A new report outlines a strategy for reducing Indonesia’s fuel subsidies.

Indonesia spent IDR164.7 trillion (US$18.1 billion) subsidizing fuel products in 2011, of which IDR76.5 trillion (US$8.4 billion) was spent subsidizing gasoline. Fuel subsidies place a huge burden on limited public resources and present a fiscal liability, vulnerable to increases in the international price of oil. Fuel subsidies are also a highly inefficient tool for reducing poverty and meeting the country’s development needs.

The report, “Indonesia’s Fuel Subsidies: An Action Plan for Reform”, identifies the positions of major civil society organisations and the private sector, based on consultations and surveys. It also provides new analysis of the practical challenges facing the government’s plans to develop alternative, gas-based transport fuels (CNG and LGV) in the Java-Bali region. Finally, the report provides a set of recommended actions for progressing fuel subsidy reform.

The report recommends that the most effective way of reducing subsidies is to change pricing policies for fuel products. Getting fuel prices right sets the market signals to incentivize the changes in energy supply and demand. For example:

• Oil refiners to invest in upgrading or developing new refineries to produce higher-grade gasoline;
• Consumers, to shift from lower-grade fuels to alternatives, such as higher-grade gasoline or gas-based fuels; and
• Energy, suppliers to develop the resources and infrastructure needed to supply increased volumes

The report also stresses the need for consultation with citizens, given that fuel subsidy reform remains unpopular with a significant part of the public. Resistance stems in part from a lack of confidence in the government’s reform strategy, including the commitment to deliver services to alleviate reform impacts on the poor. Therefore, particular attention should be paid to consulting affected groups on the priorities for redirecting subsidy expenditure to respond to the needs of poor and vulnerable groups.

The report is a joint effort of the GSI, the Indonesian Institute for Energy Economics (http://iiee.or.id/), and Q Energy Southeast Asia (http://qenergy.org/company.asp).