MoA being responsible for estimating the need for fertilizer (both subsidized and unsubsidized), the location where it will be used, and the type of fertilizer that farmers will use, as well as the price at which it has to be sold. Changes in production trends are not easily incorporated into yearly production plans and price estimates. The type of information that would be necessary to project the correct amount (and price) of fertilizer is unlikely to be available to the MoA, leading to shortages in production and imports. Further regulations originating from the other ministries involved (Ministry of Trade, Ministry of Industry and State Ministry for State-Owned Enterprises) increase the uncertainty for the private sector, resulting in very little private sector involvement in the production of fertilizer.

The subsidy system itself is contributing to some of the fertilizer shortages. The price difference between subsidized fertilizer and the market price creates incentives for subsidized fertilizer to be sold outside the system, to other retailers/ dealers, exported to foreign buyers or to end users for whom it was not intended (e.g. large plantations). Although there are no estimates of how much subsidized fertilizer ends up exported or used for estate crops, it could be substantial and this would explain the persistence of fertilizer shortages despite large increases in the budget for fertilizer subsidies. Limits to the profitability of increasing production, such as the need to sell in Indonesia at depressed prices, also limits the incentives for producers to increase production. The central determination of quantities to be produced, the prices of the fertilizer and locations where the fertilizer can be sold, provides little room for fertilizer companies to expand production and compete with one another.

The demand for fertilizer in Indonesia has grown steadily over the past decade at around 5 percent per year. Indonesia has doubled its consumption of urea at 5 million tons in 2007 when compared with its level in the year 2000. Conversely, demand for other fertilizers such as SP36 increased by only 30 percent over the same period. Demand for urea is bolstered by the subsidies (to the detriment of other types of fertilizer), as suggested by the substitution of urea with AS (ammonia-based) and SP36 (superphosphate-based) between 1999 and 2001, when Indonesia briefly stopped the fertilizer subsidies.

**Table 2.1 Fertilizer agriculture consumption in Indonesia, 1994-2007**

||**UREA**|**AS**|**TSP/SP.36**|**KCL**|**TOTAL**|
|---|---|---|---|---|---|
|1994|3,288,466|614,553|1,124,533|302,080|**5,329,632**|
|1995|3,710,455|652,999|1,069,909|403,900|**5,837,263**|
|1996|3,917,858|588,192|900,284|375,293|**5,781,627**|
|1997|3,323,601|350,503|663,478|350,270|**4,687,852**|
|1998|4,289,648|407,898|868,837|172,133|**5,738,516**|
|1999|3,140,033|243,906|394,949|380,000|**4,158,888**|
|2000|2,673,113|594,710|623,260|400,000|**4,291,083**|
|2001|4,069,585|580,724|778,689|425,000|**5,853,998**|
|2002|4,022,387|529,399|670,775|450,000|**5,672,561**|
|2003|4,336,729|511,129|1,414,091|63,715|**6,325,664**|
|2004|4,656,723|633,404|789,164|1,012,295|**7,091,586**|
|2005|4,842,537|651,986|778,706|947,212|**7,220,441**|
|2006|5,107,886|684,100|817,033|1,039,295|**7,648,314**|
|2007|5,010,434|745,378|802,812|1,382,166|**7,940,790**|

_Source:_ Indonesia Fertilizer Producer Association, 2007.

After briefly reviewing the characteristics of the fertilizer industry and the challenges ahead, the following section analyzes who is benefiting from the fertilizer subsidies.

**6**