Low Carbon Green Growth Roadmap for Asia and the Pacific CASE STUDY Easing the impact of subsidy reform Indonesia’s Bantuan Langsung Tunai cash transfer programme Key points • After realizing that fossil fuel subsidies are financially untenable, inequitable and environmentally harmful, the Indonesian Government launched a series of fossil fuel subsidy reforms over several years, with the goal of phasing them out • In combination with a direct cash transfer, Indonesia's subsidy reform mitigated potential negative impacts on the poor as well as increased political feasibility of the reform and promoted fairness and equity of the policy scheme There was a problem… With a rapid rise in the world oil price and increasing demand for energy to meet its need for growth, Indonesia became a net oil importer for the first time in 2004 At the same time, budgetary pressure of continuing fossil fuel subsidies increased.1 The fuel subsidies in Indonesia were found to be inequitable: By 2005 the top 40 per cent of households received 70 per cent of the subsidies while the bottom 40 per cent benefited only from 15 per cent of the subsidies.2 Thus there was evidence that the fuel subsidies were regressive because they represented less than 0.5 per cent of poor household incomes as opposed to more than 1.5 per cent for the most affluent household incomes.3 What was done? The Government launched a subsidy reform in 2005 to phase out fossil fuel subsidies, with the aim of diversifying its energy mix, securing energy access for continuing economic development and reducing dependence on oil imports In 2005, concern over the increasing pressure that fuel subsidies were placing on the state budget led the Government to increase fuel prices in March and then again in October by an average of 29 per cent and 114 per cent, respectively, reducing the Indonesian state budget deficit by US$4.5 billion in 2005 and US$10 billion in 2006.4 According to the 2007 national action plan for addressing climate change, gradually phasing out fossil fuel subsidies will promote low-carbon economic growth with less environmental impact while increasing the competitiveness of alternative energy sources Between 2001 and 2008, fuel subsidies ranged from 10 to 28 percent of the national budget Christopher Beaton and Lucky Lontoh, Lessons Learned from Indonesia’s Attempts to Reform Fossil-Fuel Subsidies, Trade, Investment and Climate Change Series (Manitoba, Canada, International Institute of Sustainable Development, 2010) Available from www.iisd.org/pdf/2010/lessons_indonesia_fossil_fuel_reform.pdf (assessed 12 September 2011) Annabelle Mourougane, “Phasing Out Energy Subsidies in Indonesia”, OECD Economics Department Working Paper No 808 (Paris, Organisation for Economic Co-operation and Development, 2010) Available from www.oecd-ilibrary.org/economics/phasing-out-energysubsidies-in-indonesia_5km5xvc9c46k-en (accessed October 2011); Christopher Beaton and Lucky Lontoh, Lessons Learned from Indonesia’s Attempts to Reform Fossil-Fuel Subsidies, Trade, Investment and Climate Change Series (Manitoba, Canada, International Institute of Sustainable Development, 2010) Available from www.iisd.org/pdf/2010/lessons_indonesia_fossil_fuel_reform.pdf (assessed 12 September 2011) Annabelle Mourougane, “Phasing Out Energy Subsidies in Indonesia”, OECD Economics Department Working Paper No 808 (Paris, Organisation for Economic Co-operation and Development, 2010) Available from www.oecd-ilibrary.org/economics/phasing-out-energysubsidies-in-indonesia_5km5xvc9c46k-en (accessed October 2011) K Bacon and M Kojima, Coping with Higher Oil Prices (Washington D.C., the World Bank, 2006) Low Carbon Green Growth Roadmap for Asia and the Pacific : Case Study - Indonesia’s Bantuan Langsung Tunai cash transfer programme Along with the other G20 nations, Indonesia has pledged to eliminate fossil fuel subsidies in the medium term The Government’s stated intention was to completely eliminate fossil fuel subsidies by 2014 Direct cash transfer initiative cushioned impacts on 19.2 million households To mitigate the impact of the reform on the poor, the Government introduced an unconditional cash transfer programme called Bantuan Langsung Tunai (BLT) The direct cash transfer has an advantage of easily targeting a specific group and its costs, usually known with certainty Approximately 19.2 million low-income households (whose per capita expenditure is 175,000 rupiah or less (around US$17.50 per month)) were given the equivalent of US$10 a month over a six-month period.5 According to ASEAN estimates, the BLT programme cost around a quarter of the 2006 savings, at around US$2.3 billion, excluding organizational and administrative costs of targeting and distribution of the aid Payment methods Because many recipients did not have an identification card, a bank account or a valid address, a face-to-face cash distribution method was largely used to maximize the access for the poor without the need for registration or using bank accounts This led to high transportation and maintenance costs.6 Other welfare-support measures to increase the overall effectiveness of BLT The BLT was accompanied by a number of other short-term welfare-support measures:7 • • • Free health care at local clinics, free outpatient visits and inpatient services (US$230 million) School operating assistance programme (US$1.2 billion) Rural infrastructure support project (US$60.82 million, including a loan of US$50 million) Results Reduced fiscal deficits: The reduction of fossil fuel subsidies reportedly saved US$4.5 billion in 2005 and US$10 billion in 2006.8 Reduced poverty rate: According to government research, the BLT programme was expected to significantly contribute to the compensation of the drastic rise in poor households’ living costs due to higher fossil fuel prices and even to offset poverty rates in rural areas Although different modelling simulations provide various outcomes, according to Statistics Indonesia, the number of people living below the poverty line decreased to 16.58 per cent in March 2007, from 16.66 per cent in 2005 Another estimate indicates that without the programme, the fuel price increase could have raised the poverty rate up to 22 per cent.9 The BLT programme affected differently the welfare of rural poor and urban poor populations, because the latter is more dependent on oil consumption for a higher use of kerosene fuels for cooking or fuel-related commodities such as transportation More effective policy design should consider the different consumption patterns of lowincome household groups ibid Muliadi Widjaja, An Economic and Social Review on Indonesian Direct Cash Transfer Program to Poor Families Year 2005 (Jakarta, Institute for Economic and Social Research University of Indonesia, 2011) Available from www.welfareacademy.org/pubs/international/policy_exchanges/asp_papers/widjaja.pdf (accessed October 2011) Christopher Beaton and Lucky Lontoh, Lessons Learned from Indonesia’s Attempts to Reform Fossil-Fuel Subsidies, Trade, Investment and Climate Change Series (Manitoba, Canada, International Institute of Sustainable Development, 2010) Available from www.iisd.org/pdf/2010/lessons_indonesia_fossil_fuel_reform.pdf (assessed 12 September 2011) ibid p.23 ibid.; Muliadi Widjaja, An Economic and Social Review on Indonesian Direct Cash Transfer Program to Poor Families Year 2005 (Jakarta, Institute for Economic and Social Research University of Indonesia, 2011) Available from www.welfareacademy.org/pubs/international/policy_exchanges/asp_papers/widjaja.pdf (accessed October 2011) Low Carbon Green Growth Roadmap for Asia and the Pacific : Case Study - Indonesia’s Bantuan Langsung Tunai cash transfer programme Reduced political opposition: One study indicates that compared with the previous fuel price rises in 1998 and 2003, the intervention in 2005 was met with a relatively low level of opposition thanks to the cash transfer programme and other supporting measures.10 The BLT, as one of the most high-profile welfare-support schemes applied during the reform, was credited for effectively cushioning the poor from an economic shock and raising awareness about social and economic benefits of the subsidy reform High level of public satisfaction: Independent research indicates that, on average, BLT recipients reported a relatively high level of satisfaction with the accuracy of targeted groups, the efficient distribution manner and the frequency as well as the quantity of payments.11 Efficient cash spending by the recipients: A field survey indicates that contrary to the criticism on the programme that money would be spent on activities not related to welfare increase, such as drinking or gambling, more than 90 per cent of recipients claimed to have spent the extra income on rice, followed by kerosene expenditures, private debt, health- and education costs.12 Current status of Indonesia’s fuel subsidy reform The path to zero-subsidies has not been without its bumps In February 2011, the Indonesian Government postponed a restriction on subsidies for fuel for private cars, a move that could end up costing trillion rupiah.13 In addition, the electricity subsidy increased from 65.6 trillion to 91 trillion rupiah Due in part to the subsidized and state controlled price of electricity, the state utility PLN has had difficulty in increasing energy infrastructure and supplying electricity to meet increasing need This problem, analysts find, threatens to slow Indonesia’s economic growth.14 In December 2011, it was reported that the quota of subsidized fuels would increase by between 500,000 and 1,000,000 kilolitres.15 Lessons learned Ensure penetration to the beneficiaries through effective means of distribution: The existence of large informal economy in many developing countries may pose a challenge because many people who would otherwise be eligible for the programme may be discouraged from registering for the direct cash transfer In the case of Indonesia, the face-to-face cash distribution was found to be effective, but at the same time it induced extra transport costs and other opportunity costs – and still remained limited in accessing the poor in remote areas Further research on implementing strategies to extend the benefits to all of the eligible groups would be desirable 10 Christopher Beaton and Lucky Lontoh, Lessons Learned from Indonesia’s Attempts to Reform Fossil-Fuel Subsidies, Trade, Investment and Climate Change Series (Manitoba, Canada, International Institute of Sustainable Development, 2010) Available from www.iisd.org/pdf/2010/lessons_indonesia_fossil_fuel_reform.pdf (assessed 12 September 2011) 11 Christopher Beaton and Lucky Lontoh, Lessons Learned from Indonesia’s Attempts to Reform Fossil-Fuel Subsidies, Trade, Investment and Climate Change Series (Manitoba, Canada, International Institute of Sustainable Development, 2010) Available from www.iisd.org/pdf/2010/lessons_indonesia_fossil_fuel_reform.pdf (assessed 12 September 2011); SMERU Research Institute, A Rapid Appraisal of the Implementation of the 2005 Direct Cash Transfer Program in Indonesia: A Case Study in Five Kabupaten/Kota (Jakarta, 2006) Available from www.smeru.or.id/report/research/blt/slt_eng.pdf (assessed 15 November 2011) 12 An economic and social review on Indonesian direct cash transfer program to poor families year 2005, Muliadi Widjaja, An Economic and Social Review on Indonesian Direct Cash Transfer Program to Poor Families Year 2005 (Jakarta, Institute for Economic and Social Research University of Indonesia, 2011) Available from www.welfareacademy.org/pubs/international/policy_exchanges/asp_papers/widjaja.pdf (accessed October 2011),.p 13 Rangga D Fadillah and Esther Samboh, “15 Percent of Subsidized Fuel Sold to Industries”, The Jakarta Post, March 15 2012 Available from www.thejakartapost.com/news/2011/05/31/15-percent-subsidized-fuel-sold-industries.html (accessed 15 March 2012) 14 Francis Kan, “Analysis: Power woes could trip Indonesia's economic surge”, Reuters, December 22 2011 Available from www.reuters.com/article/2011/12/23/us-indonesia-energy-bottlenecks-idUSTRE7BM06F20111223 (accessed 15 March 2012) 15 The Jakarta Post, “Govt to Add to Subsidized Fuel by Up To 1m kl”, December 15 2011 Available from www.thejakartapost.com/news/2011/12/15/govt-add-subsidized-fuel-1m-kl.html (accessed 15 March 2012) Low Carbon Green Growth Roadmap for Asia and the Pacific : Case Study - Indonesia’s Bantuan Langsung Tunai cash transfer programme Considerations for replicating Targeting the right group of beneficiaries Identifying eligible groups should be reliable and transparent: Eligible families were determined by the Central Board of Statistics, or Badan Pusat Statistik (BPS), then field-checked by post office staff and village officers and verified by poverty indicators, which include the consideration of consumption habits, level of education and assets.16 Only poor households with a per capita expenditure of 175,000 rupiah or less (around US$17.50 per month) qualified Strengthening the eligibility testing system through reliable socio-economic data and training mechanisms may increase legitimacy and transparency of the targeting approach The lack of a reliable database may create a potential for undercoverage and overcompensation, thereby limiting the effectiveness and fairness of the programme Gaining public support An effective information campaign can help garner public support: The BLT was accompanied by an awareness-raising campaign, including newspaper reports, TV talk shows, village notice boards and the distribution of pamphlets and brochures as well as information on the back of the identification card needed for payments.17 Effective modes of communicating the economic and social costs of the existing subsidies as well as the benefits of the reform to the public may differ depending on a country’s unique social and political context Strategies should be tailored to country-specific factors For example, studies indicate that a permanent and independent institution that investigates and communicates the benefits of a reform may be more credible and effective in harvesting public support than ad hoc working groups or commissions.18 A good case in point is the Productivity Commission in Australia, which consistently publishes subsidy reports and also raises public awareness about the subsidy reform through media.19 A transparent decision-making structure is crucial for credibility: A transparent and coherent governance structure that provides clear implementing guidelines and effectively oversees relevant municipalities is essential in increasing credibility and political acceptability of the scheme In 2009, for example, the Indonesian Government created a National Energy Council (Dewan Energi Nasional) to analyse energy-policy issues and monitor the cross-sector policies.20 The council consists of members of different ministries and the industry as well as academics Structural poverty alleviation measures should be set in place in the long-term: While effective in the short-term, a direct cash transfer should not be considered as a replacement for broader, longer-term structural mechanisms to alleviate poverty, such as investing in public infrastructure or education Subsidy reforms need to be ongoing: There is ample room for further reforms in subsidy measures In 2010, the Government joined the G20 pledge to phase out subsidies for fossil fuels and announced plans to eliminate them by 2014 while steadily reducing total energy subsidies (including fossil fuels, electricity and biofuel subsidies) by 10–15 per cent on average per year during the period 2011–2014 These welcome initiatives may be complemented by detailed timelines and concrete action plans in the near future 16 There is criticism that without reliable household income data, the BPS officers rely only on physical assessments such as quality of house or the judgment of the village officers, leading to public dissatisfaction 17 Christopher Beaton and Lucky Lontoh, Lessons Learned from Indonesia’s Attempts to Reform Fossil-Fuel Subsidies, Trade, Investment and Climate Change Series (Manitoba, Canada, International Institute of Sustainable Development, 2010) Available from www.iisd.org/pdf/2010/lessons_indonesia_fossil_fuel_reform.pdf (assessed 12 September 2011) 18 Annabelle Mourougane, “Phasing Out Energy Subsidies in Indonesia”, OECD Economics Department Working Paper No 808 (Paris, Organisation for Economic Co-operation and Development, 2010) Available from www.oecd-ilibrary.org/economics/phasing-out-energysubsidies-in-indonesia_5km5xvc9c46k-en (accessed October 2011) 19 ibid 20 ibid Low Carbon Green Growth Roadmap for Asia and the Pacific : Case Study - Indonesia’s Bantuan Langsung Tunai cash transfer programme Further reading An Economic and Social Review on Indonesian Direct Cash Transfer Program to Poor Families Year 2005, by M Widjaja (Jakarta, 2005) Available from www.oecd-ilibrary.org/economics/phasing-out-energy-subsidiesin-indonesia_5km5xvc9c46k-en Lessons Learned from Indonesia’s Attempts to Reform Fossil-Fuel Subsidies, by Christopher Beaton and Lucky Lontoh Lucky, Trade, Investment and Climate Change Series (Manitoba, Canada, International Institute of Sustainable Development, 2010) Available from www.iisd.org/pdf/2010/lessons_indonesia_fossil_fuel_reform.pdf Making the New Indonesia Work for the Poor (Jakarta, The World Bank, 2006) Available from http://siteresources.worldbank.org/INTINDONESIA/Resources/226271-1168333550999/PovertyAssessment.pdf “Phasing Out Energy Subsidies in Indonesia”, by A Mourougane, OECD Economics Department Working Papers No 808 (Paris, Organisation for Economic Co-operation and Development, 2010) Available from www.oecdilibrary.org/docserver/download/fulltext/5km5xvc9c46k.pdf?expires=1329276590&id=id&accname=guest&che cksum=17A36E350F6C9FC78C7EAF0B2F8A1EC0 The Effect of Fiscal Policies on the Quality of Growth, by Ramón E López, Vinod Thomas and Wang Yan (Washington, D.C., The World Bank, 2010) Available from http://siteresources.worldbank.org/INTOED/Resources/EB9_web.pdf