Monday, July 02, 2012

Transparency in the LPG subsidy

by Viral Shah.

Recently, the Petroleum Minister launched the LPG transparency portals for all three Oil Marketing Companies (OMCs):

The Oil Marketing Companies have been constantly leveraging technology to launch various initiatives for offering convenience to their consumers For example, some of them are offering the facility for booking refill cylinders 24x7online through their websites as well as through SMS and IVRS. In continuation of their endeavor to leverage technology to achieve more efficiency and improve business processes, Oil Companies have now put in place systems to capture the complete details of customers and track their LPG consumption pattern with an aim to increase transparency in LPG supply chain. With this information, each OMC has created a transparency portal which is hosted on their individual websites. These portals can also be accessed from MOPNG's website. These portals provide complete details of each customer with their consumer numbers, name, address, no. of cylinders supplied, dates of supply as well as the indicative subsidy amount for the cylinders supplied. The portals feature quick search options to find one's distributor,sort information based on consumer numberand consumer name, see thehighest off take consumer orput in a request to surrender one's connection. Logging a complaint is just as easy. Consumers can now even rate the performance of theirdistributors; and this is expected to help the services to improve further. These portals would truly empower the consumers and civil society to verify or seek information under one roof and bring about transparency in a government program where thousands of crores of subsidy is involved.

Links for the transparency portals are:

LPG distribution

The production, supply, and distribution of Liquified Petroleum Gas (LPG) is governed by the Essential Commodities Act, 1955 and the LPG Control Order, 2000. The LPG Control Order specifies various aspects of LPG distribution in great detail: storage, transport, bottling, packaging, consumer connection, etc. Subsidized LPG is provided largely for domestic use, but institutional use is permitted for Government schools, hospitals, canteens, police stations, etc. Subsidized LPG cylinders are red in colour and contain 14.2kg of LPG, whereas commercial LPG cylinders are purple and contain 19kg of LPG. LPG is supplied to consumers through distributors, who are paid a commission for every cylinder they deliver. Distributors have very thin margins for subsidized LPG, and are given distribution rights by area by the OMC. Margins for commercial LPG are higher, with no restrictiction on distribution. Thus, by design, there is no competition between distributors for subsidized LPG, but commercial LPG is supplied competitively. Almost 90% of the usage in India is domestic, and hence subsidized.

LPG subsidy

A detailed price computation for an LPG cylinder shows that as of June 1, 2012, the consumer pays Rs.399 per cylinder in Delhi, and receives a subsidy of Rs.418 per cylinder. The true subsidy is only Rs.22 per cylinder, and the rest is termed under recovery to OMCs. The Government funds the full subsidy amount of Rs.22, but the under-recovery is funded out of profits of ONGC, OMCs, and partially by the Government. It is also worthwhile to note that LPG is exempt from Excise Duty from Central Government, and often also exempt from VAT.

Sr. Elements (Delhi) Unit Effective 1st June'12
1 Free On Board Price at Arab Gulf of LPG $/MT 852.78
2 Add: Ocean Freight from AG to Indian Ports $/MT 43.39
3 Cost & Freight Price Rs. / Cylinder 689.03
4 Import Charges (Insurance/Ocean Loss/ LC Charge/Port Dues) Rs. / Cylinder 5.82
5 Basic Customs Duty Rs. / Cylinder 0.00
6 Import Parity Price (Sum of 3 to 5) Rs. / Cylinder 694.84
7 Refinery Transfer Price (RTP) for Domestic LPG Rs. / Cylinder 694.84
8 Add : Inland Freight, Delivery Charges etc. Rs. / Cylinder 39.46
9 Add : Marketing Cost of OMCs Rs. / Cylinder 12.38
10 Add : Marketing Margin of OMCs Rs. / Cylinder 6.68
11 Add : Bottling Charges (Filling and Cylinder Cost) Rs. / Cylinder 38.68
12 Total Desired Price (Sum of 7 to 11)
Before Excise Duty, VAT and Distributor Commission
Rs. / Cylinder 792.04
13 Less : Subsidy by Central Government Rs. / Cylinder 22.58
14 Less: Under-recovery to Oil Marketing Companies Rs. / Cylinder 396.03
15 Price Charged to Distributor (12-13-14)
Excluding Excise Duty & VAT
Rs. / Cylinder 373.43
16 Add : Excise Duty (Including Education Cess) Rs. / Cylinder 0.00
17 Add : Distributor Commission Rs. / Cylinder 25.83
18 Add : VAT Rs. / Cylinder 0.00
19 Retail Selling Price (Sum of 15 to 18) Rs. / Cylinder 399.26
20 Retail Selling Price at Delhi (Rounded Off) Rs. / Cylinder 399.00
21 Under Recovery due to Rounding Down Rs. / Cylinder 0.26

The Report of the Task Force on Direct Transfer of Subsidies on Kerosene, LPG and Fertiliser provides some other interesting figures. There are 12.5 crore LPG connections, consuming 6 cylinders on average. The per-capita consumption of LPG is expected to be roughly 1.5 cylinders annually, leading to a family of four requiring 6 cylinders every year. The total subsidy to consumers in FY09-10 was Rs.16,071 crore, when the per cylinder subsidy was Rs.185. With the current international oil prices being much higher, the total subsidy to the consumers could add up to Rs.50,000 crore this year. The total subsidy to the consumer was Rs.76 per cylinder in FY02-03, and has steadily risen ever since to its current value of Rs.418 per cylinder.

Benefits from transparency

The Report of the Task Force on Direct Transfer of Subsidies on Kerosene, LPG and Fertiliser provides a number of suggestions to address the leakage of subsidies:

  • Setting up a transparency portal
  • Per-capita or per-connection cap on number of subsidized cylinders per year
  • Sale of LPG at market price, with subsidy refunded to the consumer's bank account

The Ministry of Petroleum and Natural Gas, along with the OMCs, have launched transparency portals. Even though there is no restriction on the number of subsidized LPG cylinders that a consumer can order, checks have been put in so that there has to be a gap of at least 21 days between two bookings. The media has been quick to report on the heavy consumption of LPG by politicians and industrialists. The Government expects that the transparency portal will also curb the usage of domestic LPG for commercial purposes. Many are even asking whether LPG should be subsidized at all. Over the next few months, we will learn whether LPG diversion is checked due to transparency portals. However, the launch of other features such as rating of dealers, online complaints, and online booking are certainly going to be beneficial for consumers.

The Right to Information Act, 2005 has provisions that require Government to provide data electronically to citizens. Transparency portals are incredibly powerful accountability tools, and should be the first step towards e-Governance for any Ministry or Department. They take existing databases and make them available online for scrutiny, often without requiring major business process re-engineering. Rather than simply make these portals available for browsing online, care should be put in to produce high quality, anonymized, machine-readable datasets that researchers can use for various purposes. Such datasets can provide interesting insight into the microeconomics of households and also macroeconomic trends, when studied over time.

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