Indonesia's Fuel Subsidies Help Rich, Not Poor: World Bank Report

Fidelis E. Satriastanti, Jakarta Globe 20 Apr 10;

The country must eliminate fuel subsidies to ensure an efficient, sustainable, and secure energy sector, according to a World Bank report on sustainable energy released on Monday.

The report, “Winds of Change: East Asia’s Sustainable Energy Future,” finds that energy subsidies intended to protect the poor end up benefiting the rich, thus increasing the burden on the country's budget.

Based on studies in Indonesia, China, the Philippines, Malaysia, Thailand and Vietnam, the World Bank estimates the region needs additional investment of $80 billion a year to reach a sustainable energy growth path.

Vijay Jagannathan, the World Bank’s energy sector manager for East Asia and the Pacific, said the question of subsidies was a political one with no simple solution.

“We’re working with our partners in those countries to find ways to reach the target,” he said.

“I don’t think anyone can deny the fact that there are many poor people, particularly in countries like Indonesia and the Philippines, who require some amount of government assistance. But we’re also experimenting in terms of targeting outputs by which those families and individuals are provided with subsidies and unconditional cash transfer programs [that proved] effective in Indonesia a few years ago.”

Jagannathan said one option was for the poor to switch from kerosene to solar power.

“The World Bank started a program back in 1995-96 in Indonesia [on solar power] but it failed because of the economic crisis,” he said.

“We have many other programs in Bangladesh with one million households using solar systems and no longer using kerosene. There were many ways to shift fossil fuel use toward lighting or cooking, but they’re not common in Indonesia.”

He added the World Bank was not against fuel subsidies for the lower class.

“But the bank is looking at ways for poor people to improve their lives through these methods we’re suggesting,” he said.

WWF Indonesia climate and energy director Fitrian Ardiansyah said the country’s fuel subsidies had missed their mark, agreeing that the rich benefited more from them than the poor.

“However, you can’t just end it, because it’s grounded more in politics than economics,” he said, adding the government could instead gradually introduce alternative energy to phase out subsidized fossil fuels.

Finance Minister Sri Mulyani Indrawati says subsidy spending this year will be Rp 201.8 trillion ($22.3 billion), up 43.9 trillion from last year, making it the second-largest subsidy budget in 10 years after the Rp 223 trillion spent in 2008.

Around 71 percent of total subsidies, or Rp 143.2 trillion, will go toward energy, much higher than last year’s Rp 99.9 trillion.

Xiaodong Wang, lead author of the report and senior energy specialist for the World Bank, said Indonesia’s huge geothermal potential offered a solution.

“Indonesia has the world’s largest geothermal resources, and the government already has a blueprint to develop at least 6,000 megawatts of geothermal power capacity by 2020,” he said.

“We believe the [geothermal] market is visible and large. The key question is to put the right policy framework into place and for the government to [enforce] serious regulations.”