Ketahanan Energi dan Konteks Permasalahan di Indonesia

1. Ketahanan Energi dan Konteks Permasalahan di Indonesia Oleh: Prof. DR. Tri Widodo, M.Ec.Dev. FakultasEkonomikadanBisnis UniversitasGadjah Mada Yogyakarta, 8 Oktober 2012

2. Equilibrium QD = Qs S The supply curve has a positive slope because marginal cost rises as quantity increases P* The demand curve has a negative slope because the marginal value falls as quantity increases D Q* Introduction • Energy economics is a broad scientific subject area dealing with supply and supply of energy in the societies. Price of Energy Quantity per period

3. D’ Supply-Demand Equilibrium An increase in demand... Price S …leads to a rise in the equilibrium price and quantity. D Quantity per period

6. Introduction • Indonesian fuel subsidy has been a poor policy tool for the government. There are flawed aspects of the subsidy that needs to be addressed. • First, the fuel subsidy scheme which has been implemented since 1967 is a blunder, theoretically. • Second, there has been no restrictions on the purchase of subsidized fuel in retail outlets. Every household, both poor and rich, has equal chance to buy fuel at subsidized fuel.

7. The consequences of this poor policy, in terms of welfare distribution, is very appalling. • Coordinating Ministry for Economic Affairs of Indonesia (2008) showed that the top 40% of wealthy households enjoyed 70% of the subsidies while the bottom 40% of low income households benefited only 15% of the subsidies. • World Bank (2009) showed similar result from a survey conducted in 2005, the richest 40% of households enjoyed 60% of the subsidy. • Recent result from World Bank (2011) suggests that 50% of wealthy households consumed 84% of subsidized fuel with the top 10% consuming 40% of total subsidy. In contrast, the bottom 10% only consumed less than 1% of total subsidy. Further analysis suggests that two-third of poor households do not consume fuel at all.

8. Fuel Subsidy Scheme in Indonesia • Fuel subsidy has been imposing persistent pressure on Government of Indonesia (GoI) fiscal aspects. • Ministry of Energy and Mineral Resources (2010) recorded an increasing trend gasoline subsidy expenditure in the last decade (Figure 1). • The revised expenditures for subsidy in 2011 accounted for Rp129.7 trillion, higher than the planned Rp95.9 trillion. • The realization of fuel subsidy expenditure at the end of 2011, however, amounted to IDR160 trillion. 8

9. Fuel Subsidy Scheme in Indonesia Figure 2. The Price of Subsidized and Nonsubsidized Fuel, 2010-11 • The ever increasing fuel subsidy expenditure is mainly due to increase in consumers’ demand of fuel and partly due to increase in international crude price (ICP). • Law Number 22 Year 2001 mandated the government to fulfill the demand of fuel at subsidized price without conditionality. That is, government must fulfill the demand even if the consumption of fuel and international crude price (ICP) has increased sharply. • Consequently, the amount of fuel subsidy has been increasing for years . Figure 2 illustrates the increase in the price of nonsubsidized fuel due to increase in ICP and government’s burden for each liter of subsidized fuel. 9

10. Adverse Effect on Government’s Budget Table 1. Subsidy Expenditure in Indonesia, 2005-2012 • There are two consequences of the increasing fuel subsidy to the fiscal management. • First, fuel subsidy expenditure imposes pressure on the budget deficit. Given that the projected Rp160 trillion of fuel subsidy is realized, the government’s burden accounted for Rp30.3 trillion. Assuming that the current projected budget deficit in APBN-P 2011 is Rp150.8 trillion, budget deficit will increase by a staggering amount of 20.1%. • Second, the fuel subsidy imposes constraint for the government to focus on the core spending or subsidy related to pro-growth, pro-job, and pro-poor program. This constraint is not preferable for established poverty alleviation programs such as: • PNPM(Community Empowerment Based Poverty Reduction Program), • PIN (National Vaccination Program), • KUR (Credit for Small Enterprise), • Raskin (Rice for the Poor Family), • Pangkin (Food for the Poor Family), • Askeskin (Health Insurance for the Poor), and • BOS (School Operating Grants). 10

11. Adverse Effect on Government’s Budget Table 2. Ratio of Fuel Subsidy to Other Subsidy, 2005-2012 • Fuel subsidy, in some sense, also hinders the ability of ministries to expand their expenditure function. • Fuel subsidy in year 2010 budget plan is roughly fifteen-fold of budget plan for natural resources conservation, four-fold of spending for health-related programs, and nearly twice of budget plan for elementary education system (The Ministry of Finance, 2010). • Table 2 shows that fuel subsidy expenditure is 8.5 times (850% higher) food subsidy expenditure in 2011. • The ratios are even more stark in the comparison with other types of subsidy which are much needed by poor and low income households. These subsidies include agriculture related subsides, Public Service Obligations (PSO), and Credit Assistance for micro and small enterprises. 11

12. Research Problems and Objectives • Eliminating the fuel subsidy will ease the pressure on the government’s fiscal policy. • Reallocation policy improve the wellbeing of particular sector • However, the economy must sustain short-run impact of the removal. • Output adjustment • Price adjustment • Employment adjustment • Income adjustment • Analysis of the impact must be conducted in attempt to formulate the optimal reallocation scheme. • To construct general equilibrium analysis based on Indonesian Social Accounting Matrix (SAM). • To simulate the impacts of existing fuel subsidy scheme on the distributional broad-spectrum macroeconomic and microeconomic variables • To simulate the impact of fuel subsidy removal on the distributional macro- and micro-economic variables. Research Problems Research Objectives 12

13. Factor earnings (value added) Factor markets Domestic private savings Direct taxes Fiscal surplus Indirect taxes Households Government Investment Productive activities Commodity markets Social transfers Sales income Consumption spending (C) Recurrent spending (G) Investment demand (I) Export (E) Import (M) Rest of the world Remittances Foreign grants and loans Capital inflows Methodology Figure 3. Flow Diagram of Circulation Economy • This study utilizes Indonesian Social Accounting Matrix (SAM), published by Central Bureau of Statistic (BPS). • Basically, SAM is a skeletal system data presented in matrix form, which gives a broad overview of the economic and social conditions of society and the interrelationship between the two in a comprehensive, consistent and integrated form (Thorbecke, 2003). • BPS (2010) explains that as a system framework of a comprehensive and integrated data, SAM covers a wide range of economic and social data. These data are consistent because it ensures that the balance of transactions in each balance sheet is contained in it (Figure 3). 13

14. Methodology • Tabel 2 SAM Framework • SAM is essentially a square matrix that describes monetary flows from a variety of economic transactions. • The columns on the SAM represent spending (expenditures) while the rows describe the recipients (Table 2). • The basic framework SAM Indonesia include 4 main balance sheets, namely (Civardi et al, 2010): • (1) the balance sheet of factors of production, • (2) the balance sheet of the institution, • (3) the balance sheet of the production sector, and • (4) the balance sheet consisting of exogenous capital account and the rest of the world (ROW). Each sheet is occupied rows and columns. 14

15. Result 1 • Impacts of Fuel Subsidy Removal • The impact of the removal, derived from these scenarios, would be defined as the change of multiplier before and after the exogenous shock. The scenarios include: • 1) baseline multiplier analysis of Indonesia SAM and; (Scenario A) • 2) multiplier analysis of Indonesia SAM with IDR1 billion fuel subsidy reductions in the total subsidy (Scenario B)  The impact of fuel subsidy removal (C=B-A)

16. Continued.... • Impacts of Fuel Subsidy Removal • The output of this analysis is the multiplier impact of the shock in economy-wide variables including output, GDP, and production factors’ income. Multiplier Analysis of SAM on Output, GDP, and Income. Source: calculated from SNSE (2008)Note: the impact (C) corresponds to removal of the fuel subsidy by IDR1 billion The simulation shows that removal of the fuel subsidy by IDR1 billion decreases the output, GDP, and income by approximately IDR0.1639 billion, IDR0.088 billion, and IDR0.1119 billion respectively.

17. Multiplier Analysis of SAM on Production Sectors and Domestic Commodities Chemical and cement industry as well as electricity, gas, and drinking water sector pertained the highest impact of fuel subsidy removal.

18. Multiplier Analysis of SAM on Income of Factors of Production The results of the simulation show that the impact on labor multiplier is lower (0.0347=0.0087+0.0116+0.0124+0.0047) than that on capital (0.0508).

19. Multiplier Analysis of SAM on Income Distribution The results shows that households in non-agriculture sector would be affected the most by removal of the subsidy. Specifically, urban households, particularly managers, military, professionals, and technicians, would pertained the highest impact of the removal.

20. Result 2 • The Impact of Fuel Subsidy Reallocation to the Economy • The main benefit of fuel subsidy removal is the availability of government’s endowment to be reallocated to other sectors. This endowment should be reallocated to strategic programs that would create multiplier effect both in the short- and long-run. shows the priority sectors chosen based on the highest value for each parameter.

21. Fuel Subsidy Removal Reallocation to food, beverage, and tobacco industry provide the biggest impact to the economy. The impact is relatively lower than that of fuel subsidy removal. The results suggest that fuel subsidy has greater backward and forward linkages relative to these sectors thus implying a higher multiplier.

22. Sectoral Reallocation Impact to Multiplier on Production Sectors The sectors that pertained the highest impact are: 1) chemical and cement industry; 2) electricity, gas, and drinking water; 3) food, beverage, and tobacco industry; 4) and trade. The impact of reallocation is also relatively lower than that of fuel subsidy removal

23. The impact mostly benefits urban households in non-agricultural sector particularly high-income entrepreneurs, managers, military, professional, and technicians.

24. Distributional effect of the reallocation

25. Distributional effect of the reallocation

26. Distributional effect of the reallocation

27. Distributional effect of the reallocation

28. Conclusions • The analysis of impact using SAM yields useful information regarding the sectoral impact. • The results, more importantly, provide analysis regarding distributional impact of the removal. • Simulation of Indonesia SAM shows that fuel subsidy removal would affect economy-wide variables such as output, GDP, and production factors’ income. • Simulation also shows that removal of fuel subsidy affected income distribution of households, firms, and governments. • Analysis of reallocation of fuel subsidy shows that the economy would be positively affected. The impact of reallocation would be relatively smaller than that of fuel subsidy removal.

29. Policy recommendation • First, for the reasons of long-term efficiency, competitive advantage, and manageable economic, social and political instability, the GoI should have a clear long-term “scheduled” and “gradual” program of fuel subsidy reduction, and not the “big-bang” total removal of the fuel subsidy. • Second, the GoI could consider a certain amount of subsidy which is adjusted with the increase of government fiscal capacity and let the domestic fuel price fluctuated as the ICP fluctuated. Societies (both domestic consumers and producers) will learn rationally and adjust logically with the fluctuation of domestic fuel price. • Third, the GoI should not consider the “sectoral approach” to reallocate the fuel subsidy. Our analysis proves the impact of reallocation to four targeted sectors would bring relatively smaller positive effect than the negative effects of fuel subsidy removal. The GoI should consider programs such as “targeted fuel subsidy” to correct the misallocation the fuel subsidy (i.e. subsidy for the poor). As the poor will be affected most, the GoI should consider