[A-List] Indonesia: privatisation woes

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Indonesia's subsidies powderkeg
By Bill Guerin
Asia Times, January 22, 2002

JAKARTA - Fuel subsidies cost the Indonesian government 16 percent of
its overalll expenditures in 2001. A total of US$5.3 billion (53.774
trillion rupiah) went down the drain. A large part of the money was
siphoned off into the pockets of those who for ages here have
manipulated a system that subsidizes the relatively well-off classes in
the community rather than lower-income groups. The substantial price
difference between domestic prices and those in neighboring countries
has cost Indonesia dearly.

This year, as part of a deal with the International Monetary Fund (IMF),
subsidies will be cut almost in half to 30.377 trillion rupiah, roughly
8 percent of the state's total budget. And since keeping the lid on a
potentially explosive social conflict should be a major priority of an
administration that governs a country so adversely affected by crisis,
President Megawati Sukarnoputri does seem to be demonstrating nerves of
steel. She gave the green light for last Wednesday's fuel price hike to
both industrial and public users. In spite of last October's average
increase of 12 percent, petrol was increased by a further 15 percent,
diesel by 9 percent, and the crucial minyak tanah (kerosene), widely
used for cooking and lighting poorer homes, soared by 50 percent - 6
cents per liter for domestic and small businesses, and double that for
industrial purposes.

Meanwhile, the price of diesel for public transport and industry went up
to 1,150 rupiah per liter from 900. With the other fuel increases and
the recent 15 percent hike in electricity and telephone rates, this
price hike will add to the burden on the poor, the jobless, and the
underprivileged.

A special agency, empowered to intervene and re-introduce subsidies in
specific instances, is tasked with monitoring market prices and their
effect on the community. However, these new prices, except for household
kerosene, apply only until the end of February. Thereafter, state energy
company Pertamina will promulgate a new price list at the beginning of
each month. This is in line with Article 28 of the recent oil and gas
law that stipulates that fuel and gas prices be open to fair and healthy
market competition.

The new monthly prices may rise or fall in line with the Mid Oil Platt
Singapore (MOPS) price. Premium petrol is now at the equivalent of the
MOPS price, and the prices of automotive diesel, industrial diesel, fuel
oil, and kerosene have been set at 75 percent of the respective MOPS
level. Domestic kerosene is now at 75 percent of international levels
while petrol, at the new level of 1,550 rupiah (15 cents a liter),
compares with the average price in the US of around 30 cents a liter
(but still less than a third of the price in Europe).

Coordinating Minister for the Economy, Professor Dorodjatun
Kuntjoro-Jakti, forecasts healthy growth this year fired by the
agriculture sector because of the subsidy cuts. However, he didn't
explain where sector support would come from in the budget straitjacket.
The cost of the subsidies, albeit reduced, means less capability for
subsidizing the labor-intensive agriculture sector, the nation's prime
asset. Fuel-subsidy savings have long been meant to develop
infrastructure in villages and urban slums through rural financing
institutions that then relay the money as revolving credit to small
businesses.

Subsidies will be gradually lifted until prices at the pump reach global
market levels by the year 2005, when, says the professor, the government
will be able to raise development funds. But if he had taken just a
short straw poll outside his office, he would have seen that many
Indonesians can hardly believe that the day may come when they pay the
world market price for fuel. As far back as 1997 when the Suharto
administration approached the IMF with a bailout plea, all future loans
were granted on the condition that the government reduce subsidies. The
gradual lifting of fuel subsidies was, from then on, cast in stone in
the frequently revamped "Letters of Intent" signed with the IMF, which
promised Jakarta $5 billion in financial aid.

The IMF stance is that subsidy cuts will also help increase
competitiveness in the industrial sector, as indiscriminate support
prevents companies from having to improve efficiency and cut costs in
order to compete. There is no mention of the poor, except for this
week's glib acknowledgement by IMF spokesman David Hawley that "It is
widely recognized in Indonesia that fuel subsidies are poorly targeted
and do not primarily benefit the poor."

Perhaps there really is no going back, whatever the cost and the
dangers. On June 16 of last year, parliament finally approved the
package that was written into the IMF's "Letter of Intent" two months
later, when the government committed to raising fuel prices for
non-industrial users by just over 30 percent. By contrast, Abdurrahman
Wahid's administration had it much easier, as decision time for them
coincided with high global oil prices and revenues were buffered by an
extra $350 million per year in oil exports for every dollar increase in
the price of oil. An OPEC member, Indonesia contributes 6 percent of the
world's oil supply, and enjoyed a windfall of billions of desperately
needed dollars following OPEC's agreement three years ago to hold down
production.

Conversely, of course, Wahid's government had to shell out even more to
maintain the subsidies when the oil price rose. But there is no such
windfall now - international fuel prices have been hovering at rates
below the $22 a barrel assumed in the state budget.

The students are on the march again over the subsidy cuts. Across
Indonesia, they have been on the streets in the last two days. The
common theme on banners and in speeches is that, "Instead of reducing
the subsidy, the government should make serious efforts to combat
corruption, collusion and nepotism, to save money". They could have
added smugglers to the list of criminals they want sorted out.
Fraudulent practices are widespread from the permanent leaks seen in
traffic queues in Jakarta when jerricans of fuel are filled from tankers
with the driver's knowledge, to the massive fraud perpetrated by those
who re-export the subsidized fuel, mainly to Singapore and Malaysia.

Forged documents are a way of life in Indonesia, and the smuggling of
paraffin and diesel out of the country commands massive profits, which
can easily cover the expense of paying off officials or others who could
jeopardize the theft industry. Foreign flagged tankers are detained,
caught in the act of illegally transporting the subsidized fuel out of
Indonesia, part of the estimated total of 7 kiloliters carried by these
vessels. Even a small ship load (500 tons) of diesel costs Rp6 trillion
in revenue losses.

The protesters say the government's reasons for the price increases are
not "proportionate" to the huge salaries, allowances, and free use of
state facilities enjoyed by so many of the political elite. The student
body as a whole wants Megawati to "confiscate the many ill-gotten gains
of big-time corrupt politicians and others via private and public
entities before resorting to raising fuel prices".

Fuel subsidies have long been an explosive and politically sensitive
issue and these street protests will raise the stakes in the political
arena, where the ex-ruling party Golkar is already lining up a war of
attrition against Megawati and her majority PDI Party over the impending
doom facing Akbar Tanjung, the Golkar leader. These widespread, almost
permanent, economic and political crises have become mutually
reinforcing, producing a downward spiral of instability, rising poverty
and unrest and highlighting underlying social tensions previously
obscured by the relative economic stability enjoyed under Suharto.

The World Bank estimates that at least 30 million Indonesians live below
the poverty line. The National Family Planning Coordinating Board breaks
this down to around 14.7 million poor families to be supported and
aided, but the government, trying to cushion the burden on the poor by
earmarking 2.85 trillion rupiah for various benefits, says its "rice for
the poor" program, for example, will only reach around 9.79 million
needy people this year.

Drastically reduced employment prospects for university graduates and
high school dropouts have resulted in increased disillusionment with the
government. With the fastest growing inflation rate in Asia, prices
increased by more than 12 percent last year. As a result, the government
is going to have to tackle the problem of the poor head on.

One of the main reasons former president Suharto quit when he did was
because of the social unrest sparked by fuel price hike protests. The
higher fuel prices were to be implemented by January 1, and the two-week
postponement allowed the fuel black market even more opportunity to
flourish. This sparked off widespread shortages because of hoarding.
Wahid deferred fuel price hikes twice, and in doing so also brought on
multiple inflation surges in the months preceding the planned hike.

The Alliance for New Indonesia, a group of widely respected economic and
political analysts, warned last week of a possible "social revolution"
if the government failed to immediately address the searing issues
gripping the country. Its chairman, Sjahri, said that "Aside from the
fuel black market, other black markets are the black market of justice
and the black market of power politics."

The huge specter of unemployment continues to cast a giant shadow over
the social fabric and the "rich get richer and poorer get poorer"
reality of life in Indonesia, along with perceptions that no one cares
about the poor and underprivileged. These factors are all building up a
head of steam in a pot that will seriously threaten stability.

Full article at:
http://www.atimes.com/se-asia/DA22Ae01.html

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney@xxxxxx