Some number-play on BBM's subsidy

Rizal emailed me yesterday, telling me that this "debate" on fuel (BBM) subsidy with KKG has been going nowhere since 2005. KKG uses his accounting with "convenient" assumptions to debunk anything government says about the subsidy and the budget. We have said repeatedly in the Cafe, that KKG's calculation is erroneous. Others have done the same. Teguh Dartanto has his take here. Ari Perdana has one here, and Arya Gaduh here.

But of course KKG goes on and on. And many media love his style. Many pundits and commentators use his argument without reservation. Politicians send message broadcasting KKG's numbers - people re-broadcast them, of course.

I think this debate is getting more and more off the mark. And the government (and DPR) should also share the blame. They're all trapped in the debate about surplus and deficit in the budget. Which is beside the point.

But fine, since I received so many questions about that KKG's piece, here's some thought. KKG says the government actually still has a "profit" of almost IDR 100 trillion from "selling BBM". Now I don't want to debate how he got this number (but see my PS below). In fact, let's assume KKG is right. In fact, let us even "help" him by doubling his claim to IDR 200 trillion a year (are you happy now, Pak Kwik?)

Now, what is the most important obstacle in Indonesia economic development? Yes, infrastructure. How much money do we need to allocate for infrastructure development in 2011-2014? IDR 4,000 trillion - or roughly IDR 1,000 trillion per year. Now, how much is the current capacity of the government to finance this? Thirty percent. That is, 70% must come from private parties (more specifically: 50% from pure private financing and 20% from public-private financing - PPP). Can we safely assume that private money will come "just like that"? Unfortunately, no. So long as our investment climate is still lousy, private money will find better places. As long as we still have not found a good risk-sharing mechanism for PPP, do not expect too much. Let's just assume that from IDR 500 trillion expected from pure private financing, 50% materialize. So we are still short IDR 250 trillion a year. What was KKG's surplus? IDR 200 trillion (that is, after we give him a bonus of IDR 100 trillion). Oops: still short!

So my point is, isolating the debate on surplus versus deficit can be useless. Because even if you have budget surplus, it still doesn't make sense to go ahead with the current subsidy regime. And in this post I only look at one aspect: infrastructure. As I said here, there are other two pressing factors: environment and poverty eradication.

PS: It's not that I never tried to check KKG's method. Here is my excel from long time ago, trying to replicate KKG's calculation. You can see that many of his assumptions are very shaky (changing the parameters a bit - scenarios to the right of KKG's numbers - lead to significant implications). These numbers are from old time debate (of course magnitudes of the parameters have changed, but I just want to show how I think KKG thinks)  - you can adjust it as you like, using the more update data on oil lifting, crude price, et cetera. But again, if I were you, better not wasting all your time with this.

PPS. Another tone used in the current debate is that government may as well keep the current subsidy system, if they do their homework well on budget efficiency, corruption eradication, et cetera. Woah, are these even subsitutes? Of course the government should make the budget more efficient and should keep fighting corruption. But while doing all that, why keep a wrong subsidy practice?

Addendum: I made a mistake in the infrastructure fund needed in 2011-2014. The number above (IDR 4,000 trillion) is for total investment needed. Infrastructure share is about IDR 1,800 trillion. Annually this translates into IDR 450 trillion. That means, using the story above (assuming 50% of the expected pure private financing materialize), IDR 112.5 trillion is needed. This is above KKG's IDR 100 trillion "profit.