[sustran] Indonesian fuel pricing

[Cowherd at MIT.edu]

Here is a series of two articles from the Jakarta Post this week that gets
into one of our favorite issues as it applies in Indonesia.

Robert Cowherd
MIT PhD Candidate, Architecture and Planning
Bandung, Indonesia

-------------------------
>From the Jakarta Post:

Toward a fair fuel-pricing system
Editorial and Opinion ‹ April 11, 2000
By Otto Soemarwoto
This is the first of two articles on fuel pricing.

BANDUNG (JP): Fuel oil -- commonly known as bahan bakar minyak, and by its
acronym  BBM -- is making headlines again. In a bid to reduce the BBM
subsidy, the government decided  to increase its price, but because of
fierce protests the government retreated by announcing the  postponement of
the price hike.

The dilemma lies in the narrow vision which the government, non-
governmental organizations  (NGOs), the general public and even the
International Monetary Fund (IMF) and the World  Bank look at the subsidy
system of fuel oil.

The current system is unfair. The more one consumes fuel, for example by
driving more  kilometers by car, the more one enjoys the benefits of the
subsidy. These are the richer people.

Since the subsidy is derived from public funds, the poor are paying
subsidies to the rich. The  government tried to overcome this unfairness by
issuing BBM coupons to the poor, a program  which was later changed to cash
subsidies.

But considering the still corrupt bureaucracy, this system was bound to fail
miserably. What  then are the alternatives?

This article is confined to the transport sector, a major consumer of fuel
oil. The article also  seeks a synergetic relationship between the economy
and ecology.

In the transport sector there are many hidden subsidies which are not
recognized by the  government, the experts, the public and the IMF.

Firstly, car tax does not cover the costs of the construction and widening
of roads and bridges,  and their maintenance; the production, placement and
maintenance of traffic signs and operation  of traffic lights; the training
and salaries of traffic police, and the maintenance and operation of
ambulances and the health costs of traffic accidents.

The government also has to pay for many parking lots, while only a small
fraction of the revenue  goes to the government's coffers.

It is, hence, ironical that the large amount of public funds spent on the
widening of roads often  ends up creating more roadside parking places,
which increase traffic jams.

A publication of the World Resources Institute estimated that in the United
States this subsidy,  excluding the health costs, amounted to US$175 billion
annually.

No data is available for Indonesia. Assuming this to be only 0.1 percent of
the U.S. subsidy, it  would still be an annual subsidy for motorists of $175
million.

Secondly, there is the subsidy in the form of external costs. Being external
costs they are not  borne by the motorists, but by the public. Motorized
vehicles produce fumes which cause  asthma and contain toxic and
carcinogenic substances.

The lead in the fumes is suspected of inhibiting the development of the
brains of children and  thus reduces their Intelligence Quotient.

The traffic officers, parking employees, street vendors, street musicians
and beggars at traffic  lights are the ones who suffer most from the air
pollution.

The World Bank estimated that for 1990 the health cost for Jakarta alone was
$220 million. For  the whole country this figure could easily reach $500
million. Because of the growth of the  population and car numbers, this
health cost has increased steadily.

This is another subsidy for the motorists. To illustrate the magnitude of
this subsidy, compare it  with the foreign aid of $400 million which is
currently being delayed by the IMF, because  Indonesia has not been able to
satisfactorily meet its Letter of Intent.

Another external cost is related to the effect of roads and parking lots
from the increasing  frequency and intensity of floods in the rainy season
and water shortages in the dry season.

These two effects are interrelated. Roads and parking lots reduce the rate
of rainwater infiltration  into the ground. On one hand, this increases the
volume of the overland flow, causing more  floods.

On the other hand the rate of the refill of the ground water is diminished
so that in the dry season  the river flows are minimized and many wells
become dry.

Floods in the wet season inflicting billions of rupiah in damage alternate
between water shortages  in the dry season, forcing the poor, who are not
served by the state water company, to buy  water.

Floods and water shortages are also serious sources of diarrheal diseases.
Roads also contribute  to floods in the countryside which cause many
thousands of hectares of rice fields to produce  poorly or even to suffer
complete failure. Again the ones who pay are mostly the poor people  who are
subsidizing the motorists.

A third external cost is that roads, parking lots and traffic create areas
with higher temperatures  than their surroundings, the so-called heat
islands.

Even the mountain resort of Puncak, Bandung and other mountain towns are not
cool anymore.  In Kuala Lumpur the temperature difference between the
business center and the city outskirts is  close to 5 degrees centigrade. No
such data is available for Indonesia.

The higher temperatures increases the need for air-conditioning which in
turn accelerates the rate  electricity consumption, and also fuel, which
increases the amount of subsidy paid by the  government.

Air conditioning also works as a positive feedback loop for the heat
islands, making them worse.  Naturally, the poor cannot afford air-
conditioning and just have to bear the heat.

Heat islands also stimulate the development of living organisms, including
mosquitoes and flies,  hence, they exacerbate infectious diseases and dengue
hemorrhagic fever, increasing the health  budget of the government and the
people. Still more subsidies for the motorists.

Logically, it is these subsidies which should be cut first. This can be done
by adopting a  stick-and-carrot policy. The stick would be to force the
motorists to pay the external costs  described above.

Firstly, the tax on cars should be increased significantly and a road tax be
introduced. For those  who have more than one car, the tax should be
increased exponentially.

Secondly, parking fees should also be increased significantly and parking on
roads should be  banned. This latter step would have the additional
advantage of reducing congestion, which  would reduce the amount of fuel
subsidy paid by the government, and would lower air pollution.#$
Conversions of lawns to parking lots should be permitted sparingly and the
conversions should  also be taxed.

The writer is an environmental expert, teaching at Padjadjaran University in
Bandung.

-------------------------------------

Toward a fair pricing system for fuel oil
Editorial and Opinion ‹ April 12, 2000
By Otto Soemarwoto
This is the second of two articles on fuel pricing.

BANDUNG (JP): The higher tax and parking fees, and the limitation of parking
space would  work as a disincentive for using cars in inefficient ways.

This can be further strengthened by giving incentives for using cars
efficiently, the carrot part of  the policy. In the first place public
transportation should be improved by making it clean, safe  and comfortable.
It should run on dependable time schedules, with convenient interconnections
of buses and trains.

For example, an employee who lives in Bogor, West Java, and works on Jl.
Thamrin would take  the train to Gambir Station and continue his journey by
bus, without having to waste time on  connections. Having good public
transportation should not be an impossibility.

Look at the Parahyangan train serving the Bandung-Jakarta route which is
clean, generally on  time and profitable. The government-run DAMRI bus,
plying the route of Gambir-Cengkareng in  Jakarta, is another example.

The International Energy Agency reported that in Curitiba, Brazil, a public
mass transport  system based entirely on buses and run by private enterprise
proved to be efficient, cheap and  profitable. Good management is the key.

Secondly, schools, universities and offices should be encouraged to develop
a pool system by  reducing taxes on cars and the proposed road tax, or even
exempting them from this latter tax.  They would also be given priority
parking at reduced prices or for free.

A third incentive is directed at stimulating walking and bicycling for short
distance journeys by  constructing pedestrian and bicycle lanes which allow
safe walking and cycling.

Driving a car for short distances is a very inefficient way of
transportation and causes higher  levels of pollution. Walking for one
kilometer and cycling for up to 10 km can be done easily.

Considering that Indonesian cities practice mixed spatial usage, residential
areas are at short  distances from offices, schools, universities, mosques,
churches, shops and markets.

Therefore, walking and bicycling has a lot of potential. These are cheap and
clean modes of  transportation and are also healthy.

It has been reported that in countries where shopping centers which have
been closed to  motorized transport and are open for pedestrians only,
business has increased 71 percent in  Austria, 63 percent in Germany and 67
percent in Scandinavia.

Using more bicycles has the added advantage of stimulating the bicycle
industry, which would  create jobs for the production of bicycles and their
spare parts, their assembly, trade and  servicing.

Since these economic activities do not require large a capital outlay and
little or no foreign  currency, they can further stimulate small- and
medium-sized enterprises.

Even in the U.S., bicycle parts are produced in many small mom-and-pop
shops. Using the ratio  of the number of bicycles to the population of India
as an example, and assuming that an owner  would on average use a bicycle
for five years and then sell it, 2.5 million bicycles would have to  be
produced in Indonesia annually.

Using China and the Netherlands as examples, 11 million and 30 million
bicycles, respectively,  would have to be produced annually.

Those working on the streets and at road crossings, and those affected by
parking restrictions,  would be able to earn a decent and healthy living
from the bicycle economy.

Clearly, the stimulation of bicycles has the potential of a large scale
economic impact and could  actually help to overcome our economic crisis.

In conclusion cutting the large, but hidden subsidies for the motorists, and
stimulating the people  to use fuel oil more efficiently would have the
following impacts: #$                       The government would get
additional income from taxes.

The budget for road construction, maintenance and operation would be
reduced.

The fuel oil subsidy would be reduced because fewer people would drive their
own cars,  resulting in less congestion, while more people would use the
pool system, public transportation  and walk and cycle.

There would be fewer floods and water shortages.

The air quality would be improved and this would directly lead to a marked
decrease in the huge  health costs of air pollution, and with it people's
productivity would increase.

Sixth, the economy would be stimulated whereby numerous jobs would be
created.

The overall impact would be that the ecology and economy would not be at
odds with each  other. Instead they would strengthen, resulting in a better
quality of life.

In parallel with improved economy, the fuel oil subsidy could be gradually
reduced and  eventually abolished. A fair pricing system for BBM would be
instituted.

This alternative of reducing subsidies would not create social unrest, as
the people, particularly  the poor, would enjoy the benefits.

The dilemma of the BBM subsidy would be resolved by productive means. The
difficulty would  be that the poor belong to the silent mass and do not have
any lobbying power -- while the  motorists who would be adversely affected,
have access to newspapers, radio and television,  through which they can
loudly voice their discontent and protest. They also have the ability and
power to lobby high level bureaucrats.

The bureaucrats themselves would be reluctant to sacrifice their comfortable
lifestyles. But I  hope that President Abdurrahman Wahid and the legislators
will consider this alternative  favorably. The IMF and the World Bank, which
have the power to influence the government,  should also study this
alternative in detail and work out a plan of implementation to be
recommended to the government.

The writer is an environmental expert, teaching at Padjadjaran University in
Bandung.