Fiscal Policy Office Ministry of Finance Republic of Indonesia

FUEL SUBSIDY POLICY In Indonesia

IISD Conference Increasing the Momentum of Fossil-Fuel Subsidy Reform : Developments and Opportunities

Fuel Subsidy Calculation Formula

Fuel Subsidy : = [Reference Price of Fuel - (Retail Fuel Prices - Tax) ] x Fuel Volume
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 + is the distribution cost + margin MOPS (Mid Oil Platts Singapore) is the price on the stock sale and purchase transactions on the Singapore oil
Reference price of Fuel

IDR/liter

8000 7000 6000 5000 4000 3000 2000 1000 0 MOPS

Subsidy

VAT & PBBKB

Official Price

Retail Price
2

State Budget And Fuel Subsidy Policy

140 120

Fu el
120

ICP
97,0

US$/Barrel

100 80,0 80,0 80 61,6

100 72,3 80 53,4 60 37,6 40 23,9 20 68,4 28,8 24,6 39,0 64,2 45,0 95,6 83,8 64,3 139,1

60

88,9

92,8

40

20

31,2

30,0

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Revised Budget 2011 Budget Plan

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

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 its 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 3 issues

Fuel Subsidy Compare to Others Subsidy, Central Government Expenditure, Total Expenditure and GDP
Percentage
100.0
90.0 80.0 70.0 60.0

50.0
40.0

30.0
20.0 10.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

PSO & Others

Fertilizer & Seeds

Food

Electricity

Fuel

30,0

25,0

20,0

Percentage

15,0

10,0

5,0

0,0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CGE (Percentage)

Total Expenditure (Percentage)

GDP (Percentage)

Commodities and Fuel Domestic Prices, 2003-2010

Year 2003 2004 2005 2006 2007 2008 2009 2010 1Jan-31Des 1Jan-31Des 1Jan-1Oct 1Oct-31Des 1Jan-31Des 1Jan-31Des 1Jan-31Des 1Jan-31Des 1Jan-31Des GASOLINE DIESEL KEROSENE DIESEL OIL FOR INDUSTRY FUEL OIL
7,000
6,000
PREMIUM SOLAR
MINYAK TANAH

S S S S S

S S S S S

S S S S S

S S S NS NS

S S S NS NS

S S S NS NS

S S S NS NS

S S S NS NS

S S S NS NS

5,000 4,000
3,000

2,000 1,000 1Jan-23 Mei

01-Feb

01-Jun

01-Oct

24-May

01-Apr

15-Dec

01-Dec

01-Jan

03-Jan

17-Jan

21-Jan

01-Jan

Volume of Subsidized Fuel Consumption, 2006 - 2011

Million KL

40.0

37.4

38.6

39.2

37.7

36.5

36,8

30.0

20.0

10.0

2006 Diesel %
110.0 105.0 100.0 95.0 90.0 85.0 80.0 75.0 70.0 65.0 60.0

2007 Kerosene

2008 Gasoline

2009

2010

2011

Comparation of Subsidy-non Subsidy to Total Consumption

0.6
39
0.8

0.9
39

1.5
41

1.8
40

39
99.2 61

99.4 61

99.1 61

98.5 59

98.2 60

2006

2007

2008

2009

2010

% non subsidized fuel to total

% subsidized fuel to total

6

Non Subsidized Petroleum Fuel Consumption in 2009

Indonesian Petroleum Fuel and Pipeline Gas Markets

FUEL SUPPLY DEMAND, in the long term

Fuel Consumption, Production and Import (Gasoline, Kerosene, Diesel Fuel, Diesel Oil, Oil Residue)
Deficit

Volume (bbl/day)
Consumption

Domestic Production

Fuel Supply

Bio fuel

Note: - Fuel Supply = Domestic Production + Import

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
Units (millions) 70

Stock of vehicles by type

Trend projections

Units (millions) 70

Stock of cars, trucks and buses grew even faster between 20052007, 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)

60 Motorcycles 50

60

50

40

40

30

30

20 Cars

20

10

Trucks Buses

10

0
2005 2006 2007 2008 2009

0
2010

Source: Statistics Indonesia for 2005-2007, BPS. 2008 onwards are WB staff projections based on trends & monthly motorcycle sales.

Roadmap of Kerosene to LPG Conversion Program

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.

Nanggroe Aceh Darussalam Sumatera Utara Riau Kalimantan Timur Kalimantan Barat Kepulauan Riau Sulawesi Utara Gorontalo

3
Green area converted in 2009 with 23 million conversion Maluku Utara packages.
Papua Irian Jaya Barat

Sumatera Barat Jambi

Sulawesi Tengah Bangka Belitung Sulawesi Barat Sumatera Selatan Kalimantan Tengah Lampung Kalimantan Selatan DKI Jakarta Sulawesi Selatan Jawa Tengah Banten Bali Jawa Barat D.I. YogyakartaJawa Timur Nusa Tenggara Barat Nusa Tenggara Timur

Bengkulu

In 2007, 4 million conversion packages distributed in Java.

Sulawesi Tenggara

Maluku

Red area converted in 2007 and 2008 with 19 million conversion packages. 10

COVERSION OF KEROSENE TO LPG FOR HOUSEHOLD AND MICRO BUSINESS

Completion
100%
1,63% 20,90 %

Program

80%
40,80 98,37 % %

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

60%

79,10%

80,57 % 59,20 %

40%

20%
20,40

0%
LPG (kL eq. to kerosene) Kerosene (kL)
*) Unaudit

%
2007 163,182 9,851,812 2008 2,069,536 7,832,280 2009 *) 4,000,000 5,804,911 2010 7,900,000 2,000,000
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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

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Indonesias Fuel price, and compare to other countries fuel price

IDR/Liter
7.000

Indonesias Gasoline & Diesel Prices

IDR6,355

IDR5,871
4.500 IDR4,500

2.000 Jan'09 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Des Jan'10 Feb Mar Apr Mei Jun Jul Aug Sep* Oct**
Gasoline Economical Price
IDR/Liter 15,000

Diesel Economical Price DIESEL GASOLINE

Administered Price

11,560

10,000

8,429

8,777

8,451

6,590

7,367

7,049

7,759

4,784

4,500

SINGAPORE GDP/Capita :
USD 33.714

PHILIPINE
USD 1.582

THAILAND
USD 3.470

VIETNAM
USD 779

MALAYSIA
USD 6.648

INDONESIA
USD 1.748

4,500

5,000

5,066

13

Allocation of Fuel Subsidy to Public Expenditure, 2010 - 2011

Budget 2010
Others 3%

Budget 2011
Others 2% Fuel Subsidy 8% Non-Fuel Subsidy 11% Non-Fuel Subsidy 8% Transfer to Region 34%

Fuel Subsidy 8%

Transfer to Region 33%

Interest Payment 10%

Line Ministries Expenditure 35%

Line Ministries Expenditure 37% Interest Payment 11%

14

Fiscal Space should be improved

Mandatory Spending Ratio 2005 - 2010 Mandatory Spending Ratio, 2005 - 2010
93 97 85

100 80 60

90

91

85

89

85

92

87

88

85

percentage

40 20 0
To exp To rev To exp To rev To exp To rev To exp To rev To exp To rev To exp To rev

to

to net

exp

rev

to

to net

to

to net

to

to net

to

to net

to

to net

exp

rev

exp

rev

exp

rev

exp

rev

exp

rev

Transfer to local gov

2005

Subsidy
2006

Personnel exp
2007

Interest exp
2008

Goods exp
2009

Other exp
2010

Transfer to region

Subsidy

Personnel Exp

Interest Payment

Capital Exp

Other Exp

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

Mid-Term Development Plan Fuel Subsidy Phase-out Strategy

Compensating Variance

Transform price subsidy to direct subsidy Social Safety Net to shield the vulnerable

Reduction of Fuel Subsidy

Less Volume of Subsidized Fuels

Energy diversification Closed distribution system Fiscal incentive and disincentive

Fuel Price Reference

Minimizing fuels distribution cost Full cost absorption of fuel provision Effective targeting and costing of fuels subsidy

Subsidized Fuel and Target Subsidy

Fuel User Stage V Sep ' 05 Okt ' 05 Apr ' 06 Stage VI 2007 2008 Kerosene Household Small Business Industry S S NS S S NS S S NS S S NS S S NS Gasoline Transportation Fishery Industry S NS NS S NS NS S S NS S S NS S S NS Diesel Transportation Fishery Industry S S NS S S NS S S NS S S NS S S NS S/Closed 1 S/Closed 1 NS NS S/Closed 2 S/Closed 2 NS NS S/Closed 1 S/Closed 1 NS NS S/Closed 2 S/Closed 2 NS NS S/Closed 1 S/Closed 1 NS NS S/Closed 2 S/Closed 2 NS NS Stage VII 2009 2010 2011 Stage VIII 2012 2013 2014

NS

NS

NS

NS

NS

NS

Diesel Oil for Sea Freight Industry Sea Freight Industry NS NS NS NS NS NS NS NS NS NS NS

Fuel Oil for Sea Freight Industry Sea Freight Industry

S = Subsidy NS = Non Subsidy S/closed 1 S/closed 2 : : : :

NS

NS

NS

NS

NS

NS

NS

NS

NS

NS

NS

Still subsidized Not subsidized Test arrangement for closed distribution system (2009-2010) The trial closed distribution system in gradually (2011-2014)

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Mandatory for Bio ethanol Utilization (minimum %)

SECTOR Oct 2008 Dec 2008 3% (existing) 5% (existing) January 2009 1% January 2010 January 2015** 5% January 2020** 10 % January 2025** 15 % REMARK Not determined * Based on Total Needs * Based on Total Needs * Based on Total Needs Not determined Household PSO Transportation Non PSO Transportation Industry and Commercial Power Plant 3%

5%
5% -

7%
7% -

10 %
10 % -

12 %
12 % -

15 %
15 % -

Mandatory for Pure Plantation Oil Utilization (minimum %)

SECTOR Household
Industry and Transportation (Low and medium speed engine)
Industry

Oct 2008 Dec 2008 -

January 2009 0,25 %

January 2010 1% 1% 1%

January 2015** 3% 3% 5%

January 2020 ** 5% 5% 7%

January 2025 ** 10 % 10 % 10 %

REMARK Not determined

Marine

Power Plant

* Based on Total Needs

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Subsidies Policies 2009-2014 Subsidies Policies, 2009-2014

Medium Term Expenditure Framework Fuel Subsidy
120.0
In IDR Trillion

9.0

90.0 60.0 30.0 -

88.9

92.8

44.3

3.0

2010 Fuel Subidy 2011 2012 % to Total Expenditure 2013 2014

250.0

20.0

200.0
In IDR Trillion

15.0 10.0
%

150.0 100.0
50.0 5.0

2010 Non Energy Subsidy 2011 2012 Energy Subsidy 2013 % to GDP 2014 % to Total Exp

Controlling subsidised fuel consumption by closed distribution and regulation improvement Developing alternatives energies (coal, gas, geothermal) Electricity tariff adjustment

56.0

6.0

51.1

19

Energy subsidy Policies will support Fiscal Sustainability in the Medium Term
Deficit & Primary Balance, 20092014 Budget-R 2009 Budget2010
2011 2012 2013 2014

50% 45% 40% 35% 30% 25%

47%

1 0.5 0 - 0.5 -1 - 1.5 -2 - 2.5 -3

39% 35% 33% 30% 29% 29%

27%

26%

25%

Debt to GDP Ratio

Deficit

Primary Balance

20% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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
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

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

24

Maintance Fiscal Sustainability

Primary Balance and Deficit (%)
120 -0,5 100 -1 -0,9 -1,3 -1,7 46,7 40 -2,5 20 5,2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -3 -2,5 38,7 30,2 30 -1,6 50,8 49,9 -2,1 84,3 -1 -1,5 -2 80 60 -0,1 0

98,5

-0,5

Trillion Rupiah

Primary Balance (Trillion Rupiah)

Deficit (%)

Debt to GDP Ratio (%)

[ triliun rupiah ] 6.000
5.000 5.613

[%] 120%
100% 80% 3.949

4.954
4.000 3.000 2.000 1.000 0 1.299 2004 1.313 2005 1.302 2006 1.389 2007 1.637 2008 1.590 2009 57% 47% 2.774 2.296 39% 3.339 35% 33% 28%

60% 40% 20% 0%

Outstanding Outstanding Utang

GDP PDB

Debt to GDP ratio Rasio Utang thd. PDB (RHS)

Percent
25

-1,3 64

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

Target Condition
Decreasing energy intensity Provision of sufficient infrastructure and transport of fuel Alleviating fuel subsidy along with compensating variation Energy diversification Lower volume of subsidized fuels Minimum subsidy on fuels Non-fuel diversified renewable energy sources

Fuel Subsidy Alleviation

Current Condition

Strategy

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