Thursday, August 14, 2014

Abolishing Fuel Subsidies: Lessons From Indonesia

From the East Asia Forum (excerpt):

Time for a new approach to Indonesia’s energy subsidies
Authors: Stephen Howes and Robin Davies, ANU

Indonesia’s new president, Joko Widodo (Jokowi), will face many challenges but none more pressing and immediate than dealing with Indonesia’s energy subsidies, which this year will constitute a quarter of total government spending…They were 20 per cent of expenditure when President Yudhoyono (SBY) came to power, and they will be almost 25 per cent when he leaves office later this year….

…A more radical reform program is needed: instead of one-off increases, a time-bound program with an upfront agreement that the end result would be the elimination of energy subsidies within, say, three or four years….

…Whether Jokowi will deliver remains to be seen….

Short, sweet, and straight to the point.

In case you hadn’t heard, Malaysia is mulling over a scheme to revise the existing petrol and diesel subsidy, replacing the current blanket approach with a targeted scheme based on income levels. The details – at least what’s been leaked already – sound needlessly complicated.

From my perspective, such a scheme also misses the point – the fuel subsidies are there to help lower income families with the cost of living. You can achieve the exact same result (in fact, a superior result, because families can then choose what they want to spend their money on instead of getting support in kind), by getting rid of fuel subsidies entirely and using some of the proceeds to fund social transfers. In other words, just give them cash. The mechanism for that is already there, no matter what else you may think of BR1M.

Putting in a targeted subsidy scheme sounds nice in principle, but could be a nightmare to manage, not to mention the necessity of setting up another administrative system that has to be manned and paid for. Once in place, it’s going to be really hard to get rid of. There’s also the teensy, weensy issue of over-consumption and negative externalities that would be completely ignored (again) with the implementation of such scheme.

A couple of other notes: Indonesia has already implemented an income-based quota approach to fuel subsidies. It hasn’t noticeably reduced the burden of subsidies on the government. They’re also contemplating a shift to a fixed-subsidy system rather than a fixed price system, something I think we’re looking at as well. That sounds better as pump prices will move with the market and the government will only have to pay out a relatively fixed amount as the subsidy bill will vary only with consumption, instead of with both consumption and market prices.

But niggly little details like that don’t offset the main rationale of subsidy reform, which is to remove distortions from the economy, reduce government expenditure, and improve economic efficiency. Let’s get rid of these subsidies entirely and just move on, for crying out loud.


  1. Hisham,

    But giving and taking out subsidies have a direct impact on political sentiments. That's why most politician didn't have the political will to abolish subsidies.

    So, they will come out with rocket-science approach of distributing subsidies (which includes the income-based quota approach). This will at least sort of reducing Government burden giving broad based subsidy scheme and at the same time manage the people's political sentiment.


    1. @Mohamed

      Unfortunately, "rocket science" policies will tend to leak a lot.

    2. Crime Syndicates behind Diesel robberyAugust 22, 2014 at 6:19 PM

      The MACC have advised against giving diesel and petrol subsidies at the pump. It is just an indirect way of robbing cash at the fuel pumps by crime syndicates. How much have been lost at ATM robbery? Just a few measly milion. How much have been lost at petrol pumps. 15 billions per year!
      Our diesel are sold as unbranded diesel in Singapore. Singaporean Chinese shake their car boots or jack them to take in every drop of malaysian subsidies given by the Finance Minister and Kementerian Kooperasi dan Penggunaan. You wonder why such a huge subsidy is given to a stupid kementerian. So that they can hide the 30 billons subsidy thats why!.
      Even BMW have introduced a 400 thousand diesel guzzling SUV to enjoy the subsidies...
      In thailand subsidised diesel are sold by the roadside.
      If this had happened in Thailand, the PM himself would have been charged in court for abuse like that Thai PM,
      So now we know. Whoever approve subsidies at the pump must be investigated by MACC. Because the crime syndicates are behind these 30 billion ringgit diesel and petrol scam.

  2. Not some politician, it should be all politicians! And all over the world too.

    I fully agreed that this fuel subsidy should be removed once and for all. As well as water as well as a lot of things. But we are all human and need to be loved, so subsidies will be here I guess for ever, like it or not.

    Zuo De

  3. Supportive of the cash transfer proposal but I would take it further and make the cash transfers conditional like bolsa familia in Brazil. No offense to the poor but the less-educated may not be spending cash in the right places to improve their situation (e.g. education vs entertainment)

    1. @roger,

      Many others have made that point, both in public and in private. We'll see if anybody is listening

    2. No offense intendedAugust 22, 2014 at 6:08 PM

      "No offense to the poor but the less-educated may not be spending cash in the right places to improve their situation (e.g. education vs entertainment)"

      Oh yeah so you consider yourself well educated to decide how you should spend your time. Is entertainment bad? If you entertain yourself with reading the Economist would that be a waste of subsidies?
      You dont seem too educted to me offense bro.
      My you sure have some snobbish readers in your blog.

  4. Needless to say, I support cash transfer vs subsidy.

    You should check this out if you haven't :

    It's Modi wanting to have all Indians to own a bank account.

    This is probably something worth emulating, regardless whether India would succeed or not. Malaysia has higher penetration rate with better infrastructure, so we should be able to do this better than India. Having a bank account is so important in making sure the cash transfer works transparently.

    I think the biggest problem with BRIM right now is its ad-hoc nature and it's actually physical cash being transferred by hand. So many potential for corruption there. Automate and institutionalize it and it would go a long way in building a superior support system. Having a bank account helps build that institution.

    1. @Hafiz

      Haven't they shifted to direct debit into bank accounts already? I thought they started last year.

    2. Poor fella...maybe he is too rich to know the details about BR1M. Its now automatic la..kesian

  5. Oh yea? I must've been behind the curve. Nice then.

  6. Replacing subsidies with "social transfers" is a really good idea.

    However replacing one type of conditionality (fuel consumption) with another like Bolsa Família does (children must attend school) is not such a good idea, in my opinion.

    Of course some will spend their dividend unwisely, but the proportion that is misspent is probably no more than the amount of money wasted/corruptly diverted in any redistribution program.

    Conditional payments are the lazy reformer's way of social engineering. How would people feel if the transfers were made conditional on religious practice or somesuch? Better to just trust people. Sure, one will be disappointed at times, but that's life.

    There will never be a perfect solution.

    1. "How would people feel if the transfers were made conditional on religious practice or somesuch? Better to just trust people"

      I must say this is very very very good point. Never thought of it that way. Blogs open your mind hehe...

      Beside the conditions will surely be based on narrow business interest of some cronies.. force them to buy my products books, rice, or tv or ipad etc..
      So let the people thmeselves decide.