more heavily subsidized oil derivate product, with a per unit subsidy (Rp 3,671 per liter, using 2007 average prices) of more than two times its retail price (Rp 1,818 per liter). Thus, while kerosene represents only slightly more than a quarter of the total consumption, it absorbs more than half of the total subsidy; gasoline and diesel account for roughly one quarter of the total each (Table 6).<sup>3</sup> Large-scale household consumption surveys consistently indicate that households directly absorb a very large share of the kerosene subsidy, much of the gasoline subsidy and relatively little of the diesel subsidy.<sup>4</sup>

**Table 5.  Fuel subsidies price benchmark and adjustment factor, 2007**

||**Gasoli**<br>**Premiu**|**ne**<br>**m**<br>%|**Kerose**|**ne**<br>%|**Diesel**|<br>% f|
|---|---|---|---|---|---|---|
||US$/BBL|<br>of(1)|US$/BBL|<br>of(1)|US$/BBL|o<br>(1)|
|(1) Production|67.95||67.95||67.95||
|(2) Transportation|1.60|2.4|1.60|2.4|1.60|2.4|
|(3) Distribution|0.23|0.3||0.3||0.3|
|(4) Storage|1.95|2.9|1.95|2.9|1.95|2.9|
|(5) = (1+2+4) Cost of Supply|71.73||71.73||71.73||
|(6) % relative to (5) Margin of Production|6.26|9.2|14.37|9.2|10.00|9.2|
|(7) % relative to (9) Margin TPD|6.68|9.8|7.83|9.8|7.21|9.8|
|(8) = (6)+(7) Gross Corporate Margin (GCM)|12.94||22.20||17.21||
|(9) = (5)+(8)<br>Cost of supply + GCM Margin|84.67||93.93||88.94||
|(10) MOPS|74.21||82.32||77.95||
||**14.10**||**14.10**||**141**||
|**(11) = [(9)/(10)-1]*100 Adjustment** **factor**|(% of<br>MOPS:)|**24.6**|(% of<br>MOPS:)|**38.2**<br>|**.**<br>(% of MOPS:)|**30.9**|

_Source: World Bank estimates based on Ministry of Energy and Mineral Resources/Directorate General Oil and Gas presentation._ Breaking the link between international market costs of petroleum products and their domestic retail prices requires a country to finance an explicit or implicit subsidy, depending on whether the gaps take the form of fiscal costs that appear directly in the budget, or quasi-fiscal costs that are nominally borne by government owned companies but still effectively burden the budget through depressed dividends or losses and debts accrued by state-owned or affiliated enterprises.<sup>5</sup> There are various means of setting retail product prices. A review of the international experience in management of domestic petroleum prices by Baig et al. (2007), reports that from a survey of 51 countries, nearly half had an ad hoc pricing mechanism where the government adjusted the price level irregularly, 14 percent an automatic adjusting mechanism that holds the margin between world and local prices constant while allowing domestic prices to adjust, and 37 percent enjoyed a liberalized pricing system. The study finds that fuel retail prices in countries that have liberalized markets are on average 20 percent higher than countries in which prices are subject to automatic adjustments (Figure 13).

> 3 See Annex 8 for a distribution consumption of all fuel products from 1999 to 2005.

> 4 Poor coverage in these household surveys of the richest households, which consume the most fuel, make the exact results unreliable.

> 5 There was a brief period during the 1980s when Indonesian retail prices were _above_ international market prices, during which the fuel price regime acted as a tax on consumers.

14