TVRI Talk: Kerosene - LPG Conversion

It was a live talk show and I did not have the copy of the show…so, as far as I remember, here are the main points of my talk.

Brief Background Information

In the mid 2007, the government has launched a program so called kerosene-LPG conversion. It was first started in East Jakarta and other regions in Java in 2007 and it will also be run in Sumatra in 2008. Up to 2010, it targets to replace 5.2 million kilolitres kerosene with 3.5 million tons LPG. In 2007 alone, the target was one million kilolitres kerosene. To do so, about six million of a 3 kg LPG tube would be distributed in 2007. Some data estimated it was only 3.9 million tubes (66%) that have been distributed. There was surely a problem of distribution. No wonder, people suffer of two kinds of scarcity: the kerosene and the LPG, despite of long queue everywhere.


Benefit-Cost

To state budget, the program will save as much as Rp. 30 trillion per year and it only costs Rp. 20 trillion of investment. To households’ pockets, a typical household will save Rp. 16- 25 thousand per month. Surely to estimate short term net benefit is not easy, if we also take into account:
1. Waste of productive time due to long queue. It’s not uncommon to find people queued for about ten hours.
2. The death of micro or cottage enterprises that largely depends on kerosene for their production process.
3. Unemployment due to the collapse of those micro or cottage firms.


Problems in the Field

Some constraints found in the field:
1. Socialization. Despite state budget has allocated some funds (as much as billions) for socialization, it’s not effective. Good socialization must be able to answer people’s typical questions: What benefit for them? Not only talking about the benefit for the government. If it were to secure or to improve the state budget, why does the government not first seize corruptors’ assets? Why is the government so powerful and coercive against its people but so weak and disable to use its coercive power against corruptors? Is the removal of subsidy or the saving created from the program able to send their children to school or to send them properly to hospital when they have health problems?
2. People’s resistance. It can be regarded as the consequence of poor socialization and the ambitious pace of the program.
3. Wrong target. The program is supposed to target housewives, the pure users of kerosene, a household with monthly expenditures less than Rp. 1.5 million, legal local inhabitants, and micro or cottage firms. Many eligible people haven’t received the conversion package as it’s, in many cases, distributed by nepotism and intuition.
4. Poor program infrastructure.
5. Rent seeking behavior. People bear illegal cost as much as Rp. 15 thousand to get the conversion package, that’s supposed to be free of charge.
6. About 11% of the distributed tubes are found in poor quality. Is it due to bad procurement process? This situation can hardly soften people’s resistance.
7. People resell the conversion package.
8. People receive the conversion package but not immediately use it.
9. People still use kerosene in combination with LPG.
10. The demand for kerosene is still high as poor fishermen in Northern Java’s coastal area have modified their boat’s machines so that the machines can use kerosene as fuel (due to the hike of solar price).


(Improving) Implementation

Government should also address the problem of poor fishermen’s lack of affordability for fuel, not only focusing on urban (poor) households. Otherwise, the conversion will be getting harder. The demand (for kerosene to as boat fuel) will always induce supply, illegally or not. Government should also address coordination problem among related agencies: Pertamina, BPH Migas, local government, Ministry of Industry, Ministry of Cooperative and SMEs, and private sectors. In monitoring and evaluation, government must involve universities and NGOs. Task force in tackling distribution problem should be established.


Deeper Issue: Energy Policy

Indonesia has been quite some time becoming of net importer for oil and gas. It’s hard to achieve production target of 1.3 million barrels per day. It surely puts burden on state budget, especially when world’s oil price skyrocketing to $ 100 per barrel. Oil concession with foreign and monopoly status of Pertamina in distributing oil for domestic market may also need to be revisited.

Yes, LPG is cheaper than kerosene but it’s hardly a sustainable solution. Many estimates suggest that after 2020, Indonesia will be a total importer for oil and gas, unless there are new oil and gas resources. Bio fuel is then regarded as possible alternatives. However, there’s also problem of land competition: planting corn for fuel or for food? Recall, Indonesia’s food security is also in question right now.

There’s another question: if the problem is energy scarcity and state budget burden, why does government not first convert PLN’s PLTDs (Diesel-powered electricity generators) into PLTGs (Gas-powered electricity generators)? This alternative can save about Rp. 25 trillion of solar subsidies for PLN (state electricity company) and the technology for this conversion is readily available and cheap.


Deepest Issue: Inherent Problem of Subsidy

Subsidy (or the removal of it) always triggers debate. The time frame, the target, the criteria, the amount, the design, the equity/welfare/distributional impacts are the heart of the problem. It’s increasingly becoming sensitive when it’s applied to vital commodity/goods: fertilizer, food, education, health, and, in this case, kerosene or everyone’s fuel, especially the lower income people. Subsidy creates some disparities. It possibly invites rent-seeking behavior or creates some other hazards, like: panic buying or panic stocking.

Subsidy is, however, always necessary for those who most need it or for some strategic reasons. I’m afraid the radical and careless removal of subsidy will make most vulnerable Indonesian people feel their lives much worse than the live of European cattle or American corns that receive so many subsidies to compete in world market.