fuel (bbm) subsidy in indonesia

Fuel Subsidy in Indonesia, Should/ Should Not?

CHAPTER I. BACKGROUND

1.1. Background of Challenge

Since year 2000, the world oil price instability has been appeared. For the next three

years, the price of oil keeps increasing along with the decrease of the reserve capacity. There

are several factors which influence this instability. One of them is the perception towards the

low oil reserve capacity. Second is the increase of oil demand and in other side there is a

worry of the incapability of the producer countries to increase the production, while the

problem of oil refinery utilization level and the decrease of the gasoline supply in the United

States also has the influence towards the oil price that keeps increasing. (Republika Online,

Tuesday, June 28th, 2005).

This phenomenon then was being responded by the Government of several countries

in the world by increasing the oil fuel price. It is the same with Indonesia. The Indonesian

legislative assembly finally agreed the government plan to increase the oil fuel price on

Tuesday, 27 September, 2005 for minimum 50%. The policy of the increase of the oil fuel

price creates a significant impact towards the economy so that this policy creates lots of

protest from all groups.

Regarding the fact that oil Fuel (BBM) is a commodity which holds the really

important role in every economic activity, the decrease of the oil fuel subsidy and the

increase of oil fuel price is not only enlarging the burden of the poor people, but also for the

business environment. It is because there is increasing in the production expenses that

increase the total cost. As the effect, the main production price is increasing and cause the

increase the product’s selling price. The multiple effects of the soaring oil fuel price are the

increase in the factory overhead because of the increase of the raw material, transportation

cost, added with the demand of the employees who ask for the wages or salary increase

would make the total revenue of the company getting smaller and smaller. In other side, with

the increase of the oil fuel price will burden the live of the society which at the end will

decrease the society purchasing power as a whole. The decrease of the society purchasing

power will make products which are produced by the companies not sold as the target, which

at the end decrease the company’s revenue. If the company experience long term lost because

of the higher cost rather than revenue, it would lay off the employees or even close the


company. As further effect, there would be a decreasing number of the Enterprises, and the

increasing number of unemployment.

However, some people say that the giving of the subsidy oil fuel is not really

effective. It is because the one who directly feel the benefit is the one who has car or

motorcycle, which usually is the middle-high class. While the poor people only feel the

benefit indirectly through the public transportation. It is not necessarily true because based on

Ditlantas Pom and survey of BPh Migas, the proportion of fuel consumption/ capita/ day for

public transportation including bus is only 0.9% from the total consumption. Therefore some

people prefer the non-fuel subsidy which is more direct and seems pro-poor.

Nevertheless, the effectiveness of giving oil fuel subsidy and non-fuel subsidy are

still need to be questioned. In one side some people might say that by reducing the number

of oil fuel subsidy could increase the number of poverty, decrease the number of SME

(Small-Medium Enterprise), and increase the unemployment. However, in another side, by

giving the fuel subsidy, it is not really effective in helping the civilians who are in need and

could burden the government financial condition. Thereby some people might think that

direct assistance or non-fuel subsidy would be more helpful and effective.

Hence, in this research we want to examine the effectiveness of fuel subsidy and

non-fuel subsidy towards the poverty rate, unemployment rate, and the number of

Small-Medium Enterprises.

1.2. The Comprehension of Fuel Subsidy

Subsidy is the payment which is done by the government to the enterprises or

household to achieve several objectives that can make them producing or consuming a

product in a bigger amount or with a cheaper price.

In the case of fuel subsidy, the government allocates several amount of budget to

cover the real oil price, so that the fuel price in Indonesia would be lower than it is supposed

to be. In other words, Indonesian people could buy fuel in the cheaper price and in the larger

amount. The policy of giving fuel subsidy in Indonesia has been started from period of

1977/1978 with the purpose of maintaining the stability of national economy through

creating the stability of BBM price as the strategic commodity.


Nowadays there are many rumors about the impacts of decreasing rate of subsidy,

which will increase the fuel price. However, the typical Indonesian people is when there are

issues that the fuel price will increase, or even before that, all the goods price will be affected

and increased.

There are many critics toward this issue. The fuel subsidy somehow help the poor

people. However, it is more beneficial for the rich people. Therefore, from year 2000 until

now, government is trying to minimize the total fuel subsidy, one of the way is with

setting the selling price of fuel same as the cost of Pertamina. This way had the purpose to

decrease the monopolist level of Pertamina as the only one party that has the right to provide

BBM in Indonesia at that time. So, government hope that the people will pay the appropriate

value, less than what Pertamina has as the profit all that time. For lowering the fuel subsidy,

government has some compensations for the poor people. One of the compensations is giving

cas direct assistant or “Bantuan Langsung Tunai”. But if we look deeper, this compensation is

not making people become productive, on the contrary people will be more consumtive with

the fresh cash in their hand.

In giving the fuel subsidy, there are some laws which regulate the procedures, which

some of them are:

1. Law No. 22 year 2001article 8

Government has the obligation to guarantee the availability and the fluency of the

fuel distribution which is the vital commodity and has the control over most of the

citizens in Indonesian Republic.

2. President Regulation No. 55 year 2005 about the retail fuel selling price in

state:

- The retail selling price of petroleum (kerosene) for the households and small

industries including PPN for every litter is Rp 2.000,00 (article 2 verse 1)

- Selling price of retail premium gasoline and solar oil for the small industries,

transportation, and general services including PPN for every litre is Rp

4.500,00 and Rp 4.300,00 (article 2 verse 2)

- The retail selling price should be appropriate with the price of economics

which can be seen as the raise or slope of the price (article 9 verse 1)

- The adjustment of fuel retail selling price and what has been meant at the first

article is set by Ministry of Energy and Mineral Resources based on the result


of the agreement reached by the concerned institution which is coordinated b

Ministry of Economic Coordination (article 9 verse 2).

1.3. The Comprehension of Non-Fuel Subsidy

The non-fuel subsidy is the subsidy given by the government other than fuel subsidy.

In this report, we are focusing mainly to the electricity subsidy, food subsidy, seed subsidy,

fertilizer subsidy, credit interest subsidy, cash direct assistance subsidy, and the rest

subsidy goes to other subsidy.

1. Electricity Subsidy

This subsidy is given to the electricity customers, who are social customers,

households, business, and industries, with power given up to 450 VA for the

consumption up to 60 kwh per month. The subsidy is given in the term of Basic Price

of Electricity; of in Bahasa we call it ‘Tarif Dasar Listrik’ (TDL). TDL is a set to help

the people to have the even distribution and price.

The ups and downs in the TDL rate is based on:

1. Development of exchange rate between rupiah to US Dollar

2. TDL Policy

3. The calculating mechanism in electricity subsidy

However, there are many opinions that electricity subsidy mostly not used by the poor

people, but the advantage goes to the rich people. Thus, government is now obtaining

the subsidy for the usage of 6600 volt ampere and more, so that the subsidy will be

more useful for the poor people not for the rich ones.

2. Food Subsidy

This subsidy is given to the poor people in Indonesia as the supply of cheap

hulled rice. This would be done through the program of “rice for the poor” that

provides cheap price. It has the purpose to guarantee the distribution and availability

of hulled rice with reachable price for poor people in Indonesia. It has been

distributed through Perum Bulog. The amount of food subsidy is influenced by:

1. The base price of hulled rice

2. The total poor families who become the subsidy target


With this subsidy, the subsidize target will be given 20 kilograms of hulled rice for 12

months, only with Rp 1000,00 per kilogram.

3. Credit Interest Subsidy

This subsidy is given to cover the difference between market interest and the lower

interest which has appointed by the government for various credit programs, such as

‘Kredit Ketahanan Pangan’, ‘Kredit Koperasi Primer’, ‘Kredit Usaha Tani’, and many

more, including for the stuck credit. The purpose of giving this subsidy is to fulfill

the fund with lower interest rate compare to the market rate. This subsidy is

given to:

1. Credit which the source of fund is from ex-liquid credit from Bank of Indonesia

and the liquidation of certificate of government’s liability as the replacement of

the return of ex-liquid credit from Bank of Indonesia, which is developed by three

BUMN, which are PT Permodalan Nasional Madani, Bank Tabungan Negara, and

Bank Rakyat Indonesia

2. Credit from common banks which are cooperating in Kredit Usaha Tani and

helping the availability of Kredit Ketahanan Pangan

This subsidy is given through the financial organization which belongs to the country,

like PT Permodalan Nasional Madani, some BUMN banks, and Bank Pembangunan

Daerah which distributing various credit programs and credit fro owning simple

houses. Besides, it is also given by some private companies, like PT Bank Agroniaga,

PT Bank Central Asia Tbk, and PT Bank Bukopin. The subsidy allocation will be

used for interest credit for Kredit Ketahanan Pangan and KPRSh.

4. Seed Subsidy

This subsidy is given for the superior rice plant seed, soybean, hybrid corn, composite

corn, and cultivation fish, so that the farmers can get high quality seed with reachable

price. By giving this subsidy, the government hopes that the production rate will

increase so that Indonesia can export the agriculture products.

This subsidy is given through the state seed producers, which are PT Sang Hyang

Seri, PT Pertani, Penangkar Swasta om the coordination of PT Sang Hyang Seri and

PT pertani, also center technical executor unit in the department of naval and fishery.


5. Fertilizer Subsidy

This subsidy is given as the consequences of government policy in the availability of

fertilizer for the farmers with the lower selling price compare to the market price. The

main purpose of the fertilizer subsidy is to maintain fertilizer price so that it will

stay reachable for the farmers, so that it can support the increasing of farmers’

productivity, so it will encourage the food endurance program. The amount of

fertilizer subsidy is influenced by:

1. The cost of supplying the subsidize fertilizer which determined by the difference

between the highest retail price with the market price (Rp/kg)

2. The total volume of subsidize fertilizer

The subsidy distribution is being done through some BUMN which are the fertilizer

producers. There are five fertilizer producers which are given the subsidy for Urea

fertilizer, which are PT Pupuk Sriwijaya, PT Pupuk Petrokimia Gresik, Pt Pupuk

Kujang, PT Pupuk Kalimantan Timur, and PT Pupuk Iskandar Muda) and also 1

BUMN fertilizer producer which is given non-urea fertilizer subsidy, which is PT

Pupuk Petrokimia Gresik.

6. Direct Cash Assistant

This subsidy which called Bantuan Langsung Tunai in Bahasa, was first given to the

poor people in 2005 as the compensation of the increasing fuel price that caused

by the decreasing fuel subsidy in Indonesia. The cash can be taken at the nearest

post office and if the place is out of reach, the post offices will send the cash to the

place which will be scheduled. Usually the each of the listed poor family will get Rp

100.000,00 per month, which if we sum for 3 months they will get Rp 300.000,00.

However, there are many problems arise while this subsidy given. For example, there

are many people who are competing to get more money than they should get.

Besides the six non-fuel subsidies which have been discussed above, there are some

more subsidies which have been given by the government. One of them is the education

subsidy. Our group believes that education subsidy is actually the most important subsidy that

have to be given by the government for the children whose families cannot afford to finance

the school tuition. Investment in education is a valuable long-term investment. The developed


countries like Japan, Germany, and USA are the countries that pushed themselves to allocate

the fund in education sector even in the crisis era. However, as we can see that in Indonesia,

government is not really concern about our education sector. We should really learn from

those developed countries so that in the future we will have better human resources.

The other non-fuel subsidy is in infrastructure. Because of the government regulation

to decrease the fuel subsidy, there is increasing number in infrastructure subsidy nowadays. It

makes REI can build simple houses with cheaper price. It is beneficial for people with the

lower income because they can buy the houses with affordable price. There are still many

other non-fuel subsidy, like health subsidy, public service obligation subsidy, however

we will not discuss it further in this report.

1.4 The Comprehension of Small Medium Enterprise, Unemployment, and Poverty

1.4.1. Small Medium Enterprises

1.4.1.1. The Classification of Business in Indonesia

SME or Small and Medium enterprises are companies whose headcount or

turnovers fall below certain limits. The abbreviation SME occurs commonly in the

European Union and in international organizations, such as the World Bank, the United

Nations and the WTO.

The classification of enterprise is different in each country. In Indonesia, an

enterprise is qualified as Micro, Small or Medium Enterprise if they fulfill criteria

below:

1. Micro Enterprise

Annual turnover of Rp 100 millions

Net worth (excluding land and building) of maximum Rp 25 millions

Number of employees less than 10 person

2. Small Enterprise

Maximum annual sales of Rp 1 billion

Maximum net assets of Rp 200 millions

Number of employees between 11 to 50 persons

3. Medium Enterprise

Maximum annual sales of Rp 1 billion


Net assets of Rp 200 millions

Number of employees between 51 to 300 persons

1.4.1.2. Role of SME to Indonesia Economy

SME has a big role in developing the economy of Indonesia. The roles of SME

are:

SME act as the buffer economy, which helps in employment creation in Indonesia

(they employ 99.45% of employed people in Indonesia).

SME play an important role as the biggest industry in Indonesia, in terms of

number in total (99.8% of total industry, based on 2006 published data).

SME are a labor intensive industry, meaning that this will absorb more labor,

leading to the decreasing number of unemployment in Indonesia.

SME are more effective in increasing the productivity for both investment and

technology.

1.4.1.3. Problems of SME

Although the roles of SME for Indonesian economy are very significant,

however the attention of government to SME is not as much as it is supposed to be. In

fact, there are still many problems which obstruct the development in of SME in

Indonesia. Those problems are:

Lack of financing can happen to SME since they cannot easily get loan. They

do not have the sufficient financing and collateral. This situation forces some of

SME to borrow money from non-banking institutions.

Lack of managerial skills and skilled Human Resource leads to inefficient

workers productivity.

Lack of network and information causes them to become indirect exporters.

They do not have connection in foreign countries and do not know any information

about the fluctuation of demand in the global market

Lack of technologies and technology know-how (IT). SME cannot produce

standardized goods that meet the global market requirement.

1.4.2. UNEMPLOYMENT


1.4.2.1. The Definition of Unemployment

Unemployment as defined by the International Labour Organization occurs

when people are without jobs and they have actively looked for work within the past

four weeks. The unemployment rate is a measure of the prevalence of unemployment

and it is calculated as a percentage by dividing the number of unemployed individuals

by all individuals currently in the labour force.

1.4.2.2. Types of Unemployment

Basically, there are five types of unemployment, which are:

Frictional Unemployment: Frictional unemployment is a temporary condition. This

unemployment occurs when an individual is out of his current job and looking for

another job. The time period of shifting between two jobs is known as frictional

unemployment. The probability of getting a job is high in a developed economy and

this lowers the probability of frictional unemployment. There are employment

insurance programs to tide over frictional unemployment

Structural Unemployment: Structural unemployment occurs due to the structural

changes within an economy. This type of unemployment occurs when there is a

mismatch of skilled workers in the labor market. Some of the causes of the structural

unemployment are geographical immobility (difficulty in moving to a new work

location), occupational immobility (difficulty in learning a new skill) and

technological change (introduction of new techniques and technologies that need

less labor force). Structural unemployment depends on the growth rate of an

economy and also on the structure of an industry.

Classical Unemployment: Classical unemployment is also known as the real wage

unemployment or disequilibrium unemployment. This type of unemployment occurs

when trade unions and labor organization bargain for higher wages, which leads to

fall in the demand for labor.

Cyclical Unemployment: Cyclic unemployment when there is a recession. When

there is a downturn in an economy, the aggregate demand for goods and services

decreases and demand for labor decreases. At the time of recession, unskilled and

surplus labors become unemployed. Read about causes of economic recession.

Seasonal Unemployment: A type of unemployment that occurs due to the seasonal

nature of the job is known as seasonal unemployment. The industries that are


affected by seasonal unemployment are hospitality and tourism industries and also

the fruit picking and catering industries.

1.4.2.3. The Causal Factors of Unemployment in Indonesia

Basically, there are two factors which become the source of unemployment

in Indonesia:

1. Personal Factors

In this case the causes of unemployment can be caused by laziness,

disability / age and low education and skill. The explanation is as follows:

Laziness factor

Unemployed individuals which caused of laziness are actually slightly.

However, in the political system of materialist and secularist, many of which

encourage people become lazy, like a payroll system that is not feasible or the

rampant gambling. Many poor people become lazy to work in the hope of sudden

wealth by gambling or lottery win.

Factors disabled / elderly

In a capitalist system, the laws that apply are the 'law of the jungle'. Therefore,

there is no place for those who are disabled / elderly to get a decent job, because ther

are considered no as productive as the young and healthy people.

Factor of low education and skills

Currently about 74% of Indonesian workers are those with low education, namely

primary and secondary school. The impact of low education is the poor skills that

they have. Furthermore, the Indonesian education system still does not focus on

practical issues required in the life and world of work. Therefore, in the end they

become unemployed intellect.

2. Social Systems and Economic Factors

This factor is the main cause of rising unemployment in Indonesia, among them:

The imbalance between labor supply and demand


Estimated next year will come new headhunter about 1.8 million people, while

the current that can be accommodated in the formal sector only 29%. The rest in the

informal sector or become unemployed.

Government policies are not siding with the people

Many government policies are not aligned to the people and create new

unemployment. For example, according to the minister, yesterday's rise in fuel prices

has added to unemployment of about 1 million people.

Development of non-real economic sector

In a capitalist economic system, appears transaction that makes money as a

commodity that is called non-real sector, such as stock exchanges and banking

system of usury and insurance. The sector is growing rapidly. Transaction value can

even reach 10 times more than the real sector.

Growth in money supply much faster than the real sector is pushing inflation

and asset price bubbles causing declines in production and investment in real sector.

As a result, it encourages companies bankruptcies and layoffs and unemployment.

This is the main cause of economic and monetary crisis in Indonesia that occurred

since 1997.

Number of female workers

Number of women workers in 1998 there were about 39.2 million. This number

continues to increase every year. An increasing number of women workers has

resulted in competition between female job seekers and men. However, in the

capitalist system, for cost efficiency is usually preferred women because they are

easily arranged and not much demand, including the issue of salary. These

conditions resulted in the number of unemployed men.

1.4.3. POVERTY

1.4.3.1. Definition of Poverty

There is not any common definition of poverty which is accepted by all countries.

Usually, poverty is categorized as material deprivation.


However, defining poverty solely as being deprived of money is not sufficient. Social

indicators and indicators of risk and vulnerability must also be considered and

understood to obtain a clear picture of poverty.

1.4.3.2. The Criteria of Poor People in Indonesia

In Indonesia, the Central Bureau of Statistics (BPS) uses 14 criteria to assume

poverty. This poverty criteria could be debated when the government launched the

program in direct cash assistance (BLT). Then, the polemic back occurs when the criteria

are again used in the Census of Population 2010.

Quoted by Antara, the 14 criteria for poor households are:

1. The house building floor area of less than eight square meters per person.

2. The type of floor residential buildings made from earth / bamboo / wood cheap.

3. The kind of shelter walls made of bamboo / thatch / low quality wood / wall without

plaster.

4. People are also considered poor if they had no toilet facility / together with another

household.

5. Household lighting source does not use electricity.

6. Drinking water source comes from the well / unprotected spring / river / rain water.

7. Fuel for cooking day days include firewood / charcoal and kerosene.

8. Only eating meat / dairy / chicken once a week.

9. Just buy a new set of clothes in a year.

10. Could only eat one or two times a day.

11. Unable to pay medical expenses at health centers / polyclinics.

12. The highest education of household heads: no school / did not complete primary

school / primary school only.

13. 13. Source of income of household heads are farmers with an area of 0.5 hectares

of land, or farm laborers, fishermen, construction workers, plantation workers or other

jobs with incomes below Rp 600,000 per month

14. Have no savings / goods that are easy to sell with value of USD 500,000, as well

motorcycle credit or non credit, gold, livestock, motor boats and other capital goods.

Poverty Rate ↑

Unemployment ↑ SME ↓ Profit↓


1.4.4. FRAMEWORK

In this report we use a framework or basic theory that relates the fuel subsidy, non-

fuel subsidy, SME, unemployment, and poverty

Framework

The decrease of fuel subsidy and non fuel subsidy means increasing in fuel,

electricity, and raw material price and other cost that will affect the goods price in the market.

Then, it will make the living cost of Indonesian people increase, but the income will stay the

same. That factor will make people more selective in consumpting and decrease the

consumption. The decrease in consumption then will lead to the decrease of consumer

demand.

If the demand is decreasing, the enterprise especially SME, will not be able to

increase the price (because they will be afraid to lose some customers) while the cost of

production even go higher.

Moreover, the total production of SME will also be lower due to the decreasing

demand from the consumer. If that case happens, the SME will face the increasing cost to

produce the goods and also the increasing cost of producing process. Therefore, the total

profit of SME will go down.Those reasons make small enterprises face the failure.

In the long term, the failure of many SME will lead to the firing or employ reduction.

A huge number of employ reductions will increase the unemployment rate. Therefore, many

people will lose the income and in the end it will increase the poverty rate.

Fuel Subsidy and Non Fuel Subsidy↓

Raw Material Cost ↑

Goods' Price↑

Living cost ↑ , Yd

constant

Demand↓

fuel (bbm) subsidy in indonesia

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