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The benefits of subsidizing petroleum in indonesia

Lessons from Indonesia’s fuel subsidy bonfire

Indonesia is notorious for its traffic jams. Many people spend hours commuting each day. Fuel subsidies have also played a role. In early 2013, petrol was sold for just 4,500 rupiah US 46 cents per litre, well below the cost of supply. Using data for 19 toll roads in Greater Jakarta and elsewhere in Indonesia over the period 2008—2015, we find that supplying below-cost fuel contributed to rapid growth in road use.

In a sequence of important reforms, President Susilo Bambang Yudhoyono in 2013 and President Joko Widodo in 2014 implemented overnight increases in fuel prices to reduce subsidy spending. Traffic continued to increase even after the reforms, but more slowly than would have been the case if the reforms had not gone ahead.

Indonesia’s steady progress in tackling fossil fuel subsidies

Our paper adds to evidence on the effects of public policies on road traffic in Indonesia. As well as fuelling traffic jams, the subsidies placed a large burden on the central budget. Subsidising road transport fuels is a regressive form of spending in Indonesia. More driving means more pollution. The subsidies have yet to disappear entirely.

Pertamina, the national oil company, is still exposed to losses on its sales. A fixed per-litre subsidy for diesel also remains in place.

Indonesia to Effectively Continue Fuel Subsidy

There are thus more subsidies to be cut. Looking to a neighbour Singapore has led the way in the use of economic instruments to manage road traffic.

There is scope for Indonesia to take steps to emulate its small neighbour.

Among the approaches used in Singapore is an electronic road pricing system on congested roads. Singapore also has fuel excise and a cap-and-trade scheme for vehicle ownership.

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Together with a high-quality public transport system, these policies have helped Singapore avoid the sort of traffic jams seen in Indonesia. The road ahead Reforms could be on the agenda in Indonesia also.

A trial of electronic road pricing has been proposed for Jakarta, although it has been delayed. This approach would be relevant in other Indonesian cities too. A new fuel excise would also be an attractive way forward. Fuel excise is a smart tax for several reasons.

The administrative costs of collecting excise are low, as there are only a few fuel retailers in Indonesia. Fuel excise helps to ease congestion, pollution and road crash risks. Public transport is also important.

There is a long way to go, however, before the city could match the mass transport infrastructure of cities such as Beijing. Fuel subsidies and a lack of investment in public transport can, unfortunately, end up with the traffic in a jam. An open access version of the research is available here.