Fuel Smugglers Line Up Every Day to Drain Indonesia Economy

02:21 PM @ Monday - 13 October, 2014
It’s Tuesday morning and about three dozen vehicles are waiting for the fuel truck to arrive at a service station on the island of Belitung, Indonesia. Soon, a steady stream of cars will buy all the subsidized diesel and many of the drivers will then siphon their ration into jerry cans to sell at a profit.

The daily ritual is one step in a series of scams that range from car owners earning a few hundred dollars, to organized crime syndicates making millions out of Indonesia’s lopsided fuel distribution system. The pervasive fraud, which has embroiled people from all walks of life, from provincial officials to the armed forces, takes advantage of subsidies that cost the government more than $20 billion a year and lures hundreds of thousands of Indonesians into breaking the law.

“With the discrepancy between the price of subsidized fuel and market value, smuggling, hoarding and deliberate scarcity are normal,” said Achmad Sukarsono, an associate fellow at the Habibie Center, a research institute in Jakarta. “It can be a lucrative business involving soldiers, policemen and violent incidents.”

Diesel Dodge

President-elect Joko Widodo is the latest leader of the country to promise to curtail the subsidies and their inherent corruption, a strategy that helped end the three-decade rule of dictator Suharto and has eluded four presidents since. The issue is so entrenched in the country’s economy that it touches almost every aspect of life across the 17,000-island archipelago, from fishermen selling their marine diesel to pay for cigarettes, to wealthy drivers in the capital, unable to fill their SUVs as gas stations run dry.

Among the smallest operators in this nationwide scam is a tall man in a dark blue Daihatsu SUV at the filling station in Kelapa Kampit district in Belitung, who declines to give his name because what he is about to do is illegal. He’s waiting to fill up with his daily quota of 40 liters (10.6 gallons) of diesel at the subsidized rate of 5,500 rupiah (45 U.S. cents) a liter, less than half the market price. The fuel is then sold for 8,000 rupiah or more to businesses that aren’t eligible for the subsidy or need more than their quota.

He said the car belonged to someone else, the boss, and his job was to line up and buy the diesel.

Local government staff try to prevent people taking more than their ration, said Hajanudin, an official who monitors fuel distribution in another part of the island. Like many Indonesians, he only uses one name.

Second Stop

“We take down their plate numbers so that we don’t see any cheating where one vehicle tries to line up again,” said the thickly bearded Hajanudin, 49, showing the entries in his book. “There’s no smuggling. Rumors that security officials allow some people to get more than their ration of diesel are wrong.”

The tall man in the Daihatsu says he circumvents the quota by driving to another station to get 40 liters more. He then siphons the fuel out of the car’s tank and into 20-liter jerry cans. After he sells it, he splits the profit with the vehicle owner, who gets 60 percent.

It’s easy money, he said, and he has a family to feed.

Basuri Purnama, head of East Belitung Regency, says the racketeering and smuggling are so profitable that it draws people away from getting legal jobs.

“Why work?” he said. Anyone can make 200,000 rupiah a day smuggling fuel. “Every day, just do that and then chill out in the coffee house.”

Mining Tin

The diesel mostly is bought by illegal tin miners on Belitung and the neighboring island of Bangka, who use diesel-powered high-pressure hoses to blast away tin ore in pits or to suck up the metal-rich sand from offshore deposits. Indonesia is the world’s largest exporter of tin and about 90 percent of its production comes from these two islands.

It’s prohibited to buy diesel from filling stations using jerry cans, said an illegal miner in Sungailiat, on Bangka, who works a deposit that was once mined by PT Timah, Indonesia’s biggest tin producer.

The miner, who declined to give his name, said he buys fuel from the driver-smugglers, known as pengerit, to run his diesel pump. Tin mining has been going on in the province since the 1800s -- Belitung in English was known as Billiton and gave its name to the Dutch company that became part of the BHP Billiton (BHP) group.

Modified Tugboat

The miners sell their ore to local smelters and the refined metal is shipped or smuggled abroad to Singapore and other countries. While the smelters are legal -- they also refine metal from licensed mines -- many buy fuel on a much larger scale than the rationed pengerit can supply. Instead, they get fuel from bigger operators that offload diesel directly from tanker ships.

The diesel is pumped from the tankers into specially modified tugboats that can hold as much as 100 tons of fuel, said a smuggler in Pangkalpinang, near the main port on Bangka, who declined to give his name because his activities are illegal.

He’d arrange a meeting with the tanker captain using satellite telephones, said the smuggler, who became involved in the illegal trade in 2006. The deal would begin with entertainment in port.

The captain must be served first, given girls, ecstasy, clubbing -- services that usually cost about 5 million rupiah a night in total, he said.

Then the smuggler’s boat would rendezvous with the tanker and fill its tanks, with the shipment paid for in cash.

Fuel Overflowing

Sometimes there would be too much and the fuel overflows from the tanks in the tugboat, said the 33-year-old smuggler. He paid about 2,500 rupiah a liter, he said, less than half the current government subsidized rate. After expenses, he and his team earned about 2,000 rupiah a liter in profit -- more than 60 million rupiah per cargo.

How could they not afford to buy a house and car, he said, laughing.

After the transfer, the smaller vessel would take the cargo ashore and rapidly pump it into waiting fuel trucks that would move it to private storage tanks or sell directly to the smelters, he said.

The whole operation would take place with the knowledge of the authorities and the navy, he said. He’d pay about 2 million rupiah in an envelope to an intermediary. That would ensure the authorities closed their eyes and the unloading operation would be guarded by a naval police vessel, he said.

As the profits rose, so did the number of smugglers.

Previously, there was a small river with few crocodiles, he said. Now there is a small river full of crocodiles.

Navy’s Price

Boat operators like him have also been squeezed out of the offshore transfer business by more powerful parties, he said.

Now it is controlled by the navy, and operators like him can’t buy directly from the tankers, he said. Those who want to smuggle just get ready to receive the fuel on land. The navy’s price is about 7,000 rupiah per liter, he said.

Police arrested four people on the island of Batam and one in Jakarta last month for alleged fuel smuggling involving a local government official and the armed forces, said Ronny F. Sompie, a spokesman for the national police force.

“After we uncovered the case, there were linkages to officers” in the navy, Sompie said by phone.

The ongoing investigation began after the government’s financial crimes unit alerted police to a civil servant having deposited 1.3 trillion rupiah-worth of Singapore dollars into a savings account, according to Agus Santoso, head deputy of the unit.

No Officers

Navy spokesman Manahan Simorangkir denied that naval officers were involved in smuggling. He said the Batam investigation involved a contractor working at the naval base in Dumai, on the island of Sumatra.

“So far, there has been no involvement of officers, but the navy is monitoring and exploring” the case, Simorangkir said in a telephone interview. He said part of the problem is that Indonesia does not have a coast guard and so the tasks are split among 13 different institutions.

“They are not yet well coordinated,” he said. “There will be an effort from the government to form one multi-role agency, similar to a coast guard.”

Fuel-price controls have been a bugbear of Indonesia’s economy for decades, fostered by the country’s status as one of the world’s oldest oil producers. The nation’s first successful well, sunk by a Dutch plantation owner, began pumping in 1885. By 1962, Indonesia was a major oil supplier and a member of the Organization of Petroleum Exporting Countries.

Suharto’s Downfall

President Suharto sought to stamp out subsidies after seizing power in the late 1960s, but the global oil shock in the 70s created a widening gap between government-set rates and soaring international prices.

Amid the Asian financial crisis in 1998, and under pressure from the International Monetary Fund, Suharto raised fuel prices by more than 70 percent. For Indonesians suffering from inflation and food shortages, it was the final straw. Mass protests broke out in the capital and within three weeks Suharto resigned.

Efforts by three subsequent leaders to raise fuel prices were also greeted by public protests or strikes, forcing many of the plans to be diluted or rolled back. As world oil prices rose 10-fold since 1998 and more Indonesians became able to afford cars and motorbikes, the nation became a net fuel importer and the subsidy bill climbed.

Achilles Heel

“It’s the Achilles heel of the economy,” said Tim Condon, Singapore-based head of Asia research at ING Groep NV. “The best thing the incoming president could do would be to eliminate fuel subsidies. That’s going to take political leadership that’s eluded presidents for seemingly forever.”

Widodo, who is known as Jokowi, urged outgoing President Susilo Bambang Yudhoyono to raise fuel prices before the transfer of power on Oct. 20. Yudhoyono has so far refused. The 2015 budget lifts subsidies for fuel to 276 trillion rupiah ($23 billion), or 13.5 percent of government spending.

Jokowi plans to gradually reduce fuel subsidies within three years, he said in a Bloomberg TV interview, a faster target than previously announced.

“Our subsidies for oil, for fuel are very large,” Jokowi said in the Bloomberg TV interview last month. “They must be diverted to productive enterprises,” he said, referring to small village businesses, irrigation and fertilizer for farmers.

Jokowi has said he will raise fuel prices once in power, though the timing and size of the increase have yet to be decided. He may face resistance from parties loyal to defeated presidential candidate Prabowo Subianto, which control more than half of the parliament.
Economic Cost

To narrow the nation’s near-record current-account gap, Jokowi would have to raise fuel prices at least 40 percent, PT Bank Central Asia said last month.

Failure to scale back the subsidies and invest some of the savings in infrastructure would risk dragging economic growth below 5 percent within five years, said Vice Finance Minister Bambang Brodjonegoro in an interview in his Jakarta office.

He suggested a transition period with a fixed subsidy of about 3,000 rupiah per liter, and a cap of 46 million kiloliters on the total volume of subsidized fuel. That would cost the government about 143 trillion rupiah, compared with this year’s estimated bill of 246.5 trillion rupiah, he said.

“Not every president would like to take the risk of dealing with this,” said Bambang, who was dean of the economics faculty at the University of Indonesia, the nation’s most prestigious college, prior to joining the Finance Ministry. “The political aspect hasn’t been solved since the 1970s.”

Soldiers Shot

That’s partly because fuel scams, and the profits they provide, are ingrained into the economy, the government and even the military.

In September, a raid by armed police in Batam in the Riau Islands on a warehouse suspected of housing subsidized fuel, led to a fight between the police and the army, after soldiers were discovered at the building, Brigadier-General Bujang Zuhirman said in the Jakarta Post. Four soldiers were wounded and the army is investigating the incident, the paper said.

“If you go to service stations in remote places, the vehicles that line up mostly are not private cars but large trucks or modified vans to transport loads of subsidized fuel,” said Sukarsono at the Habibie Center. “In some regions that I’ve visited, people have to buy smuggled fuel because nothing legal is available.”

Fisherman’s Tale

And it’s not only in distant provinces. On the congested road to Jakarta from Pertamina’s giant Plumpang fuel depot in the north of the capital, gangs wait for the state oil company’s tankers to get stuck in traffic before they hop on and open the taps to steal the supply, a practice known as “peeing” fuel.

“There is a long list of vested interests who stand to lose out if subsidies are scrapped,” said Keith Loveard, head of risk analysis at Jakarta-based security company Concord Consulting. “While rising prices would reduce the motivation for smuggling, it would not stop fuel tapping.”

In Bangka and Belitung, the sale of contraband fuel affects almost everyone, said Purnama, the East Belitung regent.

“I met this fisherman who said he earns 700,000 rupiah a month,” said Purnama. “So I asked him, does he smoke? He said yes, he smokes three packs a day -- that’s 27,000 rupiah. That means his income is only for smoking. So how do his wives and kids eat?”

Fishermen buy diesel from special depots that are allowed to sell fuel in jerry cans. On a recent weekday at the one in Kelapa Kampit, a crowd of people at the entrance scatters as a government fuel-monitoring team pulls up in two cars, leaving a line of empty plastic containers on the ground. A few of the motorbike-drawn carts that carry the fuel, leave without their cargo.

Bigger Quota

Inside, where diesel is dispensed from two large tanks that can hold a total of 10 tons of fuel, the compound’s chief, Helmi, says there are no illegal sales. “The diesel ration is distributed equally,” he said.

Each person gets 20-40 liters a day, though they can get 100 if they’ve saved up their quota, Helmi said.

Iwan, a government official who runs Kelapa Kampit’s public-order office, said racketeers bribe officials to get a bigger quota, paying 550,000 rupiah for 100 liters and selling it to the miners for 800,000-850,000 rupiah.

“Real fishermen find it difficult to get diesel,” he said.

The irony is, while thousands rely on the subsidies to make a living from racketeering or smuggling, the fuel-price caps are actually of little benefit to the poor, said Purnama the East Belitung regent. The average motorbike owner probably only uses about 3 liters of fuel a week, he said.

Last year, the police confiscated a total of 7.2 million liters of illegal fuel in the country, according to a government regulator.

Meantime, a growing middle class, weaned on cheap fuel, is buying bigger and bigger vehicles, swelling the traffic jams in the capital almost to gridlock and pushing up demand for gasoline and diesel. To meet that demand, a country that was once one of the world’s biggest oil exporters now has to import more than 300,000 barrels of gasoline a day.

“Why do we have to break the foundation of the nation just because we’re afraid of removing subsidies?” said Purnama. “As long as there are subsidies, smuggling will continue.”
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