**Table 4.  Subsidy trends**

_<u>Rupiah trillion, constant 2007 prices</u>_

||**1995**|**1996**|**1997**|**1998**|**1999**|**2000**|**2001**|**2002**|**2003**|**2004**|**2005**|**2006**|**2007**|**2008***|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Total subsidies|0.9|7.9|89.4|86.1|139.0|160.9|130.3|69.3|66.1|127.2|146.6|114.3|150.2|220.1|
|Fuel subsidies|-|6.7|41.4|68.9|86.3|138.0|115.1|49.5|45.3|95.8|116.1|68.3|83.8|119.1|
|Non fuel subsidies|-|-|44.7|12.7|52.7|22.9|15.3|19.8|20.9|31.4|30.4|46.0|66.4|101.0|
|ER thousand Rp to USD (yr average)|2.2|2.3|2.9|10.0|7.9|8.4|10.3|9.3|8.6|8.9|9.8|9.1|9.1|9.1|
|Fuel subsidies as % total expenditure|0%|2%|9%|17%|20%|29%|20%|10%|8%|16%|19%|10%|11%|13%|

*2008 Revised Budget (APBN-P), assuming oil prices at US$95. Prices are deflated by the GDP deflator. _Source: World Bank calculations based on Ministry of Finance publications._

# _Fuel subsidy and domestic fuel price regime_

Prices of refined fuel products for households, small businesses, transportation, and public service are regulated on an ad hoc basis by the central government.<sup>2</sup> The fuel subsidy is defined as the difference between the regulated retail price and an agreed benchmark price which is an estimate of the “economic price”. Given that Indonesia is a net importer of fuel products, the economic price is therefore the price in the international market, currently set as the Mid Oil Platts Singapore price (MOPS), plus a factor to cover freight, taxes, and margins for corporate profit (i.e. so that the economic price allows for an agreed level of accounting profit). For 2008, the economic price is set as MOPS plus an adjustment factor of 9.5 percent (Figure 12). This adjustment factor is often called the “alpha factor”. The adjustment factor is the same for gasoline, kerosene, and diesel. Yet given that MOPS varies for each one of these products, the factor is kept constant by adjusting the margin of production and margin TPD for each one of these products (Table 5). Annex 2 describes algebraically how the subsidy is calculated.

**Figure 12.  Domestic prices, regulated price, and subsidy for gasoline (premium), 2007**

<!-- Start of picture text --> 90 Margin TPD Economic price<br> 9.8% 84.67 USD/BBL<br>80 14.1%Alfactor pha Storage 2.9% Subsidy Fuel Tax 5% (4,950 Rp./Lt.)<br>70 Transportation 2.4% VAT 10% Regulated price<br> 76.8 USD/BBL<br>60 (4,500 Rp./Lt.)<br>Margin of Production<br> 9.2%<br>50 Unit Subsidy<br>19.4 USD/BBL<br>40 1,036.96 Rp./Lt.<br>Mid Oil<br>30 Platts<br>Singapore Production Unit * 17 thnd. Klt.<br>20 (MOPS) Cost Revenue<br>10 Total Subsidy Gasoline<br>1.9 Bln.USD<br>0 17.6 Tr. Rp.<br>Benchmark MOPS Cost of domestic production, Regulated price, revenue,<br>comercializatoin and and subsidy<br>coporate margin<br>US$ BBL<br><!-- End of picture text --> _Source: World Bank calculations based on Ministry of Energy and Mineral Resources 2007 data._ Total budgeted fuel subsidies amounted to Rp 83 trillion in 2007, equivalent to 11 percent of total government expenditure and 2.2 percent of GDP. The total subsidy is determined by multiplying the product-specific unit subsidy by the estimated level of consumption for each product. Kerosene is the 2 See IMF (2007) for a detail of countries that have liberalized petroleum product prices and those that are set by governments on an ad hoc basis or using an automatic formula.

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