In Focus
December 2012

Economic boom in Indonesia brings host of challenges

Indonesia's economic boom in bringing a host of challenges to the largest economy in Southeast Asia. Evidence of that economic expansion can be seen in car sales. These are expected to reach almost a million units in 2012, up 11% from 894,000 units in 2011, according to the Association of Indonesia Automotive Industries (GAIKINDO).

"Indonesia's growth is projected at 6.1% for 2012 as a whole, reflecting above expectation growth already seen in the first half of the year," said Alex Sienaert, a World Bank economist who covers Indonesia. For 2013, the World Bank is forecasting a growth rate of 6.3%.

Inadequate infrastructure and rising emissions are some of those challenges. "You can imagine how heavy traffic is in Jakarta now and how many tons of emission load from transport is emitted every year in Jakarta alone," said Linda Krisnawati, head of the sub-division for evaluation and policy development of land transport in Indonesia's Ministry of the Environment.

According to the Jakarta Environmental Management Agency, the level of particulate matter (PM) less than 10 microns in size or PM10 in the capital city was about 70 micrograms per cubic meter in 2011. This is more than three times the acceptable recommended value established by the World Health Organization (WHO) of 20 μg/m3 annual mean.

Particulate matter affects more people than any other pollutant, according to the WHO. The major components of PM are sulfate, nitrates, ammonia, sodium chloride, carbon, mineral dust and water. It consists of a complex mixture of solid and liquid particles of organic and inorganic substances suspended in the air. The particles are identified according to their aerodynamic diameter, as either PM10 or PM2.5.

The Indonesian government is tackling the problem of traffic and associated emissions. In 2005, the government required new cars to meet Euro 2 emission standards. The corresponding fuel quality mandate called for a maximum of 500 parts-per-million (ppm) sulphur in petrol and 3,500 ppm sulphur in diesel fuel.

A 2011 survey conducted by the Ministry of the Environment found that Indonesia's average sulphur level in RON 88 gasoline ranged from 180 ppm to 205 ppm, while in diesel fuel that ranged from 270 ppm to 2,600 ppm. The results are an improvement over a survey conducted four years earlier in 2007, the ministry said.

In addition to RON 88, two other grades of gasoline are available in Indonesia, RON 91 and RON 95 (see Table 1). The latter two have the low aromatic and olefin levels similar to Euro 2 gasoline, Krisnawati said. RON 88 gasoline, which is subsidized, is the most widely available gasoline grade. The higher-octane fuels are only available in large cities, she said.

Table 1: Select Indonesia Petrol Specifications

Property

Grade

Grade

Grade

RON, min

88

91

95

Sulphur, ppm, max

500

500

500

Lead, g/l, max

0.3/0.013

0.013

0.013

Benzene, vol%, max

-

5

5

Aromatics, vol%, max

-

50

40

Source: Ministry of Energy and Mineral Resources, Republic of Indonesia

RON 88 is so heavily discounted because of the government subsidy that many consumers understandably opt for it, instead of the premium, and thus more expensive, grades. The subsidy means a savings of more than 25% over alternatives. Thus, the subsidy can encourage greater consumption, which results in higher emissions.

There also is an impact on refiners. For instance, the state-owned oil company PT Pertamina sells both subsidized and non-subsidized liquefied petroleum gas (LPG), without being totally compensated for the former. As a result, the company will lose an estimated IDR 4.5 trillion (US$466 million) this year on subsidized LPG alone, Trading and Marketing Director Hanung Budya said in May 2012. Such unrecoverable losses make financing refinery expansion and upgrades more difficult.

The fuel subsidy accounted for about 11% of the country's total budget in 2011. The Indonesian government has projected that the energy subsidy spending will exceed its budgetary allocation by 44% in 2012. Due to the pressure on the budget, the Ministry of Finance has recommended phasing out the fuel subsidy; the government has made several recent attempts to begin to do so. However, these efforts have run into some problems. For example, a plan to keep luxury cars from availing of subsidized fuel was scuttled in 2012 in the face of public resistance.

Meanwhile, the government is keeping its own fleet from using subsidized fuels. It has also banned the use of such fuels in plantation and mining vehicles. Finally, there are efforts underway to keep luxury cars in Jakarta from consuming subsidized fuels.

There are those who do not think that this piecemeal approach will work. "This effort will require strong control and enforcement. And this is exactly our problem, weak enforcement," said Dollaris (Waty) Suhadi, executive director of the Jakarta-based Swisscontact Indonesia Foundation. The non-governmental organization is the local branch of Zurich-based Swisscontact, which backs innovative environmental programs in clean air, emissions, solid waste and renewable energy.

Suhadi argues that Indonesia should end its fuel subsidy and that it should shift to natural gas and invest in better public transportation. The Ministry of Environment's Krisnawati believes that leapfrogging to a Euro 4 standard, which has been much talked about in the past but never formalized, could help improve Indonesia's emissions levels. Currently, there are discussions to make this jump in 2015.

However, there was considerable pushback when the Euro 2 standard was implemented, according to a 2011 Ministry of Environment report. Carmakers sought to delay implementation of the policy from 2005 to 2007. They then lobbied to delay full adoption of such critical components as catalytic converters and diesel particulate filters until 2010. The same report said that oil suppliers had failed to provide an adequate supply of good quality fuel. Thus, the goal of the current discussions is to have all elements – particularly vehicles and fuels – in place before the launch of the new standard, Krisnawati said.

This will involve full engagement of all the stakeholders. "We have to sit together to know the real condition of Indonesia and change the direction to one that we all equally want. Then we need to make a pilot city as an ideal city and replicate it to the 400 cities in Indonesia," Krisnawati said.

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