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Case Studies- LPG Subsidy Reforms-2 - Coggle Diagram

- - - - LPG in Mexico is primarily distributed in two ways: through large 20-kg and 30-kg cylinders and via large, stationary tanks.
      - In 2008, approximately 80% of households in Mexico used LPG as their primary cooking fuel, with a notable difference between rural (54%) and urban (87%) households.
      - On average, households consumed 29 kg of LPG per month, representing 5.6% of rural household expenditure and 4.4% of urban household expenditure.
      - Mexico historically subsidized LPG by setting a maximum price each month, which was often below the actual costs of importing LPG from the international market.
      - These subsidies placed a financial burden on the state-owned energy company, Pemex, as they absorbed the difference between the subsidized price and the actual import costs without compensation.
  - - - Since 2010, the Mexican government has implemented annual average increases in retail prices of LPG.
        
        These price increases have typically ranged from 7% to 8% annually.
        
        The aim of these increases was to gradually reduce the government's subsidy expenditure on LPG.
        
        While these price hikes did not completely eliminate subsidies during periods of high international crude prices, they significantly reduced the average subsidy expenditure.
        
        Notably, during periods of low international crude prices, the gradual price increases effectively eliminated LPG subsidies, saving government resources.
    - - Mexico has developed a comprehensive social safety net system over the past 18 years, making LPG subsidies less crucial as a social welfare mechanism.
        
        A significant component of this system is the conditional cash transfer program called Oportunidades, which covers 5.5 million households through distribution centers and debit cards.
        
        Oportunidades also includes a subcomponent called Oportunidades Energeticas, providing a monthly supplement of MXN 60 (USD 4.60) to help vulnerable households afford energy-related expenses.
        
        Oportunidades primarily targets low-income households and offers cash transfers linked to accessing health and education services.
        
        Payments are made to female heads of households, ensuring that funds are directed toward essential needs.
        
        The program boasts an efficient monitoring system that allows for swift follow-up on non-compliance, with benefits reduced for periods of non-compliance and adjustments made in subsequent payments.
        
        In 2010, more than 5 million people were enrolled in Oportunidades, demonstrating its widespread reach and impact in Mexico's social welfare landscape.
  - - - Gradual price increases in Mexico have demonstrated the feasibility of this approach, even in the face of potential political resistance to regular price changes.
      - Mexico's experience suggests that in some countries, it may not be necessary to provide LPG subsidies to assist the poor, especially if there is existing social assistance capacity to support low-income households.
      - Mexico's government opted for a reform plan that involved the removal of LPG subsidies, possibly due to the country's well-established social assistance programs.
      - The extensive social assistance capacity in Mexico, including programs like Oportunidades, may have influenced the decision to eliminate LPG subsidies, as these programs effectively address the needs of low-income households.
      - Additionally, the fact that LPG is already the primary cooking fuel for households across all income quintiles in Mexico may have reduced concerns about the need to encourage a shift toward modern cooking fuels, further justifying the removal of LPG subsidies.
- - - - In 2004, Peru initiated fossil fuel consumption subsidies, including LPG, in response to rising international oil prices.
      - To manage the impact of international price hikes on domestic markets, the government established the Fuel Price Stabilization Fund (FPSF).
      - The FPSF was implemented as a commodity subsidy scheme, featuring upper and lower price bands for domestic energy prices.
      - The universality of the FPSF resulted in growing fuel subsidies, reaching a peak of 1.4% of GDP in 2008.
      - In 2011, LPG subsidies amounted to 0.15% of GDP, with the FPSF disbursing USD 261 million to support LPG consumption.
      - The subsidy scheme was later found to be highly regressive and primarily benefiting the wealthiest 20% of the population.
      - Consequently, efforts were made to increase fuel prices, with LPG for household consumption and diesel being the only fuels to remain under the subsidy scheme since 2012.
  - - - In 2007, a census in Peru revealed that 37% of the population lacked access to modern fuels for cooking, with 60% residing in rural areas.
        
        In response, the Fondo de Inclusión Social Energético (FISE) was established in 2012 to enhance access to modern cooking fuels, particularly LPG, across Peru.
        
        FISE operates as a cross-subsidy scheme, funding itself through a surcharge on other energy consumption, including electricity and hydrocarbons.
        
        Eligibility for FISE subsidies is determined based on various criteria, including average monthly electricity consumption, household income, registration in the National Registry of Identification and Civil Status, precarious house construction, and allowing one beneficiary per family.
        
        Under the FISE scheme, eligible households receive a monthly voucher valued at 16 soles (approximately USD 5.70), which provides financial support for their first LPG refill each month.
        
        For families meeting FISE criteria but lacking an LPG cook stove, the program offers a two-burner stove, hose, and a 10-kg LPG canister.
        
        Vouchers are delivered through a numeric code on the electricity bill, which can be redeemed via mobile phone.
        
        Subsidy recipients can redeem their subsidy allowance for up to two months, and the LPG must be purchased through an "authorized LPG agent," which constitutes an expanded distribution network established since the program's inception.
  - - - To stabilize LPG consumer prices and manage subsidy costs, a pricing mechanism featuring a low price band can be effective.
      - Such a mechanism allows for gradual increases in consumer prices, helping to reduce subsidy expenditure, especially during periods of stable or declining international LPG prices.
      - However, if the price band is set too low, it may not effectively control subsidies during prolonged periods of increasing international energy prices.
      - Well-designed voucher systems can play a crucial role in targeting and reducing total LPG subsidy expenditure by cross-subsidizing other fossil fuels.
      - Targeting can be based on various household indicators, such as electricity consumption, type of house construction, school enrollment, or income.
      - These voucher systems are a means to provide financial assistance where it's needed most while managing subsidy costs effectively.
- - - - LPG in Thailand is available in various cylinder sizes, including 4 kg, 7 kg, 11.5 kg, 13.5 kg, 15 kg, and 48 kg cylinders.
      - Until early 2015, Thailand had a system of differentiated LPG pricing for various user categories, including low-income households, cooking, automotive transport, and industrial users in the petrochemical and other industrial sectors.
      - Starting from 2011, industrial LPG prices were generally set close to free market prices but with a government-imposed ceiling to prevent excessive price increases without government approval.
      - In 2013, the distribution of LPG usage in Thailand was as follows: 32% for cooking, 24% for the transport sector, and 44% by the petrochemical industry and other industrial users.
  - - - The Thai government has pursued gradual price increases as a strategy to reform LPG subsidies, given the political sensitivity of altering LPG prices.
        
        Multiple plans for reducing subsidies through gradual price increases have been proposed and partially implemented over the years.
        
        In 2011, the government aimed to incrementally raise the price of LPG for automotive and industrial use while maintaining household prices. However, the intended price hike was not fully realized.
        
        In November 2012, a plan was outlined to gradually increase LPG prices for households, automotive users, and industry. The plan involved monthly increases until reaching THB 36 per kg for household and automotive LPG and was delayed due to preparations for providing low-cost LPG to low-income users.
        
        In November 2013, a program was launched to raise the price of cooking gas by THB 0.5 per kg per month until it matched the transport sector's price, eventually reaching THB 24.82 in October 2014. However, household LPG prices exceeded automotive LPG prices before the program's completion.
        
        Starting in October 2014, the government began monthly retail price increases for household and automotive LPG, culminating in December 2014. Subsidies were eliminated, and the retail price was standardized at THB 24.16 for all sectors, excluding a 7% value-added tax. This change was implemented in February 2015.
        
        Under the new scheme, LPG prices in Thailand are adjusted every three months based on reference prices, including natural gas produced from the Gulf of Thailand, gas from refineries, and imported gas. Low-cost LPG continues to be provided to low-income groups.
    - - In 2012, the Thai government introduced a policy to provide subsidized LPG exclusively to low-income households and small businesses, aiming to maintain affordability for the poor.
        
        Under this policy, subsidized LPG is sold at a fixed price of THB 18.13 per kg.
        
        Eligibility for this program is determined based on specific criteria. For households, eligibility is contingent on having a power connection of no more than 5 amperes and consuming less than 90 kWh of electricity on average per month.
        
        Eligible households are allowed to purchase up to 18 kg of subsidized LPG every three months.
        
        Small businesses, including shops, hawkers, and street food vendors, are also eligible if they have a sales area no larger than 50 square meters and use 15 kg cylinders of LPG or smaller. Their monthly consumption limit is 150 kg.
        
        Households with electricity connections were identified from electricity authority databases, and they needed to register for the program using their electricity bills or other designated methods.
        
        Households without electricity and eligible small businesses were identified through a comprehensive survey conducted by Rajabhat Suandusit University, which collected detailed information, including GPS coordinates, citizen IDs, shop details, LPG cylinder size, and consumption data.
        
        Beneficiaries use mobile phone technology to access subsidized LPG. They send SMS messages with specific codes to a designated system for verification and approval.
        
        Upon approval, beneficiaries receive a six-digit code allowing them to purchase subsidized LPG from participating stores.
        
        When purchasing LPG, beneficiaries must send SMS messages specifying the brand of gas and cylinder size, and they receive confirmatory messages indicating the subsidy amount and the remaining subsidized LPG they can purchase.
        
        Subsidized LPG can only be obtained from participating vendors, ensuring program integrity and control.
    - - The Thai government implemented a comprehensive public communications strategy to support the gradual price increases and the introduction of targeted LPG subsidies.
        
        This strategy consisted of two stages, aligned with different phases in the government's planning process.
        
        Activities before and after price adjustments included interviews with Ministry of Energy officials, seminars, public hearings, and the dissemination of informational materials such as leaflets and posters.
        
        The government utilized various media channels, including TV, print media, radio, and online news, to communicate information about the changes in LPG pricing and subsidies to the public.
        
        The establishment of the LPG4u website and an LPG Hotline provided additional resources for the public to access information and seek clarification on the subsidy program.
        
        This multifaceted public relations plan aimed to ensure that the public was well-informed and engaged throughout the process of implementing LPG subsidy reforms.
  - - - Differential LPG pricing, where different consumer categories pay varying prices, has proven to be problematic. Instead of mitigating opposition to reform, it concentrated resistance among affected consumer groups and led to economic distortions, including illegal resale of lower-cost LPG to higher-cost consumers.
      - Lower global oil prices do not equate to successful subsidy reform. Although reports suggest the end of LPG subsidies in Thailand, retail prices have only slightly increased for households and automotive users and significantly decreased for industry. Future challenges may arise when global oil prices rise again.
      - Targeted LPG subsidy programs necessitate adequate preparation and simplicity. Thailand's attempt to target subsidies to low-income households and small businesses faced challenges. Problems included ineffective beneficiary identification through surveys and cumbersome registration and purchase processes. Despite extensive awareness campaigns, more effective communication efforts might have yielded better results.