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 24×7online 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:

* Indane
* Bharat Gas
* HP Gas

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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