Will Hickey – Indonesia has a burgeoning population with an exponentially growing need for energy, but many still live hand to mouth. So as April 1 approaches, the issue of fuel subsidies has been highly contentious. What the controversy shows is that Indonesia has failed to use its vast oil and coal resources to lift the living standards of all its citizens.
The root cause of the problem has been a squandering of resources for short-term profits. This has been a consistent theme, such as exporting high-calorie thermal coal from Kalimantan to higher paying markets instead of selling back a lower quality coal under the domestic coal obligation to state utility company Perusahaan Listrik Negara.
Leaders in the government and ministries do not consider Indonesia's resources to be owned by its citizens, but rather by themselves and foreign investors. For example, Freeport owns over 90 percent of its operation in Papua, with revenue last year of $2.3 billion, and BHP Billiton has a 75 percent stake in a $1.3 billion Kalimantan coal project. Companies appear Indonesian, but are heavily foreign influenced.
When it comes to the fuel subsidies, the constant banter about numbers hides the real issue: empowerment and resource ownership. The fuel subsidy is the only real claim to ownership or bona fide share interest most residents have on the natural resources in their own country.
In the absence of leadership that will empower, develop or add tangible value to its people, this shouldn't be taken away. And if the government insists on taking the subsidy away, it should also renegotiate production sharing contracts and mining work contracts that give generously to foreign investors and likely the people that approved them.
Nigeria is a country that has been ravaged by the pitfalls of production sharing contracts and corruption. It has some of the most pristine oil reserves in the world, yet most of its residents live on less than $2 a day. Where has the money gone?
Recently, Nigeria tried to remove fuel subsidies, resulting in severe riots and economic shutdown. Oddly, Nigeria's current World Bank candidate NGOzi Okonjo-Iweala (a self-proclaimed champion for the poor) supported this removal and in a lengthy discourse explained why it was good for Nigeria's future.
Nonetheless, President Goodluck Jonathan was forced to backtrack. Nigerians did not believe that any savings in the fuel subsidy would magically accrue to their benefit and development under the current regime.
The takeaway in countries like Nigeria and Indonesia should be from the ones who are benefiting immensely from the current system, not from those struggling on day-to-day subsistence.
China has subsidized prices for a long time to keep the export machine running. Yet a narrower-than-expected trade surplus last month forced China to raise the price of fuel. Nonetheless, China is committed to increasing value-added exports and it must continue to subsidize fuel to play the role of the world's factory.
The country provides for economic placation by way of continued fuel subsidies and mandating that any investing entities share skills and tech transfers through joint ventures to increase its value added activity on its exports. It has recently mandated that any new investments in its coastal area must be value added, not merely labor intensive.
But unfortunately Indonesia is not considering any such strategy. And the people on the street know full well the impact of lessening any subsidy: any shortfall will be forced on their shoulders, not on those of the elite. The people behind the budgets seem to be playing things by the numbers under a static rubric of today. They are not thinking about the future.
But fuel subsidies should be seen as a long-term, qualitative issue and not a short-term, quantitative one. Instead of a wish list about what a reduction in fuel subsidies might bring, let's consider a few things that active empowerment, leadership and resource ownership can produce.
Pollution reduction is one. Reducing fuel subsidies will not solve this issue. Only greater investment in public transportation, alternative energy and the education required for developing those factors will in the long term.
The solution is not in building bigger overpasses, longer runways, or wider freeways. That only increases the dependence on fossil fuels. Leadership must make alternative projects a reality.
Value added capacity should be a second priority. Malaysia is already pursing this goal in its oil sector. Its residents are not interested in merely exporting crude and palm oil for short term gain. They want to develop finished oil products for export to developing Asia.
Value added products, under conventional economic theory, raise living standards, salaries and a country's gross domestic product. China, too, is therefore squarely focused on developing value added exports for its export industries.
Third, don't forget human resource development, as this is the real key to sustainability. Does Indonesia really want to become a cheaper default to higher-priced Chinese labor? The government's attitude should be one of selective investment. The main question should be: who stands to benefit more, foreign investors or ordinary residents?
Investments that foster low-wage tourism and apparel making or allow a flood of cheap, Chinese-made goods to enter the market are not the way to go. Trade Minister Gita Wirjawan has approved investment ventures from China into infrastructure, ports and power generation. These investments create higher-wage jobs, but the minister should know that China is well-versed in integrating its own citizens into these projects at all levels in the work processes. And that is an important thing for Indonesia to keep in mind.
But there are other examples for Indonesia's national leadership to take to heart. The US state of Alaska, for example, and the United Kingdom and Norway take the position that it is citizens who effectively own a country's natural riches.
The way the people are paid varies. Alaska generates a cash windfall each year that is divided among residents, about $1,000 yearly. The UK has a "citizens first" mandate for educating their own to work in both upstream oil drilling and downstream refineries via its workforce development arm. Norway has a preference for using its oil reserves to empower its citizens via free health care, education and subsidizing childbearing.
Obviously, these are countries with high levels of transparency, but the point is that something can be done for ordinary people if only the political will is there. It should also be noted that in the case of Alaska and in the UK, oil investors originally fought hard against these reforms. It took significant political leadership and vision to force gain-sharing in these industries to benefit the masses.
For Indonesia, exactly that is needed. And the fuel subsidies should be left alone until a real development and growth strategy has been prepared that will benefit all.
[Will Hickey, a former Fulbright professor of energy and human resources, is an associate professor of management at Solbridge International School of Business in Daejeon, South Korea. He can be contacted at whickey@solbridge.ac.kr.]