build effective systems to protect the poor during the reform of subsidies: the dominican republic...
TRANSCRIPT
SUSANA GAMEZ
September 9, 2014
Build Effec+ve Systems to Protect the Poor During the Reform of Subsidies : The Dominican Republic Case
MENA Knowledge Sharing and How-To in Subsidy Reform:
Regional Workshop
Reform of Subsidies…
Reduc7on or immediate or gradual elimina7on of exis7ng subsidies and establishing new rules for these subsidies.
Rapid implementa7on of the reform , taking into account the economic pressures to reduce the impact of subsidies on the fiscal deficit.
Yet we should.. consider the impact of higher prices on the most vulnerable popula7on and evaluate the advantages and disadvantages of the rapid implementa7on of the reform.
Implementa7on of the Reform
The speed of the implementa7on of the reform is related to the difference between the subsidized price and non-‐subsidized price. Thus, the greater the difference the greater the impact will be .
Therefore, the progressive process ensures the mi7ga7on of social impact, but it can also mean that , facing social pressures , the government delays or cancels the reform .
However, to rapid reform can increase social impact but ensures the implementa7on of the reform.
Petroleum products in the Reform…
Regular and premium gasoline Regular and premium diesel avtur fuel Oil Fuel Oil EGP
Kerosene Petroleum gas liquefied in cylinders
Transport of goods and people and power genera7on Fuel for kitchen
SUBSTITUTION EFFECT
Before the Reform…
Prices of petroleum products
Pricing and discre7onary tax
Prices of subsidized LPG
Electricity rates subsidized twofold
Consump7on
LPG consump7on and almost universal access to electricity
service
Ban on u7liza7on of forest and control coal produc7on
Controlled wood importa7on
Subsidy
General subsidy of LPG to households
Subsidized electricity rates and cross-‐subsidies for electricity rates
Grant to electrical service focused geographically
Stages of the process in the Dominican Republic
2000: Stage 1: Variable subsidy (market condi7ons) and generalize the liquefied petroleum gas (LPG) to
households
2005: Stage 2: Fixed and generalized to the liquefied
petroleum gas (LPG) subsidy to consumers of less than 100 pounds.
2008: Stage 3: Targe7ng subsidies to poor
households and transport drivers of public vehicles operated by the private
sector.
2009: Stage 4: Targe7ng of electric subsidy to poor
households.
Stages of the process in the Dominican Republic
2000: Stage 1: Variable subsidy (market condi7ons) and generalize the liquefied petroleum gas (LPG) to
households
Adop7on of a law that sets the retail price by considering market condi7ons (interna7onal
prices and varia7on of exchange rate)
Establishment of a direct subsidy to families for the purchase of liquefied petroleum gas
(LPG) for domes7c use.
The government has begun to take on some of the final price of LPG
Stages of the process in the Dominican Republic
2005: Stage 2: Fixed and generalized to the liquefied petroleum gas (LPG) subsidy to consumers of less than
100 pounds.
Removal of the subsidy to large consumers of LPG
Maintaining the same structure of the susidy variable on consump7on on petroleum gas under 100 pounds, independent of its use
Market Segmenta7on (subsidized price o unsubsidized)
Objec7ves of the 3rd stage of the Reform…
Protect the income of: i) poor
households, and ii) specific social
groups (average lower class) taking into account their
vulnerability to price increases.
Improve the financial status of the government
Nego7ate with transport unions maintaining fares on public transport operated by private
contractors.
Stages of the process in the Dominican Republic
2008: Stage 3: Targe7ng subsidies to poor households and drivers of public transport vehicles operated by the private sector.
Using a mechanism for targe7ng and payment.
Inclusion of the subsidy to the poor and vulnerable households in the context of welfare.
Nego7a7ons with the unions to ensure transporta7on rates unchanged through the subsidies to drivers.
Stages of the process in the Dominican Republic
2009: Stage 4: Targe+ng of electric subsidy to poor households
Gradual implementa7on of BonoLUZ and inclusion of the subsidy as part of social protec7on.
Removal of geographically focused subsidy on "customers with a contract and non-‐contract customers" in areas considered poor
with fixed rates.
Adop7on of a joint strategy between the Social Administra7on and Dispensers of Electricity for inclusion BonoLUZ to the rest of the
poor households in the country
What are the consequences in each step of the Reform? ...
Stage Consequences
First Social and poli7cal balance were maintained, because the government undertook a por7on of the final price of GLP.
Second Balances begin to collapse: a) civil society are aware of the social cost of energy subsidies opportuni7es b) the Government recognizes the impossibility of maintaining the generalized subsidy considering its high cost, limited fiscal capacity and urgent social demands.
Third Reinstatement of a durable new social and poli7c balance regarding the subsidy policy.
Obviously, in the Dominican case…
Policy decisions taken at first were not supported with a system that
allowed targe7ng the direct subsidy to poor families
In the second stage, although the government had a mechanism for targe7ng and payment, poli7cally, it was not the right 7me to consider
subsidy policy reform.
It is only when the tax burden has become unsustainable, that
poli7cians responsible of subsidies and technicians responsible for targe7ng agreed on the 7ming
and amount
Finally, subsidies to households became part of the social protec7on system established by the Social
Office
The reluctance of the government to target subsidies can also be explained by:
Limited capacity of the government response, and consequently its low impact on the poor.
Lack of mechanisms for targe7ng and payments for the transfer at a na7onal level.
Lack of a strategy to integrate transfer programs and subsidy policy.
Licle or no coordina7on between the en77es that administer subsidies and social program.
The use of the Social Protec7on
System to integrate the widespread
consump7on of LPG subsidy.
Reallocate resources resul7ng from tax savings to increase the coverage and the amount transferred to poor households to mi7gate the price
increase.
Introduce gradually, given its complexity, the
implementa7on of the targeted subsidy for the
electricity consump7on
The reasoning of interven7ons consisted of:
Strategy to bring together
social programs
Targe7ng mechanism Unique registry of beneficiaries
Payment mechanism for transparent transfer
Solidarity bank card
Implementa7on of a condi7onal transfer
program
Solidarity Program
Addi7onal financial support to social sectors
Implementa7on of programs to support the
households incomes
Subven7ons ciblées aux prix des produits pétroliers
Transi7onal jobs program.
The government ini7ated the social protec7on system
Subsidy to LPG was performed
with resolu7on of the Ministry of Industry and
Trade, which has established a
single rate for all types of
consumers.
Bonogas -‐ Households Program for poor households and lower-‐middle class and based
on the single registry of beneficiaries.
Bonogas-‐drivers program for drivers of private vehicles to public transporta7on,
based on the registered lists of the technical department of land transport.
Using Solidarity Bank Card, which is the payment mechanism used in the country by the condi7onal transfer program, Solidarity.
Targe7ng Subsidies LPG
The transparency of these mechanisms have allowed consensus on reform, even layers of the "losers" popula7on in the process.
Type of subsidy TYPE OF SUBSIDY QUANTITY PRICE
SUBSIDY FIXED PER PERSON
The government es7mates an average consump7on from which it decides the amount
of the subsidy.
The government considers the difference in price at the beginning of the reform,
implying that the price used to calculate the subsidy is fixed.
FIXED SUBSIDY, BUT REVIEWABLE, PER PERSON
The government es7mates an average consump7on and
decided that would be willing to subsidize.
The government considers the difference in price at the
beginning of the reform, but accept that this difference may vary and revise prices every 3 or 6 months, depending on the
market price of fuel
VARIABLE SUBSIDY PER PERSON
The government believes that consump7on is variable and can not affect this variable
The government agrees to pay any difference in price for the dura7on of the subsidy
Es7ma7on Bonogas-‐ Households
In es7ma7ng the amount of subsidies, it was noted according to the records of the registry of poor average consump7on of 6 gallons per month per poor household, by a value equals to the difference between the market price and
subsidized price , when making the decision.
Es7mated amount to subsidize
Determine a fixed amount of "cash" regardless of the amount consumed
it is a subsidized amount
reviewable, which was and is
recommended when market prices
are unstable
households bear part of the cost,
long term they acquired a minimum
consump7on
leading to a more ra7onal
consump7on, since all consump7on
above the minimum would be taken by the household
Sehng the value of a specific amount of
used gallons
Similarly
In es7ma7ng the subsidized amount, it was considered according to informa7on from the Ministry of Industry and Trade, the average
consump7on of 6 gallons every two days, by the difference between the market price and subsidized prices
Es7mated Bonogas-‐ Drivers
The underlying idea is that the net impact on the budget for poor households is zero, since the price difference before and post-‐consump7on is the subsidized amount. So that post the implementa7on of the program, households pay the same value per 6 gallons represen7ng their es7mated monthly consump7on.
For households consuming more than 6 gallons per month, the direct impact on their budgets, is subject to fluctua7ons in fuel prices. However, given the low weight (0.0038406) in the basket of consump7on, even a significant price increase would have licle impact.
Impact on households
Tax impact of the removal of the GP generalized subsidy
Since the calcula7on of the subsidy per gallon defines an average consump7on (6 gallons), the amount of the total grant is not altered by changes in consump7on
The increase of the subsidy, it would be possible only by the admission of a greater number of beneficiaries or the modifica7on of the standard price per gallon set.
The selec7on of beneficiaries is based on ob jec7ve and measurable eligibility criteria;
Recip ients can v iew their situa7ons by Internet, or by calling * 462, or by contac7ng community officials regarding the status of the subsidy.
The par7cipa7on of civil society and the transporta7on unions in the process of inclusion and exclusion of beneficiaries as well as making complaints or claims regarding the func7oning of the program.
Using a credit card for the beneficiary with the approval of VISA as payment and existence of an en7ty responsible for making the link between the central government, financial en77es and beneficiaries' accounts.
Transparency in ac7ons of Bonogas-‐Households et Bonogas-‐ Drivers
We must not forget, when subsidy policy is designed ...
General subsidies were jus7fied in the stability of social and poli7cal balances
Governments decide the amount and the subsidy recipients
A subsidy policy must take into
account the financial
capacity of the government.
If the tax capacity is exceeded it
can generate a budget deficit, which affects
the popula7on.
In conclusion
Each country can go its own way,
but in the Dominican case, it was decided to set
up a special program for targeted subsidies.
And with the savings obtained, it was decided to increase the
amount per month for the Condi7onal Transfers Program.
The results, in terms of poverty incidence, showed that this strategy was correct, since during the 2008
crisis, the popula7on in
extreme poverty had con7nued to
decrease.
In sum, the existence of a network of social protec7on, the joint ac7on of different public actors (ministries of finance, energy and social development) allowed to build a new social contract around subsidies and therefore a new
poli7cal balance.