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Case Studies- LPG Subsidy Reforms-1 - Coggle Diagram

- - - - Indonesia was a net exporter of oil and gas until the 1990s.
      - The country traditionally provided energy subsidies to citizens, peaking at 18% of total state expenditure in 2005.
      - These subsidies covered diesel, gasoline, and kerosene and were intended as a form of social assistance.
      - In 2007, kerosene was the primary cooking fuel for 37% of households, totaling 20.9 million households out of 56.4 million.
      - The decline in domestic oil supply and rising oil prices increased the burden of the government's subsidy for household kerosene, soaring from USD $1.96 billion in 2005 to USD $5.24 billion in 2008.
      - Attempts to reduce the subsidy by raising kerosene prices led to serious riots.
      - The primary motivation for the conversion program was to decrease the total subsidy while safeguarding households from economic shocks.
      - Kerosene subsidies had already been phased out in the industrial sector in 2005.
      - Fuel leakage from the subsidized domestic sector to the industrial sector and even abroad, where kerosene was more expensive, further strained the state budget.
  - - - The conversion program in Indonesia was implemented in phases, focusing on areas with LPG infrastructure readiness, distribution ease, and high kerosene consumption.
      - The initial phase concentrated on Western Indonesia, particularly the capital region, due to its high population density, with a significant emphasis on the densely populated island of Java.
      - The program targeted eight provinces annually for the first three years, as indicated by the yellow, green, and orange regions on the map.
      - From 2012 to 2015, an additional five provinces were included in the program, represented by the blue regions.
      - Since 2016, the focus shifted to previously out-of-scope areas in the Eastern part of the country, including Nusa Tenggara, Maluku, and Papua, along with additional consolidation efforts on islands off Sumatra, marked by red circles on the map.
      - To support this expansion, five new LPG primary storage facilities were constructed, providing a cumulative storage capacity of 6,000 tons at a total cost of IDR 871.45 billion (US$ 62 million).
      - As part of the conversion program, households and micro-businesses received free LPG starter packages, which included a 3 kg filled cylinder (chosen for easy handling), a one-burner stove, a rubber hose, and a regulator to facilitate the transition to LPG.
  - - - Domestic kerosene consumption in Indonesia underwent a significant reduction, plummeting from 10 million kiloliters (kl) in 2006 to a mere 0.8 million kl in 2015, marking a remarkable 92% decline in usage.
      - In contrast, household consumption of LPG increased substantially during the same period, rising from 1.1 million tons (Mt) to 6.3 Mt in 2015, according to Pertamina.
      - This increase in LPG consumption contributed to 8% of Indonesia's total energy mix.
      - The per capita consumption of LPG in Indonesia saw a substantial rise, going from 4.7 kg per capita in 2007 to 24.4 kg per capita in 2015.
      - Simultaneously, kerosene consumption per capita decreased significantly, dropping from 57.3 kg per capita to 3.1 kg per capita during the same period.
      - Indonesia's journey in adopting LPG began with a low penetration rate, measuring less than 5 kg per capita per year. This starting point was similar to the current LPG penetration levels observed in many Sub-Saharan African countries.
      - However, Indonesia managed to double its LPG penetration rate within just a few years, reaching penetration rates comparable to mature LPG markets like Brazil, which had a penetration rate of 25.5 kg per capita in 2014 by the year 2015
  - - - Universal energy subsidies, including those for LPG, are recognized to disproportionately benefit wealthier households. This disparity arises from the fact that LPG penetration is often weak in poorer, more rural areas, limiting access for those in need. Additionally, wealthier households tend to consume more energy than poorer households, further magnifying the unequal distribution of benefits from universal subsidies.
      - Price Gap Influence- Subsidies become regressive due to their universality, with wealthier households benefiting more. A larger price gap between 3-kg and 12-kg LPG incentivizes wealthier households to switch to 3-kg LPG consumption, increasing the subsidy's impact on higher-income groups. Research by Granado, Coady, & Gillingham in 2012 found that, on average, only 3.8% of LPG subsidies reach the lowest income group, highlighting the unequal distributional effects of these subsidies.
- - - - In El Salvador, LPG is available in various cylinder sizes, including 10 pounds (4.5 kg), 20 pounds (9 kg), 25 pounds (11 kg), and 35 pounds (16 kg).
      - Approximately 70% of households in El Salvador use LPG for their energy needs, with the 25-pound cylinder being the most commonly consumed volume.
      - Prior to April 2011, the government of El Salvador implemented a price ceiling for LPG, applicable to all consumers. This price ceiling was set at USD 5.10 per 25-pound cylinder.
      - The price ceiling was significantly lower than the market price, estimated to be approximately USD 8 higher, creating substantial subsidies for LPG consumers.
      - These subsidies had a notable fiscal impact, with the subsidy expenditure increasing from 0.3% of the country's GDP in 2004 to 0.6% of GDP in 2012, reflecting the financial burden on the government's budget.
  - - - In April 2011, El Salvador removed LPG price ceilings, causing the price of a 25-pound cylinder to rise significantly from USD 5.10 to USD 13.60.
        
        Simultaneously, the government introduced an income transfer program for households consuming less than 200 kWh of electricity per month.
        
        These transfers were distributed through banks upon the presentation of a barcode printed on electricity bills, and beneficiaries had the choice to deduct the sum from their electricity bills or receive it in cash.
        
        The system aimed to enhance targeting in several ways
        
        Preventing Wealthier Households: Wealthier households were excluded from benefiting from the subsidy as the income transfer was tied to electricity consumption, not LPG usage.
        
        Encouraging Efficient Consumption: The fixed monthly payment supported the use of one LPG cylinder per month, acting as an incentive against excessive consumption.
        
        Preventing Smuggling and Illegal Resale: The targeting system helped reduce supplies for smuggling and illegal resale.
        
        Unlike the previous LPG subsidy, which only benefited households using LPG, the income transfer was accessible to all households, making it a more progressive approach.
        The implementation included a cutoff at 200 kWh of electricity consumption per month, which excluded only 6% of households. This consumption limit played a significant role in targeting, as it was found that a large portion (70%) of those consuming more than one cylinder per month had above-average incomes.
    - - Establishment of Customer Care Centers (2013-2014): The government initiated a transition to a new LPG subsidy system, setting up 14 "customer care centers" to facilitate vendor identification, beneficiary registration, and complaint resolution.
        
        Vendor Support and Mobile Phones: Vendors were equipped with basic mobile phones and received training on how to use them for reimbursement of subsidized LPG sales. By mid-2015, over 13,000 phones had been distributed to vendors.
        
        Beneficiary Registration with Single Identity Document (DUI): Household heads were required to register as beneficiaries using their single identity document (DUI), which includes a photo, fingerprint, and biometric data.
        
        Personal Identification Number (PIN): Registered consumers were provided with a unique PIN. When purchasing LPG from designated vendors, they entered their PIN into the vendor's mobile phone. This data was sent to a central database to validate eligibility in real-time.
        
        Subsidy Process: Eligible consumers received a confirmation message, and the government transferred a subsidy to the vendor's e-wallet. Beneficiaries could then purchase LPG at a fixed below-market price. Vendors had a separate card to withdraw cash from their e-wallets at designated financial institutions.
        
        Market-Linked Subsidy: The subsidy paid to vendors was allowed to vary based on the market price of LPG, ensuring a fixed price for beneficiaries. In 2015, the price for beneficiaries was set at USD 4.90 per 25-pound cylinder, necessitating a subsidy ranging from USD 3.37 to USD 4.60.
        
        Online Monitoring: The government used mobile technology to monitor LPG sales through an online system, recording individual transaction details, including the point of sale and previous beneficiary transactions.
        
        Transition to Solidarity Card (January 2014): In January 2014, beneficiaries were required to present a Solidarity Card (Tarjeta Solidaria) instead of their DUI.
        
        Universal Availability and Coverage: This new subsidy system was universally available and reached approximately 74% of households in El Salvador, making it more inclusive and efficient (Ministerio de Economía, 2015).
  - - - An appropriate targeting system is required if the reform is intended to help cut costs
      - by concentrating benefits on only low-income households.
      - The effectiveness of cost-cutting reforms in El Salvador, which aimed to concentrate LPG subsidies on low-income households, faced challenges in implementation.
      - Broad Subsidy Coverage: Both the 2011 and 2013 reforms continued to provide LPG subsidies to a majority of the population, undermining the goal of targeting assistance.
      - Uneven Distribution: In 2012, the 2011 reform resulted in subsidies being fairly evenly distributed across income quintiles, from the second to the ninth, indicating a lack of precise targeting.
      - Stable Costs: Despite the 2013 reform, subsidy costs remained at around 0.6% of GDP in 2013, suggesting limited cost reduction.
      - Reduced Benefits for High-Income Households: The 2013 reform did lead to a reduction in benefits for high-income households, which received only around 10% of the subsidies.
      - Middle-Income Beneficiaries Persist: Middle-income households continued to capture over 40% of the subsidy benefits, possibly due to political and policy considerations.
      - Broader Assistance Approach: The distribution of benefits beyond low-income households may reflect a policy decision that not only the poorest households require assistance for clean cooking fuels.