This case study reviews the mixed success of fuel subsidy reform in Indonesia over the last two decades, highlighting the importance of public engagement in the success – or not – of these policy changes. It demonstrates how effectively communicating the benefits that reforms can lead to will be essential to public buy-in to the reform programme.
One of the greatest barriers to energy reform are fossil fuel subsidies – government measures that keep prices below market levels for consumers, or above market levels for producers. Well meaning, but ineffective, energy subsidies were originally put in place to improve energy access for the poorest, but have left governments stuck with expensive measures that predominantly middle class consumers have grown used to. Recognized as bad policy, in 2009 the G20 countries got together and pledged to eliminate fossil fuel subsidies. But since then global energy subsidies have doubled, with the IMF putting the total figure at $2 trillion per year.105
One of the most visible outputs of energy reform for ordinary citizens in emerging economies is likely to be a rise in fuel prices, particularly in the context of subsidy reform. In countries without properly functioning tax and transfer systems, raising the cost of gas and electricity foments public discontent, which has stymied previous governments’ attempts at change – despite the boost to competitiveness this change would bring.
For the two EAPI indicators on price distortion of fossil fuels, Indonesia displays poor performance relative to other major emerging economies, placing 111th for super gasoline and 109th for diesel compared to other countries on the EAPI. Subsidies represent a significant portion of the federal budget (20%), amounting to $20 billion annually.106 Thus, budgetary pressures constitute important drivers of reform, as the government needs to reduce levels of subsidies to lessen the slowdown in growth and keep the fiscal deficit low.107 This has become even more pressing since Indonesia became a net importer in 2004, underlining its dependence on imports of expensive fuels. As such, it comes as no surprise that the new government has identified subsidy reform as one of its priorities – less than one month after assuming office, President Joko Widodo announced cuts to fuel subsidies commenting that “the decision to transfer the fuel subsidies to a number of productive sectors is aimed at creating a budget that is more useful for the Indonesian people overall”.108
Although the recent fall in oil prices may help, successive Indonesian governments’ records in this area of energy reform highlight how challenging this can be. Addressing Indonesia’s high subsidies has been attempted numerous times, and in most cases, with limited success. The key barrier to effective removal of subsidies has been in the form of public opposition. Given this shaky history, politicians are only too aware of the political minefield this poses: in 1998, President Suharto’s regime collapsed during the Asian financial crisis after raising fuel prices under pressure from the IMF; in 2008, protests took place; in 2013, violent clashes occurred after the parliament raised the price of subsidized gas and diesel fuel by 44%.109
A number of considerations should be kept in mind when embarking on the reforms the country needs. The IMF concluded that six elements are required for successful reform of subsidies in the energy sector, many of which are linked to engagement with the public to heighten trust on the nature and purpose of reform.110 These elements include a comprehensive sector reform plan, an extensive communications strategy, appropriately phased price increases, targeted measures to protect the poor, and institutional reforms that depoliticize energy pricing. Various solutions have been proposed in the past, including the concept of Sunset Credits, where subsidies are replaced with credits, put into the hands of the consumer to be redeemed for a range of products or services.111 As part of his announcement to cut subsidies, President Jokowi promised that the government would provide low-income families with several social protection cards, including the Indonesian Health Card (KIS), the Indonesian Smart Card (KIP) and the Prosperous Family Card (KKS) which is a step in the right direction.112
The removal of such subsidies needs to be synchronized with other reforms of the public sector. A successful solution will be one that provides meaningful, feasible choices for consumers who work in the local market, securing the public support needed to enact energy reform.