American Indonesian Chamber of Commerce


Subsidies Return

Commentary by Wayne Forrest

 When President Jokowi took office in 2014 he opened his arms wide to foreign investment, ended the costly energy subsidies, announced that building critically needed infrastructure would be his priority, and set 7% GDP growth as his 5-year goal.   A key part of the plan was to build an additional 35,000 megawatts of power. Currently, only 1,357 MW have been completed, energy subsidies have returned, and the government has capped the price for domestic coal that PLN (the electricity monopoly) will pay at 30% below market price. This follows 2017 decisions by the Ministry of Energy to cap the rates that independent power producers (IPP) could charge.  PLN has borrowing massively to improve its balance sheet to make it less dependent on cash infusions.  Since 75% of the 35 GW goal was to come from IPPs rather than plants owned by PLN,  its difficult to imagine –given the current policy mix– how it can stay solvent and how new private investment will flow into this sector.

Another large SOE, Pertamina, with its virtual monopoly on gasoline distribution, is watching its finances degrade due to a combination of higher import prices (well above the budgeted amount) as well as policy decisions to abandon the pricing formula that allowed retail prices to fluctuate relative to world market prices. Although it has not released its figures, some analysts have estimated that Pertamina’s funding gap is (also counting monies the government owes it for 2017) could be several $billion. The government will keep retail prices for low octane fuel fixed for the next 2 years, the run-up to the 2019 presidential election.

Similar to his views on energy, the President believes that tolls are too high on the new roads being built and has asked the Public Works Ministry to reduce them.  Its not clear that truck operators will increase their use of the roads as their compensation is not tied to transport times. When interviewed, many stated their preference for traditional roads that have numerous rest areas which the toll roads do not. Arbitrarily resetting toll road rates is a departure from the fixed toll adjustments based on inflation.  This “goal post change midstream” could well scare new investors. Of course, reducing the tolls is another government subsidy.

Can Indonesia afford all these new “hand outs”?  Its clear from the public record that Finance Minister Sri Mulyani is increasingly concerned by the balance sheets of not only PLN but other state-owned enterprises, especially those involved with toll road construction.   However, the Ministry also appears confident that it has contingency funds to cover their costs.

Indonesia may ultimately be able to underpin the subsidies but why return to them when there continues to be a scarcity of tax revenues and unfinished infrastructure priorities. In 2014, the rationale to curtail subsidies was that they primarily benefited the middle and upper classes.  Are the 2019 elections the reason?  One expects so.   A more focused policy framework would recognize that current energy/electricity/toll road subsidies are unsustainable, degrade the climate for private sector involvement, and require a higher burden of public debt either through bond offerings of SOEs or direct cash transfers to them. Indonesia in recent years made the adjustments to achieve an investment grade rating but the agencies are becoming increasingly concerned.  (see article on page 2)

Who is standing up for private sector solutions?  Not many, in my opinion. Perhaps their voices are muted as we approach the political season. Or, perhaps Indonesia’s public remains conditioned to the State as the reliable supplier of energy and many other goods.  It naturally does not question dysfunctional policies that favor inefficient state-owned monopolies and their politically connected private business groups who reap large rewards from subcontracts.

During the Presidency of Megawati (2001-2004) there were moves to privatize SOE’s but rarely do we hear about this today.  Instead, we have SOE’s competing for international capital with Indonesia’s private enterprises.  Sometime soon there is the huge Freeport divestment that the government must pay for.

The decision to increase subsidies could come back to haunt this government. And no one mentions 7% growth anymore.

(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)