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 + 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

IDR/liter
8000 Reference price of Fuel
7000  Subsidy
6000
5000 VAT & PBBKB

4000
3000
2000
1000
0
MOPS Official Price Retail Price
2
 State Budget And Fuel Subsidy Policy
140 120
Fu el ICP US$/Barrel

120 97,0
100

100 80,0 80,0

72,3 80

64,3 61,6
80

53,4 139,1 60
60
37,6
95,6 92,8 40
83,8 88,9
40 28,8
23,9 24,6
64,2
45,0 20
20 39,0
68,4 31,2 30,0

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

Policy Implementation: Challenges :

• 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
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
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)

4
 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 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
S S S NS NS NS NS NS NS
INDUSTRY
FUEL OIL S S S NS NS NS NS NS NS

7,000
6,000
PREMIUM
5,000
SOLAR
4,000 MINYAK TANAH
3,000
2,000
1,000
-

1Jan-23
01-Feb

01-Oct
01-Jun

24-May
01-Apr

01-Dec

15-Dec
17-Jan

01-Jan

21-Jan

01-Jan

03-Jan

Mei 5
Volume of Subsidized Fuel Consumption, 2006 - 2011

Million KL 38.6 39.2

40.0 37.4 37.7 36.5 36,8

30.0

20.0

10.0

-
2006 2007 2008 2009 2010 2011
Diesel Kerosene Gasoline

%
Comparation of Subsidy-non Subsidy to Total Consumption
110.0
105.0
100.0 0.6 0.8 0.9 1.5 1.8
95.0
90.0 39 39 39 41 40
85.0
80.0 99.4
61 99.2
61 99.1
61 98.5
59 98.2
60
75.0
70.0
65.0
60.0
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

7
 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

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

Units (millions)
Stock of vehicles by type Units (millions)
70 70
Trend projections
 Stock of cars, trucks and buses
60 60
grew even faster between 2005- Motorcycles
2007, almost 30% per year, albeit
50 50
off a lower base
40 40

 Number of cars could reach

almost 14 million in 2010, 30 30

followed by trucks (8 Mn) and

20 20
buses (3.5 Mn)
Cars

10 10
Trucks
Buses
0 0
2005 2006 2007 2008 2009 2010

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

WB staff projections based on trends & monthly motorcycle sales. 9
 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 3

Sumatera Utara Green area converted in 2009
Riau
Kalimantan Timur
Sulawesi Utara
with 23 million conversion
Kalimantan Barat
Kepulauan Riau Gorontalo packages.
Maluku Utara

Papua
Sulawesi Tengah Irian Jaya Barat
Sumatera Barat Bangka Belitung
Sulawesi
Jambi
Barat
Sumatera Selatan
1 Bengkulu Kalimantan Tengah

In 2007, 4 million conversion

Lampung
DKI Jakarta
Kalimantan Selatan
Sulawesi Selatan
2
Sulawesi Tenggara
Maluku
Jawa Tengah
packages distributed in Java. Banten Red area converted in 2007 and
Jawa Barat Bali
D.I. YogyakartaJawa Timur
2008 with 19 million conversion
Nusa Tenggara Barat packages.
Nusa Tenggara Timur

10
 COVERSION OF KEROSENE TO LPG
FOR HOUSEHOLD AND MICRO BUSINESS
Completion Program
100%
1,63%
20,90
%
80%
40,80
98,37 %
Note: %
60%
In 2010, subsidized
kerosene remained in 79,10%
the market used only 80,57
for household in 40% %
remote area, small
business and house 59,20
lighting. %
20%

20,40
%
0%
2007 2008 2009 *) 2010
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
*) 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
IDR/Liter Indonesia’s Gasoline & Diesel Prices
7.000 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 Diesel Economical Price Administered Price

IDR/Liter
15,000
DIESEL GASOLINE

10,000
11,560

8,777
8,429

7,759
8,451

7,367
6,590

7,049

5,066
5,000

4,784

4,500

4,500
0
SINGAPORE PHILIPINE THAILAND VIETNAM MALAYSIA INDONESIA
GDP/Capita : USD 33.714 USD 1.582 USD 3.470 USD 779 USD 6.648 USD 1.748
13
Allocation of Fuel Subsidy to Public Expenditure, 2010 - 2011

Budget 2010 Budget 2011

Others Others
3% Fuel Subsidy 2% Fuel Subsidy
8% 8%

Non-Fuel
Non-Fuel
Subsidy
Subsidy
8%
11%
Transfer to Transfer to
Region Region
33% 34%

Line Ministries
Line Ministries Expenditure
Expenditure 37%
35%
Interest Interest
Payment Payment
10% 11%

14
 Fiscal Space should be improved
Mandatory
Mandatory SpendingSpending
Ratio,Ratio
20052005 - 2010
- 2010
93 97
100 90 91 89 92 87 88 85
85 85 85

80

60
percentage

40

20 to to net 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 exp rev
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

Transfer to local gov Subsidy Personnel exp Interest exp Goods exp Other exp
2005 2006 2007 2008 2009 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

• Transform price subsidy to direct

Compensating subsidy
Variance • Social Safety Net to shield the
vulnerable

Reduction • Energy diversification

Less Volume
of Fuel • Closed distribution system
Subsidy of Subsidized
Fuels • Fiscal incentive and disincentive

• Minimizing fuels distribution cost

Fuel Price
• Full cost absorption of fuel provision
Reference
• Effective targeting and costing of fuels
subsidy
 Subsidized Fuel and Target Subsidy

Stage V Stage VI Stage VII Stage VIII

Fuel User
Sep ' 05 Okt ' 05 Apr ' 06 2007 2008 2009 2010 2011 2012 2013 2014
Kerosene
Household S S S S S S/Closed 1 S/Closed 2
Small Business S S S S S S/Closed 1 S/Closed 2
Industry NS NS NS NS NS NS NS NS NS NS NS
Gasoline

Transportation S S S S S S/Closed 1 S/Closed 2

Fishery NS NS S S S S/Closed 1 S/Closed 2
Industry NS NS NS NS NS NS NS NS NS NS NS
Diesel

Transportation S S S S S S/Closed 1 S/Closed 2

Fishery S S S S S S/Closed 1 S/Closed 2
Industry NS NS NS NS NS 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 NS NS NS NS NS NS NS NS NS NS NS

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)
17
 Mandatory for Bio ethanol Utilization (minimum %)
Oct 2008 - January January January
SECTOR January 2010 January REMARK
Dec 2008 2009 2015** 2020**
2025**

Household - - - - - - Not determined

PSO 3% * Based on
1% 3% 5% 10 % 15 %
Transportation (existing) Total Needs
Non PSO 5% * Based on
5% 7% 10 % 12 % 15 %
Transportation (existing) Total Needs
Industry and * Based on
- 5% 7% 10 % 12 % 15 %
Commercial Total Needs

Power Plant - - - - - - Not determined

Mandatory for Pure Plantation Oil Utilization (minimum %)

Oct 2008 - January January January January January
SECTOR REMARK
Dec 2008 2009 2010 2015** 2020 ** 2025 **

Household - - - - - - Not determined

Industry and Industry

Transportation - - 1% 3% 5% 10 %
(Low and
medium speed Marine
- - 1% 3% 5% 10 %
engine)
* Based on Total
Power Plant - 0,25 % 1% 5% 7% 10 % Needs

18
 Subsidies
Subsidies Policies, Policies 2009-2014
2009-2014
Medium Term Expenditure Framework Fuel Subsidy
120.0 9.0
88.9
90.0 92.8
In IDR Trillion

6.0
56.0
60.0 51.1

%
44.3
3.0
30.0

- -
2010 2011 2012 2013 2014
Fuel Subidy % to Total Expenditure

250.0 20.0

200.0
15.0
In IDR Trillion

150.0
10.0

%
100.0
5.0
50.0

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

• Controlling subsidised fuel consumption by closed distribution and regulation

improvement
• Developing alternatives energies (coal, gas, geothermal)
• Electricity tariff adjustment
19
Energy subsidy Policies will support Fiscal Sustainability in
the Medium Term
Deficit & Primary Balance, 2009-2014
50%
47%
Budget-R
2009 Budget2010 2011 2012 2013 2014
45%
1

0.5 39%
40%
0 35%
35% 33%
- 0.5
30%
-1 29% 29%
30%
27%
- 1.5 26%
25%
25%
-2
Debt to GDP Ratio
- 2.5 20%
Deficit Primary Balance
-3 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 (%)
-0,1
120 0

-0,5
98,5
100 -0,5
-0,9 84,3
-1
80 -1
-1,3 -1,3
Trillion Rupiah

64

Percent
-1,6
60 -1,7 50,8 -1,5
49,9
46,7
38,7 -2,1
40 -2
30,2 30
-2,5
20 -2,5
5,2
0 -3
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Primary Balance (Trillion Rupiah) Deficit (%)

Debt to GDP Ratio (%)

[ triliun rupiah ] [%]
6.000 120%

5.613
5.000 100%
4.954
4.000 80%
3.949
57%
3.000 3.339 60%
47%
2.774 39%
2.000 35% 33% 40%
2.296 28%

1.000 20%
1.299 1.313 1.302 1.389 1.637 1.590
0 0%
2004 2005 2006 2007 2008 2009

Outstanding
Outstanding Utang GDP
PDB Debt
Rasioto GDP ratiothd. PDB (RHS)
Utang 25
 Policy Framework for Phasing Out Fuel Subsidy
Target
•Rising fuel consumption Condition
•Fuel prices increases •Decreasing energy
•Bottleneck domestic intensity •Lower volume of
refineries •Provision of sufficient subsidized fuels
•Restricting domestic fuel infrastructure and •Minimum subsidy on
stock
•Insufficient infrastructure
Fuel Subsidy transport of fuel
•Alleviating fuel
fuels
•Non-fuel diversified
and transportation Alleviation subsidy along with renewable energy
•Ineffective fuel subsidy compensating sources
variation
Current •Energy diversification
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