Fuel Subsidies Distort Indonesia’s Logistics Efficiency

The long-standing assumption that fuel subsidies reduce logistics costs in Indonesia is a fundamental misunderstanding that creates a systemic distortion rather than actual efficiency. According to RJ Lino, the former president director of PT Pelindo II, the reliance on these subsidies has produced an illusion of competitiveness in the trucking sector while hindering the development of more structurally optimal transport modes.

The Impact of Price Distortion

The economic disparity in fuel pricing is significant. Diesel is priced at approximately Rp 6,800 (US$0.40) per liter, which is far below its economic value of around Rp 13,000 (US$0.77). This creates a price distortion of nearly 48 percent.

Lino argues that this artificial pricing makes trucking appear competitive not because of structural optimization, but because it is subsidized. This distortion leads to the over-utilization of road transport, with 80 to 85 percent of Indonesia’s domestic cargo moving by truck, even over distances where such a method is structurally inefficient.

other critical transport modes, specifically maritime and inland waterways, remain underdeveloped because fuel subsidies distort the relative price signals across different modes of transport.

Redefining Logistics Costs

A central point of the analysis is that logistics costs are frequently oversimplified to mean only transport costs. In reality, total logistics costs are composed of four distinct elements:

• Transport cost
• Inventory cost
• Handling cost
• Uncertainty cost

The World Bank’s Logistics Performance Index (LPI) supports the view that logistics performance is driven by system integration, infrastructure, and reliability rather than the price of fuel. Indonesia’s LPI score of approximately 3.0 indicates systemic inefficiencies that cannot be resolved through cheap fuel, but require a correction of the system itself.

Analyses from the IMF and OECD consistently indicate that fossil fuel subsidies result in the misallocation of resources, increased pollution, and congestion, leading to long-term inefficiency.

Political and Legislative Context

While economic arguments suggest the removal of subsidies to correct these distortions, the political landscape remains complex. On February 24, 2025, the House of Representatives (DPR) denied claims that subsidized fuel would be eliminated.

Bambang Haryadi, Deputy Chairman of Commission XII, stated that any changes to the subsidy mechanism must be approved by parliament because subsidies are embedded in the state budget (APBN). He emphasized that there is no plan to remove fuel subsidies and that any such policy would require prior legislative discussion.

Haryadi further clarified that President Prabowo is committed to protecting lower-income citizens. The administration’s focus is on making subsidies more precisely targeted to ensure they reach those who truly need them, rather than eliminating them entirely. This included a clarification of statements made by National Economic Council (DEN) Chairman Luhut Binsar Pandjaitan, suggesting that Luhut was proposing a refinement of the system rather than the removal of subsidies.

Historical Precedent and Regional Trends

Indonesia has previously attempted subsidy reform. In 2015, President Joko Widodo stopped certain fuel subsidies to redirect funds toward more urgent needs rather than favoring private car owners. At that time, the Indonesian Crude Price (ICP) had fallen from a peak of US$61.9 per barrel in May 2015 to US$27.5 by January 2016, making subsidies less necessary due to low market prices.

More broadly, both Indonesia and Malaysia have begun the process of reducing long-standing subsidies that have historically kept fuel prices well below market rates.