Mauricio Medinaceli Monrroy
Private Consultant
Oil - Natural Gas - Energy

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Cash Transfers and LPG Price Subsidies: Could shake hands

One of the biggest headaches in Latin America and the Caribbean oil producing countries of, is the subsidy price for major derivatives: gasoline, diesel oil and liquefied petroleum gas (LPG). Usually in countries with significant oil production, the social pressure to keep prices below their international opportunity, or even below their production cost generated (and still does) significant market distortions. Distortions that are reflected in difficulties to supply domestic demand for these products where LPG is one of the leading exponents. In this context I want to share with you the Brazilian experience regarding cash transfers and LPG subsidy price, I think it could well help solve the mess that we are currently (Iran also has an excellent example http: // bit.ly/pE5y45.

While there is no explicit policy to reduce LPG price in Brazil the "Auxilio Gas" program was created, this program consisted of a cash transfer of R $ 7.50 to the country's poorest families. The eligibility criteria was to verify if the maximum per capita family income was less than half the minimum wage. Families should be registered in the "Catastro Único para Programas Sociales" from the Federal Government from which also families were recipients of the Program "Bolsa Escuela" and/or "Bolsa Alimentación". ALso, there is in Brazil the "Bolsa Familia" Program (PBF) which is a longer range and it consist in cash transfers (between R $ 22 and R $ 200) depending on the characteristics of the family, in particular: monthly rent and the number of children below 15 years and younger people between 16 and 17 years.

In October 2003 the Auxilio Gas involved more than 9 million families and PBF to more than 1.1 million. Given the characteristics of both programs, families began to migrate from the former to the latter, thus, in October 2008 the PAG benefited 230,000 families, while the PBF had more than 11 million; Because of this the PAG was closed in December 2008 through decree 6392. Thus, the subsidy receiving families to purchase LPG, now joins a larger one that increases the spending capacity of them.

What can we draw from this? Without entering into the discussion about the merits of the cash transfers that currently is provided by Governments, which should be clear is that the databases (with information on families receiving such cash transfers) grow every day. In this sense, it is not unreasonable to think of remove the LPG price subsidy and grant direct subsidies to poorest families. Some might say that's an impossible task since it's very difficult to identify which families would receive the cash transfer, the answer is (at least with high probability) in the Brazilian experience ... "if one of the world's largest country could find poor families, why others can't? ".

Of course, while things remain as they are today, middle and high income families benefit from lower LPG prices, because poor families ladies and gentlemen cook with wood, in fact they don't even cook because the work all day. Ah! I almost forgot, when there is shortage in LPG market only families of urban centers can buy LPG at subsidized prices because there are institutions where they "can claim". Instead, families living in rural areas often pay an LPG price 4 times higher because they usually live in rural areas, not funny isn't? Vagaries of price subsidies.

Mauricio Medinaceli Monroy

La Paz, September, 2010

 

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