View Point: Smuggling makes fuel-subsidy cut even more imperative

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, September 28 2014, 1:37 PM

Several military (TNI) and police members were embroiled in a brawl at a housing complex on Batam Island near Singapore early this week after a police raid nearby on an alleged illegal storage house of subsidized fuel leaving four TNI non-commissioned officers with gunshot wounds.

A few days earlier, a low-ranking female civil servant, also in Batam, was arrested on charges of laundering Rp 1,300 billion (US$108 million) in cash allegedly derived from the illicit export of subsidized fuel. Four others, including an employee of state-owned oil company PT Pertamina and two temporary Navy employees, have also been implicated in the contraband fuel trade case.

Earlier this month, the Supreme Court almost doubled the sentence of former low-ranking police officer Labora Sitorus to 15 years’ imprisonment for fuel smuggling, illegal logging and money laundering worth about $103 million.

These are just a few of the dozens of cases of subsidized-fuel smuggling uncovered over the past 10 years.

It is common knowledge that a lot of subsidized fuel has always been smuggled overseas; the long coastlines of the world’s largest archipelagic nation provide great opportunities for such contraband trade.

Poorly-paid officials, police, members of the military and employees of state oil company Pertamina, the sole supplier of fuel oil, are all highly prone to corruption. Most importantly, the subsidized prices of domestic fuel oil are far — almost 50 percent — lower than in neighboring Singapore and Malaysia, which are only about 20 minutes by ship from Riau Islands, including Batam and Bintan.

The customs agency, the police and patrolling naval units do reveal from time to time the interception and foiling of oil smuggling, but this is simply a ploy to mislead the public into thinking that they are doing their best to prevent fuel being smuggled overseas.

The greatest credit for the latest uncovering of massive fuel smuggling should go to the Financial Transaction Report and Analysis Centre (PPATK), which in most other countries is called the financial intelligence unit.

It was the PPATK, which routinely scours financial records for signs of illegal activity and suspicious transactions through bank accounts, that discovered the fuel smuggling in Papua and Batam.

PPATK analysts realized that the billions of rupiah flowing weekly or monthly through the bank accounts of the low-ranking woman civil servant and former police officer Labora did not comply with their earning profiles, as their official salaries did not exceed Rp 4 million ($333) monthly.

The analysis and further police investigations finally traced the suspicious transactions to a ring of subsidized fuel smuggling that had been in operation for several years.

The rings of fuel smugglers in Riau Islands, Central and East Java, East Kalimantan, Papua and several other provinces that have been uncovered in recent years could not have occurred without collaboration with Pertamina officials or Navy members or seaport officials.

Pertamina still has the monopoly on the distribution of subsidized fuel throughout the country and it must know if a significant volume originally allocated for certain areas is diverted overseas.

Smuggling and other forms of malfeasance related to the misuse of subsidized fuel once again show how imperative and urgent it is now to bring domestic fuel prices closer to international levels. As long as domestic fuel prices remain at only 50 percent of international prices, the large margin is too much of a temptation for profiteers and corrupt officials to resist.

As the country now depends on imports for almost 60 percent of its oil needs and oil imports have become the main cause of the ballooning current account deficit and the sharp rupiah depreciation, subsidized fuel smuggling could be considered an act of economic subversion.

The government therefore should be deadly serious in investigating and dealing with the brains and leaders behind oil smuggling, unlike in past cases where only the “small fry” have ended up in court.

It is not exaggeration to say that the way the new government addresses the runaway fuel subsidy will be the litmus test of its economic management and policy-making capability.

President-elect Joko “Jokowi” Widodo promised in his election campaign to abolish fuel subsidies within four years. He should deliver this promise, but time the gradual phase-out wisely to minimize the impact on inflation. Most analysts consider November or April, which are the harvest seasons, as the most appropriate time to usher in the fuel subsidy cut.

Certainly, reforming the fuel subsidy system will inflict some short-term pain, as production costs and prices of goods and services will increase. Therefore the new government should conduct a nationwide information campaign to prime the public on the benefits of the fuel reform measure.

Many ideas have been touted on how to phase out the fuel subsidy. One reform scenario calls for the indexation of the subsidized fuel prices to an agreed threshold, thereby allowing the prices to move up and down on a monthly or quarterly basis.

The second idea sets a quarterly subsidy spending limit, then adjusts the prices in subsequent quarters when international market oil prices cause subsidies to breach the ceiling.

The fixed-subsidy scheme is attractive because the automatic monthly price adjustment provides policy predictability for the market and general public, as well as protecting the economy from sharp price adjustments and their shocking inflationary pressures.

Whichever policy the new government implements, the energy reform should from the outset clearly set out the fuel-policy direction for the next five years, instead of muddling through one-off price rises.

The writer is senior editor at The Jakarta Post.