOPS US$ 130/barrel)

Gross Domestic Product = Rp 8,120 trillion

State Revenue = Rp 1,293 trillion

State Expenditure = Rp 1,419 + (232-124) trillion = Rp 1,527 trillion

Deficit = 2.8 % of GDP

The Deficit 2.8% of GDP should be added by 1.5% which comes from deficit of regional budget. Total deficit will be 3.3% which exceeds deficit limit allowed by the law amounting only 3%.

2.       Opportunity to promote renewable energies

It is almost impossible for renewable energies in Indonesia to develop if their competitor, the conventional energy, is still cheap and accessible. It will be favorable if the government could allocate fund from fuel subsidy cut to the development of renewable energies.

Well, the decision has been made in the parliament. Although the subsidy cut is not cancelled (it is suspended), it is too bad that we have un-visionary lawmakers. I do not know whether they realize or not that we are facing infrastructure crisis since the decision was made based on their political interest.

For now, let us see whether the government could take bold action.

Source:

- www.depkeu.go.id
- http://ekonomi.kompasiana.com/moneter/2012/03/28/mari-menghitung-harga-bahan-bakar-
  minyak-secara-sederhana
- www.bps.go.id