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Cablegate: Indonesia's Subsidies Are a Hard Habit to Break

VZCZCXYZ0001
RR RUEHWEB

DE RUEHJA #0226 0501024
ZNR UUUUU ZZH
R 191024Z FEB 10
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 4530
INFO RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS JAKARTA 000226

SENSITIVE
SIPDIS

STATE FOR EAP/MTS
STATE ALSO FOR EEB/ESC/IEC/ENR, S/CIEA
ENERGY FOR PI-32 CUTLER
COMMERCE FOR 4430 NADJMI AND 6930
STATE PASS TO USTR EHLERS AND WEISEL

E.O. 12958: N/A
TAGS: ECON ENRG EPET EINV ID
SUBJECT: INDONESIA'S SUBSIDIES ARE A HARD HABIT TO BREAK

1. (SBU) Indonesia has found it politically difficult to wean itself
from consumer energy subsidies. Indonesia lifted all subsidies for
fuel consumed by business and industry in 2005, but government plans
to do the same for consumer fuels have not been implemented. Energy
subsidies routinely exceed the central government's combined
expenditures on health and welfare.

2. (SBU) Indonesians recognize that energy subsidies
disproportionally benefit wealthier Indonesians. Most analysts -
from government, academia, or the press - publicly acknowledge that
subsidies should be better targeted to benefit the poor. However,
the government has been unwilling to make the hard choices to change
the system. Reducing subsidies would require political rather than
economic capital, as cost savings would be a net benefit, even if
the government implemented assistance programs to poor Indonesians
negatively affected by the removal of subsidies.

Subsidy Structure
-----------------

3. (U) Indonesia's subsidies operate as fixed prices for consumers,
with the government reimbursing the distributors (Pertamina for
fuel, PLN for electricity) for the difference between production
cost and sales price. The government subsidizes gasoline, diesel,
and kerosene for individual consumers, but the commercial market for
these fuels is unsubsidized and open to competition. All
electricity is subsidized, although there is a sliding price scale
between individual consumers and commercial users. In 2009, the
government spent Rp 52.4 trillion ($5.7 billion) for fuel subsidies
and Rp 47.5 trillion ($5.2 billion) for electricity subsidies, and
has budgeted Rp 68.7 trillion ($7.5 billion) for fuel and Rp 37.8
trillion ($4.1 billion) for electricity in 2010.

4. (U) The greatest subsidy is for kerosene, which is used primarily
as a cooking fuel. The government has been gradually weaning
Indonesians off kerosene through a program that provides free LPG
cookstoves to Indonesians. Between 2007 and December 2009, the
program was successfully completed in Banten, Jakarta, West Java,
Yogyakarta and South Sumatra, and is now being implemented
nationally. The Indonesian government subsidizes LPG, but this
subsidy is far below that for kerosene. As an added benefit, LPG
emits fewer harmful emissions or greenhouse gases.

5. (SBU) In May 2008, when rapidly rising petroleum costs threatened
to break Indonesia's budget, the government raised the subsidized
fuel price from Rp 4,500 per liter ($0.49) to Rp 6,000 ($0.65), a
move that immediately and significantly reduced the President's
popularity. As the price of oil declined in late 2008 and early
2009, Indonesia decreased the subsidized price in stages to Rp
4,500. At that time, the government declared that the price of
gasoline and diesel would no longer be subsidized and would vary
with the international oil price, up to a maximum Rp 6,000 per
liter. However, the government did not change the Rp 4,500 fuel
price, despite subsequent increases in the price of crude oil. Even
after President Yudhoyono's victory in July 2009 elections, with 60%
of the vote and oil prices increasing, the government did not raise
fuel prices. In January 2010, Coordinating Minister for the Economy
declared that fuel prices would not rise in 2010. Prices for fuel
are standard throughout the country, and Pertamina cross-subsidizes
distribution costs, although these expenses do not appear on budget
for subsidies.

6. (SBU) Indonesia's electricity subsidies do not subsidize fossil
fuels directly, although government budget pressures have pushed
PLN, the national electricity monopoly, to focus on the least-cost
primary energy, which currently is coal. In the outer islands,
Indonesia generates much of its electricity with diesel generators,
a legacy from when Indonesia was an oil exporter and could satisfy
its fuel needs with domestic refining. Since fall 2009, the
government has proposed several schemes to begin raising rates on
targeted groups. It proposed increasing tariffs in Java and
reducing them in regions that have low electricity penetration;
raising tariffs in high-income neighborhoods; raising tariffs on
high-income households; and finally raising tariffs on high-use
households. Each proposal has been dropped soon after it was
proposed. The cost of electricity generation and distribution
varies widely throughout the country, from around 8.5 cents per kWh
in Java to 20-30 cents per kWh in the outer islands.

HUME

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