Fuel Subsidy Restriction Delayed Indefinitely

Vehicle owners in Indonesia are entitled to a government fuel subsidy, with this right being assured in the State Budget Plan via Law No. 10 of 2010 on the 2011 State Budget Plan (“Law”). As widely publicized by the media, for the 2011 fuel subsidies this is ensured by means of an allocation of IDR 95.9 trillion, as stipulated in Article 7 (1) of the Law, covering subsidized fuels such as the 3 kilogram Liquefied Petroleum Gas (LPG) canisters, the low octane level “Premium” fuel, and the low cetane level “Diesel” fuel.

In the 2010 fuel subsidy budget, the government had spend an extra IDR 80 trillion to ensure the supply of subsidized fuel to the public, instead of the initial IDR 68.7 trillion, in October 2009, as later amended to IDR 88.9 trillion in May 2010 (Law No. 2 of 2010 on the Amendment of Law No. 47 of 2009 on the 2010  State Budget Plan). This increase in expenditure on fuel subsidies was due to the rise in the oil price, and consumption of subsidized fuel increasing twofold as Pertamax (unsubsidized fuel) consumers migrated to using Premium.

Learning from last year’s swollen budget, the government, since the beginning of 2011, had continuously lobbied the House of Representative (Dewan Perwakilan Rakyat / DPR) to agree on a restriction on subsidized fuel. This resulted in an agreement between the executive and the legislature, that starting on 1 April 2011, the restriction would come into force, affecting 4 wheeled personal vehicles. Such restrictions are justified under Article 7 (2) of the Law.

Current developments at the DPR indicate that the enforcement of the fuel restriction will not commence on 4 April 2011, as previously planned and agreed by the two state organs. The government, which was initially a strong advocate of the fuel restriction, is now more heavily weighing the political implications than the economic ones.

As the price of fuel continues to escalate due to the world crude oil prices, more consumers can be expected to migrate to the subsidized fuel, resulting in another swollen budget in 2011. With the indefinite schedule to enforce the fuel restriction, it will also further postpone the fair competition between foreign petrol stations and Pertamina.