Price may increase 15 percent next year

The government plans to increase the base price for electricity by between 10 and 15 percent next year to reduce the swelling subsidy allocated for state electricity company PLN, Finance Minister Agus Martowardojo said.

The plan emerged amid the government’s indecisiveness in limiting fuel subsidies and after a round of delays in its plan to hike the electricity base tariff since one year ago.

“The electricity subsidy is huge and has not been channeled to the right target. Therefore, the Finance Ministry indicated that we need to do a subsidy conversion from general subsidy to targeted subsidy for those who truly need it,” Agus said Friday.

The electricity subsidy has ballooned in the past seven years to Rp 40.7 trillion (US$4.8 billion) in 2011, the state budget shows. Before 2004, the electricity subsidy totaled only about Rp 3 trillion.

Acting chair of the Fiscal Policy Office (BKF), Bambang Brodjonegoro, said that the government’s plan to increase 10 to 15 percent of the electricity base tariffs will save more than Rp 15 trillion in the state budget, as the overall electricity subsidy may slide to below Rp 30 trillion.

Local and international economists, including those from the World Bank and the International Monetary Fund, have expressed concerns about mounting subsidies as the fund could be used to improve the lacking social safety net in the country or to build basic infrastructure, which in turn will create multiplier effects for the nation’s economy.

The government allocated a total of Rp 136.61 trillion for energy subsidies — fuel and electricity — in 2011, about 11 percent of the total state spending.

Coordinating Minister for the Economy Hatta Rajasa said the realization of the government’s plan will need approval from the House of Representatives. “This is just a plan that will be discussed. The final decision will depend on the discussion.”

“The government will continue to pay close attention to people who truly need the subsidies. Subsidies will not be scrapped, they will still be channeled to the poor,” Hatta said in Jakarta on Friday.

Dahlan Iskan, president director of PLN, which has a monopoly in the power sector, said the company would follow whatever decision was made by the government.

“Tariffs and margins are the domain of the government and House of Representatives. PLN will wait for the final decision as we improve the electricity output and services quality for the people,” Dahlan said.

With the 10 to 15 percent increase in the electricity base tariff, Minister Agus said he hoped that PLN would receive a larger amount of subsidies from the government.

Indonesia expects to scrap electricity and fuel subsidies by 2014 so that fluctuating energy prices would reduce financial burdens on the state. The subsidy system is also seen as an impediment to Indonesia’s achievement of an investment grade credit rating because it limits the government’s freedom in macroeconomic policymaking