Case studies from the APEC region
APEC Technical Workshop on Fossil-Fuel
Subsidy Reform
Tara Laan, Global Subsidies Initiative
18 October 2011
Outline of this presentation
1.
2.
3.
4.
5.
6.
Objectives and GSI’s approach
Case studies 1 to 4: key policies and lessons
Q&A
Case studies 5 to 7: key policies and lessons
Overarching lessons
Q&A
1. Objectives
• Experience and best practice
• Methods for protecting the poor and enhancing access
to energy
• Range of subsidy and economy types
• Focus mainly on the needs of developing economies
• Clear rationale
1. GSI’s approach
• Range of subsidy and economy types
– Producer subsidies widespread in the region
– But reform in developing economies focussed on
consumer subsidies for petroleum
• Few examples of perfect reform programs
– best-practice and successful reform are policies that
helped reduce subsidies even if they have been
reinstated
• Target specific reform strategies
The Reform Framework
How subsidies
have arisen
Costs
New policies
(pricing/tax regime)
Complementary
policies
New policies
(pricing/tax regime)
Complementary
policies
Research
Recipients
Economic impacts
Reform options
Implementation
Timing
Political strategy
Strategies to
respond to change
Monitoring,
evaluation and
adjustment
Transparency
Communication and consultation
1
2. Case studies: overview
Reform strategy
Economy
Fuel type
Subsidy type
Research
Australia
All
Producer &
consumer
Communications and
Indonesia
measures to assist the poor
Gasoline, diesel, kerosene,
Consumer
LPG
Measures to assist the poor Mexico
Petroleum products
Gradual deregulation and
assisting the poor
Thailand
Transparency
Chile
Gasoline, diesel, natural
gas
Gasoline, diesel, natural
gas
Price adjustment
mechanisms
China
Gasoline and diesel
Consumer
Gradual liberalization
Russia
Natural gas
Consumer
Consumer
Consumer
Consumer
2. Research: Australia’s Productivity Commission
• Subsidies: none or US$12 billion in 2011-12
• Unique approach:
– Independent body within government to research
and advise on reform on an ongoing basis
• Independence, transparency, community-wide
focus
• Other methods can achieve similar results
2. Research: Australia’s Productivity Commission
Main lessons:
• gradually build a pro-reform constituency
• reforms once made tend to stick
• investment in thorough research worthwhile in
the long-term
2. Building support for reform: Indonesia
• Consumer subsidies for gasoline, diesel,
kerosene and LPG: US$ 9.6 billion in 2010
• Fixed prices were successfully raised in
2005 and 2008
– Communication and consultation campaigns
– Social programs
2. Building support for reform: Indonesia
• Communications
– Consultation with opposition parties, academics
and industry
– Media campaigns on the benefits of reform and
compensation packages
– Emphasis on “fuel efficiency” not price increases
2. Building support for reform: Indonesia
Social programs: 2005 reforms
Program
Recipients
Cost
School and Student
Assistance
40.3 million
students
US$ 639 million
Basic Health Care Package
36.1 million poor
individuals
US$ 391 million
Rural and regional
infrastructure support
12,834 villages
US$ 340 million
Unconditional cash transfers 15.5 million poor
households
US$ 474million
2. Building support for reform: Indonesia
Industry and labour sector programs : 2005
reforms
• increase in the tax-free threshold for income tax
• increase in the government’s purchase price for rice
• exemption of value added tax on agricultural
commodities
• reduced interest rates and longer repayment times
for credit
• removal of certain road and transport charges
2. Building support for reform: Indonesia
Social programs: 2008 reforms
Program
Recipients
Cost
Rice support for the poor
19 million
households
US$ 433 million
Unconditional cash transfer
19.2 million
households
US$ 1549 million
Financial support for the
children of lowest ranks of
civil servants , military and
police officers
1.4 million children US$ 46 million
Loan interest subsidy for
SMEs
US$ 103 million
2. Building support for reform: Indonesia
Main lessons
• Unlike failed 2003 attempt, reforms in 2005 and
2008 successfully raised prices
• Build on previous reform
efforts and existing support
programs
• Benefits of reforms eroded by
continued price fixing
2. Assisting the poor: Mexico’s Oportunidades
program
• Subsidies: around US$ 6 billion for gasoline, diesel,
LPG and electricity in 2010
• Mexican Conditional Cash Transfer (CCT)
poverty alleviation program, “Oportunidades”
– Provide grants to low-income households
– Co-responsibilities: children attend school and
families attend health clinics and information session
2. Assisting the poor: Mexico’s Oportunidades
program
Key features of Oportunidades
Coverage
5 million families
Budget
US$4.7 billion
Amount per family
US$15 to US$165 every 2 months
• Energy component added in 2007
• Set at MXN 50 (US$ 4.12) in 2010 recipients
2. Assisting the poor: Mexico’s Oportunidades
program
Main lessons
• Proven model for CCT program
• Energy component could be raised to coincide with a
reduction in fossil fuel subsidies
• Expanded to include the lower-middle class that would
object to subsidy removal without compensation
2. Gradual reform and assisting the poor:
Thailand
• Consumer subsidies to diesel, LPG and CNG: US$2
billion in 2010
• Market deregulated in 1991 at a time of falling prices
• Oil fund and budget allocations used to subsidize certain
fuels and reduce price spikes
• Fixing prices for petroleum products in 2004-05 cost
US$ 2.92 billion: led to a change of approach
• When oil reached US$ 145/barrel in July 2008, the
government still imposed taxes and levies on gasoline
2. Gradual reform and assisting the poor:
Thailand
Measures to assist the poor cope with high energy
prices
• free electricity and tap water for low-consuming
households
• free travel on non-air conditioned buses and trains
• price freeze on household
cooking gas
• excise tax cuts on fuel
2. Gradual reform and assisting the poor:
Thailand
Main lessons
• Deregulation during a time of falling prices reduces the
need for a comprehensive reform package
• But complimentary policies will be necessary as soon as
prices rise
• Thailand has gradually introduced the public to volatile
energy markets while shifting towards more targeted
ways to help the poor
3. Q&A
• Research tools
• Measures to assist the poor
• Corrections, clarifications, other reforms
4. Transparency: Chile’s Probity and
Transparency Agenda
• Subsidies: fuel sector deregulated but prices
stabilized through two oil funds
– government “top-ups”: US$ 1.2 billion in 2008
• Government makes available all documents
regarding price stabilization mechanisms
– weekly reports on the calculation of the fuel price plus
the oil fund’s financial balance
– disseminated through website and federal gazette
4. Transparency: Chile’s Probity and
Transparency Agenda
Main lessons
• transparency particularly important when the
government intervenes in fuel prices
• Improved transparency helps consumer understand price
fluctuations and opens the door to informed debate
• Need to provide specific subsidy reporting in the budget
on transfers to the oil fund and cross-subsidies by the
National Oil Company
4. Price adjustment mechanism: China
• Consumer subsidies for gasoline and diesel: US$ 11
billion in 2010
• New pricing mechanism introduced in 2008 on the back
of falling international oil prices
• Links domestic and international prices in controlled way
• Price adjustments considered every month
• Maintains the option of not adjusting domestic prices
• 1st half 2011: crude prices rose 26%, retail prices 10%
4. Price adjustment mechanism: China
Main lessons
• Take advantage of falling world prices to introduce a
market-based formula
• The formula must be applied automatically and
independently to avoid political interference
• Controlling fuel prices may help fight inflation but it
comes at a high cost
• Rumours of a move to price deregulation
4. Gradual deregulation: Russian natural gas
Consumer subsidies to domestic consumers of gas: US$ 17
billion in 2010
Russian gas sales prices (per bcm) (from Pirani, 2011)
2003
2004
2005
2006
2007
2008
2009
2010
Industry,
wholesale
24.70
31.70
35.51
40.58
52.81
67.87
64.80
82.60
2011
(proj.)
85.58
Residential,
wholesale
16.30
20.80
25.61
31.72
40.27
51.85
49.47
63.43
75.28
European
border price
147.60 157.80 213.70 285.70 285.20 294.10 418.90 307.80 323.70
4. Gradual deregulation: Russian natural gas
Gradual introduction of market pricing:
• Electronic trading platform trialled from 2006 to 2008: is
to become permanent
• From 2007, Gazprom and clients can negotiate the price
of gas within range around the regulated price
• From 2011-12 regulated prices to be based on the
market price of alternative fuels
• Gradual increase in prices toward international parity
4. Gradual deregulation: Russian natural gas
Main lessons
• Introduction of market mechanisms provides a
controlled exposure to market forces before deregulation
• Some market forces are working for reform
• Need to develop methods for targeted social assistance
5. Overarching lessons
• Comprehensive reform strategies needed
• Link domestic and international prices
• Deregulation with ongoing compensation
programs
• Political economy issues are significant
• Decouple fossil-fuel subsidies from social and
economic policies: governments need better tools
6. Q&A
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•
•
•
Transparency
Price adjustment mechanisms
Gradual deregulation
Overarching lessons
Thank you
email: tlaan@iisd.org
www.globalsubsidies.org/en