Parting the fuel divide

By Lauren Gumbs

Indonesia is going to save a massive A$9 billion in 2015, by increasing diesel and gasoline prices RP 2,000 per litre (18c).

That’s $9 billion that can be allocated to poverty alleviation, health and infrastructure out of around $22 billion that is spent on the subsidy each year.

It keeps petrol at half the market price, RP6,500 per litre (66c), and other types of fuel similarly low.

To an Australian who pays around $1.50 a litre, a fuel subsidy is a fiscal profligacy that could not be justified as it reduces the cost of living for the wealthy and middle class at the expense of the poor who are left without adequate spending on things like health and education.

While Australia has its share of dubious tax breaks and schemes that favour high income earners, it would be unimaginable to provide concessions for private vehicle owners, encouraging more cars on the road and perpetuating import and fossil fuel dependency.

Indonesia is actually an importer, not a producer, and the expense of subsidising fuel has left the country with an account deficit for the past two and a half years.

Many Indonesians are heavily invested in cheap fuel and fear not just inflation of the cost of living, but corruption; savings they might never see translated into economic outcomes.

Fuel subsidy is a popular program for obvious reasons – using a vehicle is cheap, using a generator is cheap, doing business is cheap - and this does trickle down to the cost of living, but it is also an unsustainable program that disproportionately benefits the well off.

The price of subsidised fuel is not a ‘true’ price, it distorts the cost of resources and contributes to over consumption without actually adding value to the economy.

Fuel subsidy, like electricity subsidies, is a luxury concession and far outweighs spending on health, education, defence, social security or the environment.

Even in 2011 it was reported that in Indonesia the top 40 percent of income earners make up 70% of gasoline consumption and in countries with fuel subsidies, on average, the top income earners consume six times as much fuel as the bottom quintile.

In addition, the top five percent of households consume 82 litres of subsidised gasoline per month, whereas the bottom five percent consume only 1.7 litres.

The World Bank reported that the top 50 percent urban rich represent 84 percent of consumption. The bottom 10 percent consume less than one percent.

Jokowi inherited a budget from his predecessor but has since acted on an election pledge to reduce the fuel subsidy, allocating RP443 trillion (AUD $41.8 billion) for 2015-2019. 

He did not need parliamentary approval this year but he will need the legislature to sign off on the budget next year, which dominated by his opposition, will pose a challenge. 

Jokowi was unable to convince former President Susilo Bambang Yudhoyono (SBY) to reduce the amount before he left office to make room for Jokowi’s reform programs.

It was unlikely SBY would acquiesce his last budget to enable Jokowi’s reforms and shoulder the blame for price hikes, especially as he had been down that road before.

Over the past five years SBY spent RP 713 trillion (UD $67.3 billion) on fuel subsidies alone.

Yudhoyono increased fuel costs last year (some may remember lines extending kilometres from the local Pertamina as people rushed to fill up cars and containers after gasoline went from RP4,500 to RP6,500).

Increased fuel prices are predictably accompanied by fierce protests because many Indonesians believe the subsidies will not be properly re-distributed.

Fuel subsidies are a direct discount that can be felt in the wallet and benefits like infrastructure and poverty alleviation programs could be years into the future - if they ever materialise at all.

In a country facing endemic corruption in resource and service delivery, losing such a concrete concession program seems an unconscionable risk to many. 

The reality is that the ones who benefit the most from the subsidy are also those who can afford to absorb an increase, but because fuel subsidies look so much like a benefit, most people believe they are being short-changed. 

Students and workers have been particularly riled at the impost and staged protests around the country when Yudhoyono introduced cuts in his final term. They are vocal once again as President Jokowi introduces the new price increases. 

Yet such a move so early in the game could make him deeply unpopular and really create a frenzy – IMF mandated fuel subsidy cuts were part of Suharto’s final undoing, resulting in riots that eventually overthrew him.

Jokowi however, has stuck to a clear platform to address poverty and overhaul the economy and he is determined to phase out fuel subsidies across his four year term. 

He said he would tackle poverty, he said he would upgrade infrastructure, he said he would improve the economy and he has logically gone after the most obvious example of misplaced funds that will free up the budget to implement real, nation changing reform programs.

Jokowi now faces stiff resistance from those who have the most to lose from a redistribution of luxury concessions but also from those who believe it is cheap fuel that keeps the cost of living down.

The hard part is getting people to understand that fuel subsidies are not normal and are contributing to the wealth divide that drives the rich/poor polarity.

An increase in the price of fuel will have immediate effects, it will push the price of food and other commodities up, but this will level out as funds are redistributed. 

After all fuel subsidies made up 55 percent of total subsidies in 2011, a mind boggling amount that should be spent on pulling Indonesians out of poverty, and savings from cuts can be used to stall inflation in the aftermath of a fuel increase when there is some upheaval while the market settles.

But is Jokowi’s plan any different from Yudhoyono’s and will he have success in eroding fuel subsidy dependence? 

SBY was hesitant to take the plunge but in 2013 lawmakers voted in favour of a revised budget and, amid violent protests, fuel increased 33 percent.

SBY set aside $900 million for cash hand-outs to poor families but Jokowi said he will not do this because the money is spent frivolously on things like phones and phone credit rather than saved.

Instead he wants to encourage people to bank their money, so he will make funds available for withdrawal from banks using a welfare card.

Jokowi will use the $9 billion in savings to support farmers, fisherman and workers and to build roads and establish basic infrastructure like irrigation.

Not only will programs like this assist productivity, it will make transportation and doing business in Indonesia much more efficient – and society far more fair.

Spending money on programs that improve people’s quality of life and ability to become productive will allow for greater social mobility, a less prominent wealth divide and ultimately a stronger economy.

If Jokowi is to achieve a market based rate within four years, he will need to reduce dependency gradually, during low inflation periods, while at the same time making sure savings are distributed to transparent reform programs with tangible benefits.

If the Indonesian people can see what they are getting and where the money is going, Jokowi can rebuild public trust and administer a budget that adds value not just to the economy but to people’s lives.

Lauren Gumbs is a postgraduate Human Rights student and Director of Social Media at the Indonesia Institute.