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JAKARTA - The government says it will gradually liberalize the domestic fuel market over the next five years, with the aim of completely eliminating costly fuel subsidies by 2010. "In the year 2010, fuel prices will be determined by the mechanism of healthy and appropriate competition, and the government will only give special help to replace subsidies for certain fuels," Energy and Mineral Resources Minister Purnomo Yusgiantoro was quoted as saying Monday (29/11/04) by detikcom online news portal.
Indonesia spends about $6 billion annually on subsidizing fuel for the general public, far more than it allocates to health, education and other basic needs. Critics have long argued that subsidies on non-kerosene petroleum products should be scrapped to reduce the burden on the state budget, with the savings redirected to help the needy through job creation and small business programs.
They argue that of all the fuel subsidies, the poor directly benefit only from subsidized kerosene, which is widely used by low-income households for cooking and lighting. There are also concerns that much of Indonesia’s subsidized fuel is smuggled abroad and also sold to industrial consumers. Purnomo said a transitional or “semi-liberalization” phase of the domestic fuel market would commence next year, but declined to mention by how much fuel prices would be increased.
"During the semi-liberalization period, the liberalization could be applied to certain fuels or a cross section of fuel," he was quoted as saying by state news agency Antara. He said subsidies on gasoline and diesel were likely to be reduced over the transitional phase, while kerosene would continue to be subsidized. The minister said it would be impossible to swiftly introduce substantial fuel subsidy cuts due to the public’s low purchasing power parity.
Fuel price rises have long been a politically sensitive issue in Indonesia, sparking widespread protests and riots in 1998 that hastened the downfall of ex-president Suharto. In early 2003, ex-president Megawati Sukarnoputri’s administration briefly raised utility prices but was forced to backtrack after massive anti-government demonstrations.
This year the government again axed its plan to eliminate subsidies on non-kerosene petroleum products and pledged not to increase fuel prices, claiming the move was necessary to prevent possible violence surrounding the legislative and presidential elections.
President Susilo Bambang Yudhoyono, who took office on October 20, has already acknowledged that cutting subsidies is necessary to avoid fiscal disaster, but claims his administration will implement such cuts in a way that won’t hurt the poor. Finance Minister Yusuf Anwar has confirmed the government will raise fuel prices next year to reduce subsidy costs. Bank Indonesia says the increases should only cause a “temporary” increase in the inflation rate, if they are carefully planned and implemented.
Foreign firms to sell fuel
Tubagus Haryono, head of the Downstream Oil and Gas Supervisory Agency (BPH Migas), said liberalization of the fuel sector will start in November 2005, when state oil and gas company Pertamina loses its monopoly on the distribution and sale of fuel. Foreign firms will then be able to sell certain types of fuel in Indonesia, provided they obtain licenses and operate with local partners.
Haryono said BPH Migas has proposed that fuel subsidies not be completely eliminated until 2010 because the public is not yet ready for steep fuel price increases. He also said Indonesia’s facilities for fuel distribution and storage also need to be improved in accordance with international standards. "Many factors have caused complete liberalization to be postponed until 2010. However, before liberalization is carried out, there will be a transitional stage and a balancing stage. That is our proposal,” he was quoted as saying by detikcom.
He said the number of investors seeking to enter Indonesia’s retail fuel market after Pertamina loses its monopoly is not yet high due to the costly subsidies. Megawati last month enacted a regulation allowing foreign investment in the distribution, refining, storage and sale of oil and gas. The government has already granted licenses to Royal Dutch/Shell Group and five local companies to directly import and sell certain types of fuel from next year.
Other foreign firms that have reportedly expressed interest in selling fuel in Indonesia include US-based ChevronTexaco, French oil major Total SA, Anglo-American energy giant BP and Malaysia's Petronas.
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