indonesia energy subsidy review - iisd

Issue 1. Volume 1. March 2014

http://www.iisd.org/gsi/

A biannual survey of energy subsidy policies

INDONESIA ENERGY SUBSIDY REVIEW

• Infiscalyear2013,theIndonesianGovernmentallocated IDR 199.9 trillion (US$ 18.0 billion)1 of the government budget to petroleum product subsidies and IDR 100.0 trillion (US$ 9.0 billion) to electricity subsidies. This amounted to a total of IDR 299.8 trillion (US$ 27.0 billion) of government spendingonenergysubsidies,equaltoaround2.5%ofGDPand25%oftotalgovernmentexpenditure.

• In2014,thegovernmenthasbudgetedforatotal of IDR 282.1 trillion (US$ 25.4 billion). In mostyears,actualexpenditureishigherthanbudgeted.

• InJune2013,thegovernmentincreasedthepriceof gasoline and diesel in order to avoid exceeding itsbudgetdeficitlimitof3percentofGDP.ThepriceofgasolinerosefromIDR4,500(US$0.41)perlitretoIDR6,500(US$0.59)perlitre,a44percentincrease;anddieselfromIDR4,500(US$0.41)perlitretoIDR5,500(US$0.50)perlitre,a22 per cent increase.

• TheJune2013gasolineanddieselreformswerecombined with an IDR 29.1 trillion (US$ 2.6 billion) package of compensation mechanisms targeted atlow-incomehouseholds,includingatemporarycashtransfer,abasicinfrastructureprogramandexpansionsofthePoorStudentEducationSupport(BSM)program,theHopefulFamilyProgram(PKH)conditionalcashtransferandthesubsidized rice program Raskin.

• InthefirstweekofJanuary2014,statepetroleumcompanyPTPertaminaattemptedtoraisethepriceof12kg-cylinderLPGfromIDR5,850(US$0.53)perkgtoIDR9,809(US$0.88)perkg,a68per cent increase. The move was hotly contested and within 24 hours the price increase was rolled backtoonequarterofitsoriginalsize,resultinginanewpricefor12kg-cylinderLPGofIDR6,850(US$0.62)perkg.PTPertaminaclaimsthattheunderpricingof12kg-cylinderLPGhascauseditlosses of IDR 7.7 trillion (US$ 0.7 billion) in 2011-2012.

• ThegovernmentcontinueditsKerosene-to-LPGconversionprogramin2013.Therateofconversion—and hence the reduction in kerosene subsidies—hasslowedinrecentyears,astheprogram is extended into more remote provinces where fuel consumption is lower than in urban areas.

• Parliamentaryandpresidentialelectionsin2014mean that there is likely to be little appetite for furthersubsidyreformsinthefirsttwothirdsof2014.However,thetraditionaldriversofreformareallinplace—highinternationalcrudeprices,a weak exchange rate for the Indonesian rupiah and increased government expenditure in other areas.

Highlights

Contents

Introduction

Part One: Recent trends in fossil-fuel pricing policy

Part Two: Guest Analysis

The Last Word

References

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4

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IndonesiaEnergySubsidyReviewis published by The International Institute for Sustainable DevelopmentInternationalEnvironmentHouse2,ChemindeBalexert,5thFloor1219,Chatelaine,Geneva,Switzerland

Tel +41 22 917-8748Fax+41 22 917-8054Email [email protected]

ExecutiveDirector-InternationalInstituteforSustainableDevelopment-Europe MarkHalle

ProgrammeLeader–SubsidiesandSustainableEnergy PeterWooders

EditorChristopher Beaton AuthorsLuckyLontoh,KieranClarkeandChristopherBeaton

Design: TheHouseLondonLtd. Web:www.thehouselondon.com

Acknowledgments SpecialthankstoRimawanPradiptyoforhisvaluable input. Any errors are the responsibility of the authors.

Indonesia’senergysubsidiesrepresentasignificantfiscalburdentotheGovernmentofIndonesia.Onaverage,paymentsrelatedtoconsumersubsidiesalonehaveamountedtoaround3.1percentofannualGDPsincefiscalyear(FY)2010—acostthathasledtointermittentmacroeconomicinstabilityand tends to ‘crowd out’ core developmental expenditure. Despite being widely perceived as a form ofsocialassistance,manyofIndonesia’senergysubsidiesareregressive,benefitinghigherincomegroupsdisproportionately,duetoalackoftargetingonthepoorest.Atthesametime,thepricingsystemencourageswastefulenergyconsumption,providinglittleincentivetoimproveenergyefficiencyorreducedomesticgreenhousegasemissions,andcontributestothedeteriorationofIndonesia’stradebalances.Forthesereasons,Indonesia’sfuelpricingpolicymeritsattention.

ThisisthefirsteditionoftheIndonesia Energy Subsidy Review,anewbiannualpublicationbytheGlobalSubsidiesInitiative(GSI)oftheInternationalInstituteforSustainableDevelopment(IISD).PartOneofeachedition will outline economic and policy developments affecting Indonesia’s subsidized energy markets (Premium-brandgasoline,Solar-branddiesel,LPG,keroseneandelectricity)andanalyzethedynamicsofeach market.

PartTwowillfeatureanalysisbyguestauthorsonissuesrelatedtoenergypricingpolicy.Inthisedition,twoarticlesexaminetheimpactoffuelsubsidyreformsonlow-incomehouseholds:thefirst,lookingattheconsequencesofenergysubsidyreformforsmallandmedium-sizedenterprises(SMEs);thesecond,looking at the relationship between fossil-fuel subsidies and the growth in coverage and complexity of Indonesia’s social welfare systems. This edition concludes with a commentary by Dr. Zamroni Salim of the EconomicResearchCentreoftheIndonesianInstituteofSciences.

Table 1: Sed ut perspiciatis unde

Introduction

3

Figure 1: Total Fuel Subsidy Expenditure in Absolute Spending (IDR Billion) and as a % of GDP

Source:FiscalNoteandStateBudgetProposal2014;BankofIndonesia(n.a.)



(a) Overview of current fuel subsidy expenditure, 2013

Energysubsidies(bothforliquidfuelsandelectricity)continuetomakeupthelargestsinglecomponentofstateexpenditureinIndonesia,accountingfor2.5percentofGDPin2012.Thetotalbudgetaryexpenditureallocatedtofuelsubsidiesforgasoline,diesel,keroseneandLPGamountedtoIDR199.9trillion(US$18.0billion)in2013.ThebudgetalsoallocatedIDR 100.0trillion(US$9.0billion)forelectricitysubsidiesandIDR100.0billion(US$0.01billion)tosubsidizetheconsumptionofLGV(liquidgasforvehicles).Fuelsubsidyallocationin2013comprised17percentoftotalplannedstateexpenditure,withanadditional8percentdedicatedtoelectricitysubsidies.

Part One: Recent trends in fossil-fuel pricing policy

Table 1: Economic Indicators in Indonesia Revised State Budget 2013

Source: IISD (2013a); Tempo (2013a); Kompas (2013a); Cabinet Secretariat (2012), Fiscal Note and State Budget 2014.

Indicators

Inflation year-on-year

Growth

Government’s Bond Interests Rate (3 month)

Oil Production

Gas Production

Modelled Exchange Rate (IDR/US$)

Indonesia Crude Price (ICP)

Fuel Subsidy (amount, Premium, Solar, Kerosene, LPG 3kg combined)

Fuel Subsidy (volume; Premium, Solar, Kerosene combined)

Fuel Subsidy (volume; LPG 3kg)

Electricity Subsidy

State Revenue

State Expenditure

Budget Deficit (amount)

Budget Deficit (Deficit to GDP ratio)

Initial Stage Budget 2013

4.9%

6.8%

5%

0.9 mbd2

1.36 mboed3

9,300

US$100/bbl

IDR 193.8 trillion(US$ 17.4 billion)

46 mkl4

3.86 million ton


IDR 1,530 trillion(US$ 137.7 billion)



1.65%

Revised State Budget 2013 (unaudited)

6.3%

7.2%

5%

0.84 mbd

1.24 mboed

9,600

US$108/bbl


48 mkl

4.39 million ton





2.38%

State Budget 2014

5.5%

6.0%

5.5%

0.87 mbd

1.24 mboed

10.500

(US$105/bbl)

IDR 210.7 trillion (US$ 19.0 billion)

48 mkl

4.78 million ton


IDR 1,667 trillion (US$ 150.0 billion)

IDR 1,843 trillion (US$ 167.7 billion)

IDR 175.3 trillion (US$15.8 billion)

1.69%

Fuel Subsidy Expenditure

Macroeconomic Indicators

Electricity Subsidy Expenditure

Fiscal Balances

Issue 1. Volume 1. March 2014 5

Table 2: Budgeted Central Government Expenditure in 2013 (IDR billion, unaudited)

Source:FiscalNoteandStateBudget2014.

‘

Itisworthnotingthat,asaproportionofstatespending,totalbudgetedenergysubsidyexpenditurefor2013wascloseto10percenthigherthancapitalexpenditure(seeTable2),akeydriveroflong-termeconomicgrowth.Indonesiacurrentlyfacesseriousinfrastructuredeficits.ThediversionofgovernmentfundsawayfromcriticalcapitaldevelopmentprojectsisthereforeakeydevelopmentalissueforIndonesia.Further,ahighproportionofinflexiblefixedexpenditureitemswithinthenationalbudget(fuelsubsidies,personnelexpenditure,interestpaymentsondebtetc.)reducesthediscretionaryspendingpowerofthegovernment,limitingitsabilitytoinvestwherenecessaryasthe need arises.

Indonesia’sMinistryofFinanceestimatesthatactualtotalfuelsubsidyexpenditurein2013willonceagainexceedtheamountallocatedinthebudget.DatareleasedinJanuary2014suggestsactual2013expenditurewasIDR210.9trillion(US$ 19.0billion)(Antara,2014)and,onceamorecomprehensiveauditiscompleted,maypotentiallyexceedIDR250trillion(US$22.5billion)(Bisnis.com,2014a).Whiletargetsforthetotalvolumeofsubsidizedfuelsold(48millionkiloliters)havelargelybeenmet,thedepreciationoftherupiah—whichhasfallenfromIDR9,760perUSdollaronMay2013toIDR12,245perUSdollaron20December2013—combinedwithhigherinternationaloilpriceshavedrivensignificantlyhighersubsidycostsperunitoffuelsold(Detik.com,2013;BankofIndonesia).

Expenditure

Personnel

Goods

Capital

Debt

Fuel Subsidy

Electricity Subsidy

Non-Energy Subsidy

Grants

Social Assistance

Others

Amount

232,978.6

206,507.3

192,600.4

112,517.8

199,850.0

99,979.7

48,289.3

2,346.5

82,487.9

19,270.8

Figure 2: Monthly IDR/US$ exchange rate vs. Indonesian basket crude (IDR price, i.e., month-to-month IDR-US$ rate x oil prices), 2013

Source:OECD(n.d.),BankofIndonesia(n.d.a.),MEMR(n.d.).


Figure 3: Fuel and Electricity Subsidy Expenditure, by product, quarterly, 2009-2014 (est., in IDR trillion)

Table 3: Subsidized Fuel Consumption, 2013 (in million kiloliter)

Source:Kompas(2013a);JPNN(2014);Fiscal Note and State Budget 2013.

Note:* Annual data does not include the carryover from previous year.** Unaudited.*** Data from Fiscal Note and State Budget 2013,unaudited.****Plannedexpenditurefor2014budget.Source:FiscalNoteandStateBudgetProposal2014;FiscalNoteandStateBudgetProposal2013.

Fuel Type

Gasoline

Diesel

Kerosene

Total

Fuel Allocation in the Initial 2013 State

Budget Proposal (October 2012)

29.2

15.1

1.7

46.0

2013 Subsidized Fuel Consumption (as of June 2013)

14.4

7.70

0.50

22.6

Revised State Budget 2013

30.8

16.0

1.2

48.0

State Budget 2014

32.5

14.6

0.9

48.0


BOX1:Thecombinationofrecentweaknessintherupiah,highcrudepricesandcontinuedstrongpetroleum product demand in Indonesia—the latter driven partly by subsidized fuel prices—has continuedtosignificantlyaffectIndonesia’sbalanceofpaymentsposition.Highinternationaloilpricesandtheweakexchangerateiscausingthecostofoilimportstoincreasesignificantly(seeFigure4).Demandforimportedoilisrelativelyprice-inelasticintheshort-to-medium-term,meaningthatrupiahdepreciationisunlikelytocauseadeclineindomesticdemand;rather,theamountspentonoilimportswilllikelyrisecommensurately.Thiswillresultinadeteriorationofthetradebalancethat,leftunchecked,will weaken Indonesia’s external macroeconomic position.

BetweenJanuaryandNovember2013,Indonesiaimported14.7billiontonsofcrudeoilworthUS$12.5billion,ariseof25percentfromthesameperiodin2012.Importvolumesofmotorspiritproducts5 reached13.4billiontons(withavalueofUS$13.6billion)inthesameperiodin2013,5.2percenthigherthanin2012.Jetfuelimportswere38.4percenthigherbetweenJanuaryandNovember2013comparedtothesameperiodin2012(BPS,n.a.a,).

InNovember2013,Indonesia’sMinisterofFinance,ChatibBasri,arguedthataddressingIndonesia’scurrentaccountdeficitishiskeyeconomicpolicypriority.Measurestoreduceoilandrefinedproductimports,includingenergysubsidyreformandenergyefficiencyenhancementmeasures,areanecessary part of this policy program. Recent proposals towards fuel subsidy reform are being driven inlargepartbyadesiretostabilizeIndonesia’stradeandcurrentaccountbalances,aswellasbyconcernsaboutpublicfinances.

Figure 4: Indonesian current account balance, quarterly, 2009-13 (in million US$)

Source: Bank of Indonesia (n.d.b.)


(b) Indonesia’s efforts to address the energy subsidy burden, 2013.

Duringcalendaryear2013,theIndonesiangovernmentputinplaceanumberofprogramsandreformstoaddressthepersistentfiscalburdenthatfuelsubsidiesplaceonthegovernment.InJanuary2013,thegovernmentannouncedthatfuelsubsidieswouldnolongerbeprovidedforgovernmentandgovernment-affiliatedvehicles.Italsoproposedtheimplementationofanambitiousdualpricingsystemforgasolineanddiesel,wherebycertainprivatevehicleswouldnotbeeligibleforaccesstosubsidizedfuel.However,thisproposalwasabandonedinApril2013duetolackofconfidenceintheeffectivenessofmeasurestoaccuratelydirectfueldistributiontotheintendedcustomers.Soonafterwards,Indonesiareceivedaninternationalcredit-ratingdowngrade,andbeganaprocessofconcertedbudgetaryconsolidation,includingsignificantexpenditure-cutsinanumberofgovernmentofficesacrossthe country.

InMay2013,inthemidstofbudgetaryoverruns,thegovernmentbeganastatebudgetrevisionwithparliamentinordertoavoidexceedingitsbudgetdeficitlimitof3percentofGDP.ThislimitwassetbytheStateBudgetActanditprovidedastrongrationaleforpoliticalpartiestoagreeonareductiontothefuelsubsidy.AccordingtoHerrySetyawanoftheSupervisoryCommitteeonTaxationoftheMinistryofFinance,withoutadjustment,Indonesia’sbudgetdeficitwaslikelytoreachUS$47.25billion,or3.38percentofGDP(Setyawan,2013,p.37).InJune,thebudgetrevisionwaspassedand,followingthis,thegovernmenttookthesignificantstepofintroducinghigherpricesforgasolineanddiesel.Theserose44percentand22percentrespectively—thefirstpriceincreasesofthiskindsince 2008.

Indonesia’sJunefuelpriceincreasesweremetwithsignificantopposition,bothfromkeyvestedinterestsandfromoppositionpoliticalparties.Thesubsidycutswere,however,combinedwithasignificantexpansionofIndonesia’scashtransfersystemtocompensatepoorhouseholdsforhigherfuelprices.Intotal,acompensationpackageofaroundIDR29.1trillion(US$2.6billion)wasannouncedatthetimeofJune’spriceadjustment(IISD,2013c;WorldBank,2013).

Thelargestcomponentofthispackage,costingIDR9.3trillion(US$0.8billion),istheTemporaryCashTransferProgram(BLSM).TheBLSM,intendedtohelphouseholdscopewiththeshort-termimpactsofreform,wasdesignedtoprovide15.5millionpoorhouseholdswithIDR150,000(US$13.5)permonthforfourmonths.

This was combined with other programs targeting poverty alleviation in the medium- to long-term poverty. These includedabasicinfrastructureprogram,focusedonvillageswithhighpovertyrates,atacostofIDR7.3trillion(US$0.7billion);anexpansionoftheexistingPoorStudentEducationSupport(BSM)program,increasingfinancialsupportforschoolingfrom8.7millionto16.6millionschoolchildren,atacostofIDR7.5trillion(US$0.7billion);anexpansionoftheconditionalcashtransferHopefulFamilyProgram(PKH),from2.4to3.2millionhouseholds,atacostofaroundIDR0.7trillion(US$0.1billion);andanextensionoftheexistingRiceforthePoorprogram(Raskin),providingsubsidizedriceto15.5millionhouseholds,atacostofaroundIDR4.3trillion(US$0.4billion)(IISD,2013c;WorldBank,2013).

TheinflationaryimpactoftheJune2013fuelpriceincreasespeakedinthemonthofJuly,buteasedinthesubsequentmonths,matchingtheforecastsmadebythegovernmentpriortotheseinitialpricechanges(seeFigure5).Nevertheless,Indonesiawillstillexperiencesignificantinflationin2014,withinflationin2013closetotheannualtargetof9.2percent.DatafromtheBankofIndonesiashowyear-on-yearinflationat8.32percentinOctober2013,withthelikelihoodoffurthergeneralizedprice-levelrisestowardstheendoftheyearasaresultofincreasedseasonaldemandaroundtheChristmasandend-of-yearholidays(BankofIndonesia,2013).

Figure 5: Inflation, monthly, 2013

Source:FiscalNoteandStateBudgetProposalFiscalYear2014


(c) Looking Forward – Energy Subsidies in the State Budget, 2014

Indonesia’s2014StateBudget,finalizedinlate-October2013,allocatesIDR282.1trillion(US$25.4billion)forfuelandelectricitysubsidiesin2014,whichcontinuetobethelargestsinglecomponentoftotalgovernmentexpenditure. The 2014 energy subsidy allocation is approximately IDR 10.8 trillion (US$ 1.0 billion) higher than whatwasallocatedinthe2013revisedbudget.Infact,thegovernmentinitiallyplannedareductionintotalenergysubsidiesfor2014(RevisedStateBudget2013),butweaknessintherupiahandhigherinternationalcrudepricesinthesecondhalfof2013reducedanticipatedsavingsfromsubsidyexpenditure.

Indonesia’stotalfuelsubsidyin2014willcontinuetocovergasoline,diesel,kerosene,LPG,andLGV(liquidgasforvehicles).Thecombinedtotalvolumeofsubsidizedliquidpetroleumproducts(gasoline,automotivediesel,andkerosene)in2014issetat48millionkiloliters,whichissimilartothequotacontainedinthe2013revisedbudget.Thegovernmentinitiallyproposedaquotaof50.44millionkilolitersforthesefourproducts,butdeliberationsbetweenthegovernmentandparliamentresultedinaloweringofthequota(Kompas,2013b).The2014subsidyforLPG—providedtohouseholdsandsmallbusinesses—willbeIDR36.77trillion(US$3.3billion).

Thesequotasarelikelytobedifficulttargetsforthegovernmenttomeet.Indeed,failuretomeetsubsidyquotassetoutinyearlybudgetsisbecomingarepetitivefeatureofIndonesia’sfiscallandscape,partlyduetoparliament’sinsistenceduringbudgetnegotiationsonreducingthequotalevelsinitiallyproposedbygovernment.In2013,thegovernment’sinitialquotaproposalof48millionkilolitersofsubsidizedfuelswascutto46millionkilolitersafterparliamentarynegotiations,whilein2014thegovernment’ssubsidy-estimaterangeof49-50.5millionkiloliterswasultimatelyreducedto48millionkiloliters(Antara,2012;Beritasatu,2013;JPNN,2013).

Targets will be especially hard to meet given that several new policies designed to control fuel consumption will likelytakeconsiderabletimetodevelopandimplement.TheseincludetheRadioFrequencyIdentificationDevicesystem(RFID),whichidentifiesthoseeligibleforsubsidiesthroughatagontheirvehicle,andacashlessfueltransactionsystem.Consumptionmayalsobeincreasedbyotherpolicies,suchastherecentindustryinitiativefora domestically-produced low-cost “green car”.

Nonetheless,initspolicyplanssupportingthe2014budget,thegovernmenthascommitteditselftoambitiouschanges in energy pricing. It intends to work towards sweeping new subsidy targeting measures (so-called ‘closed distributionsystems’)thatbuildonthecashtransfermechanismsthatwererolledoutfollowingJune’spricerises,aswellasapotential‘flat-ratesubsidy’thatestablishesasubsidypaymentforindividualfuelswhichremainsconstantovertimedespitefluctuationsininternationalcrudepricesandthevalueoftherupiah.

Itishighlyquestionable,however,whethertherewillbesufficientpoliticalwillin2014toincreasefuelpricesortoshrinksubsidyeligibilityinthefirsttwo-thirdsoftheyear,giventhatparliamentaryandpresidentialelectionsareduetotakeplaceon9Apriland9Julyrespectively,withasecondroundofpresidentialvotingpotentiallyrequiredinSeptember.Indeed,dependingonthepolicyapproachandideologyofthenewgovernment,the2014electionsmight even reduce the likelihood of subsidy reform initiatives in the years to come.

Table 4: Planned Budget for Indonesian Fuel Subsidy in 2014 (in IDR trillion)

Source:Kompas(2013a);JPNN(2014).

Description

Fuel Subsidy

- Gasoline (Premium and biofuel equivalent)

- Kerosene

- Diesel (Solar and biofuel equivalent)

- LPG 3kg cylinders

- Liquefied Gas for Vehicles (LGV)

- Value-Added Tax

- FS carryover to the next Fiscal Year

- FS carryover from 2010

- FS carryover from 2011

- Estimated FS carryover from 2012

- Estimated FS carryover from 2013

Initial State Budget 2013

193.8

87.2

8.0

51.2

26.5

0.1

17.3

-

-

3.5

-

-

Revised State Budget 2013 (unaudited)

199.9

83.5

6.7

59.7

31.5

0.1

18.1

-22.6

0.0

0.4

18.9

-

State Budget 2014

194.9

68.8

6.1

56.3

36.8

0.1

16.8

-

-

-

-

10.0

Source:FiscalNoteandStateBudgetProposalFiscal2013;FiscalNoteandStateBudgetProposalFiscal2014


Figure 6: Gasoline Consumption vs Gasoline Subsidy Expenditure, quarterly, 2012-13

Nonetheless,Jakarta’shighlypopularGovernor,JokoWidodo,whowasannouncedasthepresidentialcandidatefortheIndonesianDemocraticPartyofStruggle(PDI-P),andiswidelypolledastheleadingcontenderforthepresidency(Cochrane,2014),haspreviouslybeenastrongcriticofthegovernment’senergysubsidypolicy.Inlate2013,heindicatedthathewouldliketoseetherevenuesthatarespentoncurrentsubsidiesinJakartadivertedtopublictransport(Tempo,2013b).Althoughhehasconfirmednoformalstanceonthefuelsubsidysincehisannouncedcandidacy,thissuggeststhatitisatleastpossiblethataWidodo-ledgovernmentmightadoptareformiststancetowardsenergysubsidiesfollowingvictoryintheupcomingelections,atleastonalimitedbasisinmajor cities.

It is also clear that a lack of reform will continue to pose serious problems for Indonesia if the factors that have traditionallybeencoredriversofsubsidyreform—highinternationalcrudeprices,lowexchangeratesandensuingpressureonthebudget—continueunabated.Inaddition,newpressureonthebudgetislikelytostemfromthegovernment’slaunchofitscostlynewnationalsocialsecuritysystem,theSistemJaminanSosialNasional(SJSN)(WorldBank,2012),startinginJanuary2014withtheunveilingoftheuniversalhealthcoveragecomponent,theJaminanKesehatanNasional(JKN).Regardlessofthespecificpoliticalideologyofthenewgovernment,therefore,itispossiblethatnewreformswilltakeplacetowardstheendof2014,underthegrowingpressureofbudgetaryconstraints and in the period of strong popular legitimacy conferred by an electoral victory.

(d) Current dynamics in subsidized fuel markets

Gasoline (Premium-branded)—InJanuary2013,theMinistryofEnergyandNaturalResourcesprohibitedtheuseofsubsidized gasoline for government-owned public transport and other government vehicles and sea-going vessels. FortheJavaandBaliarea,theregulationwaseffectiveonthedayitwasannounced,witharollingcountry-wideimplementation to follow.

InearlyApril2013,aplantoapplyadual-pricingsystemforgasolineanddieselwasfloated.WhilethegovernmentinstructedPTPertamina,thestate-ownedsubsidizedfuelretailer,tomakepreparationstoputthispricingsysteminplace,theprogramwasabruptlycancelledinApril(IISD,2013d).Theprogramwastoallowforthepurchaseofsubsidizedfuelbyonlyalimitednumberoftargetedcustomers,especiallymotorcycleusers,whilecarownerswereexpected to pay market rates for transport fuels. The exact mechanisms for achieving the dual-pricing system were notknown.ThegovernmentalsohadplanstoapplytheRFIDmechanismtogasolinepurchases,butprogressontheimplementationofthissystemthroughearly2014waslimited(IISD,2013b).

InJune2013,followinglengthynegotiationswithIndonesianmembersofparliamentregardingtherevisionofthestatebudget,theDemocrat-ledgovernmentintervenedtoincreasethepriceofgasolineby44percentfromIDR4,500(US$0.41)perlitretoIDR6,500(US$0.59)perlitre,thefirstpriceriseofthiskindsince2009(seeIISD,2013c).

Finalfiguresfortheconsumptionofsubsidizedgasolinein2013areexpectedtoshowarisefrom27.3millionkilolitersin2012to30.8millionkiloliters,whilethevalueoftotalgasolinesubsidiesisestimatedtoincrease38percent,fromIDR59.7trillion(US$5.4billion)toIDR83.5trillion(US$7.5billion)overthesameperiod(FiscalNoteandStateBudget2014,p.4-103).Thissignificantyear-on-yearincreaseinthevalueofsubsidiesaccruingtogasolineconsumption is the result of the continued growth in domestic transport fuel demand due to strong private car and motorvehiclessales,aswellastheweakenedvalueoftherupiahinthesecondhalfof2013.

Note:* Unaudited. **DatafromFiscalNoteandStateBudget2013,unaudited.***Plannedexpenditurefor2014budget.Source:FiscalAgencyPolicy(n.d.);FiscalNoteandStateBudgetProposal2013,FiscalNoteandStateBudgetProposal2014.


Diesel (Solar-branded)—Asingasolinemarkets,subsidizeddieselconsumptionbypublicservicevehiclesandvesselswasprohibitedinearlyJanuary2013,exceptforemergencyservicesandmaritimevesselsservingremoteareas.Followingthegovernment’sfailuretoimplementtheproposeddualpricingsystemfordieselandgasoline,dieselpriceswereraisedfromIDR4,500(US$0.41)perlitretoIDR5,500(US$0.50)perlitre,or22percent,halfofthe increase experienced in gasoline prices.

Finalfiguresfortheconsumptionofsubsidizeddieselin2013areexpectedtoshowarisefrom14.8millionkilolitersin2012to16millionkiloliters,whilethevalueoftotaldieselsubsidiesispredictedtorisebyIDR32.3trillion(US$2.9billion)toIDR59.65trillion(US$5.4billion)—ayear-on-yearincreaseof81percent(FiscalNoteandStateBudget2014,p.4-103).Thegrowthindiesel-fueledvehiclesales,mostlyinheavytransport,hasbeenlowerthanthatforvehiclesusinggasoline.Howeverarapidlydepreciatingrupiahinthesecondhalfof2013putsignificantupwardpressureondieselsubsidycosts,inthesamewayitdidforgasoline.

Kerosene and LPG–Indonesia’ssubsidizedLPGpricewasrevisedtwiceinthefirstweekofJanuary2014.PTPertaminaannouncedthenewpricefor12kg-cylinderLPG,whichiswidelyusedfordailyhouseholdactivities,on1January2014.ThepriceincreasewasfromIDR5,850(US$0.53)perkgtoIDR9,809(US$0.88)perkg,a67percentincrease.Thiswasthefirstchangeinpricessince2009,whenthe12kg-cylinderLPGwassetatIDR5,850(US$0.53)perkg.PTPertaminaannouncedthatithadsufferedlossesofIDR21.8trillion(US$2.0billion)from2008-2013inthedistributionof12kg-cylinderLPG(TheJakartaPost,2014),andwouldcontinuetomakealossofIDR2,100(US$0.19)perkgunderthenewprice(Kompas,2014).PTPertamina’spositionwassupportedbytheassessmentoftheNationalAuditBoard(BadanPemeriksaKeuangan[BPK]),whichquantifiedPertamina’slossesin2011 and 2012 at around IDR 7.7 trillion (US$ 0.69 billion) in 2011 and 2012 and said this resulted largely from the distributionofsubsidized12kg-cylinderLPG(Liputan6,2014;TheJakartaPost,2014).

On5January2014,followingconsiderablepublicoppositiontoPertamina’sdecisioninthedaysfollowingthepriceincrease,IndonesianPresidentSusiloBambangYudhoyonointervenedinthedebate,instructingPTPertaminaandassociatedministerstoreviewtheinitialdecisionwithin24hours.Thenextday,PTPertaminascaledthepriceincreasebacktoaquarteroftheoriginalincrease,setting12kg-LPG’sretailpriceatIDR6,850(US$0.62)perkgand citing the public reaction to higher prices as its reason.

Atthesametime,inresponsetothereductioninprices,PTPertaminareviseditsprofitgrowthprojectionsfor2014downwards,from13.17percentto5.65percent.AccordingtoHanungBudaya,PTPertamina’sDirectorofMarketingandTrade,59percentofLPGmarketedbyPertaminaisimported,whileIndonesia’sconsumptionofLPGin2013reached5.6milliontons,ofwhich4.4milliontonsweresubsidized(Kompas,2014).

SubsidypolicyinkeroseneandLPGmarketsiscloselylinkedasaresultofIndonesia’slargeLPG-for-keroseneConversionProgram,whichaimstosubstitutetheuseofsubsidizedkerosenewiththesubsidized3kg-cylinderLPGinpoorruralhouseholds.WhiletheIndonesiangovernmenthasexpectedarapidfallinkeroseneusageinthelastseveralyears,thedifficultiesinimplementingtheConversionPrograminseveralprovinceshasslowedtheanticipateddeclineofsubsidycostsassociatedwithkerosene.In2013,thegovernmentcontinuedtoexpandthe

Figure 7: Diesel Consumption vs Diesel Subsidy Expenditure, annual, 2012-13



reachoftheconversionprogramtounconvertedareasinIndonesia,especiallyinthefiveremoteprovincesofWestSumatra,BangkaBelitung,CentralKalimantan,SoutheastSulawesiandCentralSulawesi.Allfivehadfailedtomeetconversiongoals,despitetheprogramoriginallybeingscheduledtoconcludein2011.

Keroseneconsumptionin2012and2013hasbeenstableataround12millionkilolitersperannum,withthevalueof the subsidy on kerosene decreasing slightly from IDR 7.88 trillion (US$ 0.71 billion) to IDR 6.65 trillion (US$ 0.6 billion)between2012and2013(FiscalNoteandStateBudget2014).Thequotaforsubsidizedkerosenein2013wasrevisedinJune2013,from1.7millionkilolitersto1.2millionkiloliters.LPGconsumption,encouragedbythecontinuationandexpansionoftheconversionprogram,isexpectedtohaverisenfrom3.6millionkilogramsin2012to4.39millionkilogramsin2013—anincreaseof22percent—whilesubsidycostsareexpectedtohaverisenby8per cent over the same period.

Figure 8: LPG Consumption vs LPG Subsidy Expenditure, annual, 2012-13


Figure 9: Kerosene Consumption vs Kerosene Subsidy Expenditure, annual, 2012-13

Note:* Unaudited. **DatafromFiscalNoteandStateBudget2013,unaudited.***Plannedexpenditurefor2014budget.Source:FiscalAgencyPolicy(n.d.);FiscalNoteandStateBudgetProposal2013,FiscalNoteandStateBudget


Electricity –Accordingtothe2014StateBudget,asubstantialreductionintotalenergysubsidiesisexpectedtocomefromreducedelectricitysubsidiesinthenextyear,whichin2013werebudgetedatIDR100.0trillion(US$9.0billion).

ElectricitysubsidiesinIndonesiaareconferredbythedifferentratesperkilowatthourchargedtodifferentcustomerclasses:thepublicservice(classS),households(classR),businesses(classB),industry(classI)andgovernmentandstreetlighting(classP),eachofwhichissubdividedagainintogroupingsofsmall,medium,andlargepowerconnections.In2013,electricitytariffswereincreasedforalltypesofcustomerclassonallbutthetwolowestsizesof power connection (the 450VA and 900VA classes). The increases were levied every three months up to a total cappedincreaseof15percentyear-on-year,withthelastoftheseincreasesoccurringinOctober2013.Atthetimeofwriting,thehouseholdclasswithalargepowerconnection(R3),thebusinessclasswithamediumpowerconnection(B2),andtheupperhalfofthegovernmentclasswithasmallpowerconnection(P1above2,200VA)hadalreadyreachedorexceededthepointthatstatepowercompanyPTPLN(PerusahaanListrikNegara)hadtargetedasbeingthemarketprice,aroundIDR1,350(US$0.12)perkWh(PLN,Tempo,2012).Table5showsanexampleofthestatusofelectricitytariffsinthehouseholdsectorin2013.

Goingforward,theGovernmenthaspledgedtocontinueeffortstoreducebothelectricityproductioncostsandtheuseofrefinedoilproductsinelectricitygeneration.Itplanstodothisbysecuringgreatersuppliesofgas,coalandotheralternativeenergysourcesforpowergenerators,improvingtheperformanceofPTPLN,andfurtherevaluatingsubsidyandpricingsystemsforretailelectricity.Plansarealsoinplacetocontinuetoincreaseelectricitytariffsduring 2014 in order to further reduce electricity-related subsidy payments.

TheGovernmenthasarticulatedseveralspecificpolicychanges,includingambitionstoalterthedesignandnatureoftheelectricity-pricingscheduleintheshortterm,andthewayitmanageselectricitytariffsforsmallconnections(450VAand900VA).On22January2014,thegovernmentacquiredparliament’sapprovaltoapplyatariffadjustmentonindustryclasseswithmediumandlargeconnections,I3andI4(Antara,2014).In2014,thetarifffortheI3classwillgoupby38.9percentandthetarifffortheI4classby64.7percent.Theincreasewillbephasedineverytwomonths,startinginMay2014(Tribunnews,2014).

(e) Political issues

In2014,Indonesia’sgovernmentisexpectedtobecautiousaboutpushingastrongagendaofenergypricingreform.PresidentYudhoyono’sDemocratPartycomprisesjustoveronequarterofparliamentaryseatsandneedstoconsolidateacoalitiontosecurethemajoritythatwouldberequiredtopassfurtherreforms.Thegeneralelectionin2014isalsolikelytocreateadifficultpoliticalsituationascompetingpartiesseizepoliticalgainsbypolemicizingenergyreformissues.AsrecordedbyBraithwaite,etal.(2012,p.19),politicalalignmentonenergyreforminitiative

Note:Thefirstsetofshadedrowsaretariffclasseswhoserateshavebeenmaintainedin2013.Thesecondsetofshadedrowsaretariffclassesinwhichtheratesweregraduallyincreasedeverythreemonthsin2013.ThefinalrowisatariffclassthatisalreadyatPLN’sstatedmarketrate.

Source:MinisterofEnergyandNaturalResourcesRegulationNo.30/2012.

Source:Kompas(2013a);JPNN(2014).

Tariff Class

R1 - 450VA 0 - 30kWh

R1 - 450VA 30kWh-60kWh

R1 - 450VA >60kWh

R1 – 900VA 20kWh-60kWh

R1 – 900VA above 60kwH

R1 - 1,300VA

R1 - 2,200VA

R2 - 3,500VA-5,500VA

R3 >6,600VA 0-55 hours

R3 >6,600VA >55 hours

1 Jan - 31 Mar

160

360

495

445

495

833

843

948

980

1,380

1 Apr - 30 Jun

160

360

495

445

495

879

893

1,009

1,225

1,380

1 Jul - 30 Sep

160

360

495

445

495

928

947

1,075

1,290

1,380

1 Oct - 31 Dec

160

360

495

445

495

979

1,004

1,145

1,352

-

Tariff

Table 5: Electricity Tariffs for Household Group, quarterly, 2013 (in Rupiah/kWh)


issues in Indonesia has proven to be fragile. Only two political parties in the country have shown a consistent voting pattern over energy reform initiatives. The government also demonstrated a defensive stance on the non-subsidized LPGprice-adjustmentissueinJanuary2014whenitmoderatedPTPertamina’sLPGpriceincreasetoalowerlevel(JakartaGlobe,2014).

Nonetheless,theneedtopushforwardtheenergyreformagenda,especiallyenergypricerationalization,iswell-recognized by many political actors in Indonesia. The increasingly costly energy subsidy—combined with the hard factsofdecliningoilproduction,limitedrefiningcapacity,theneedtoextendelectrificationandincreasingenergyconsumption—will pose a great challenge for any winner of Indonesia’s general election.

Indonesiamayalsobegintofacechallengesattheregionallevel,asASEANmember-countriesentertheimplementationphaseoftheASEANeconomiccommunityin2015(ASEAN,n.d.).Indonesianeedstoaccommodatethe new regional economic architecture as it strives to meet its commitment to build a single market and production base,anddevelopcross-countryenergyinfrastructures,inparticulartheASEANPowerGridandTrans-ASEANGasPipeline,tosupportregionaleconomicgrowth(ADB,n.d.).Indonesia’senergypricesareamongthelowestinSoutheastAsia(Detk.com,2013).

(f) Recommendations, 2014

Aspreviouslyindicated,thepoliticalcontextin2014islikelytopreventanysignificantchangestoenergypricingpolicyinthefirsttwo-thirdsoftheyear.However,thecoredriversforreform– highinternationalcrudeprices,aweak exchange rate and increased government expenditure elsewhere – mean that energy subsidy reforms may nonethelessbepossiblebytheendoftheyearorinearly2015.Inparticular,itislikelythatenergysubsidyreformand the development of social security measures in Indonesia will remain closely intertwined. This means that the general focus of government action in 2014 should be preparatory: ensuring that the “pieces are in place” to allow forquick,effectiveandsociallyprogressivereformswhenneeded.

Basedontheaboveanalysis,thefollowingrecommendationsaremadeforeachfueltype.

Premium-brand gasoline and Solar-brand diesel

• Developdetailedstrategiesforthereductionofsubsidyexpenditure,eitherbyreducingsubsidiesonanad hoc basis or gradually tightening the targeting of the subsidy.

• Design and prepare the implementation an automatic pricing mechanism that would:o Allowsomepass-throughofinternationaloilpricefluctuations,therebyreducingfiscaluncertainty

about the total cost of subsidies; ando Include a path for the gradual reduction of subsidies.

• Continuetoimprovesocialassistancemeasureswhenimplementingpricerises.Thisshouldinclude:o Explicitlinkageofenergysubsidyreformtothedevelopmentofnewsocialsafetynetpolicy;o Recognition of the need for short- and long-term assistance measures to mitigate the initial impact of

priceshocksandvolatility,aswellasoflonger-termcost-of-livingpressures;o Enhancedtargetingofassistancetoreduceleakageandexclusionaspartoftheprocessofthe

broader development of social safety nets in Indonesia; ando Enhancedmonitoringandevaluationoftheeffectivenessofassistancemeasuresinfulfillingtheir

purposeinmitigatingtheimpactofhigherenergypricesonhouseholdsandSMEs.

• Reviewreformimpactsthatarenotcurrentlycushionedbyanymitigationmeasures(forexample,onSMEs),and the impact of price volatility on households and businesses under a new automatic pricing mechanism.

Kerosene and LPG

• ContinuetheimplementationoftheLPG-for-KeroseneConversionProgram.

• AdoptthesamestrategiesforLPGpriceincreasesasforotherfuels:gradualsubsidyreductionscombinedwithtargetedmitigationmeasurestoensureaneutralor,preferably,aprogressiveoutcomefornear-poorandpoorhouseholds.

• Improve the consistency of communications regarding subsidy reform. The recent public outcry and controversy overLPGpricingsuggeststhereisscopeforenhanced,morestrategiccommunicationandawareness-raisingregarding energy subsidies and the process of subsidy reform.

• SecureLPGsupplyforthedomesticmarket,inordertoensurethemarketisabletomeetthegrowthindemandinducedbygovernmentpolicytopromoteLPGuse.

Electricity

• Continue the implementation of gradual price reforms until electricity pricing fully recovers the ongoing costs of maintaining and improving Indonesia’s electricity system.


1AllIDR/US$conversionsinthisreviewhaveusedarateof0.00009,unlessotherwisestated.

2 Million barrels per day

3Millionbarrelsofoilperdayequivalent

4 Million kilolitres

5Includedinthismotorspiritcategory:motorspirit,ofRON97andabove;motorspirit,ofRON90andabovebutbelowRON97leaded;andothermotorspiritunleaded.

Notes

• Develop a comprehensive strategy to improve performance of so-called electricity lifeline rates (rates granted to lower-income households).

• Expandtheelectrificationratewithtargetedmeasurestofacilitatethegrowthofeconomiccapacityoutsidethemajor centres of economic activity.

• Maintain the expansion of electricity production and provide a business-friendly climate for new investment in the electricity sector.


Part Two: Guest analysis

Small and Medium-Sized Enterprises (SMEs): A Key Group to Consider for the Welfare Impacts of Fossil-Fuel Subsidy ReformDr.TulusTambunan,CenterforIndustry,SMEandBusinessCompetitionStudies,USAKTI6

Introduction

Smallandmedium-sizedenterprises(SMEs)makeupalargeproportionofbusinessesinIndonesiaandcreateasignificantproportionoftotalemployment.Theyhavealsobeeninstrumentalinreducingpoverty.Howaretheyaffectedbyfossil-fuelsubsidyreform,andwhatdoesthismeanforgovernmentplans?

SMEs in Indonesia: Some Background

Asinmanydevelopingcountries,SMEsinIndonesiaareverynumerous,amountingtosome56.5millionin2012(UKM,2013).Theygenerateasignificantamountofemploymentforlow-incomehouseholdsandcanhelpdiversifyeconomicoutput.ManySMEsarebasedinruralareas,sotheyalsoplayanimportantrole in stimulating rural economic development.

Theylookverydifferent,however,toSMEsinmoredevelopedeconomies.About99percentofSMEsinIndonesiaaretiny,so-calledmicroenterprises,withthefollowingcharacteristics:

• They are unregistered and operate in the informal sector. • Theydonotadoptmodernsystemsoforganization,managementandaccounting.• They use mainly low-educated paid workers as well as unpaid family members.

Becauseofthesecharacteristics,mostoftheenterpriseshavelowproductivity,producecomparativelyinferiorgoodsandhavedifficultiesaccessingnecessaryinputs,includingcapital,high-qualitylabour,technology and information. They also lack access to domestic and export markets.

How Important Are Energy Prices to SMEs?

EnergypricesareonlyoneofthemanyconstraintshamperingIndonesianSMEs(especiallysmallandmicro-enterprises,orSEs).

Itisgenerallyknownthat,onaverage,SMEs,particularlySEs,aremuchlessenergy-intensivecomparedtolargeenterprises(LEs).SMEenergyintensitycanbeaslowasaround10percentofthetotalcostofproduction,accordingtotheUnitedStatesAgencyforInternationalDevelopment([USAID],2008).However,theimportanceofenergyvariesbygroupofindustry,anddependsonthenatureoftheproductionprocessandenergyefficiencyofindividualfirms,amongotherfactors.

ItisdifficulttopinpointwhichIndonesianSMEsaremostaffectedbyenergysubsidyreformsbecausegooddataarenotavailable.TheBPS,Indonesia’sCentralAgencyforStatistics,hasonlydisaggregateddataonSEsinthemanufacturingindustryandeventhisdataisfairlylimited.ItshowshowmanySEsidentifyenergyastheirmainconstraint.Thetopfivegroupsaretobacco-processing;thosewhomanufacture reproductions of publishing and recording media; machinery and tools; food; and paper and itsproducts.BPSdataalsoshowsthatthemajorityofSEswhoidentifyenergyastheirmainconstraint


arelocatedoutsideJavaandSumatra,thefiveprovinceswhereenergycostsarethebiggestissuebeingWestKalimantan,KepulauanRiau,WestNusaTenggara,GorontaloandBanten.Butthedatadonotdistinguishbetweentheproblemsofenergypriceandsupply.Theyalsodonotindicatewhichspecificenergysources(e.g.,electricity,liquefiedpetroleumgas[LPG],kerosene)causethemostsignificantproblemsfordifferenttypesofSME.

Suchinformationiscrucial,however,iftheimpactoffossil-fuelsubsidyreformsistobeproperlyexamined.Energyusewillvarysignificantlybytypeofenterprise:forexample,handicraftswillhavehightransportationcostsbutusevirtuallynoelectricity;otheractivities,suchasfoodprocessing,willmakeextensiveuseofkerosene.Itcanbeassumedthatreformstogasolineanddieselprices,suchasthoseimplementedinJune2013,willonlyaffectcertaingroupsofSMEs,forexampletraditionalindustrieslikefoodandbeverages,orthosemakingproductsfromwood,bambooandrattan,andleatherproducts.Intheseindustries,thekeytypeofenergyusedbySMEsiskerosene,followedbySolar-branddieselandgasoline.ReliabledataarerequiredtoaccuratelypredicttheimpactsofreformsandtoensureSMEsareprepared.

What We Know From Experience: How Have SMEs Coped with the Latest Increases in Energy Prices?

EvenifenergytakesupaverysmallpercentageoftheproductioncostsofSMEs,anincreaseinenergycosts can still seriously affect them. Vulnerability to energy price increases is to some extent determined byabusiness’sabilitytocopewithchange:cantheypasstheextracostsontotheirconsumers,ormusttheyabsorblossesthemselves?

Atthetimeofwriting,nodetailedstudieshadyetbeenpublishedabouttheimpactoftheJune2013pricereformsforgasolineanddieselonSMEs.However,anecdotalreportsfromvariousnewspapersindicatethattheimpactseemstobesignificant.Forinstance,theRepublika newspaper has stated that manySMEsintheWestJavacityofSukabumimayhavetoclosedownbecauseofthefuelsubsidypolicy(RepublikaOnline,2013).Citingcomplaintsthattherisingcostsofproductionhavemadeitdifficulttoexpand,Antara News(2013b)hasstatedthatthepricechangeshavebeenfeltbymanySMEsinEastJava,andhaveeventhreatenedsomebusinesseswithbankruptcy.IntheEastJavacityofMalang,atleast10,000localSMEsarefacingbankruptcyduetothesharpriseinoperatingcosts(especiallytransportationcosts)thatfollowedthefuelpricechange(AntaraNews,2013b).

According to Kompasnewspaper,theBPSandtheStateMinistryforCooperativesandSMEshaveestimatedthattheimpactofthefuelpricereformhasgeneratedfinancialproblemsformanySMEsinIndonesia(Purwanto,2013).Accordingtothegovernmentstudy,althoughtheresultingincreaseinproductioncostsisnotasbadaswhenfuelpriceswereincreasedin2005,ithasstillcreatedsignificantproblems(Antaranews.com,2013a,2013b).

Somestudiesofthe2005energypricereformsonSMEshavecometodifferentconclusions.Forinstance,acasestudyinNorthSumatrain2007showsthatthebusinessperformanceoflocalSMEswasnotsignificantlyaffectedbytheincreaseinfuelpricein2005(Rizal,2007).However,otherfindings—suchasthosefromasurveyconductedbytheMinistryforCooperativesandSMEsin2006(citedinSinaga,2013)—showthatproductcostsandbusinessincomeswereaffectedconsiderably.Thissurveycovered37,950SMEsinover33provincesthatusekerosene,solaroilandgasolineinarangeofbusinesses,includingfoodprocessing,ricemilling,fishery,foodstalls,batik(Indonesiantraditionalcloth),industriesproducingsimplebuildingmaterialsliketilesandbrick,andcitytransportation.Itfoundthatproductioncostsincreasedbyanaverageof28.1percent—inmicroenterprises,by34percent;insmallenterprises,by24.6percent;andinmediumenterprises,by29.6percent—andthatnetincomedroppedby18.37percent.Withrespecttocopingstrategies,thesurveyfoundthatabout76.8percentofthetotalnumberofSMEssurveyedhadincreasedtheirsellingprice;45.4percenthadreducedthesizeorquantityoftheirproducts;63.6percenthadreducedqualityoftheirproducts;39.7percenthadreducedtheirprofitmargins;39.7percenthadincreasedproductioncostefficiency;and6.11percenthadpursued“other”strategies in addition to the above.

Generally,experienceshowsthattheeffectoftheincreaseinthepriceoffuelonSMEstakesplacethroughdirectandindirectchannels.DirectimpactsincreasethetotaloperationalcostsofSMEsbecausetheymustpaymoreforenergy.Thedegreeoftheincreasewillvarybyindustrygroup,accordingtotheamountandtypeofenergytheyconsume.Indirectimpacts,ontheotherhand,occurthroughtheknock-oneffectsthatenergypriceriseshaveonotheraspectsofanSME’sbusiness—forexample,increasingthecostsofotherinputs,thecostofcreditorreducingconsumers’realincome,therebyreducingdemand.IndirecteffectsonSMEsaregenerallyexpectedtobemoresignificantthandirecteffects.


Conclusions and Policy Recommendations

Ingeneral,SMEsarelessenergy-intensivethanlargeenterprises(LEs),buttheyarealsomorevulnerable.ThismeansthatwhilethedirectfinancialimpactsofenergypriceincreasesmaynotbeasseriousasthoseexperiencedbyLEs,thecapacityofSMEstocopewithanynegativeimpactsislikelytobemuchlower,andevensmallnegativeeffectscanbemuchmoresevere.

SMEsareextraordinarilydiverse,andcurrentknowledgeistoopoortoaccuratelypredictindetailhowenergypricingwillaffectdifferentSMEsectorsorgroupsofindustry.Forthetimebeing,anecdotalevidencesuggeststhathistoricalreformstogasolinesubsidieshavemostseriouslyaffectedSMEsinfood-processing,ricemilling,fishery,foodstalls,buildingmaterials(suchastilesandbricks)andcitytransportation.ItisalsoclearthatchallengesaremostprevalentintheeasternpartofIndonesia,whereenergypricesarehighduetolong-distancetransportationoffuelandalackoflocalinfrastructure,including roads from harbours to centres of local economic activity.

ItistheindirectimpactsofenergypriceincreasesthatarelikelytohavethemostseriouseffectsonSMEs,especiallythroughthecostsoftransportation,rawmaterialsandcapital.AllSMEs,nomatterwhattheirsize,aredependentonlandtransportation,whichhasalwaysbeenthemainfocusoffossil-fuelsubsidyreforminIndonesia.Furthermore,energypriceriseshaveabroaderdampeningeffectonconsumerbehaviour,andIndonesianSMEs,especiallySEs,areheavilydependentonlow-incomehouseholdsastheir main buyers.

GovernmentinterventionstoassistSMEscopewiththeimpactoffuelsubsidyreformmightincludestepsto:

1. Increaseaccesstobankfinanceforbusiness-viableSMEs,especiallythosethatareseentohavethepotentialtocontributetoGDPandfutureexports.

2. Reallocate a proportion of subsidy savings to the development of infrastructure and public transportationfacilities,especiallyinruralareaswherethemajorityofSMEsarelocated.FundscouldbereallocatedmoregenerallytohelpimplementIndonesia’sexistingpolicyinsupportofSMEs,whichincludeshumanresourcedevelopment,entrepreneurshipdevelopmentandfinancing.

3. SupportSMEstoimprovetheirenergyefficiencyandgainbetteraccessalternativeenergies.

SMEsshouldalsobeencouragedtotakepreparatoryactions,ofwhichatleastthefollowingtwoshouldbe considered:

1. Appropriatemeasurestoadapttohigherenergypricesbyincreasingenergyefficiency.

2. Explorationoflong-termsolutionstorisingenergycosts.

Professor Tulus T.H. Tambunan lectures at Trisakti University in Jakarta on Indonesian small and medium-size enterprises and cooperatives. He is also the director of the Center for Industry, SMEs and Business Competition studies in the same university.


Energy Subsidies and Social Welfare Programs7 AriA.Perdana,TheNationalTeamforAcceleratingPovertyReduction,RepublicofIndonesia

Overthepastdecade,theIndonesiangovernmenthasseveraltimesincreasedthepriceoffuel.Ateveryincrease,ithasalsotargetedthepoorersegmentsofthepopulationwitharangeofcompensationprograms to help them cope with the adverse effects. Can energy subsidies be reduced without harming thepoor?AndcanthesesubsidiesplayalargerroleintheimprovementofIndonesia’ssocialwelfarepolicies?

Social Welfare in Indonesia

Indonesia’sefforttoreducepovertyisaninternationalsuccessstory.Currently,28millionIndonesians,or11percentofthepopulation,arepoor(BPS,2013),comparedto19percentofthepopulationin2001.

Nonetheless,despiteasteadydeclineinthenumberofthepoor,manypeopleliveclosetothepovertylineandpovertyisverydynamic.Atanygivenyear,manypeoplecanescapepoverty,yetatthesametimeasignificantnumberofotherpeoplefallintopoverty.In2009,forexample,53percentof2008’spoorpopulationescapedpoverty,becomingnear-poororevennon-poor;but22percentof2008’snear-poorpopulationand5percentofthenon-poorpopulationfellintopoverty(Suryahadietal.,2012).

Indonesia’s 2009-2014 medium-term development plan set a target to bring down the poverty rate to 8-10percentby2014,meaningareductionof2-3pointsfromthepovertyrateof11-12percentin2013(GovernmentofIndonesia,2009).ThestrategytoachievethistargetarrangesIndonesia’spovertyreductionprogramsintothreeclusters,basedonthemajorgrouptargetedbyeachone(TNP2K,2011):

1. Cluster 1:Programstargetinghouseholds.Thisclusterconsistsofseveralsocialassistanceprograms:subsidizedrice(Raskin);aconditionalcashtransferprogram(PKHorProgramKeluargaHarapan);educationalassistanceforpoorschoolchildren(BSMorBantuanSiswaMiskin);andsubsidized health care (Jamkesmas).

2. Cluster 2:Programstargetingcommunities.Consistsofseveralcommunity-drivendevelopmentprogramsundertheumbrellaofPNPM(ProgramNasionalPemberdayaanMasyarakat).

3. Cluster 3:Programstargetingmicro,smallandmedium-sizedenterprises(MSME).ThegovernmentisofferingaguaranteeschemeforbankcreditcalledKreditUsahaRakyat(KUR).

How do Fossil-Fuel Subsidies Fit In?

Todate,thegovernmentofIndonesiahasusedenergysubsidiesasacorepolicyinstrumentforstabilizingpricesandprotectingthegeneralwelfareofthepopulation.Tosomeextent,subsidizedenergypriceshave acted as a form of social welfare. Low prices of gasoline and diesel fuel bring down transportation costsshould,inprinciple,helpstabilizelowpricesofgoodstransportedfromruraltourbanareas,orbetweencities.Forlower-andmiddle-incomehouseholds,subsidizedfuelshouldalsolowerthecostofciviliantransportservices.Similarly,low-costenergyforlightingandcookingshould,inprinciple,reducetheir cost.

However,overtheyearsenergysubsidieshavebecomelesseffectiveandefficient.Transportcostshaveincreasedbecauseofbadroadsandinefficientpublictransport;manyareasinIndonesiareportenergypricesthatarefarabovetheirofficialsubsidizedlevels,orhavesufferedfuelshortagesduetocompanies being unable to recover the cost of supply to remote areas. And as Indonesia has grown wealthier,alargerandlargershareofbenefitshasbeencapturedbythegrowingmiddle-andhigh-incomepopulation.Atthesametime,increasingglobalfuelpricesanddwindlingpetroleumreserveshaveincreasedthefiscalcostofsubsidiesforthegovernment.Asaresult,energysubsidiesconsumearoundonefifthtoonequarterofgovernmentexpenditure,asumlargerthanexpenditureondefence,education,healthandsocialsecuritycombined(Tumiwaetal.,2012).Thishasmorethanjustafinancialimplication.Highandincreasingenergysubsidiesmeanlessandlessgovernmentexpenditureonsocialwelfareandinfrastructure.

Inshort,energysubsidies—althoughhavingsomepositiveeffectongeneralwelfare—donotsupportlow-incomehouseholdsveryefficientlyand,astheybecomeincreasinglyexpensive,caneffectively“crowdout” government spending on alternative policies.


Building a Social Safety Net: A Transition from General Subsidies to Targeted Poverty Alleviation

Social assistance programs targeting households are a relatively new development in Indonesia. During theNewOrder,thegovernmentprimarilymadeuseofuniversalsubsidiestostabilizethepricesoffuelandothercommodities,withsomerudimentarytargetingatparticulargeographicareasoremploymentsectors.ThegovernmentfirstintroducedmoresophisticatedsocialassistanceprogramsfollowingtheAsianfinancialcrisisinlate1997,withapackageofprogramsknownastheSocialSafetyNet(Jaring Pengaman Sosial,orJPS).TheJPSincludedprogramsonjobcreation(variouslabour-intensiveprograms,blockgrantsandsmall-scalerevolvingcredit),afoodsecurityprogram,asubsidyforbasichealth services and an education assistance program designed for children of poor families.8

Intheyearsfollowingthecrisis,thegovernmentdevelopedandintroducedanumberofongoingtargetedwelfareprograms.Untilrecently,theseprogramswerescattered,notcomprehensiveanduseddifferenttargeting databases to identify recipients. But gradually the government has strengthened and improved theprograms,andbuiltabetterdatabasefortargeting.9

Overthepastdecade,fossil-fuelsubsidyreformshavebeeninterlinkedwiththedevelopmentofthesenewsocialprograms.Ineachmajorinstancewhenfuelpriceswereincreased—2005,2008and2013—social protection measures were either introduced or expanded at the moment that fuel subsidies were reduced,tohelphouseholdscopewiththeimpactontheirwelfare.

Indonesia’s experiences show strong two-way linkage between energy subsidies and social welfare policy reforms.Fromoneside,energysubsidyreform—reducingsubsidiesandincreasingdomesticprices—hascreatedtheneedtodelivercompensationprograms.Fromtheother,asuccessfulsocialwelfaresystemcan strongly justify further energy subsidy reform. Looking at the relative sophistication of the welfare measuresusedtoaccompanysubsidyreformsin2005,2008and2013—andtakingintoaccounttheincreasingly muted public opposition to reforms—it is clear that the government has continued to learn andimproveuponitsexperiences,andthatconfidenceinimplementingthiskindofdualenergy-and-welfare policy reform has grown.

What Programs Have Been Used to Compensate for Fuel Subsidy Removal?

FoursocialassistanceprogramsthatarepartoftheCluster1programstargetinghouseholdshavebeen used in the past decade to help cushion the impact of fuel subsidy reforms.10 These are ‘regular’ programs,meaningtheyaredeliveredonanongoing,permanentbasis.

• Raskin—Subsidized Rice Program: Raskin (Beras Miskin or “rice for the poor”) is a social assistance schemethatwaspartoftheinitial1998socialsafetynetprograms.Today,Raskintargetssome15 million households (the poorest 25 per cent of the population) by delivering subsidized rice to ‘distributionpoints’(usuallyatthevillagelevel)eachmonth.Eligiblevillagerscanpurchaseupto15kilogramsofriceeachat20-30percentofthemarketprice.11Aswithenergysubsidies,foodsubsidyprograms like Raskin rarely perform as intended. Many studies have documented problems such asbeneficiariesbeingdeniedtheirfullallotmentofrice,non-poorhouseholdspurchasingtherice,delayeddistribution,corruptionandfraud.12

• Jamkesmas—Health Insurance:LikeRaskin,Jamkesmas(Jaminan Kesehatan Masyarakat,thepublichealthinsurancesystem)originatedinthe1998socialsafetynetera.Today,Jamkesmastargets76.4millionIndonesians,about30percentofthepopulation,providingbeneficiarieswithfreehealthcareservicesatPuskesmasandClassIIIpublichospitals.Asaschemetomitigatetheimpactsoffuelsubsidyreform,Jamkesmasdoesnothelphouseholdscopewithahighercostoflivingintheshort-term,butitdoeshavethepotentialtosignificantlyimprovetheirwellbeinginthemedium-tolong-term.A major challenge facing its continued expansion and effectiveness is that health facilities are simply notavailableorareinadequatefortheperformanceofmanyhealthservices.

• BSM—Assistance for Poor Students: BSM (Bantuan Siswa Miskin,literally“assistanceforpoorstudents”) is a cash assistance program for school children from poor households who are enrolled inelementaryschool,juniorsecondaryschoolandhighschool,intendedtocovernon-tuitionschool-relatedexpenses,mainlythecostoftransport.ItprovidesacashtransferoffromIDR360,000(US$36)toIDR1,000,000(US$100)perstudentperyear,dependingontheschoollevel.Inthesecondhalfof2013,followinganincreaseinfuelprices,theBSMwasexpandedevenfurthertotargetallstudentsfromhouseholdsinthebottom25percentile,anumberequivalentto15.4millionchildren(Rahayu,2013).Asaschemetohelphouseholdscopewiththewithdrawaloffuelsubsidies,theBSM


6Thisarticlesummarizestheauthor’sfullertreatmentofthesamesubjectinFossil-FuelSubsidyReformandSmallandMedium-SizedEnterprises(SMEs):Theimpactsandpossibleresponses,availableathttp://www.iisd.org/gsi/sites/default/files/ffs_indonesia_briefing_SMEs.pdf

7 Thisarticlesummarizestheauthor’sfullertreatmentofthesamesubjectinTheFutureofSocialWelfareProgramsinIndonesia:FromFossil-FuelSubsidiestoBetterSocialProtection,availableathttp://www.iisd.org/gsi/sites/default/files/ffs_indonesia_briefing_welfare.pdf

8Foranoverview,seeDaleyandFane(2002).

9Foramoredetaileddiscussiononpastsocialassistanceprograms,seePerdanaandMaxwell(2012)

10SeealsoWorldBank(2012)foradetaileddiscussionoftheseprograms.

11Accordingtothecurrentprogramdesign,Raskinistobedeliveredmonthly.However,inpractice,manyvillagesreceiveRaskinonlyonceeverytwotothreemonths,sometimesevenlessoften,duetologisticalconstraints.In2013,aspartofthecompensationofferedforthefuelpriceincreasethatyear,itwasdecidedthatRaskinwastobe distributed 15 times a year through 2014.

12HastutiandMaxwell(2003),SumartoandSuryahadi(2010).

Notes

reduces households’ education-related expenditure and contributes to long-term poverty reduction bypromotinggreaterschoolattendance.Atthesametime,however,itonlybenefitshouseholdswithchildrenofschoolage,andthusdoesnotextendtoallhouseholdsaffectedbyenergypriceincreases.

• PKH—the conditional cash transfer:In2007,thegovernmentlaunchedProgramKeluargaHarapan(PKH,orTheHopefulFamilyProgram).PKHtargetshouseholdsatthebottom7-10percent(considered as ‘very poor’) including at least one of the following: a pregnant mother; children under the age of 6; elementary school children (aged 7-12); or junior secondary school children (aged 12-15).PKHhouseholdsneedtoensurethatpregnantmothersvisitahealthcarecentreatleastfourtimes during their pregnancy; that children under six visit a health clinic to measure their weight and height as well as to receive vitamins and scheduled immunization; and that school-aged children are enrolled in schools and maintain a minimum 85 per cent attendance each month. The program covers 2.4millionhouseholds,andwillexpandtocover3.2millionhouseholdsin2014.HouseholdswillreceiveuptoIDR2,800,000peryear(US$280),dependingonhowmanyfamilymembersareenrolledinthePKH,andiftheyfullycomplywithallconditionsforeligibility.AswithJamkesmasandtheBSM,thePKHcanoffershort-andlong-termbenefitstohouseholdsaffectedbyfuelsubsidyreforms,butthis will not include all households affected by energy price changes. The biggest challenge to its expansionisdisparityinsupply-sideavailability.Inremoteareas,mainlyintheEasternpartofthecountry,poorhouseholdsmayliveinanareawithoutadequateaccesstotransportandwheretheclosest health facility is more than 50 km away.

Concluding thoughts

Indonesia needs to continue reforming its energy policy while still in the midst of improving and expanding itswelfarepolicies.Energysubsidieshaveconsumedasignificantportionofthenationalgovernment’sbudget.Fuelpriceincreaseshavecreatedsomeroomforthegovernmenttospendonotherthings,frominfrastructure to social welfare programs. But the yawning gap between economic and domestic fuel pricescontinuestodistortthesignalofscarcityandleadtooverconsumption.And,asanon-targetedinstrument,energysubsidiescontinuetobenefitthepoorlessthantherich,whoconsumemorefuel.

There is still much work to do. The government needs to set out a comprehensive plan for energy sector reform aiming to reduce dependency on fossil fuels. Subsidy cuts should be just one part of the largerenergysectorreforms,thepurposeofwhichshouldbetonarrowthegapbetweendomesticandinternationalfuelprices,andtomakepricesmoreefficientlyreflectscarcity.Theextrabudgetresourcesderivedfromfuelsubsidycutscouldbereallocatedtothreebroadareas:infrastructuredevelopment,public transport facilities and further improvement of social welfare programs. The main social welfare programsinneedofgreatergovernmentfundingconcernhealth,nutritionandeducation.Butdespitethechallengesitfaces,Indonesia’sgovernmentdoesnotneedto“reinventthewheel”.Ithasalreadydevelopedmanyinstrumentsthatcanserveasthebuildingblocksofamoreeffectiveandefficientfuturewelfare system.


The Last Word

Making energy policy work for economic growth: time for a bold change in directionZamroniSalim,Phd,theEconomicResearchCentreoftheIndonesianInstituteofSciences

Indonesia’seconomyhasperformedrelativelywellinthepastfiveyears,enjoyingsteadygrowthofaround6%.Thatisanimpressivefigurewhenseeninthecontextofastill-strugglingworldeconomyandissomethingtobethankfulfor.Nevertheless,isthisthisrateofgrowthsufficientornot?TakingintoaccountIndonesia’sexistingmacroeconomicsituation(i.e.aninflationratethatisundercontrol,alowunemploymentrateandasufficientlyfavourableexchangerate),ourgrowthcouldstillbeacceleratedandmade more sustainable.

Budget Deficit and Current Account

Economichealthintherealandbankingsectorsisaprerequisiteforhighandsustainableeconomicgrowth.Therealsectoriswheredifferentfiscal,monetaryandbankingpoliciesintersect.Alongsidebroadmacroeconomicpolicy,therealsectoralsoneedsaclearsectoralpolicy.Anenergypolicycapableof supporting the real sector productively is a key part of achieving sustainable economic growth. In Indonesia,thisdoesnotonlyconcernthefuelsubsidyanditscost,butalsohowtoallocateenergyresources most effectively for the needs of domestic industry and consumers.

Indonesiaisnolongeranetexporterofoil.Today,ithasbecomeanetimporter.Nevertheless,itisstilltrapped in a cycle wherein oil dominates the economy across various dimensions. This is evident from therolethatoilplays(i.e.thepriceofIndonesiancrude,oilandgasproduction)asthemaindeterminantintheformulationofthestatebudget.EnergypolicyhasdirectimpactsonIndonesia’smacro-economy,includingaspectssuchasinflation,wagerates,employment,thetradebalanceandthestatebudget.Inflationinparticularissignificantlyaffectedbyfuelsubsidyreform:increasedfuelpriceswillleadtoageneral price increase in a relatively short time.

Budgetary funds are allocated to fuel subsidies every year based on the volume of fuel that the governmentestimatespeoplewillconsume.Butthebudgetalwaysmissesthetarget.Inpractice,theamountconsumedisalwayshigherthanthepredictedvolume.In2013,forexample,thevolumeoffuelsubsidyandbiofuelwasinitiallysetat46.01millionkiloliters,whilethevolumeof3kg-cylinderliquidpetroleumgas(LPG)was3.86millionmetrictonnes.Thevolumeforfuelandbiofuelswasthenrevisedto48millionkiloliters,whilethevolumefor3kgcylinderLPGwasrevisedto4.39millionmetrictonnes(FiscalNoteandStateBudgetProposal2014,pp.4-103).

Budget allocation data also reveals that subsidies today are focused on consumption and that this trend has only become more pronounced with time. Consumption subsidies (largely for fuel and electricity) madeup77.8percentofthetotalsubsidyallocationin2007,andby2013thisamounthadincreasedto86.1percent.Subsidiesfocusedonmoreproductiveactivities(suchasforfertilizer,seeds,creditprograms,etc.)amountedtoonly22.2percentofthetotalallocationin2007(KeyStateBudgetStatistics2005-2010,p.12),andby2013thishaddecreasedto13.9percent(FiscalNoteandStateBudgetProposal2013,p.11).Thequestionis:howdothestate’sfinancescopewiththesebadlydesignedsubsidies?

Overthepastfiveyears,therehasbeentrendofincreasinglylargebudgetdeficits,fromIDR4.1trillion(0.08percentofGDP)in2008toadramatic224.2trillion(2.38percentofGDP)in2013(FiscalNoteandStateBudgetProposal2014,p.2).Itispredictedthatthedeficitwillreachasmuchas154.2trillionin2014,or1.49percentofGDP(FiscalNoteandStateBudgetProposal2014,p.2).Thefuelsubsidy


isfrequentlyconsideredtobethesourceofthestate’sbudgetdeficit.ItisclearthatIndonesia’sbudgetdeficitcanonlybereducedbyeitherincreasingIndonesia’sincomeorbyreducingsomeofitsinefficientbudgetary expenditure.

Inadditiontobudgetdeficits,thenationaleconomyinthepasttwoyearshasbeencontinuallyshadowedbyacurrentaccountdeficitof3percentofGDPonaverage.InQ42013,thecurrentaccountdeficitwasapproximatelyUS$4billion(1.98percentofGDP)(BankofIndonesia,2014).ThesizeofthisdeficitiscausedmainlybythehighlevelofoilandgasimportsthatreachedUS$45.27billionin2013.In2014,thecurrentaccountdeficitispredictedtoreach2.5percentofGDP(MinistryofFinance,2014).Amongthemaincausesarethehighlevelofimports,especiallyfuel,andafallindemandofsomeofIndonesia’spriority export commodities.

Infact,thefuelsubsidywouldcausenoproblemifitweredistributedeffectivelytotherightfulbeneficiaries:thepoor.Ifthefuelsubsidyweretogoonlytothepoor,thenover-consumption,alongwithitsimplications,couldbeavoided.Asforbudgetandcurrent-accountdeficits,theycouldbereducedorovercome if the government were serious about implementing an energy policy that is concerned not only withfuelover-consumption,butalsowiththedevelopmentanddeploymentofalternativeenergy.

Problems in Energy Management in Indonesia

HowisenergypolicyinIndonesiaimplemented?Thegovernmentusuallyemploysenergypolicytocontrolenergydemand,ratherthanenergysupply.Forexample,itseekstolimitfuelconsumptionbyrichpeople,anddistributesfuelcouponstothepoor..Thiskindofpolicywillfacegrowingdifficulties,however,giventhatconsumersbothrichandpoorhavegrownaccustomedtosubsidizedenergy.Inthepast,suchchanges—especiallysubsidyreform—havesparkedavarietyofangryresponses,includingprotestsandriots.

AnotherfactofsomeconcernisthatsubsidiesinIndonesiaaremostlyprovidedforconsumption,notproduction-oriented activities. Unlike developed countries that tend to provide subsidies and other aidstotheproductionside(suchasfarmersandtheagriculturalsector),Indonesia’ssubsidiesprovideconsumption-orientedsupport,suchasthefuelsubsidies,socialwelfareprogramslikeRiceforthePoor(Raskin),cashtransfersandsoon.

Inthefieldofpetroleumexplorationandexploitation,Pertamina,ourstate-ownedcompany,hasbecomeasecondaryplayerinitsowncountry,bothforoilandgas.Attheupstreamlevel,Pertaminacannotexpandproductionduetoanumberoffactors,includingoften-inaccurateexplorationdataandinsufficientinvestmentandregulatorysupport.Atthedownstreamlevel,alackofdevelopmentinenergyinfrastructure has led to a situation where oil-product output is likely to remain stagnant or even decline fromyeartoyear,increasingIndonesia’srelianceonimports.

Sofar,thegovernmenthasfocusedonincreasingcrudeoilandgasexportsandimportingrefinedoilandgasproducts.Meanwhile,theproductionofelectricityisoftenhamperedbythedifficultiesinsupplyingcoalandgastopowerplants.EvenwiththeDomesticMarketObligation(DMO)policyinaccordancewithLawNo.22/2001,whichobligesoilandgascompaniestodevote25%oftheirproductiontodomesticconsumptionneeds,thatquotaitselfiswaybelowwhatisneededtoaffordenergydemand.Inthisrespect,Indonesiahasnotadequatelyprioritizedthedevelopmentofnewandrenewableenergy(NRE).

New and Renewable Energy (NRE)

Nevertheless,Indonesiahasmanyopportunitiestomeetatleastsomeofitsenergyneedswithnewandrenewable energy technologies.

Indeed,thereisalreadyastronglegislativefoundationofenergypolicyinthisarea,intheformofanumberofprovisionsforexpandingtheuseofrenewableenergy,includingderivativeregulationsandanenergypolicyroadmapforenergydiversification,includingtheuseofrenewables.Now,wealsohave a roadmap for our future energy mix: Vision 25/25. Indonesia’s energy policy is summarized in ActNo.30/2007onEnergy,andotherregulationsonelectricityandgeothermal,includingPresidentialRegulationNo.5/2006andotherderivativeregulations.TheaforementionedPresidentialRegulationstatesthatIndonesiatargetsa17%shareofnewandrenewableenergyinitsprimaryenergymixby2025,madeupofamixofbiofuels,biomass,nuclear,hydro,solar,wind,geothermal,andliquidcoal.

Indonesiaalsohasabundantalternativeenergyresourcesthatcanbedeveloped,suchassolar,biomass,hydropower,geothermal,biodiesel,andbioethanol.


Source:MinistryofEnergyandMineralResources,2011

But much more could be done to turn Indonesia’s ambitions and potential into reality. The target set forth inPresidentialDecreeNo.5/2006,andthenlaterinVision25/25,actuallyshowsIndonesiastillrelyingheavily on unrenewable fossil fuels in its energy policy. And no concrete steps have taken by the national orlocalgovernmenttoensurethatthetargetswillbereached,despitethemandateintheEnergyLaw.Governmentincentivestobusinessactorsandconsumersarefarfromsufficient.ThetwoformsofsupportfortheindustrymentionedintheEnergyLaw– funding for research and development and the obligation to use domestic human and technological resources where available – have still not been enough for the industry to achieve its economic potential.

Final thoughts

EnergypolicyinIndonesiaisstillnoton-track,andmanyreformsremainstuckatthediscussionstage.Energypolicyshouldbedirectedtowardreallocatingandrestructuringthefuelsubsidytoproductivesectorssothatbudgetdeficitscanbeavoidedandthecurrentaccountreturnstosurplus.Inaddition,energypolicyshouldbedirectedtocreatenewandrenewableenergyataneconomicscale,tofulfiltheneedfordomesticenergyataffordableprices.Realsupport,includingvariousproductionincentives,must be created for the new and renewable energy industry sector. The continued absence of political willandconcretegovernmentsupportinhandlingIndonesia’senergyissueswillleadtogrowingdeficitsinstatebudgetandcurrentaccountalike.Ontheotherhand,ifenergypolicyisimplementedproperly,Indonesia could achieve a much higher level of sustainable economic growth.

Figure 10: Vision 25/25 – Modified Energy Mix Target In 2025


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About IISDThe International Institute for Sustainable Development (IISD) contributes to sustainable development by advancing policy recommendations on international trade and investment,economicpolicy,climatechangeandenergy,andmanagementofnaturalandsocialcapital,aswellastheenablingroleofcommunicationtechnologiesintheseareas.Wereportoninternationalnegotiationsanddisseminateknowledgegainedthroughcollaborativeprojects,resultinginmorerigorousresearch,capacitybuildingindevelopingcountries,betternetworksspanningtheNorthandtheSouth,andbetterglobalconnectionsamongresearchers,practitioners,citizensandpolicy-makers.

IISD’svisionisbetterlivingforall—sustainably;itsmissionistochampioninnovation,enabling societies to live sustainably. IISD is registered as a charitable organization inCanadaandhas501(c)(3)statusintheUnitedStates.IISDreceivescoreoperatingsupportfromtheGovernmentofCanada,providedthroughtheCanadianInternationalDevelopmentAgency(CIDA),theInternationalDevelopmentResearchCentre(IDRC),andfromtheProvinceofManitoba.TheInstitutereceivesprojectfundingfromnumerousgovernmentsinsideandoutsideCanada,UnitedNationsagencies,foundations and the private sector.

About GSIGSIisaninitiativeoftheInternationalInstituteforSustainableDevelopment(IISD).GSIputsaspotlightonsubsidies—transfersofpublicmoneytoprivateinterests—and how they impact efforts to put the world economy on a path toward sustainable development. In cooperation with a growing international network of research and mediapartners,GSIseekstolaybarejustwhatgoodorharmpublicsubsidiesaredoing; to encourage public debate and awareness of the options that are available for reform; and to provide policy-makers with the tools they need to secure sustainable outcomes for our societies and our planet.

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