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Politics

Pertamina's bind shows perils of petrol price controls

Indonesia's state oil company points finger at Jakarta for missing profits

A Pertamina gas station in Jakarta   © Reuters

JAKARTA -- Indonesia's state-owned oil and gas company Pertamina took the unusual step in its recent earnings briefing of blaming the government's fuel price policy for robbing it of a significant amount of profit.

The company reported a net profit of roughly $2 billion for the nine months to September during an earnings conference earlier this month. But Pertamina argued that its bottom line would have been $1 billion or so higher, had the government allowed it to increase gasoline prices to reflect the rise in crude oil prices.

One of the biggest achievements of the current administration of President Joko Widodo, who came to power in October 2014, was abolishing gasoline subsidies, said Darmin Nasution, coordinating minister for economic affairs. Freed-up funds have been diverted to infrastructure development, whose benefits flow more broadly through Southeast Asia's most populous nation.

At the same time, the government has effectively blocked Pertamina from lifting gasoline prices to prevent surges at the pump. In Indonesia, the state sets gasoline prices every three months. But it has left them unchanged even as crude oil has grown dearer. Crude has risen to more than $55 from around $48 per barrel in early 2015. The argument can be made that the subsides have been replaced by a policy of sacrificing Pertamina's profits in order to keep gasoline prices low.

Furthermore, the Joko administration has introduced a flat nationwide gasoline price. Before the move, gasoline prices were lower in cities than in remote areas and islands, where poor distribution infrastructure makes it more expensive to deliver gasoline. The new policy has been credited with helping reduce regional economic disparities, but it has placed an additional burden on Pertamina.

Some say it is only natural for state-run enterprises to reflect national interests and society's needs, since maximizing profits is not their mandate.

But Pertamina raises funds from the private sector through the bond market. And many state-run enterprises, such as airline Garuda Indonesia, are listed on the country's stock exchange. Shareholders in such companies may end up bearing risks of sustaining policies like gas subsidies that are popular with the public. Investors, who vote with their feet, likely need something more convincing than talk about the national interest.

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