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.