Solution
to swelling energy subsidies: Gas!
Kurtubi, A POSTGRADUATE LECTURER AT PARAMADINA UNIVERSITY AND ECONOMICS SCHOOL,
UNIVERSITY OF INDONESIA
Sumber : JAKARTA POST, 26 Desember 2011
The energy subsidies for 2011 are estimated
to reach Rp259 trillion (US$28,508,530,500), composed of fuel subsidies worth
Rp168 trillion and electricity subsidies of around Rp91 trillion, plus the
carryover of previous years totaling about Rp16 trillion.
These very large energy subsidies could be spent on the construction of various kinds of infrastructure, such as those for energy, as well as for agriculture, rural areas and health.
Based on the experience of economic development in advanced countries like the US and later China, with priority given to transportation and energy infrastructure, Indonesia should strive for maximum development of evenly distributed economic infrastructure, rather than merely concentrating on Java. Otherwise, Indonesia will be left even further behind.
The US has achieved a high level of prosperity today largely due to the massive development of transportation infrastructure following World War I.
At present, for instance, the US has the best and longest highway network system in the world. Its interstate highway system covering around 500,000 km connects all parts of that country and with a road quality similar to the Jagorawi turnpike in Indonesia.
Interstate highway users in the US do not need to pay tolls as such road users do in Indonesia, subject to a charge that rises almost annually.
China has followed in the footsteps of the US by building an extensive highway system of toll-road quality that smoothly extends from the north to the south and from the east to the west, passing through the Gobi Desert as far as the western end of China.
Its air and sea ports and railway infrastructure are developing and expanding as the flows of passengers and goods soar. Transportation and logistic costs are becoming relatively cheaper.
The economy consistently records very high growth, even into double-digits. Poverty has decreased sharply. The world admires China’s economic achievements made only over the last three decades.
The US and China are of course geographically continental countries, unlike Indonesia, an archipelagic country. However, Indonesia still needs to have a good highway network system connecting all regions in the country, quite apart from railway, sea and air port infrastructure of adequate capacity.
What we see today is the minimum transportation infrastructure available. Virtually no city in Indonesia is free from traffic congestion at present, which leads to considerable wasted fuel consumption.
Jakarta’s roads in particular are heavily jammed everywhere especially during peak hours. The capacity of Soekarno-Hatta Airport is very inadequate. Train passengers sitting on rooftops and hanging out of doors have become a common daily sight.
Thus infrastructure needs to be seriously and comprehensively developed right away. This certainly demands huge funds from the State Budget.
Besides tax revenue, the dominant source of its funding should be obtained by optimizing state income from the energy and mineral resources (ESDM) sector, and improving national fuel and energy management presently still in a muddle.
The management of national oil, gas and mining resources should be put in order so that state receipts from the ESDM sector, now only around Rp250 trillion or almost equal to the value of energy subsidies, can be increased significantly.
Oil and gas production can still be raised by simplifying the system of oil and gas industrial management in order to invigorate investment in exploration as in the 1980s.
The Oil & Gas Law No. 22/2001, which is not investor-friendly and turns out to be in contravention of the Constitution, should be promptly replaced.
Renegotiation of mining contracts should be carried out by referring to relevant laws and the Constitution. They include the poorly drafted Tangguh contract, which has led to the sale of extremely cheap gas to Fujian, China.
The sale price formula for Tangguh gas, fixed at the level of US$3.35/mmbtu in the contract, obviously needs to be changed soon.
By comparison with East Kalimantan’s Badak gas price the estimated loss incurred by the state in the cheap sale of Tangguh gas to Fujian has so far reached about US$8 billion or around Rp72 trillion. That sum could be used to build thousands of kilometers of roads and bridges all over Indonesia.
If China persistently declines to change this very unfair formula, the option should be open for the domestic transfer of Tangguh gas now shipped to Fujian, so as to reduce subsidies for electricity.
In terms of national energy management, the energy subsidies now worth about Rp250 trillion could be shifted in phases to infrastructure development funding by changing the consumption of oil fuel to gas, as in the shift from the consumption of kerosene to gas (LPG), which has reduced fuel subsidies by significant amounts.
For example, significant savings in power subsidies could be achieved if the use of oil fuel by the state electricity company PLN was reduced and replaced by gas.
This is already being planned by the PLN power generating plant in North Jakarta, after the Receiving Terminal and Offshore Re-gasification Unit at Tanjung Priok begins operations in the first quarter of 2012.
This method of reducing fuel subsidies by shifting from oil fuel to gas is far better than implementing the program for subsidized-fuel restrictions to avoid quota excess.
The restrictions program already launched by the government (Downstream Oil-gas Regulating Agency), like the ban on subsidized-fuel purchases for private cars, cars of over 2000cc and those produced after 2005, is impossible to enforce.
So, the fuel-restriction program need not be continued because quite apart from the expensive and complicated control mechanisms required, it will cause the emergence of a fuel black market.
Also, it will limit economic growth with consequent effects on employment. This is because, based on the most elementary energy-economics theories, sufficient energy should be available to enable economic growth.
Energy supply must not be reduced. Any energy reduction will result in lower GDP growth.
If the prevailing conditions are deemed urgent, the most efficient way of reducing the burden of energy subsidies is the application of energy pricing-policy instruments, by raising fuel and energy prices in phases until the subsidies reach Rp0- or the sale price equals the cost price.
Yet the government prefers not to increase fuel prices. The policy chosen by the government, despite its deeper political nuances, is not entirely mistaken.
At least, for the short to medium term this choice can be understood. It is because amid the threat of the European and US crises, the domestic economy has to be boosted and kept growing.
The purchasing power of relatively low-income people has to be maintained to enable them to buy daily needs, even perhaps increased if possible so that retail and food businesses, for example, can develop and thrive as we have observed.
The informal economy can make headway due to cheap fuel and electricity. This situation has supported Indonesia’s relatively high economic/GDP growth in spite of the world economic crisis that has been ongoing since 2008.
The correct policy for reducing energy subsidies is for the transfer of the funds to the development of infrastructure and should be adopted while applying the concept of energy diversification.
The dependence on oil consumption should be reduced and shifted to the use of non-oil energy or gas the availability of which can be guaranteed in large quantities and in a sustainable way. Gas is far cheaper than oil fuel and also far more environment-friendly. ●
These very large energy subsidies could be spent on the construction of various kinds of infrastructure, such as those for energy, as well as for agriculture, rural areas and health.
Based on the experience of economic development in advanced countries like the US and later China, with priority given to transportation and energy infrastructure, Indonesia should strive for maximum development of evenly distributed economic infrastructure, rather than merely concentrating on Java. Otherwise, Indonesia will be left even further behind.
The US has achieved a high level of prosperity today largely due to the massive development of transportation infrastructure following World War I.
At present, for instance, the US has the best and longest highway network system in the world. Its interstate highway system covering around 500,000 km connects all parts of that country and with a road quality similar to the Jagorawi turnpike in Indonesia.
Interstate highway users in the US do not need to pay tolls as such road users do in Indonesia, subject to a charge that rises almost annually.
China has followed in the footsteps of the US by building an extensive highway system of toll-road quality that smoothly extends from the north to the south and from the east to the west, passing through the Gobi Desert as far as the western end of China.
Its air and sea ports and railway infrastructure are developing and expanding as the flows of passengers and goods soar. Transportation and logistic costs are becoming relatively cheaper.
The economy consistently records very high growth, even into double-digits. Poverty has decreased sharply. The world admires China’s economic achievements made only over the last three decades.
The US and China are of course geographically continental countries, unlike Indonesia, an archipelagic country. However, Indonesia still needs to have a good highway network system connecting all regions in the country, quite apart from railway, sea and air port infrastructure of adequate capacity.
What we see today is the minimum transportation infrastructure available. Virtually no city in Indonesia is free from traffic congestion at present, which leads to considerable wasted fuel consumption.
Jakarta’s roads in particular are heavily jammed everywhere especially during peak hours. The capacity of Soekarno-Hatta Airport is very inadequate. Train passengers sitting on rooftops and hanging out of doors have become a common daily sight.
Thus infrastructure needs to be seriously and comprehensively developed right away. This certainly demands huge funds from the State Budget.
Besides tax revenue, the dominant source of its funding should be obtained by optimizing state income from the energy and mineral resources (ESDM) sector, and improving national fuel and energy management presently still in a muddle.
The management of national oil, gas and mining resources should be put in order so that state receipts from the ESDM sector, now only around Rp250 trillion or almost equal to the value of energy subsidies, can be increased significantly.
Oil and gas production can still be raised by simplifying the system of oil and gas industrial management in order to invigorate investment in exploration as in the 1980s.
The Oil & Gas Law No. 22/2001, which is not investor-friendly and turns out to be in contravention of the Constitution, should be promptly replaced.
Renegotiation of mining contracts should be carried out by referring to relevant laws and the Constitution. They include the poorly drafted Tangguh contract, which has led to the sale of extremely cheap gas to Fujian, China.
The sale price formula for Tangguh gas, fixed at the level of US$3.35/mmbtu in the contract, obviously needs to be changed soon.
By comparison with East Kalimantan’s Badak gas price the estimated loss incurred by the state in the cheap sale of Tangguh gas to Fujian has so far reached about US$8 billion or around Rp72 trillion. That sum could be used to build thousands of kilometers of roads and bridges all over Indonesia.
If China persistently declines to change this very unfair formula, the option should be open for the domestic transfer of Tangguh gas now shipped to Fujian, so as to reduce subsidies for electricity.
In terms of national energy management, the energy subsidies now worth about Rp250 trillion could be shifted in phases to infrastructure development funding by changing the consumption of oil fuel to gas, as in the shift from the consumption of kerosene to gas (LPG), which has reduced fuel subsidies by significant amounts.
For example, significant savings in power subsidies could be achieved if the use of oil fuel by the state electricity company PLN was reduced and replaced by gas.
This is already being planned by the PLN power generating plant in North Jakarta, after the Receiving Terminal and Offshore Re-gasification Unit at Tanjung Priok begins operations in the first quarter of 2012.
This method of reducing fuel subsidies by shifting from oil fuel to gas is far better than implementing the program for subsidized-fuel restrictions to avoid quota excess.
The restrictions program already launched by the government (Downstream Oil-gas Regulating Agency), like the ban on subsidized-fuel purchases for private cars, cars of over 2000cc and those produced after 2005, is impossible to enforce.
So, the fuel-restriction program need not be continued because quite apart from the expensive and complicated control mechanisms required, it will cause the emergence of a fuel black market.
Also, it will limit economic growth with consequent effects on employment. This is because, based on the most elementary energy-economics theories, sufficient energy should be available to enable economic growth.
Energy supply must not be reduced. Any energy reduction will result in lower GDP growth.
If the prevailing conditions are deemed urgent, the most efficient way of reducing the burden of energy subsidies is the application of energy pricing-policy instruments, by raising fuel and energy prices in phases until the subsidies reach Rp0- or the sale price equals the cost price.
Yet the government prefers not to increase fuel prices. The policy chosen by the government, despite its deeper political nuances, is not entirely mistaken.
At least, for the short to medium term this choice can be understood. It is because amid the threat of the European and US crises, the domestic economy has to be boosted and kept growing.
The purchasing power of relatively low-income people has to be maintained to enable them to buy daily needs, even perhaps increased if possible so that retail and food businesses, for example, can develop and thrive as we have observed.
The informal economy can make headway due to cheap fuel and electricity. This situation has supported Indonesia’s relatively high economic/GDP growth in spite of the world economic crisis that has been ongoing since 2008.
The correct policy for reducing energy subsidies is for the transfer of the funds to the development of infrastructure and should be adopted while applying the concept of energy diversification.
The dependence on oil consumption should be reduced and shifted to the use of non-oil energy or gas the availability of which can be guaranteed in large quantities and in a sustainable way. Gas is far cheaper than oil fuel and also far more environment-friendly. ●
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