FUEL SUBSIDY POLICY In Indonesia

Fiscal Policy Office – Ministry of Finance

Republic of Indonesia

IISD Conference “Increasing the Momentum of Fossil-Fuel Subsidy Reform :

Developments and Opportunities

Fuel Subsidy Calculation Formula

• Retail fuel price is the retail selling price per liter of fuel in domestic area.

• Tax is a Value Added Tax (PPN 10%) and Motor Vehicle Fuel Tax (PBBKB 5%).

• Reference price of fuel is calculated based on the MOPS price plus distribution costs and margins.

• Reference price of fuel = MOPS + α

α is the distribution cost + margin

MOPS (Mid Oil Platt’s Singapore) is the price on the stock sale and purchase transactions on the Singapore oil

Fuel Subsidy :

= [Reference Price of Fuel - (Retail Fuel Prices - Tax) ] x Fuel Volume

0

1000

2000

3000

4000

5000

6000

7000

8000

MOPS Official Price Retail Price

IDR/liter

VAT & PBBKB

Subsidy

Reference price of Fuel

2

Challenges :

Ensuring availability of gas supply for conversion

of kerosene to LPG achieved

Increased development of gas fuel stations and

filling stations and transport of bulk of LPG

World oil prices are fluctuating so frequently it’s

change fuel subsidies estimation

Community dependence on fuel is still high, so

the use of alternative energies need to be

socialized

Controlling alternative energy utilization with land

clearing to avoid environmental and forestry

issues 3

State Budget And Fuel Subsidy Policy

Policy Implementation: • Reducing subsidized fuel in 2005 from 5

to 3 commodities by removing Diesel Oil for industry and Fuel Oil from subsidy.

• Conversion program (kerosene to LPG) • Energy diversification (Gas for Bus and

public transportation) • Retail fuel price adjustment • Improving the subsidized fuel

distribution mechanism to enable the subsidy to be more targeted

68,4 31,2 30,039,0

95,6

64,2

83,8

139,1

45,0

88,9 92,8

23,9 24,628,8

37,6

53,4

64,3

72,3

97,0

61,6

80,0 80,0

0

20

40

60

80

100

120

0

20

40

60

80

100

120

140

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Revised Budget

2011 Budget

Plan

Fuel ICP US$/Barrel

Fuel Subsidy Compare to Others Subsidy, Central Government Expenditure, Total Expenditure and GDP

0,0

5,0

10,0

15,0

20,0

25,0

30,0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Percen

tage

CGE (Percentage) Total Expenditure (Percentage) GDP (Percentage)

4

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010PSO & Others Fertilizer & Seeds Food Electricity Fuel

Percentage

Commodities and Fuel Domestic Prices, 2003-2010

5

Year 2003 2004 2006 2007 2008 2009 2010

1Jan-31Des 1Jan-31Des 1Jan-1Oct 1Oct-31Des 1Jan-31Des 1Jan-31Des 1Jan-31Des 1Jan-31Des 1Jan-31Des

GASOLINE S S S S S S S S S

DIESEL S S S S S S S S S

KEROSENE S S S S S S S S S

DIESEL OIL FOR

INDUSTRYS S S NS NS NS NS NS NS

FUEL OIL S S S NS NS NS NS NS NS

2005

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

01

-Ap

r

01

-Ju

n

17

-Ja

n

01

-Ja

n

21

-Ja

n

01

-Fe

b

01

-Ja

n

03

-Ja

n

01

-Oct

1Ja

n-2

3

Me

i

24

-Ma

y

01

-De

c

15

-De

c

PREMIUM

SOLAR

MINYAK TANAH

Volume of Subsidized Fuel Consumption, 2006 - 2011

6

Comparation of Subsidy-non Subsidy to Total Consumption

37.4 38.6 39.2 37.7 36.5

-

10.0

20.0

30.0

40.0

2006 2007 2008 2009 2010 2011

Million KL

Diesel Kerosene Gasoline

36,8

99.4 99.2 99.1 98.5 98.2

0.6 0.8 0.9 1.5 1.8

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

2006 2007 2008 2009 2010

% non subsidized fuel to total % subsidized fuel to total

%

40

60

41

59

39

61

39

61

39

61

Non Subsidized Petroleum Fuel Consumption in 2009

Indonesian Petroleum Fuel and Pipeline Gas Markets

7

Deficit

Volu

me (

bbl/

day)

Consumption Domestic Production Fuel Supply Bio fuel

Note:

- Fuel Supply = Domestic Production + Import

FUEL SUPPLY – DEMAND, in the long term

Fuel Consumption, Production and Import

(Gasoline, Kerosene, Diesel Fuel, Diesel Oil, Oil Residue)

8

Stock of vehicles is growing quickly, driven by motorcycles

Stock of vehicles is growing quickly, in line with strong economic growth and rising incomes, driven by motorcycles whose number could reach an estimated 60 million in 2010 – roughly 1 per household – up from 42 million in 2007 – Motorcycle sales in 2010 have averaged almost 600,000 units per month, which

would add 7 million new units if trend maintained

Source: Statistics Indonesia for 2005-2007, BPS. 2008 onwards are

WB staff projections based on trends & monthly motorcycle sales.

Stock of vehicles by type

Stock of cars, trucks and buses

grew even faster between 2005-

2007, almost 30% per year, albeit

off a lower base

Number of cars could reach

almost 14 million in 2010,

followed by trucks (8 Mn) and

buses (3.5 Mn)

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010

Units (millions) Units (millions)

Motorcycles

Cars

Motorcycles

Cars

Trucks

Buses

Trend projections

9

Nanggroe Aceh Darussalam

Sumatera Utara

Sumatera Barat

Riau

Jambi

BengkuluLampung

Sumatera Selatan

Bangka Belitung

Kepulauan Riau

BantenJawa Barat

Jawa TengahDKI Jakarta

D.I. Yogyakarta Jawa Timur

Bali

Kalimantan Barat

Kalimantan TengahKalimantan Selatan

Kalimantan Timur

Nusa Tenggara Barat

SulawesiBarat

Sulawesi Tenggara

Nusa Tenggara Timur

Sulawesi Tengah

Gorontalo

Sulawesi UtaraMaluku Utara

Maluku

Papua Irian Jaya Barat

Sulawesi Selatan

Roadmap of Kerosene to LPG Conversion Program

Red area converted in 2007 and

2008 with 19 million conversion

packages.

In 2007, 4 million conversion

packages distributed in Java.

Up to 2007

• Kerosene used by majority households

in Indonesia (9.9 million KL) and

subsidized by Government (more than

Rp 37 Trillion /year)

• LPG only used by 10% of households

and more expensive than subsidized

kerosene.

2007 - 2009

• Government program : distribute 42 millions

of conversion package to targeted

households.

• Removing 2,069 million KL of kerosene and

distribution of 19 million conversion package

up to 2008.

• Removing 4,1 million KL of kerosene and

distribution of 23 million conversion package

up to 2009.T

2010 forward…

• LPG will become major energy with

estimated volume of 4.1 million

tonnes/year.

• 6 million KL of kerosene will remove

and only maintain 2 million KL.

Green area converted in 2009

with 23 million conversion

packages.

1 2

3

10

0%

20%

40%

60%

80%

100%

LPG (kL eq. to kerosene) 163,182 2,069,536 4,000,000 7,900,000

Kerosene (kL) 9,851,812 7,832,280 5,804,911 2,000,000

2007 2008 2009 2010

Note:

In 2010, subsidized kerosene remained in the market used only for household in remote area, small business and house lighting.

Program Completion

COVERSION OF KEROSENE TO LPG FOR HOUSEHOLD AND MICRO BUSINESS

1,63%

98,37%

20,90%

79,10%

40,80%

59,20%

80,57%

20,40%

*)

*) Unaudit 11

Fuel Subsidy Policy, 2010-2011

• Limiting subsidized fuel users to households, micro businesses, fishery businesses, public transportation and public services

• Reducing the consumption of fossil fuels by introducing new types of bio-fuel

• Enhancing the development of alternative energy,

• Continuing conversion program of kerosene to LPG 3 kg

• To enhance monitoring of subsidized fuel distribution and law enforcement for misuse

• Reform in fuel business : – Open procurement for Fuel Subsidies distribution

– Bonded Area for Gasoline Storage Facilities

12

Indonesia’s Fuel price, and compare to other countries’ fuel price

0

5,000

10,000

15,000

SINGAPORE PHILIPINE THAILAND VIETNAM MALAYSIA INDONESIA

8,4

29

6,5

90

7,3

67

7,0

49

4,7

84

4,5

00

11

,56

0

8,4

51

8,7

77

7,7

59

5,0

66

4,5

00

IDR/Liter

GDP/Capita :

DIESEL GASOLINE

USD 33.714 USD 1.582 USD 3.470 USD 779 USD 6.648 USD 1.748

13

IDR5,871

IDR6,355

2 . 000

4 . 500

7 . 000

Jan' 09 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Des Jan' 10 Feb Mar Apr Mei Jun Jul Aug Sep* Oct**

IDR/Liter Indonesia’s Gasoline & Diesel Prices

IDR4,500

Gasoline Economical Price Diesel Economical Price Administered Price

Allocation of Fuel Subsidy to Public Expenditure, 2010 - 2011

14

Fuel Subsidy8%

Non-Fuel Subsidy

11%

Line Ministries Expenditure

35%Interest

Payment10%

Transfer to Region

33%

Others 3%

Budget 2010

Fuel Subsidy8%

Non-Fuel Subsidy

8%

Line Ministries Expenditure

37%

Interest Payment

11%

Transfer to Region

34%

Others 2%

Budget 2011

Fiscal Space should be improved

Fiscal space was limited, 2005-2010 :

• In term of revenue : fiscal space was around 85% - 97%

• In term of expenditure : fiscal space was around 85% - 91% 15

Mandatory Spending Ratio, 2005 - 2010

to

exp

to net

rev to

exp

to

exp

to

exp to

exp

to

exp

to net

rev

to net

rev to net

rev to net

rev

to net

rev

Transfer to local gov Subsidy Personnel exp Interest exp Goods exp Other exp

0

20

40

60

80

100

To exp To rev

2005 2006 2007 2008 2009 2010

90 91 85

89 85

92 87 88 85

93

85

97

pe

rce

nta

ge

Mandatory Spending Ratio 2005 - 2010

Transfer to region Subsidy Personnel Exp Interest Payment Capital Exp Other Exp

To exp To exp To exp To exp To exp To rev To rev To rev To rev To rev

• Transform price subsidy to direct

subsidy

• Social Safety Net to shield the

vulnerable

• Energy diversification

• Closed distribution system

• Fiscal incentive and disincentive

• Minimizing fuels distribution cost

• Full cost absorption of fuel provision

• Effective targeting and costing of fuels

subsidy

Reduction

of Fuel

Subsidy

Compensating

Variance

Less Volume

of Subsidized

Fuels

Fuel Price

Reference

Mid-Term Development Plan Fuel Subsidy Phase-out Strategy

Subsidized Fuel and Target Subsidy

Sep ' 05 Okt ' 05 Apr ' 06 2007 2008 2009 2010 2011 2012 2013 2014

Household S S S S S

Small Business S S S S S

Industry NS NS NS NS NS NS NS NS NS NS NS

Transportation S S S S S

Fishery NS NS S S S

Industry NS NS NS NS NS NS NS NS NS NS NS

Transportation S S S S S

Fishery S S S S S

Industry NS NS NS NS NS NS NS NS NS NS NS

Sea Freight Industry NS NS NS NS NS NS NS NS NS NS NS

Sea Freight Industry NS NS NS NS NS NS NS NS NS NS NS

Gasoline

Kerosene

S/Closed 2

S/Closed 2

S/Closed 2

S/Closed 2

S/Closed 1

S/Closed 1

Diesel

S/Closed 2

Fuel Oil for Sea Freight Industry

Diesel Oil for Sea Freight Industry

S/Closed 1

S/Closed 1

S/Closed 1

Stage V Stage VI

S/Closed 2

S/Closed 1

Fuel UserStage VII Stage VIII

17

S = Subsidy : Still subsidized

NS = Non Subsidy : Not subsidized

S/closed 1 : Test arrangement for closed distribution system (2009-2010)S/closed 2 : The trial closed distribution system in gradually (2011-2014)

Mandatory for Bio ethanol Utilization (minimum %)

SECTOR Oct 2008 -

Dec 2008

January

2009 January 2010

January

2015**

January

2020**

January

2025**

REMARK

Household - - - - - - Not determined

PSO

Transportation

3 %

(existing) 1 % 3 % 5 % 10 % 15 %

* Based on

Total Needs

Non PSO

Transportation

5 %

(existing) 5 % 7 % 10 % 12 % 15 %

* Based on

Total Needs

Industry and

Commercial - 5 % 7 % 10 % 12 % 15 %

* Based on

Total Needs

Power Plant - - - - - - Not determined

Mandatory for Pure Plantation Oil Utilization (minimum %)

SECTOR Oct 2008 -

Dec 2008

January

2009

January

2010

January

2015**

January

2020 **

January

2025 ** REMARK

Household - - - - - - Not determined

Industry and

Transportation

(Low and

medium speed

engine)

Industry - - 1 % 3 % 5 % 10 %

Marine - - 1 % 3 % 5 % 10 %

Power Plant - 0,25 % 1 % 5 % 7 % 10 % * Based on Total

Needs

18

• Controlling subsidised fuel consumption by closed distribution and regulation improvement

• Developing alternatives energies (coal, gas, geothermal) • Electricity tariff adjustment

Subsidies Policies, 2009-2014 Subsidies Policies 2009-2014

19

-

5.0

10.0

15.0

20.0

-

50.0

100.0

150.0

200.0

250.0

2010 2011 2012 2013 2014

%

In ID

R T

rilli

on

Non Energy Subsidy Energy Subsidy % to GDP % to Total Exp

88.9 92.8

56.051.1

44.3

-

3.0

6.0

9.0

-

30.0

60.0

90.0

120.0

2010 2011 2012 2013 2014

%

In ID

R T

rilli

on

Fuel Subidy % to Total Expenditure

Medium Term Expenditure Framework Fuel Subsidy

Budget deficit is consolidated into 1% in 2014 and primary balance keeps increase

Financing Policies: Lowering debt GDP ratio to maintain fiscal sustainability

Debt instruments diversification to minimize cost and risk

Lowering government debt ratio to GDP consistently

Improving transparency and accountability on debt management

Energy subsidy Policies will support Fiscal Sustainability in the Medium Term

- 3

- 2.5

- 2

- 1.5

- 1

- 0.5

0

0.5

1

Budget - R 2009 Budget2010 2011 2012 2013 2014

Deficit & Primary Balance, 2009 - 2014

Deficit Primary Balance

47%

39%

35%

33%

30% 29% 29%

27% 26%

25%

20%

25%

30%

35%

40%

45%

50%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Debt to GDP Ratio

20

Challenges

Inappropriate targeted subsidy

Influenced by political policy

Impact to inflation, poverty, and unemployment

Socialization to the Parliament and Public

These roadmap is enacted to limit the utilization of subsidy to be more appropriate and to reduce ineffectiveness of budget subsidy allocation. Recently, the most important things to be conducted by Indonesian Government are to monitor and to supervise the implementation of the roadmap.

21

Thank You

Outline

1. Background

2. Policy Implementation until 2009

3. Fuel Subsidy 2010 - 2011

4. Mid-Term Expenditure Framework - Subsidy

5. Challenges

23

Regulatory Framework on Fuel Subsidy

24

Law No.22/2001 on Oil and Gas

Govt Regulation No.36 /2004 on Downstream Oil and Gas

Presidential Decree No.55/2005 on retail domestic fuel prices and preceeding Presidential Decree No.9/2006

Presidential Decree No.71/2005 on Provision and Distribution of Particular Typer of Fuels

Fuel subsidy defined as a budgetary allocation given to a company or institution that produces

and/or sells the oil fuel and Liquefied Petroleum Gas (LPG), with the purpose of providing access

to energy at an affordable price for consumers.

Fuel Price is lower than market price by applying administered price policy for Gasoline,

Kerosene and Diesel.

Allocated directly through State Owned Enterprise/Private Companies

Challenges:

• Volatility of raw fuel price makes domestic fuel price is also volatile

• Eliminated untargeted subsidies

1.299 1.313 1.302 1.389 1.637 1.590

2.296

2.774

3.339

3.949

4.954

5.613

57%

47%

39%35% 33%

28%

0%

20%

40%

60%

80%

100%

120%

0

1.000

2.000

3.000

4.000

5.000

6.000

2004 2005 2006 2007 2008 2009

[ % ][ triliun rupiah ]

Outstanding Utang PDB Rasio Utang thd. PDB (RHS)

Maintance Fiscal Sustainability

Debt to GDP Ratio (%)

25

Primary Balance and Deficit (%)

Outstanding GDP Debt to GDP ratio

46,7

64

30,2

38,7

50,8 49,9

30

84,3

5,2

98,5

-2,5

-1,3

-1,7

-1

-0,5

-0,9

-1,3

-0,1

-1,6

-2,1

-3

-2,5

-2

-1,5

-1

-0,5

0

0

20

40

60

80

100

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Perce

nt

Trillio

n Rup

iah

Primary Balance (Trillion Rupiah) Deficit (%)

Policy Framework for Phasing Out Fuel Subsidy

•Rising fuel consumption

•Fuel prices increases

•Bottleneck domestic refineries

•Restricting domestic fuel stock

•Insufficient infrastructure and transportation

•Ineffective fuel subsidy

Current Condition

Fuel Subsidy Alleviation

•Decreasing energy intensity

•Provision of sufficient infrastructure and transport of fuel

•Alleviating fuel subsidy along with compensating variation

•Energy diversification

Strategy

•Lower volume of subsidized fuels

•Minimum subsidy on fuels

•Non-fuel diversified renewable energy sources

Target Condition

Strategy of Subsidy Reform

– The phasing out of inefficient fossil fuel subsidies in Indonesia is to be implemented in a gradual manner in order to minimize the spill-over impact on the poor noting that a large part of the consumption basket of the poor is affected by higher fossil fuel prices.

– The phasing out strategy is to be sequenced through managing the demand side by adopting measures that will reduce fossil fuel energy consumption and then by gradually narrowing the gap between domestic and international prices.

26