Fiscal Policy related to Fuel Subsidy

and Climate Change Program In

Indonesia

Fiscal Policy Office – Ministry of Finance

Republic of Indonesia

Expert Workshop on Estimating Support to Fossil Fuels, in OECD, Paris

18 - 19 November 2010

by Askolani

Indonesia : Fuel Subsidy Formula

• Retail fuel price is the retail selling price per liter of fuel in domestic area.

• Tax is a Value Added Tax (10%) and Motor Vehicle Fuel Tax (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

Fuel Subsidy :

= [Reference Price of Fuel - (Retail Fuel Prices - Tax) ] x Fuel Volume

0

1000

2000

3000

4000

5000

6000

7000

8000

MOPS Official Price Retail Price

IDR/liter

VAT & PBBKB

Subsidy

Reference price of Fuel

2

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

The vulnerable of oil price

Community dependence on fossil fuel

subsidies is still high

Targeted fuel subsidies 3

State Budget And Fuel Subsidy Policy

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

68,4 31,2 30,0 39,0

95,6

64,2

83,8

139,1

45,0

88,9 92,8

23,9 24,6

28,8 37,6

53,4

64,3

72,3

97,0

61,6

80,0 80,0

0

20

40

60

80

100

120

0

20

40

60

80

100

120

140

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

2011 Budget

Plan

Fuel Subsidy ICP

US$/Barrel IDR Trillion

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Pe

rce

nta

ge

CGE (Percentage) Total Expenditure (Percentage) GDP (Percentage)

Fuel Subsidy Compare to Other Subsidies, Central Government Expenditure, Total Expenditure, and GDP

4

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 PSO & Others Fertilizer & Seeds Food Electricity Fuel

Per

cen

tage

Share of Fuel Subsidy to the Total Subsidies

Share of Fuel Subsidy (%)

CGE = Central Government Expenditure

GROWTH OF SHARE AND FOSSIL FUEL SUBSIDY, 2000 – 2009

42,99 %

34,47 %

18,48 %

4,07%

Average increase in last

10 years:

1.Oil : 0,52 %/year

2.Coal : 13,70 %/year

3.Gas : 1,81 %/year

4.Total : 4,33 %/year

A. Increase of Total Share (in million BOE)

B. Increase of Fossil Fuel Subsidy (in billion IDR)

727 772

800 859 873 896 897

956

1065 NRE

Coal

Gas

Oil

1014

*)

*) = 2+3+4 Source : Ministry of Energy and Mineral Resources 5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1. Electricity 3.93 4.30 4.10 3.36 3.31 10.65 33.90 37.48 78.58 53.72

2. Electricity using Fossil

Fuel3.30 3.55 3.49 2.92 2.86 9.20 29.75 32.63 68.16 46.14

3. Fossil Fuel Subsidy 55.64 63.26 31.75 30.04 59.18 103.35 64.21 83.79 139.03 45.04

4. LPG Subsidy 0 0 0 0 0 0 0 0.15 3.84 7.78

Total Fossil Subsidy 58.94 66.81 35.24 32.96 62.04 112.55 93.96 116.57 211.03 98.96

Commodities and Fuel Domestic Prices, 2003-2010

6

-

1.000

2.000

3.000

4.000

5.000

6.000

7.000

01-A

pr

01-J

un

17-J

an

01-J

an

21-J

an

01-F

eb

01-J

an

03-J

an

01-O

ct

1Jan

-23

May

24-M

ay

01-D

ec

15-D

ec

2001 2002 2003 2004 2005 2006 2007 2008 2008 2009

IDR

GASOLINE

DIESEL

KEROSENE

Year 2003 2004 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

INDUSTRYS S S NS NS NS NS NS NS

FUEL OIL S S S NS NS NS NS NS NS

2005

Note : S = Subsidy, NS = Non Subsidy

Fuel Price Adjustment (IDR/ liter)

Nanggroe Aceh Darussalam

Sumatera Utara

Sumatera Barat

Riau

Jambi

BengkuluLampung

Sumatera Selatan

Bangka Belitung

Kepulauan Riau

BantenJawa Barat

Jawa TengahDKI Jakarta

D.I. Yogyakarta Jawa Timur

Bali

Kalimantan Barat

Kalimantan TengahKalimantan Selatan

Kalimantan Timur

Nusa Tenggara Barat

SulawesiBarat

Sulawesi Tenggara

Nusa Tenggara Timur

Sulawesi Tengah

Gorontalo

Sulawesi UtaraMaluku Utara

Maluku

Papua Irian Jaya Barat

Sulawesi Selatan

Roadmap of Kerosene to LPG Conversion Program

Red area converted in 2007 and

2008 with 19 million conversion

packages.

In 2007, 4 million conversion

packages distributed in Java.

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.

Green area converted in 2009

with 23 million conversion

packages.

1 2

3

7

Achievement of Kerosene to LPG Conversion Program

8

9

Volume of Fuel Subsidies, 2006 - 2011

37,5 38,6 39,2 37,7 38,2 38,6

-

10,0

20,0

30,0

40,0

50,0

2006 2007 2008 2009 2010* 2011*

Million KL

Diesel Kerosene Gasoline

Volume of Fuel Subsidies

7.2 7.3 7.1 8.1

92.8 92.7 92.9 91.9

-

20.0

40.0

60.0

80.0

100.0

120.0

2006 2007 2008 2009

%Fuel Subsidies vs Non Fuel Subsidies

% BBM Bersubsidi thd Total Konsumsi % BBM Non Subsidi thd Total Konsumsi

%

% non subsidized fuel to total% subsidized fuel to total

Challenge : 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

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

WB staff projections based on trends & monthly motorcycle sales.

Stock of vehicles by type

Stock of cars, trucks and buses

grew even faster between 2005-

2007, 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)

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010

Units (millions) Units (millions)

Motorcycles

Cars

Motorcycles

Cars

Trucks

Buses

Trend projections

10 Source : World Bank study

FUEL SUPPLY – DEMAND, in the long term

Source : Ministry of Energy and Mineral Resources 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

12

Indonesian Fuel Price : Compare to Other Countries’ Fuel Price

13

IDR5,871

IDR6,355

2 . 000

4 . 500

7 . 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**

IDR/Liter Indonesia’s Gasoline & Diesel Prices

IDR4,500

Gasoline Economical Price Diesel Economical Price Administered Price

0

5,000

10,000

15,000

SINGAPORE PHILIPINE THAILAND VIETNAM MALAYSIA INDONESIA

8,42

9

6,59

0

7,36

7

7,04

9

4,78

4

4,50

0

11,5

60

8,45

1

8,77

7

7,75

9

5,06

6

4,50

0

IDR/Liter

GDP/Capita :

DIESEL GASOLINE

USD 33.714 USD 1.582 USD 3.470 USD 779 USD 6.648 USD 1.748

Challenge : phasing out fuel subsidy will be a tool to improve Fiscal Space ?

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% 14

to

exp

to net

rev to

exp

to

exp

to

exp to

exp

to

exp

to net

rev

to net

rev to net

rev to net

rev

to net

rev

Transfer to local gov Subsidy Personnel exp Interest exp Goods exp Other exp

0

20

40

60

80

100

To exp To net rev

2005 2006 2007 2008 2009 2010

90 91 85

89 85

92 87 88 85

93

85

97

pe

rce

nta

ge

Mandatory Spending Ratio 2005 - 2010

Transfer to region Subsidy Personnel Exp Interest Payment Capital Exp Other Exp

To exp To exp

To exp To exp To exp

To net rev

To net rev

To net rev

To net rev

To net rev

• Transform price subsidy to direct

subsidy

• Social Safety Net to shield the

vulnerable

• Energy diversification

• Closed distribution system

• Fiscal incentive and

disincentive

• Minimizing fuels distribution cost

• Full cost absorption of fuel provision

• Effective targeting and costing of

fuels subsidy

Reduction

of Fuel

Subsidy

Compensating

Variance

Less Volume

of Subsidized

Fuels

Fuel Price

Reference

Mid-Term Development Plan Fuel Subsidy Phase-out Strategy

15

Road map of Fuel Subsidy Targeted

16

S = Subsidy S/closed 1 : Test arrangement for closed distribution system (2009-2010)

NS = Non Subsidy S/closed 2 : The trial closed distribution system in gradually (2011-2014)

Source : Ministry of Energy and Mineral Resources

Sep ' 05 Okt ' 05 Apr ' 06 2007 2008 2009 2010 2011 2012 2013 2014

Household S S S S S

Small Business S S S S S

Industry NS NS NS NS NS NS NS NS NS NS NS

Transportation S S S S S

Fishery NS NS S S S

Industry NS NS NS NS NS NS NS NS NS NS NS

Transportation S S S S S

Fishery S S S S S

Industry NS NS NS NS NS NS NS NS NS NS NS

Sea Freight Industry NS NS NS NS NS NS NS NS NS NS NS

Sea Freight Industry NS NS NS NS NS NS NS NS NS NS NS

Fuel UserStage VII Stage VIII

S/Closed 2

S/Closed 1

Fuel Oil for Sea Freight Industry

Diesel Oil for Sea Freight Industry

S/Closed 1

S/Closed 1

S/Closed 1

Stage V Stage VI

Gasoline

Kerosene

S/Closed 2

S/Closed 2

S/Closed 2

S/Closed 2

S/Closed 1

S/Closed 1

Diesel

S/Closed 2

Mandatory for Bio ethanol Utilization (minimum %)

Mandatory for Pure Plantation Oil Utilization (minimum %)

17

MANDATORY for BIODIESEL UTILIZATION (minimum %)

Source : Ministry of Energy and Mineral Resources

SECTOROct - Dec

2008

January

2009

January

2010

January

2015**

January

2020**

January

2025**REMARK

PSO Transportation1 %

(existing)1 % 2,5 % 5 % 10 % 20 % * Based on Needs

Non PSO

Transportation- 1 % 3 % 7 % 10 % 20 %

Industry and

Commercial2,5 % 2,5 % 5 % 10 % 15 % 20 % * Based on Needs

Power Plant 0,1 % 0,25 % 1 % 10 % 15 % 20 % * Based on Needs

SECTOROct - Dec

2008

January

2009January 2010

January

2015**

January

2020**

January

2025**REMARK

PSO

Transportation

3 %

(existing)1 % 3 % 5 % 10 % 15 %

* Based on Needs

Non PSO

Transportation

5 %

(existing)5 % 7 % 10 % 12 % 15 %

* Based on Needs

Industry and

Commercial- 5 % 7 % 10 % 12 % 15 %

* Based on Needs

SECTOROct - Dec

2008

January

2009

January

2010

January

2015**

January

2020 **

January

2025 **REMARK

Industry andTransportation

(Low & medium

speed engine)

Industry - - 1 % 3 % 5 % 10 %

Marine- - 1 % 3 % 5 % 10 %

Power Plant - 0,25 % 1 % 5 % 7 % 10 % * Based on Needs

• Controlling subsidised fuel consumption by closed distribution and regulation improvement

• Developing alternatives energies (coal, gas, geothermal) • Electricity tariff adjustment

Subsidies Policies, 2009-2014 Subsidies Policies 2009-2014

18

-

5.0

10.0

15.0

20.0

-

50.0

100.0

150.0

200.0

250.0

2010 2011 2012 2013 2014

%

In ID

R T

rilli

on

Non Energy Subsidy Energy Subsidy % to GDP % to Total Exp

88.9 92.8

56.051.1

44.3

-

3.0

6.0

9.0

-

30.0

60.0

90.0

120.0

2010 2011 2012 2013 2014

%

In ID

R T

rilli

on

Fuel Subidy % to Total Expenditure

Medium Term Expenditure Framework Fuel Subsidy

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

Energy Subsidy Policies will Support Fiscal Sustainability in the Medium Term

- 3

- 2.5

- 2

- 1.5

- 1

- 0.5

0

0.5

1

Budget - R 2009 Budget2010 2011 2012 2013 2014

Deficit & Primary Balance, 2009 - 2014

Deficit Primary Balance

47%

39%

35%

33%

30% 29% 29%

27% 26%

25%

20%

25%

30%

35%

40%

45%

50%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Debt to GDP Ratio

19

Challenges Phase out fuel Subsidy will have a broad impact, such as :

Inflation

Poverty and Unemployment

Competitiveness of Industry

Economic growth

Fiscal sustainability

Energy sustainability

How to design a comprehensive of phase out fuel subsidy, include its broad impact

Followed up by compensation policies to society and industry to minimize its negative impact

In developing countries (i.e. Indonesia, Malaysia, India), implementation of phase out fuel subsidy policy will be affected by political decision.

20

Fiscal Incentive for Climate Change

1. Minister of Finance (MoF) Regulation on Taxation and Customs Facility

for Renewable Energy Sources Utilization Activities;

2. MoF Regulation on VAT burden by the Government on the Import of

Goods for Geothermal Activities

4. MoF Regulation on VAT burden by the Government for Bio Fuel

5. Price subsidy for Bio Fuel

6. MoF Regulation on VAT burden by the Government for mitigation and

adaptation climate change

7. Revolving fund for geothermal exploration (IDR1 trillion in 2011)

21

(Billion IDR)

Revised

BudgetReal.

Revised

BudgetReal. Budget

Revised

Budget

Proposed

Budget

a. Income Tax on geothermal energy commodities 500,0 500,0 800,0 800,0 624,3 624,3 1.000,0

b. VAT for adaptation and mitigation climate change - - - - - 900,0 500,0

500,0 500,0 800,0 800,0 624,3 1.524,3 1.500,0

2011

Tax Subsidies

Total

2008 2009 2010

DAK Environment

Support the national priority targets of pollution loads reduction and alleviation of 50 percent

pollution level by the implementation of water pollution control, air and solid waste in the

region and to strengthen the implementation of regional environmental field of Minimum

Service Standard (SPM).

Transfer to Region for Climate Change Programs

To support climate change-adaptation and mitigation in the region, the Government attempt to fund activities related to climate change trough the Special Allocation Fund (DAK). There are two sectors related to climate change activities that are DAK Forestry and DAK Environment

Climate Change Financing for Regions

22

DAK Forestry

Improve watershed function, in order to maintain and increase the carrying capacity of forest

resources, land and water, and to support climate change mitigation. The policy is sated by

preventing more damage of forest resources, soil water that is in the watershed trough

implementing land rehabilitation, forest management in the scope of the district / city /

province affairs, including the development of village nurseries and peat land conservation.

(Billion IDR)

Sector/Year 2006 2007 2008 2009 2010

Environment 217.5 351.6 351.6 351.6 351.6

Forestry 100.0 100.0 100.0

Thank You