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
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