Update on Fertilizer Subsidy Policy in Indonesia: Perspective and Challenges

Update on Fertilizer Subsidy Policy in Indonesia: Perspective and Challenges

Published: 2023.07.06
Accepted: 2023.07.06
147
Consultant
Indonesian Agricultural Researcher’s Alliance (APPERTANI)
Senior Agricultural Economist and Research Professor
Research Center for Behavioral and Circular Economy, National Research and Innovation Agency (BRIN), Indonesia

ABSTRACT

The fertilizer subsidy policy has been implemented in Indonesia for five decades, namely from 1970 up to the present. This policy is essential to support agricultural development including food-security achievement. It is implemented dynamically and is disbursed every year. Recently, the Government of Indonesia issues the Regulation of Agricultural Minister Number 10/2022 on Procedures for Determining the Allocation and Highest Retail Prices of Subsidized Fertilizers in the Agricultural Sector including Urea and NPK for nine commodities (rice, maize, soybean, chili, shallot, garlic, sugarcane, cocoa, and coffee). The implementation of this regulation has been restricted towards reducing the type of fertilizers, decreasing the type of commodities, increasing the highest retail prices, anticipating the rising global prices of fertilizers, and responding to the shortage of raw materials for fertilizers and global food crisis problems. It is challenging to implement this regulation, particularly in line with the disparity in prices between subsidized and non-subsidized fertilizers. Therefore, supervision of subsidized fertilizers should comprise upstream and downstream levels and representatively comprise the process of budget and beneficiary planning as well as distribution lines.

Keywords:  fertilizer subsidy, policy, agriculture, Indonesia

INTRODUCTION

Background

Fertilizer is technically additional substance containing the right balance of essential nutrients supplied to the crops to increase productivity. Without fertilizer, the use of other inputs such as superior seeds, water, and labor will only provide marginal benefits so that agricultural productivity and farmer income will be low. Therefore, the Government of Indonesia (GoI) regulates the procurement and distribution of fertilizers through subsidy policy program.

The subsidized fertilizer policy program is considered to increase effectiveness and efficiency of procurement from producers and/or imports and distribution to consumers (farmers) according to the six principles of right, namely the right type, amount, place, time, quality, and price. It is implemented in the form of price subsidy scheme. With this scheme, the ratio of fertilizer prices to agricultural product prices will be lower than without subsidies (Susilowati, 2016). It is reasonable since fertilizer is a commodity that is commercially traded both in national and international markets.

The fertilizer subsidy policy in Indonesia seeks to achieve two objectives. First, it seeks to increase agriculture productivity and preserve national food security. Second, it aims to enhance farmers’ ability to optimize the use of fertilizers. However, there is also a sense that the policy is a tool to achieve broader goals, ascribing to the program the objectives of maintaining farmers’ welfare, poverty alleviation, or a price stabilizer (Osorio, et.al. 2011). The fertilizer subsidy policy for farmers is another form of the government’s support for improving the standard of living and welfare of farmers.

It is required to estimate the need for fertilizers, data on target farmers (name, address, how much area to plant, etc.), the types of fertilizers that farmers will use, as well as the price at which it has to be sold. Even though these data are complete, this fertilizer subsidy policy still has positive and negative impacts. On one hand, the subsidized fertilizer policy program has a positive impact, particularly within the framework of achieving food self-sufficiency. On the other hand, the negative impact of this program, among other things, is suspected to encourage excessive and inefficient use of fertilizers (Susila, 2009).

Every year the GoI allocates a fertilizer subsidy budget to encourage increased productivity and quality of agricultural products while ensuring access to fertilizers at affordable prices for farmers who need them based on supervision of the procurement and distribution of this program (DGAIF, 2022). Recently, the GoI issues the Minister of Agriculture of Indonesia Number 10/2022 concerning Procedures for Determining the Allocation and Highest Retail Prices of Subsidized Fertilizers in the Agricultural Sector. Hence, this paper discusses the update on policy program comprising a historical review and urgency of fertilizer subsidy, followed by rationale, perspective, and challenges.

FFRAMEWORK ON FERTILIZER SUBSIDY POLICY

Historical review  

According to the regulation of Indonesian Minister of Trade Number 15/2013 on Procurement and Distribution of Subsidized Fertilizers for the Agricultural Sector, subsidized fertilizers are goods under supervision whose procurement and distribution receive subsidies from the government for the needs of farmer groups in the agricultural sector (MoT, 2013). It includes Urea (Nitrogen), ZA (Zvavelvuure Ammonium/Nitrogen and Sulphur), SP36 (Super Phosphate P2O5 36%), NPK (Nitrogen, Phosphorus, and Potassium), and other types. The policy of determining subsidized fertilizers as goods under supervision has been established for a long time because the policy of subsidized fertilizers has been implemented five decades ago.

Historically, fertilizer subsidy policies have been dynamic following strategic environmental conditions. However, the essence of the fertilizer subsidy policy since 1970 has remained the same, namely to encourage increased productivity and national food production and improve the welfare of farmers. Since then, fertilizer subsidies have continued to be provided in the form of the Highest Retail Price/HET[1]. In other words, the amount of subsidy provided by the GoI is the difference between the cost of fertilizer production and cost of distribution with the highest retail price.

Based on the subsidy system and sources of financing, the history of fertilizer subsidy policies in Indonesia can be divided into four periods. They are (Darwis and Supriati, 2014):

  1. The first period (1970-1998). During this period, there were two types of subsidies: (1) Subsidies from the State-owned Electricity Company (PLN) and imported fertilizers (1970-1973); and (2) fertilizer price subsidies originating from imports and domestic production (1973-1998).
  2. The second period (1999-2001) where the GoI provides subsidies for the price of raw materials (gas) for fertilizer production in the form of Domestic Gas Incentives (IGD) to fertilizer producer company with a gas price of US$1.3/MMBTU (Metric Million British Thermal Unit). The amount of subsidy is equal to the difference between the price of gas supplied to fertilizer producers and the price of gas in the market.
  3. The third period (2002-2005) where fertilizer subsidies are provided through a combination of gas subsidies for Urea fertilizers and price subsidies for non-Urea fertilizers. Subsidy gas is carried out by imposing a gas price requirement of US$1.0/MMBTU for fertilizer producing company, while the price difference with the market price borne/subsidized by the Government.
  4. The fourth period (2006-2021) through highest retail price. The fertilizer subsidy system and its financing sources can be seen in Table 1.

Urgency

Fertilizer is a strategic commodity because it is related to increasing production and income of farmers and its contribution to building national food security. Together with other production factors, fertilizer has an important role in increasing crop production. Even though the contribution of fertilizer to farming costs is only around 10%, fertilizer is a strategic commodity and is included in the group of goods whose distribution is monitored (Susilowati, 2016). Rice as a commodity that receives the most subsidized fertilizers has a relatively high cost of production compared to other major world rice producers (Bordey et.al. 2016). Despite changing subsidized fertilizer policies, the GoI rice commodity is still maintained as a commodity receiving subsidized fertilizers. If the GoI revokes the subsidized fertilizer policy, it is feared that inflation will occur due to rising rice prices.

The subsidized fertilizers are procured by the producer (PT Pupuk Indonesia) and distributed to farmer’s groups through distributors and retailers starting from the line I, line II, line III, up to line IV (Figure 1) based on RDKK[1]  at price not exceeding the HET.

Producer consists of PT Pupuk Sriwidjaja Palembang, PT Petrochemical Gresik, PT Pupuk Kalimantan Timur, PT Pupuk Kujang, and PT Pupuk Iskandar Muda which produces inorganic and organic fertilizers. Distributor is an individual company or business entity, whether in the form of a legal or non-legal entities appointed by the producer based on a SPJB[2] to purchase, store, distribute, and sell subsidized fertilizers in large parties in the area of responsibility.

The retailer is an individual company or business entity, whether in the form of legal or non-legal entities domiciled in sub-districts and/or villages, appointed by distributors based on SPJB with the main activity of selling. The retailer is required to carry out the distribution of subsidized fertilizers based on the six principles of precision of procurement and distribution of subsidized fertilizers which includes the right type, quantity, price, place, time, and quality in line IV to farmers and/or farmer groups based on the RDKK.

Line I is the location of the fertilizer warehouse in the producer factory area or the destination port area for imported fertilizers. Line II is the location of the manufacturer’s warehouse in the provincial capital area and the Fertilizer Packaging Unit (UPP) or outside the port area. Line III is the location of the manufacturer's and/or distributor’s warehouse in the district/city area designated or determined by the producer. Line IV is the location of a warehouse or retail kiosks on sub-district and/or village designated or established by the distributor. The formulation and subsidy disbursement of subsidized fertilizers are presented in Table 2.

UPDATE ON POLICY FOR FERTILIZER SUBSIDY

Rationale

As an effort to recover from the impact of the COVID-19 pandemic and to restore growth in economic activity toward increasing national food security, the GoI continues to be committed to paying attention to the agricultural sector. Improving the pattern of agricultural empowerment is urgently needed to improve the quality and quantity of agricultural products to meet domestic staple food needs. The initial steps that need to be taken include providing production inputs for farmers such as seeds, seedlings, fertilizers, and cultivation techniques, including harvesting and post-harvest technology.

One of the strategic governments’ policies related to fertilizers is providing subsidy so that farmers pay fertilizer at a lower price.  It is carried out since fertilizer is a key factor in increasing productivity and subsidies with cheaper fertilizer prices will encourage an increase in the use of this input. Fertilizer subsidy aims to respond to the tendency of rising fertilizer prices in the international market and declining levels of farming profits. The fertilizer subsidy policy is also to fulfill six principles in its distribution, namely the right type, right price, right time, right place, right amount, and right quality. The result is that fertilizer subsidies are expected to increase agricultural productivity and farmer welfare (Susila, 2009).

In 2022, the Indonesian MoA has allocated a fertilizer subsidy budget of more than IDR25 trillion (US$1.67 billion) to meet the needs of around 16 million farmers, who are registered in the e-RDKK to support national food security (CMEF, 2022). It is supported by the Regulation of the Ministry of Agriculture Number 10/2022, followed by the Decree of the Minister of Agriculture Number 734/2022.

Regulation of the Ministry of Agriculture Number 10/2022

Regulation of the Ministry of Agriculture Number 10/2022 issues the Procedures for Determining the Allocation and Highest Retail Prices of Subsidized Fertilizers in the Agricultural Sector on 1 October 2022. The summary of this regulation can be seen in Table 3.

Table 3. Summary of Regulation of the Ministry of Agriculture Number 10/2022

Aspect

Description

  1. Source
  1. Subsidized fertilizers can come from domestic and/or foreign production, consisting of: Urea and Nitrogen, Phosphate and Potassium (NPK)1] produced and/or procured by PT Pupuk Indonesia; and
  2. In the event that the fertilizer subsidy budget is still available after being allocated to subsidized fertilizer types, other types of fertilizers are needed to increase production, the provision of subsidized fertilizers can be allocated to other types of fertilizers.
  1. Target
  1. Subsidized fertilizers are targeted to farmers who carry out farming sub-sectors of food crops, horticulture, and estate crops with a land area of no more than two hectares per planting season; and
  2. Farmers receiving subsidized fertilizers must join a farmers’ group and be registered in the Agricultural Extension Management System (Simluhtan), which is an agricultural extension information system that provides a database of extension institutions, extension personnel, and main actor institutions
  1. Commodity

It comprises nine commodities2], namely: (1) Rice; (2) Maize; (3) Soybean (food crops); (4) Chili; (5) Shallot; (6) Garlic (horticulture); (7) Sugarcane; (8) Cocoa; and (9) Coffee (estate crops)

  1. Determination
  1. Determination of subsidized fertilizer allocations consists of subsidized fertilizer allocations at the central, provincial levels; and districts/cities; and
  2. Determination of the allocation of subsidized fertilizers at the district/city level is carried out after the allocation of subsidized fertilizers at the provincial level has been determined. This is determined based on the spatial data of farmers’ land or land area data in Simluhtan.
  1. Allocation
  1. The allocation of subsidized fertilizers at the central level is determined based on the spatial data of farmers’ land. Farmer’s land spatial data is data about the geographical location, dimensions, size, and/or characteristics of agricultural land that is on or above the earth’s surface;
  2. The allocation of subsidized fertilizers at the provincial level is further broken down by district/city, type, amount, and monthly distribution. It is similarly implemented at the district/city level;
  3. The allocation of subsidized fertilizers at the district/city level is further broken down by sub-districts, type, amount, and monthly distribution;
  4. Proposals for fertilizer allocation from sub-districts are carried out through electronic group definitive needs plans (e-RDKK)3], and district/city-subsidized fertilizer allocations;
  5. In addition to spatial data on farmers' land, the determination of the allocation of subsidized fertilizer at the central level takes into account the standard area of protected paddy fields and the determination of LP2B4], and/or the absorption of subsidized fertilizer in the previous year. If spatial data on farmer's land is not yet available, land area data in Simluhtan is used; and
  6. If the allocation of subsidized fertilizers in an area in the current month is insufficient, the distribution of subsidized fertilizers can be carried out using the remaining allocation from the previous month and/or from the allocation for the following month, without exceeding the one-year allocation.
  1. Realocation
  1. Subsidized fertilizer allocation can be reallocated if there is a shortage or surplus of fertilizers in one area by taking into account the available allocation and the proposed fertilizer needs; and
  2. Reallocation is carried out as follows: (1) Reallocation between provinces and between types of fertilizers subsidized, determined by the Director General on behalf of the Minister; (2) Reallocations between regencies/cities within one province area are stipulated by a Governor’s decision; and (3) Reallocation between sub-districts within one district/city area shall be stipulated by decision of the Regent/Mayor.
  1. Distribution

Subsidized fertilizer distribution from retail kiosks to farmers uses Farmer Cards through Electronic Data Capture machines and/or digital applications. If Farmer Cards5] are not yet available, subsidized fertilizer distribution to farmers can use Identity Cards.

  1. HET
  1. HET (the highest retail price) of fertilizer is determined by a Ministerial Decree; and
  2. The HET is applied to purchases by farmers at authorized retailers by statutory provisions

Note: 

1] Those are selected based-fertilization efficiency due to the current condition of agricultural land and the content of macro-nutrients essential for increasing optimal crop production.

2]It is selected to support the realization of better food security in the future.

3] e-RDKK is data on subsidized fertilizer receipts implemented to improve the accuracy of distribution targets to farmers registered in the farmers’ group.

4]LP2B (Sustainable Food Agricultural Land) is a sector of agricultural land that is determined to be consistently protected and developed to produce staple food for national food self-sufficiency, resilience, and sovereignty.

5] Farmer Card is a means of accessing banking services in physical or electronic/digital form which functions as a transaction tool for subsidized fertilizer redemption at official retailers.

Source: MoA, 2022

Decree of the Minister of Agriculture Number 734/2022

Decree of the Minister of Agriculture Number 734/2022 concerns the Determination of the Allocation and the Highest Retail Prices of Subsidized Fertilizers for 2023. It includes two basic components. First, setting the HET for subsidized fertilizers for 2023 as follows: (1) Urea (Rp2,250 or US$0.14/kg); (2) NPK (Rp2,300 or US$0.15/kg); and (3) NPK special formula (Rp3,300 or US$0.21/kg). Second, allocating the subsidized fertilizers is about 9,013,736 tons (Table 4).

The high allocations are respectively in January to March and October to November as planting periods of the rainy season and the first dry season in Indonesia. During those seasons, fertilizers must be available to support agriculture, particularly for rice farming.

Perspective and challenges

The implementation of update on subsidized fertilizer policy program has been restricted in line with several concerns. First, reducing the type of fertilizers namely from Urea, ZA, SP36, NPK, and organic to only Urea and NPK including NPK special formula due to increase in the price of raw materials for fertilizers especially natural gas (Table 5). Second, decreasing type of commodities i.e., from 70 commodities to nine strategic commodities that have an impact on inflation. Third, increasing the highest retail prices of Urea i.e., from Rp1,800 per kilogram to Rp2,250 per kilogram. Fourth, anticipating the rising global prices of fertilizers since the price of energy is increased. Fifth, responding to the shortage of raw materials for fertilizers and global food crisis problems, particularly related to the conflict of Russia and Ukraine.

There are some changes in the implementation of the update on fertilizer subsidy, primarily due to the limitation of the state budget and ineffective distribution mechanism of fertilizers. Even though restricting fertilizer amid the threat of a global food crisis could be considered counterproductive in the efforts of boosting domestic food production, the update on the fertilizer subsidy policy must be carried out to achieve the budget allocation that is right on target. Therefore, the GoI will further tighten the distribution and redemption of subsidized fertilizers to be more on target, among other things by preparing data of beneficiaries, using digital technology, and strengthening supervision.

It is challenging to implement this regulation, particularly in line with the disparity in prices between subsidized and non-subsidized fertilizers. According to CMEF (2022), the global fertilizer crisis has had a direct impact on increasing domestic fertilizer prices. Since the end of 2021, the prices of non-subsidized fertilizers in Indonesia have significantly increased compared to the previous prices. The price of non-subsidized Urea increased from Rp5,000-8,000 per kilogram in 2021 to Rp13,000 to Rp15,000 per kilogram at the beginning of 2022. Likewise, the price of NPK increased from Rp8,000 per kilogram to Rp15,000 per kilogram. In addition, update on non-subsidized fertilizers has emerged with trademarks very similar to those of subsidized fertilizers. With a relatively low level of knowledge and accuracy of farmers, they are often fooled by the trademarks of these non-subsidized fertilizers. The impact is not only on losses due to plants not growing optimally, but in some cases also increasing the intensity of pest and disease attacks.

The large disparity in the prices of subsidized and non-subsidized fertilizers also has the potential to cause moral hazard such as the hoarding of subsidized fertilizers and counterfeiting of subsidized fertilizers. Consequently, it is strongly required that the anticipatory steps be taken in the form of strict supervision involving law enforcement agencies to control the allocation and distribution of subsidized fertilizers following the implementation of this new regulation. 

CONCLUSION AND RECOMMENDATION

The government is committed to continue supporting and improving the governance of the subsidized fertilizer policy in economic development in the agricultural sector that is more innovative and adaptive to technological advances. The fertilizer subsidy can be viewed as pro-poor policy related to poverty alleviation among farmers by helping to reduce production costs in the context of agricultural cultivation.

The update on policy for fertilizer subsidy is critical, particularly in line with the current situation such as the increasing prices of fertilizers as an impact of the global crisis including the conflict between Russia and Ukraine. Therefore, the GoI decided to only subsidize Urea and NPK fertilizers by implementing the Ministry of Agriculture Regulation Number 10/2022.

Supervision of subsidized fertilizers should start from upstream to downstream. Upstream supervision includes the process of budget and beneficiary planning. Furthermore, downstream supervision comprises distribution lines. The most potential mal administration will be in line III (distributor’s warehouse at district/city level) and line IV (retailer’s kiosk at village). The extent of potential mismanagement in line I (producer’s warehouse at factory) and line II (producer’s warehouse at province/UPP) is expected to be lower due to the implementation of monitoring based-computerization.

REFERENCES

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CMEF. 2022. Benahi Tata Kelola Pupuk Bersubsidi, Pemerintah Siapkan Sektor Pertanian Lebih Inovatif dan Adaptif dengan Kemajuan Teknologi (Fixing the Subsidized Fertilizer Management, the Government Prepares the Agricultural Sector to be More Innovative and Adaptive with Advances in Technology). Press conference, 15 July 2022. Indonesian Coordinating Ministry for Economic Affairs. Jakarta.

Darwis, V. and Supriyati. 2014. Subsidi Pupuk: Kebijakan, Pelaksanaan, dan Optimalisasi Pemanfaatannya (Fertilizer Subsidy: Policy, Implementation, and Optimization of Its Utilization).  Jurnal Analisis Kebijakan Pertanian (Agricultural Policy Analysis Journal), Volume 11, Number 1, June 2014: 45-60. Indonesian Center for Agricultural Social Econimic and Policy Studies. Bogor.

DGAIF. 2022. Surat Edaran Direktur Jenderal Prasarana dan Sarana Pertanian Nomor 256 Tahun 2022 tentang Revisi Petunjuk Teknis Pengelolaan Pupuk Bersubsidi Tahun Anggaran 2022 (Circular Letter Number 256/2022 on Revision of the Technical Guidelines for the Management of Subsidized Fertilizers for the 2022 Fiscal Year). Directorate General of Agricultural Infrastructure and Facilities. Indonesian Ministry of Agriculture. Jakarta.

MoA, 2021. Peraturan Menteri Pertanian Indonesia Nomor 49 Tahun 2021 tentang Tata Cara Penetapan Alokasi dan Harga Eceran Tertinggi Pupuk Bersubsidi Sektor Pertanian (Regulation of the Minister of Agriculture of Indonesia Number 49/2021 on Procedures for Determining the Allocation and Highest Retail Price of Subsidized Fertilizer in the Agricultural Sector). Indonesian Ministry of Agriculture. Jakarta.

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MoT. 2013. Peraturan Menteri Perdagangan Republik Indonesia Nomor 15 Tahun 2013 tentang Pengadaan dan Penyaluran Pupuk Bersubsidi untuk Sektor Pertanian (Regulation of the Minister of Trade Number 15/2013 on Procurement and Distribution of Subsidized Fertilizers for the Agricultural Sector). Indonesian Ministry of Trade. Jakarta.

Osorio, C. G., D. E. Abriningrum, E. B. Armas, and M. Firdaus. 2011. Who Is Benefiting from Fertilizer Subsidies in Indonesia? Policy Research Working Paper 5758. Retrieved from: https://openknowledge. worldbank.org/bitstream/handle/10986/3519/5758.pdf (27 December 2022). Poverty Reduction and Economic Management Unit,  the World Bank East Asia and Pacific Region. Jakarta.

Rachman, B. and T. Sudaryanto. 2010. Impacts and Future Perspectives of Fertilizer Policy in Indonesia. Jurnal Analisis Kebijakan Pertanian (Agricultural Policy Analysis Journal), Volume 8, Number 3, September 2010. Indonesian Center for Agricultural Social Econimic and Policy Studies. Bogor.

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[1]   RDKK (Definitive Plan of Group Needs) refers to the calculation of plans for subsidized fertilizer needs that are prepared and provided by farmers’ groups based on the size of the farming area (MoT, 2013)  

[2]   SPJB (Sale Purchase Agreement) is a binding cooperation agreement between producer and distributor or between distributor and retailer which contains the rights and obligations of each in the procurement and distribution of subsidized fertilizers for farmers’ groups based on statutory provisions (MoT, 2013)   

[3]   HET (Highest Retail Price) refers to the highest price of subsidized fertilizers in 50 kilograms, 40 kilograms, or 20 kilograms packages in Line IV purchased in cash by the farmer’s group (MoT, 2013)  

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