Two days after the policy on the issuance of 3-kilogram LPG retailers came into effect, residents in several regions have begun to feel the scarcity of subsidized gas. The long queues that occurred were a clear impact of a policy that did not have a mature transition mechanism.

These conditions further strengthen the urgency of energy subsidy reform in Indonesia, especially liquified petroleum gas (LPG).

Based on 2024 data, the energy subsidy allocation reached Rp 189.1 trillion, with Rp 87.4 trillion devoted to 3 kilogram (kg) LPG. This figure is the largest compared to other energy subsidies, such as certain types of fuel oil (JBT) and electricity.

The government has long realized that energy subsidies are not well targeted. As revealed in the publication Toft et al. (2016), International Experiences with LPG Subsidy Reform, the LPG subsidy system in Indonesia is regressive. High-income groups enjoy greater benefits than the poor, who should be the main target recipients.

Structural problems of LPG subsidies

Since the kerosene to LPG conversion program was launched in 2007, LPG consumption has increased rapidly. However, the current subsidy practice has a fundamental flaw: anyone can buy 3 kg LPG at the subsidized price. The public hasn’t forgotten that a famous celebrity was in the spotlight for having green LPG in her house.

Subsidized LPG that can be accessed by everyone, including those who are not entitled, raises a number of complicated problems. First, the universal nature of the subsidy encourages excessive consumption by high-income households or businesses that should not be eligible.

A study by Coady et al. (2015) entitled The Unequal Benefits of Fuel Subsidies Revisited shows interesting findings. In developing countries, those at the top of the income pyramid receive more than six times the benefits of LPG subsidies than the lowest income group.

Second, subsidy leakage through unofficial distribution channels exacerbates the problem. Without a strict control mechanism, the practice of hoarding and distributing subsidized LPG by unauthorized parties can become more widespread.

The recent scarcity case shows that when the government tried to issue unauthorized retailers, LPG distribution was disrupted because the informal system was suddenly stopped without any alternative solution.

Third, the price scheme has been stagnant for more than a decade, increasing the government’s financial burden. Since 2009, the price of 3 kg LPG has been at Rp 5,000 per kg. The retail price of 3 kg LPG a few days ago in Jabodetabek was still around Rp 22,000, or no significant increase.

This price is far below the proper market price. As a result, the LPG subsidy continues to swell, almost doubling from its initial amount of Rp 48.97 trillion in 2014, further burdening the state budget.

Planned gradual reform

Some countries have undertaken more targeted and gradual LPG subsidy reforms. For example, Mexico has implemented gradual LPG price increases of 7-8 percent per year since 2010. Thailand removed LPG subsidies in 2014 while still ensuring prices remained stable through measured government intervention.

Peru and El Salvador are different. There, subsidies are given directly in cash to eligible households when they purchase LPG. In India, subsidies are channeled directly to verified beneficiary accounts to minimize the risk of corruption in the distribution chain.

The lesson we can learn from the experiences of other countries is that subsidy reform cannot be done in a hurry without a clear strategy. There are three main principles that the government can apply to LPG subsidy reform in Indonesia.

First, establish an effective targeting system. Instead of being accessible to everyone, subsidies need to be focused on the groups that really need them. Subsidy provision can be considered through a cash transfer scheme based on valid beneficiary data. In the field, this scheme can be realized in the form of a special subsidy card or barcode that is only intended for poor households.

Determining who the most eligible beneficiaries are will be challenging. However, the government could set indicators such as electricity consumption of less than 90 kWh per month on average. Then, LPG consumption could be limited to 6 kg per month for households, or three times that for small businesses.

Second, distribution policy reform. LPG distribution strategies are needed to ensure smooth supply and avoid inequality of access.

In order for the new distribution policy to be effective and not trigger scarcity, the government needs to ensure that the number of authorized bases that have a Business Identification Number (NIB) is sufficient to reach all areas, especially remote and remote areas that still rely heavily on small retailers. The one-month time given to all retailers to obtain NIBs is unreasonable. As a result, authorized bases are limited, and people have difficulty getting LPG at a reasonable price.

In LPG distribution reforms in several countries, the transition period is key to successful implementation. The government must provide sufficient time for the community to adapt to the new system, including conducting massive socialization so that people understand how to obtain subsidized LPG at official bases.

Third, make gradual price adjustments. LPG prices must be slowly adjusted to approach market prices to reduce the subsidy burden without causing major social turmoil. The government needs to ensure that the LPG price adjustment policy goes through careful planning. Gradual price increases will give people enough time to adapt, while allowing the government to evaluate the impact on vulnerable groups.

LPG distribution reforms need to be flexible, with regular evaluations to adjust policies based on data in the field. If problems such as accessibility or scarcity are found, the government should respond immediately through appropriate mitigation policies.

Government Commitment

In addition to technical aspects, the communication strategy is also a key factor for the success of LPG subsidy reform. The government needs to educate the public on the urgency of subsidy reduction, for example by showing how the diversion of subsidy funds is used for more impactful development programs, such as infrastructure or more equitable social assistance.

It also needs to be conveyed to the public that LPG subsidy reform is not just a matter of government fiscal efficiency. This policy is about social justice as well as energy sustainability. Every dollar spent on subsidies that are not well-targeted is a form of injustice to those who really need it.

At the time, the government was faced with a difficult choice between maintaining the budget-wasteful general subsidy or taking bold steps with gradual reforms to ensure the subsidy was well-targeted. The recent LPG shortages are proof that the system needs fundamental change.

History shows that subsidy reform is always a challenging decision. But the courage to change is the only way to create a more equitable and sustainable system. The government must communicate and prove that energy reform is not just a discourse, but a real commitment to a better future.

By Ismail Khozen, Dosen Departemen Ilmu Administrasi Fiskal Universitas Indonesia

Source: Kompas.id