Energy Subsidy Dilemma in the Year of Politics

JAKARTA – The government suddenly inflated the allocation of energy subsidies 2019 Budget Plan and State Expenditures (APBN) to Rp. 156.53 trillion, up to 65 percent from the previous year’s allocation of only Rp. 94.52 trillion.

Investigating, the increase in oil prices seems to be the culprit of the swelling of Indonesia’s energy subsidies. The rising price of oil has made the government increase the amount of subsidies for diesel fuel this year, from the previously only Rp. 500 per liter to Rp. 2,000 per liter.

Evidently, the increase in oil prices so far this year has made the projected realization of 2018 energy subsidies swell from Rp 94.5 trillion to Rp 163.5 trillion.

As a result, subsidies for fuel oil (BBM) and Liquefied Petroleum Gas (LPG) are estimated to increase from Rp. 46.86 trillion to Rp. 103.4 trillion.

Executive Director of the Institute for Essential Services Reform (IESR) Fabby Tumiwa said that the increase in energy subsidies next year is unavoidable. In the political year, the government did not have the option to cut the amount of energy subsidies amid rising oil prices. In fact, Fabby estimates that the government is ready to increase energy subsidies if it turns out that oil prices are racing again next year.

“In a political year like this, both the government and the House of Representatives (DPR) definitely want subsidies (energy). If you can, whatever you give. I see that tendency exists, “Fabby said when contacted by on Wednesday (8/22).

The oil market, according to Fabby, is currently not stable. This year’s projected realization of energy subsidies could be greater than expected. Consequently, there will be a subsidy debt that can be charged by the government next year.

The assumption of US $ 70 per barrel, continued Fabby, is an acceptable conservative estimate based on current oil price developments. However, Fabby reminded that oil is expected to tighten next year so that it has the potential to hoist oil prices more than the government estimates.

“2019, 2020 oil supply is expected to be tight. Naturally, if the assumption of government oil is US $ 70 per barrel, it could be the price of oil above US $ 80 if you see long-term supply, “he said.

According to Fabby, the key to reducing the burden of energy subsidies on the budget is the distribution of subsidies that are right on target. At present, the government still provides energy subsidies on goods, in this case BBM and LPG, as a result anyone can feel the benefits of subsidies, not only the poor are entitled.

“Solar subsidies will be difficult to reduce because the political issues are quite large, only what really needs to be ascertained is the problem of targeting accuracy,” he added.

For LPG subsidies, the government can arrange distribution of three kilograms (kg) of LPG or melon melon to be more targeted. At present, anyone can sell and buy LPG melon. It is difficult to estimate the volume of LPG that is truly consumed by the poor.

Therefore, the government can take the option to channel LPG subsidies. Unfortunately, the policy cannot be done in a short time.

“To this day, the closed distribution mechanism is still not running,” he explained.

Improvement efforts have been made for the distribution of electricity subsidies where the government determines the recipients of subsidies are 450 Volt customers (VA) and 900 VA customers. However, according to Fabby, it would be more fair if electricity subsidies were given based on electricity consumption. The government can regulate the maximum electricity usage that is entitled to subsidies.

“If large electricity is used, the 450 VA class customer can be charged a normal rate. “The more electricity consumption means that it can be economically not poor,” he explained.

At the same time, the government can allocate subsidies for the cost of connecting electricity to rural communities of around Rp. 1 million per connection. This will help the government to pursue the electrification ratio target of 99.99 percent by the end of 2019.

Details of energy subsidies in the 2019 Draft State Budget (CNN Indonesia/Timothy Loen).


In line with Fabby, the Executive Director of the Reforminer Institute Komaidi Notonegoro also saw the potential for swelling energy subsidies due to an unexpected increase in oil prices. United States (US) sanctions against Iran have the potential to cut Iran’s supply on the global market by around 2 million barrels (bpd).

Despite the potential for additional oil supplies from the US and the Organization of the Petroleum Exporting Countries (OPEC), Komaidi warned that market perceptions also play a role in influencing prices.

“On paper, US and Arab (oil) production might be able to compensate for what happened in Iran, but in the market, the response is not necessarily the same as the calculations on paper,” Komaidi said.

Despite the potential to swell, the government cannot help but bear it. According to Komaidi, the option of reducing the volume of subsidies is very risky if taken by the government in the political year. Moreover, the current government also has a goal to extend its term of office.

The oil assumption of US $ 70 per barrel, according to Komaidi, is moderate enough to maintain subsidies. If there is a deviation, Komaidi estimates that it can still be managed by the fiscal posture, both in terms of revenue and expenditure.

Fuel subsidy distribution 2015-2019 (Indonesian CNN/Timothy Loen).


Previously, Finance Minister Sri Mulyani Indrawati stated that the prediction of the Indonesian oil price assumption (ICP) was the most difficult one to do.

In the presentation of the Ministry of Finance’s 2019 RAPBN, the government sees oil prices next year will move stably with higher crude oil production growth compared to demand due to the increase in US shale oil reserves.

On the other hand, based on OPEC’s projection, 2019 crude oil demand will slow down compared to this year, which is 1.45 million bpd.

The determination of the ICP assumption of US $ 70 per barrel was made after seeing the development of ICP over the past six months which was far above the assumption of the 2018 State Budget, US $ 48 per barrel.

“Maybe US $ 70 per barrel is safe to make our state budget credible even though there are those who predict that oil prices can rise to US $ 90 or even go down to US $ 50,” Sri Mulyani said last week.

The government actually does not close its eyes to see energy subsidies that are still not on target. Some efforts were made, for example, to review LPG distribution through integration with other social assistance, where buyers must use cash direct assistance cards (BLT) such as the Prosperous Family Card (KKS) held by recipients of Non-Cash Food Aid (BPNT).

Then, the government also encouraged PT Pertamina (Persero) to digitize each of the nozzle distribution channels in order to monitor the distribution of subsidized fuel. By digitizing, the volume of fuel coming out of the nozzle will automatically be recorded electronically.

2015-2018 electricity subsidy distribution (Indonesian CNN/Timothy Loen).


The data will be directly connected to the data center that can be accessed by related ministries / agencies (K / L), one of which is BPH Migas. The plan is that this year there will be 5,518 Public Refueling Stations (SPBU) out of a total of 7,415 gas stations throughout Indonesia that have implemented digitalization of nozzles.

Adding to the allocation of energy subsidies is easy to do, the difficult thing is how to ensure that the subsidy remains the target. Keep in mind, limited state finances make additional budgets in one post a reduction in other posts.

With energy subsidies that are more targeted, the government can have more allocations for development. In this case, the Joko Widodo Government still has homework that needs to be completed.


IESR Indonesia and CNN Indonesia

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