GENEVA, Switzerland, December 2008: A GSI report on government support to biofuels in Indonesia finds that the country has

been slow to implement its ambitious plans for biofuel production and consumption, largely due to dramatic rises in feedstock prices in 2007 and early 2008. The Government of Indonesia became an enthusiastic supporter of liquid biofuelsfuelgrade ethanol, biodiesel and biokerosenein 2005, as the countrys oil production started to go into decline and petroleum prices began to soar. Among the top reasons it gave for promoting the development of biofuels were energy security, job creation (particularly in rural areas), building on existing strengths in the agricultural sector and developing new export opportunities. Early government plans envisaged that biofuels would meet 10 per cent of transport fuel consumption by 2010, create thousands of new jobs and lead to energy selfsufficiency for rural villages. However, volatile prices for biofuel feedstock and petroleum since 2006 have led to dramatic shifts in the cost of biofuel production, relative to petroleum fuels, and the government's appetite for providing support has waxed and waned with the profitability of the industry. In 2006, the government instructed the national oil company, Pertamina, to start selling biofuel blends mixed with petroleum fuels. Soaring agricultural commodity prices later in 2007 and during the first half of 2008 made biofuel production increasingly unprofitable. Pertamina suffered mounting losses from its biofuel blends, as the government required it to sell biofuels at the same price as subsidized petroleum fuels, but did not provide additional subsidies to cover the higher cost of biofuels. These losses are effectively a government subsidy, given that Pertamina is state-owned. Total government allocations for biofuel development between 2006 and June 2008 reached up to IDR 1 500 trillion (US$ 1.6 billion). However, it is unlikely that all of these funds were disbursed. Low budget transparency in Indonesia makes it difficult to assess amounts committed in the budget and progress with implementation. Actual subsidy levels are likely to have been in the neighbourhood of IDR 1 800 billion (US$ 200 million), comprising Pertaminas losses and interest rate subsidies for plantation renewal, as well as training, research and development relating to biofuel feedstock cultivation. Biofuels added to the government's fuel-subsidy bill, which will exceed IDR 130 trillion (US$ 14.5 billion) for 2008 alone. Pertamina reduced the biofuel content of its blends on several occasions during 2007 and 2008, due to the rising cost of biofuels. The government did not intervene until biofuel costs fell and, in September 2008, it issued a compulsory blending mandate. The new mandates, if enforced, will lock-in a predetermined share of biofuels in transport fuel consumption regardless of the cost. It is unclear why the government would want to do this. Indonesia's experience with petroleum pricing has clearly demonstrated that fuel subsidies can become a major drain on the economy, and politically difficult to reduce once in place. Recent steps to liberalize fuel prices have been a major advance for the Indonesian economy. Letting fuel prices rise to levels prevailing in international markets would reduce consumption and improve efficiency, resulting in improved energy security. Adding an additional layer of subsidies for biofuels to an already distorted system makes little economic sense.