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New Indonesia president needs to relook fuel subsidy

Publication Date : 11-08-2014


Severe jams across Java over the recent Eid break as millions of motorists drove out of Jakarta and other major cities to be with their families showed just how stretched the country's road networks on its main island are.

Fajrin Noor, 35, drove a sedan for 24 hours to get from the capital to Semarang, Central Java, with his wife and two children, four times the duration the journey normally takes.

The government relations officer at an investment portal stopped to rest five times during the trip.

Experiences like this are a reminder that when president-elect Joko Widodo takes office on Oct 20, fixing overstretched road infrastructure and a key factor behind it - swelling fuel subsidies - will have to be a key area of focus.

Development spending in Indonesia has increasingly been hampered by the hefty fuel subsidy bill, especially as crude oil prices have stayed above US$100 a barrel since 2010, while Indonesia's crude oil output has kept declining, pushing up imports for consumption.

Indonesia spent about 200 trillion rupiah (US$17.6 billion) last year and plans to spend 250 trillion rupiah ($21.2 billion) this year to keep fuel prices affordable to the majority of Indonesians.

Most Indonesians now pay 6,500 rupiah ($0.55) for a litre of petrol, some 60 per cent of the price of higher-grade unsubsidised petrol.

Such hefty subsidies - coupled with strong economic growth in recent years - have seen the number of Indonesians owning private cars and motorcycles grow rapidly in recent years, as public transport in cities across the country has failed to keep pace with demand.

On Aug 1, the government put a limit to the consumption of subsidised fuel by stopping its sale in central Jakarta and along toll roads at certain hours to keep the subsidy bill in check and within the budgeted quota of 46 million kilolitres for this year.

However, economists and observers say Joko will have to seriously relook the fuel subsidy - which gobbles up a huge chunk of the state budget and diverts funds away from education and social spending - even before he takes office.

"The most effective way is to raise fuel prices. Putting a limit to consumption will prompt leaks.

"If prices rise, consumption will automatically decline, people will stay away from using private vehicles," Aldian Taloputra, an economist at financial house Mandiri Sekuritas, told The Straits Times.

But Hasto Kristiyanto, a deputy chairman of Joko's transition team, said last Thursday that the new administration will not abruptly cut the subsidy and raise the price of subsidised fuel too quickly, but will do so gradually to minimise its social impact.

Aldian said better public transport must also be provided as an alternative, including adding more trains and even ferries plying coastal areas.

Joko has, in his campaign platform, pledged to improve bus services and the availability of rail transport.

Managing traffic is also a key focus, as up to 20 per cent of fuel consumed is estimated to be wasted as vehicles stay idle in traffic snarls.

Even as he ponders these issues, Joko will have to look at unclogging bottlenecks in local government that delay approval for infrastructure projects and investments, and leave the bureaucracy prone to graft.

Vice-president-elect Jusuf Kalla recently identified the two biggest problems facing the next government as hefty fuel subsidies and managing decentralisation.

Indonesia's decentralisation drive that began a decade ago, where powers were devolved to city and regency authorities, has seen frequent delays in vital public projects as local leaders fought shy of making key decisions to avoid breaching stricter governance standards.

"We need to fix this. Officials at the upper levels of these decision-making authorities must go ahead and dare to make decisions to speed up the process,"Kalla said.

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