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Fuel Subsidy in Indonesia, Should/ Should Not?
CHAPTER I. BACKGROUND
1.1. Background of Challenge
Since year 2000, the world oil price instability has been appeared. For the next three
years, the price of oil keeps increasing along with the decrease of the reserve capacity. There
are several factors which influence this instability. One of them is the perception towards the
low oil reserve capacity. Second is the increase of oil demand and in other side there is a
worry of the incapability of the producer countries to increase the production, while the
problem of oil refinery utilization level and the decrease of the gasoline supply in the United
States also has the influence towards the oil price that keeps increasing. (Republika Online,
Tuesday, June 28th, 2005).
This phenomenon then was being responded by the Government of several countries
in the world by increasing the oil fuel price. It is the same with Indonesia. The Indonesian
legislative assembly finally agreed the government plan to increase the oil fuel price on
Tuesday, 27 September, 2005 for minimum 50%. The policy of the increase of the oil fuel
price creates a significant impact towards the economy so that this policy creates lots of
protest from all groups.
Regarding the fact that oil Fuel (BBM) is a commodity which holds the really
important role in every economic activity, the decrease of the oil fuel subsidy and the
increase of oil fuel price is not only enlarging the burden of the poor people, but also for the
business environment. It is because there is increasing in the production expenses that
increase the total cost. As the effect, the main production price is increasing and cause the
increase the product’s selling price. The multiple effects of the soaring oil fuel price are the
increase in the factory overhead because of the increase of the raw material, transportation
cost, added with the demand of the employees who ask for the wages or salary increase
would make the total revenue of the company getting smaller and smaller. In other side, with
the increase of the oil fuel price will burden the live of the society which at the end will
decrease the society purchasing power as a whole. The decrease of the society purchasing
power will make products which are produced by the companies not sold as the target, which
at the end decrease the company’s revenue. If the company experience long term lost because
of the higher cost rather than revenue, it would lay off the employees or even close the
Fuel Subsidy in Indonesia, Should/ Should Not?
company. As further effect, there would be a decreasing number of the Enterprises, and the
increasing number of unemployment.
However, some people say that the giving of the subsidy oil fuel is not really
effective. It is because the one who directly feel the benefit is the one who has car or
motorcycle, which usually is the middle-high class. While the poor people only feel the
benefit indirectly through the public transportation. It is not necessarily true because based on
Ditlantas Pom and survey of BPh Migas, the proportion of fuel consumption/ capita/ day for
public transportation including bus is only 0.9% from the total consumption. Therefore some
people prefer the non-fuel subsidy which is more direct and seems pro-poor.
Nevertheless, the effectiveness of giving oil fuel subsidy and non-fuel subsidy are
still need to be questioned. In one side some people might say that by reducing the number
of oil fuel subsidy could increase the number of poverty, decrease the number of SME
(Small-Medium Enterprise), and increase the unemployment. However, in another side, by
giving the fuel subsidy, it is not really effective in helping the civilians who are in need and
could burden the government financial condition. Thereby some people might think that
direct assistance or non-fuel subsidy would be more helpful and effective.
Hence, in this research we want to examine the effectiveness of fuel subsidy and
non-fuel subsidy towards the poverty rate, unemployment rate, and the number of
Small-Medium Enterprises.
1.2. The Comprehension of Fuel Subsidy
Subsidy is the payment which is done by the government to the enterprises or
household to achieve several objectives that can make them producing or consuming a
product in a bigger amount or with a cheaper price.
In the case of fuel subsidy, the government allocates several amount of budget to
cover the real oil price, so that the fuel price in Indonesia would be lower than it is supposed
to be. In other words, Indonesian people could buy fuel in the cheaper price and in the larger
amount. The policy of giving fuel subsidy in Indonesia has been started from period of
1977/1978 with the purpose of maintaining the stability of national economy through
creating the stability of BBM price as the strategic commodity.
Fuel Subsidy in Indonesia, Should/ Should Not?
Nowadays there are many rumors about the impacts of decreasing rate of subsidy,
which will increase the fuel price. However, the typical Indonesian people is when there are
issues that the fuel price will increase, or even before that, all the goods price will be affected
and increased.
There are many critics toward this issue. The fuel subsidy somehow help the poor
people. However, it is more beneficial for the rich people. Therefore, from year 2000 until
now, government is trying to minimize the total fuel subsidy, one of the way is with
setting the selling price of fuel same as the cost of Pertamina. This way had the purpose to
decrease the monopolist level of Pertamina as the only one party that has the right to provide
BBM in Indonesia at that time. So, government hope that the people will pay the appropriate
value, less than what Pertamina has as the profit all that time. For lowering the fuel subsidy,
government has some compensations for the poor people. One of the compensations is giving
cas direct assistant or “Bantuan Langsung Tunai”. But if we look deeper, this compensation is
not making people become productive, on the contrary people will be more consumtive with
the fresh cash in their hand.
In giving the fuel subsidy, there are some laws which regulate the procedures, which
some of them are:
1. Law No. 22 year 2001article 8
Government has the obligation to guarantee the availability and the fluency of the
fuel distribution which is the vital commodity and has the control over most of the
citizens in Indonesian Republic.
2. President Regulation No. 55 year 2005 about the retail fuel selling price in
state:
- The retail selling price of petroleum (kerosene) for the households and small
industries including PPN for every litter is Rp 2.000,00 (article 2 verse 1)
- Selling price of retail premium gasoline and solar oil for the small industries,
transportation, and general services including PPN for every litre is Rp
4.500,00 and Rp 4.300,00 (article 2 verse 2)
- The retail selling price should be appropriate with the price of economics
which can be seen as the raise or slope of the price (article 9 verse 1)
- The adjustment of fuel retail selling price and what has been meant at the first
article is set by Ministry of Energy and Mineral Resources based on the result
Fuel Subsidy in Indonesia, Should/ Should Not?
of the agreement reached by the concerned institution which is coordinated b
Ministry of Economic Coordination (article 9 verse 2).
1.3. The Comprehension of Non-Fuel Subsidy
The non-fuel subsidy is the subsidy given by the government other than fuel subsidy.
In this report, we are focusing mainly to the electricity subsidy, food subsidy, seed subsidy,
fertilizer subsidy, credit interest subsidy, cash direct assistance subsidy, and the rest
subsidy goes to other subsidy.
1. Electricity Subsidy
This subsidy is given to the electricity customers, who are social customers,
households, business, and industries, with power given up to 450 VA for the
consumption up to 60 kwh per month. The subsidy is given in the term of Basic Price
of Electricity; of in Bahasa we call it ‘Tarif Dasar Listrik’ (TDL). TDL is a set to help
the people to have the even distribution and price.
The ups and downs in the TDL rate is based on:
1. Development of exchange rate between rupiah to US Dollar
2. TDL Policy
3. The calculating mechanism in electricity subsidy
However, there are many opinions that electricity subsidy mostly not used by the poor
people, but the advantage goes to the rich people. Thus, government is now obtaining
the subsidy for the usage of 6600 volt ampere and more, so that the subsidy will be
more useful for the poor people not for the rich ones.
2. Food Subsidy
This subsidy is given to the poor people in Indonesia as the supply of cheap
hulled rice. This would be done through the program of “rice for the poor” that
provides cheap price. It has the purpose to guarantee the distribution and availability
of hulled rice with reachable price for poor people in Indonesia. It has been
distributed through Perum Bulog. The amount of food subsidy is influenced by:
1. The base price of hulled rice
2. The total poor families who become the subsidy target
Fuel Subsidy in Indonesia, Should/ Should Not?
With this subsidy, the subsidize target will be given 20 kilograms of hulled rice for 12
months, only with Rp 1000,00 per kilogram.
3. Credit Interest Subsidy
This subsidy is given to cover the difference between market interest and the lower
interest which has appointed by the government for various credit programs, such as
‘Kredit Ketahanan Pangan’, ‘Kredit Koperasi Primer’, ‘Kredit Usaha Tani’, and many
more, including for the stuck credit. The purpose of giving this subsidy is to fulfill
the fund with lower interest rate compare to the market rate. This subsidy is
given to:
1. Credit which the source of fund is from ex-liquid credit from Bank of Indonesia
and the liquidation of certificate of government’s liability as the replacement of
the return of ex-liquid credit from Bank of Indonesia, which is developed by three
BUMN, which are PT Permodalan Nasional Madani, Bank Tabungan Negara, and
Bank Rakyat Indonesia
2. Credit from common banks which are cooperating in Kredit Usaha Tani and
helping the availability of Kredit Ketahanan Pangan
This subsidy is given through the financial organization which belongs to the country,
like PT Permodalan Nasional Madani, some BUMN banks, and Bank Pembangunan
Daerah which distributing various credit programs and credit fro owning simple
houses. Besides, it is also given by some private companies, like PT Bank Agroniaga,
PT Bank Central Asia Tbk, and PT Bank Bukopin. The subsidy allocation will be
used for interest credit for Kredit Ketahanan Pangan and KPRSh.
4. Seed Subsidy
This subsidy is given for the superior rice plant seed, soybean, hybrid corn, composite
corn, and cultivation fish, so that the farmers can get high quality seed with reachable
price. By giving this subsidy, the government hopes that the production rate will
increase so that Indonesia can export the agriculture products.
This subsidy is given through the state seed producers, which are PT Sang Hyang
Seri, PT Pertani, Penangkar Swasta om the coordination of PT Sang Hyang Seri and
PT pertani, also center technical executor unit in the department of naval and fishery.
Fuel Subsidy in Indonesia, Should/ Should Not?
5. Fertilizer Subsidy
This subsidy is given as the consequences of government policy in the availability of
fertilizer for the farmers with the lower selling price compare to the market price. The
main purpose of the fertilizer subsidy is to maintain fertilizer price so that it will
stay reachable for the farmers, so that it can support the increasing of farmers’
productivity, so it will encourage the food endurance program. The amount of
fertilizer subsidy is influenced by:
1. The cost of supplying the subsidize fertilizer which determined by the difference
between the highest retail price with the market price (Rp/kg)
2. The total volume of subsidize fertilizer
The subsidy distribution is being done through some BUMN which are the fertilizer
producers. There are five fertilizer producers which are given the subsidy for Urea
fertilizer, which are PT Pupuk Sriwijaya, PT Pupuk Petrokimia Gresik, Pt Pupuk
Kujang, PT Pupuk Kalimantan Timur, and PT Pupuk Iskandar Muda) and also 1
BUMN fertilizer producer which is given non-urea fertilizer subsidy, which is PT
Pupuk Petrokimia Gresik.
6. Direct Cash Assistant
This subsidy which called Bantuan Langsung Tunai in Bahasa, was first given to the
poor people in 2005 as the compensation of the increasing fuel price that caused
by the decreasing fuel subsidy in Indonesia. The cash can be taken at the nearest
post office and if the place is out of reach, the post offices will send the cash to the
place which will be scheduled. Usually the each of the listed poor family will get Rp
100.000,00 per month, which if we sum for 3 months they will get Rp 300.000,00.
However, there are many problems arise while this subsidy given. For example, there
are many people who are competing to get more money than they should get.
Besides the six non-fuel subsidies which have been discussed above, there are some
more subsidies which have been given by the government. One of them is the education
subsidy. Our group believes that education subsidy is actually the most important subsidy that
have to be given by the government for the children whose families cannot afford to finance
the school tuition. Investment in education is a valuable long-term investment. The developed
Fuel Subsidy in Indonesia, Should/ Should Not?
countries like Japan, Germany, and USA are the countries that pushed themselves to allocate
the fund in education sector even in the crisis era. However, as we can see that in Indonesia,
government is not really concern about our education sector. We should really learn from
those developed countries so that in the future we will have better human resources.
The other non-fuel subsidy is in infrastructure. Because of the government regulation
to decrease the fuel subsidy, there is increasing number in infrastructure subsidy nowadays. It
makes REI can build simple houses with cheaper price. It is beneficial for people with the
lower income because they can buy the houses with affordable price. There are still many
other non-fuel subsidy, like health subsidy, public service obligation subsidy, however
we will not discuss it further in this report.
1.4 The Comprehension of Small Medium Enterprise, Unemployment, and Poverty
1.4.1. Small Medium Enterprises
1.4.1.1. The Classification of Business in Indonesia
SME or Small and Medium enterprises are companies whose headcount or
turnovers fall below certain limits. The abbreviation SME occurs commonly in the
European Union and in international organizations, such as the World Bank, the United
Nations and the WTO.
The classification of enterprise is different in each country. In Indonesia, an
enterprise is qualified as Micro, Small or Medium Enterprise if they fulfill criteria
below:
1. Micro Enterprise
Annual turnover of Rp 100 millions
Net worth (excluding land and building) of maximum Rp 25 millions
Number of employees less than 10 person
2. Small Enterprise
Maximum annual sales of Rp 1 billion
Maximum net assets of Rp 200 millions
Number of employees between 11 to 50 persons
3. Medium Enterprise
Maximum annual sales of Rp 1 billion
Fuel Subsidy in Indonesia, Should/ Should Not?
Net assets of Rp 200 millions
Number of employees between 51 to 300 persons
1.4.1.2. Role of SME to Indonesia Economy
SME has a big role in developing the economy of Indonesia. The roles of SME
are:
SME act as the buffer economy, which helps in employment creation in Indonesia
(they employ 99.45% of employed people in Indonesia).
SME play an important role as the biggest industry in Indonesia, in terms of
number in total (99.8% of total industry, based on 2006 published data).
SME are a labor intensive industry, meaning that this will absorb more labor,
leading to the decreasing number of unemployment in Indonesia.
SME are more effective in increasing the productivity for both investment and
technology.
1.4.1.3. Problems of SME
Although the roles of SME for Indonesian economy are very significant,
however the attention of government to SME is not as much as it is supposed to be. In
fact, there are still many problems which obstruct the development in of SME in
Indonesia. Those problems are:
Lack of financing can happen to SME since they cannot easily get loan. They
do not have the sufficient financing and collateral. This situation forces some of
SME to borrow money from non-banking institutions.
Lack of managerial skills and skilled Human Resource leads to inefficient
workers productivity.
Lack of network and information causes them to become indirect exporters.
They do not have connection in foreign countries and do not know any information
about the fluctuation of demand in the global market
Lack of technologies and technology know-how (IT). SME cannot produce
standardized goods that meet the global market requirement.
1.4.2. UNEMPLOYMENT
Fuel Subsidy in Indonesia, Should/ Should Not?
1.4.2.1. The Definition of Unemployment
Unemployment as defined by the International Labour Organization occurs
when people are without jobs and they have actively looked for work within the past
four weeks. The unemployment rate is a measure of the prevalence of unemployment
and it is calculated as a percentage by dividing the number of unemployed individuals
by all individuals currently in the labour force.
1.4.2.2. Types of Unemployment
Basically, there are five types of unemployment, which are:
Frictional Unemployment: Frictional unemployment is a temporary condition. This
unemployment occurs when an individual is out of his current job and looking for
another job. The time period of shifting between two jobs is known as frictional
unemployment. The probability of getting a job is high in a developed economy and
this lowers the probability of frictional unemployment. There are employment
insurance programs to tide over frictional unemployment
Structural Unemployment: Structural unemployment occurs due to the structural
changes within an economy. This type of unemployment occurs when there is a
mismatch of skilled workers in the labor market. Some of the causes of the structural
unemployment are geographical immobility (difficulty in moving to a new work
location), occupational immobility (difficulty in learning a new skill) and
technological change (introduction of new techniques and technologies that need
less labor force). Structural unemployment depends on the growth rate of an
economy and also on the structure of an industry.
Classical Unemployment: Classical unemployment is also known as the real wage
unemployment or disequilibrium unemployment. This type of unemployment occurs
when trade unions and labor organization bargain for higher wages, which leads to
fall in the demand for labor.
Cyclical Unemployment: Cyclic unemployment when there is a recession. When
there is a downturn in an economy, the aggregate demand for goods and services
decreases and demand for labor decreases. At the time of recession, unskilled and
surplus labors become unemployed. Read about causes of economic recession.
Seasonal Unemployment: A type of unemployment that occurs due to the seasonal
nature of the job is known as seasonal unemployment. The industries that are
Fuel Subsidy in Indonesia, Should/ Should Not?
affected by seasonal unemployment are hospitality and tourism industries and also
the fruit picking and catering industries.
1.4.2.3. The Causal Factors of Unemployment in Indonesia
Basically, there are two factors which become the source of unemployment
in Indonesia:
1. Personal Factors
In this case the causes of unemployment can be caused by laziness,
disability / age and low education and skill. The explanation is as follows:
Laziness factor
Unemployed individuals which caused of laziness are actually slightly.
However, in the political system of materialist and secularist, many of which
encourage people become lazy, like a payroll system that is not feasible or the
rampant gambling. Many poor people become lazy to work in the hope of sudden
wealth by gambling or lottery win.
Factors disabled / elderly
In a capitalist system, the laws that apply are the 'law of the jungle'. Therefore,
there is no place for those who are disabled / elderly to get a decent job, because ther
are considered no as productive as the young and healthy people.
Factor of low education and skills
Currently about 74% of Indonesian workers are those with low education, namely
primary and secondary school. The impact of low education is the poor skills that
they have. Furthermore, the Indonesian education system still does not focus on
practical issues required in the life and world of work. Therefore, in the end they
become unemployed intellect.
2. Social Systems and Economic Factors
This factor is the main cause of rising unemployment in Indonesia, among them:
The imbalance between labor supply and demand
Fuel Subsidy in Indonesia, Should/ Should Not?
Estimated next year will come new headhunter about 1.8 million people, while
the current that can be accommodated in the formal sector only 29%. The rest in the
informal sector or become unemployed.
Government policies are not siding with the people
Many government policies are not aligned to the people and create new
unemployment. For example, according to the minister, yesterday's rise in fuel prices
has added to unemployment of about 1 million people.
Development of non-real economic sector
In a capitalist economic system, appears transaction that makes money as a
commodity that is called non-real sector, such as stock exchanges and banking
system of usury and insurance. The sector is growing rapidly. Transaction value can
even reach 10 times more than the real sector.
Growth in money supply much faster than the real sector is pushing inflation
and asset price bubbles causing declines in production and investment in real sector.
As a result, it encourages companies bankruptcies and layoffs and unemployment.
This is the main cause of economic and monetary crisis in Indonesia that occurred
since 1997.
Number of female workers
Number of women workers in 1998 there were about 39.2 million. This number
continues to increase every year. An increasing number of women workers has
resulted in competition between female job seekers and men. However, in the
capitalist system, for cost efficiency is usually preferred women because they are
easily arranged and not much demand, including the issue of salary. These
conditions resulted in the number of unemployed men.
1.4.3. POVERTY
1.4.3.1. Definition of Poverty
There is not any common definition of poverty which is accepted by all countries.
Usually, poverty is categorized as material deprivation.
Fuel Subsidy in Indonesia, Should/ Should Not?
However, defining poverty solely as being deprived of money is not sufficient. Social
indicators and indicators of risk and vulnerability must also be considered and
understood to obtain a clear picture of poverty.
1.4.3.2. The Criteria of Poor People in Indonesia
In Indonesia, the Central Bureau of Statistics (BPS) uses 14 criteria to assume
poverty. This poverty criteria could be debated when the government launched the
program in direct cash assistance (BLT). Then, the polemic back occurs when the criteria
are again used in the Census of Population 2010.
Quoted by Antara, the 14 criteria for poor households are:
1. The house building floor area of less than eight square meters per person.
2. The type of floor residential buildings made from earth / bamboo / wood cheap.
3. The kind of shelter walls made of bamboo / thatch / low quality wood / wall without
plaster.
4. People are also considered poor if they had no toilet facility / together with another
household.
5. Household lighting source does not use electricity.
6. Drinking water source comes from the well / unprotected spring / river / rain water.
7. Fuel for cooking day days include firewood / charcoal and kerosene.
8. Only eating meat / dairy / chicken once a week.
9. Just buy a new set of clothes in a year.
10. Could only eat one or two times a day.
11. Unable to pay medical expenses at health centers / polyclinics.
12. The highest education of household heads: no school / did not complete primary
school / primary school only.
13. 13. Source of income of household heads are farmers with an area of 0.5 hectares
of land, or farm laborers, fishermen, construction workers, plantation workers or other
jobs with incomes below Rp 600,000 per month
14. Have no savings / goods that are easy to sell with value of USD 500,000, as well
motorcycle credit or non credit, gold, livestock, motor boats and other capital goods.
Poverty Rate ↑
Unemployment ↑ SME ↓ Profit↓
Fuel Subsidy in Indonesia, Should/ Should Not?
1.4.4. FRAMEWORK
In this report we use a framework or basic theory that relates the fuel subsidy, non-
fuel subsidy, SME, unemployment, and poverty
Framework
The decrease of fuel subsidy and non fuel subsidy means increasing in fuel,
electricity, and raw material price and other cost that will affect the goods price in the market.
Then, it will make the living cost of Indonesian people increase, but the income will stay the
same. That factor will make people more selective in consumpting and decrease the
consumption. The decrease in consumption then will lead to the decrease of consumer
demand.
If the demand is decreasing, the enterprise especially SME, will not be able to
increase the price (because they will be afraid to lose some customers) while the cost of
production even go higher.
Moreover, the total production of SME will also be lower due to the decreasing
demand from the consumer. If that case happens, the SME will face the increasing cost to
produce the goods and also the increasing cost of producing process. Therefore, the total
profit of SME will go down.Those reasons make small enterprises face the failure.
In the long term, the failure of many SME will lead to the firing or employ reduction.
A huge number of employ reductions will increase the unemployment rate. Therefore, many
people will lose the income and in the end it will increase the poverty rate.
Fuel Subsidy and Non Fuel Subsidy↓
Raw Material Cost ↑
Goods' Price↑
Living cost ↑ , Yd
constant
Demand↓