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Quo Vadis Oil Fuel Subsidy?

The decision of the government to reduce oil fuel subsidy by increasing the price of Premium gasoline for private vehicles in my opinion has not solved the problem yet. This act is only a palliative remedy; medical treatment that reduces pain without curing its cause. It’s very discouraging to know the amount of state money being wasted –without a trace – for subsidizing oil fuel. Vice Energy and Mineral Resources Minister, Susilo Siswoutomo estimated that oil fuel subsidy in 2013 may reach Rp 250 trillion. Several resources even mentioned the figure of Rp 300 trillion. Even said figure may still change, considering the high fluctuation of world oil price and other commodities of natural resources.

This indicates that energy subsidy becomes a threat to the certainty of the state’s budget allocation. In addition to it, imports of crude oil and oil fuel are increasingly rising to meet national oil fuel consumption in particular for transportation purposes and power plants that are forced to use oil fuel due to the delayed completion of steam power plant (PLTU) projects.

Another thing that becomes a problem is the profile of those who are enjoying energy subsidy. In various legislative rules as well as policies, it was stated that those who have the right to enjoy energy subsidy are the underprivileged members of the community. However, the fact in the field indicates the opposite condition.

This was also indicated by the report of World Bank in 2011 which stated that 84% of the people with high income were enjoying subsidized oil fuel with 10% of the richest consuming 40% of the total consumption. Meantime, 10% of the poorest were consuming less than 1% of the total consumption of subsidized oil fuel.

In view of the above-mentioned, my opinion is that the policy to abolish oil fuel subsidy is very appropriate. The main reason is not because the rise in world oil price which subsequently will burden the state budget, but intrinsically the oil fuel policy can be categorized as a defect policy.

Oil fuel subsidy

If we examine carefully the history of oil fuel subsidy, we can see that Indonesia’s economic condition, when oil fuel was subsidized for the first time (in the new order era), was good viewed from the point of the overflowing supply of crude oil. Meanwhile, the world oil price that kept on soaring did not cause any loss to Indonesia.

It can even be said that Indonesia obtained the benefit from the world high oil price for Indonesia was one of the suppliers of crude oil, and domestic oil consumption was smaller than its production thereby Indonesia gained profit from exporting oil. This has made the policy of oil fuel subsidy looked normal as a form of compensation toward the people so that they could enjoy the profit from selling crude oil abroad.

But the condition at this moment is different. At present, crude oil production at home is increasingly declining, while oil consumption is rising, thereby Indonesia is compelled to import oil. This condition is compounded with the continuously rocketing price of oil – a matter that previously was an advantage (when Indonesia was an oil exporter). Viewed from this point, the policy of oil fuel subsidy today is no longer relevant.

In 2012 the government subsidized oil fuel as much as Rp 211.9 trillion, a fantastic amount. Just imagine if said subsidy is used for developing infrastructures, be they roads, bridges, trains as well as ports. It is therefore no surprise if development in Indonesia is like marking time, because the budget for developing infrastructures – one of the factors of success development – is never big enough.

For example, until today the development of Sunda Strait Bridge has not been realized, for it requires a huge investment of around Rp 150 trillion. Whereas, the fund of oil fuel subsidy may be used for developing the bridge which will result in an extensive multiplier effect that will not only be felt in Java and Sumatra, but also throughout Indonesia.

If Sunda Strait Bridge were realized, it will become a phenomenal project which benefit will always be enjoyed for hundreds of years ahead. Unlike burning oil fuel that produces dust and pollution.

If only the government (and the House) have the courage to abolish oil fuel subsidy, where should the budget be transferred to? Let us calculate the cost and benefit, so that the idea to abolish said subsidy becomes grounded and justified.

Road infrastructure

At present road construction throughout Indonesia has yet to be evenly distributed. Many areas are still isolated because of the lack of funds for building roads, for example, the construction of roads in the provinces of Papua and West Papua that is very urgent. The construction of Trans Papua road is beneficial to support the centers of economic growth, to press down the high prices, and to safeguard the sovereignty of Indonesia.

The opening of the Jayapura-Wamena-Mulia road section for instance, will spur the expansion of development in Papua. This road section has not been entirely broken through, with damaged and rocky road condition.

As a basic assumption, for Jayapura-Wamena-Mulia road section, the cost of developing national road per km of 7 meter wide is Rp 10 billion. It means that a fund of Rp 7.2 trillion is required for developing 717 km national road connecting Jayapura-Wamena-Mulia. This is indeed a relatively small figure compared with oil fuel subsidy in 2013 which is estimated to reach Rp 300 trillion.

Bridge infrastructure

The main reason for the development of Sunda Strait Bridge is to overcome the problem of inter-island transportation between Java and Sumatra. The accumulation of motorized vehicles waiting to cross by ferry boats is one of the reasons for developing Sunda Strait Bridge (SSB). Besides more economical from the point of tariff, SSB will also save travel time from Merak to Bakauheni. For crossing a 17-nautical mile or 30 km strait, a roll-in roll-out (roro) vessel requires 2.5 to 3 hours and 1 hour for speed boats. If a bridge is used, the time needed by drivers to cross the Sunda Strait is about 30 minutes.

The development of SSB will unite the islands of Java and Sumatra, thereby accelerating the development in Sumatra. Although the cost for its development is huge about Rp 150 trillion, it is much more beneficial than wasting state money for oil fuel subsidy. The realization of SSB should have been the government’s priority, bearing in mind the economic and social impacts hundreds of years to come.

Train transport infrastructure

With a capacity of transporting 1500 people and oil fuel consumption of 3 liter/km, the consumption of oil fuel/km/passenger is only Rp 9. Other superiorities of train include non-polluting, saving of space and energy, safe and smooth and very efficient for congested traffic and urban transportation.

As an illustration, if the government wishes to connect Kupang, the capital of East Nusa Tenggara (NTT) Province with Atambua, the capital of Belu Regency which is a border area between Indonesia and Timor Leste, the government can build a 300-km railway. If the cost required to construct the railway infrastructure is Rp 20 billion/km, the total budget needed for building Kupang-Atambua railway is Rp 6 trillion.

Once again, Rp6 trillion is a small amount compared with oil fuel subsidy, whereas it has a great impact as it will solve the problem of transportation in the province of NTT.

Harbor infrastructure

Until today, almost 90% cargoes entering and leaving Indonesia are transferred through international hub harbors in neighboring countries. In 2011, Made Sudiarsa conducted an investment feasibility study on the development of Amed harbor in Karangasem.

The development of the harbor was for anticipating the rising trend of the export volume of Bali and to take advantage of the potential maritime tourism, in particular pleasure craft tourism.

Within a time span of 30 years ahead, the investment needed for the development of Amed harbor is Rp 434 billion with an estimated total benefit of Rp 6.6 trillion. Once more, we have to think by comparing the value of oil fuel subsidy amounted to Rp 300 trillion with no long-term benefit at all.

Monorail infrastructure

Even though the cost is higher than special bus lane as it has to have its own rail, monorail has more value since the oil fuel consumption rate per person is more economical. Based on a calculation by Adhi Karya, by using monorail residents will save up to Rp 1.5 trillion on oil fuel per year. This mode is estimated able to transport 270,000 passengers per day.

Other than in Jakarta, monorail is also planned to be developed in Bandung, Padang and Batam. The amount of investment needed for developing monorail in Bandung is estimated at Rp 4 trillion, in Padang Rp 4.5 trillion, in Batam also about Rp 4 trillion, and in Jakarta Rp 7 trillion.

Flood canal infrastructure

Banjir Kanal Timur / Eastern Flood Canal (BKT) which development had been completed during the governance of Governor Fauzi Bowo, was planned to accommodate the flows of Ciliwung, Cililitan, Cipinang, Sunter, Buaran, Jati Kramat and Cakung Rivers. The catchment area encompasses more than 207 km2 or about 20,700 hectares.

Its economic benefits are among others to secure the distribution of goods where prices usually raise 10-20% during the flood due to hampered distribution, also to eliminate the potential of loss such as power outages, cut off telecommunication network, cut off transportation lanes and the halted industrial activities. The loss of the business world caused by the flood within a week is estimated to reach Rp 1 trillion.

The fund of Rp 4.5 trillion for the development of BKT is able to provide a long-term invaluable benefit, not only for Jakarta area but also for other economically connected areas.

Are we fit for subsidy?

The need for infrastructures in Indonesia from the data of MP3EI (the Master Plan for the Acceleration and Extension of Indonesia’s Economic Development) is as follows: bridge (Sunda Strait, Pulau Balang, Tayan, Trans Maluku) total Rp 155 trillion; dam/flood canal (Karian, Citarum, Umbulan, Jati Barang, Waduk Wain) total Rp 14 trillion; road (Trans Sumatra, Jambi, Riau, North Sumatra, East Java, Trans Kalimantan, Central Sulawesi, South Sulawesi, Southeast Sulawesi, NTT, Trans Papua, Trans Maluku, North Maluku) total Rp 129 trillion.

Train infrastructure (South Sumatra, Lampung, North Sumatra, DKI Jakarta, West Java, East Java, Central Kalimantan, East Kalimantan, Bali) total Rp 135 trillion; MRT (DKI Jakarta) total Rp 7 trillion; monorail (DKI Jakarta) total Rp 9  trillion; and harbor (Dumai, Lhokseumawe, Belawan, Tanjung Api-Api, Panjang, Meak VI, Cerocok Painan, Palembang, Lamongan, Branta, Tanjung Priok, Teluk Lamong, Maloy, Kariangau, Teluk Melano, Tanah Grogot, Pontianak, Bumiharjo, Laut Garongkong, Laut Bungkutok, Bau-Bau, Raha, Serui, Ambon, Jayapura, Waren, Buli, Depapre, Sofif, Merauke) total Rp 88 trillion.

The entire infrastructure projects in the MP3EI mentioned above if they are added up is ‘only’ Rp600 trillion. Imagine the multiplier effects resulted from the development of said infrastructures.


Estelita Hidayat, MBA

(Article published in Petrominer Magazine, No. 05 Vol. XXXIX May 15, 2013)

Index Article
04-06-2013 » Quo Vadis Oil Fuel Subsidy?
04-06-2013 » Quo vadis subsidi BBM?
18-04-2013 » Peraturan Menteri ESDM No 7 tahun 2012 di dalam kerangka Game Theory (Part 2)
18-04-2013 » Peraturan Menteri ESDM No 7 tahun 2012 di dalam kerangka Game Theory (Part 1)
06-08-2012 » EMR Ministerial Regulation No 7/2012 in the Framework of Game Theory
09-10-2009 » BBM, BLT, BKM, dan ‘BT’
11-05-2009 » Siapkah Kita Memaafkan Koruptor?
11-05-2009 » Selamat Hari Kartono