11.3.1 Fossil Fuel Subsidies in Indonesia

Fossil fuel subsidies have had a major impact on Indonesia’s energy policy, development and overall economic health – but not in the way the government intended. Following the 1973 oil crisis, Indonesia benefited from rising global oil prices and domestic production. As Indonesia became a member of the Organization of the Petroleum Exporting Countries and a major producer in the mid-1960s, the government began subsidising fossil fuels for domestic consumption to alleviate poverty, to reduce the impacts of inflation and as a basic public service obligation underlined in the Constitution (GOI 1945). Oil exports fuelled an economic boom throughout the 1980s and 1990s, but mismanagement, overproduction and corruption led to long-lasting negative impacts. One of the most significant impacts is Indonesia’s transition from a net oil exporter to net importer in 2004 due to decades of mismanagement and lack of investment in the oil sector; this change meant the government began subsidising imported fuels, a policy that quickly became economically unsustainable when combined with dramatic increases in domestic energy demands. Subsidies consumed up to 24 per cent of government expenditure and contributed to ongoing energy crises caused by insufficient supply, growing demand and much-needed infrastructure investment (HKSIP 2013). These challenges put pressure on the Indonesian government to prioritise energy diversification, reduce subsidies and raise fuel prices. Table 11.1 provides an overview of the history of fossil fuel subsidy reforms in Indonesia from 1997 to 2016.

11.3.2 Political Economy of Fuel Subsidy Reform and Actor Constellations

Indonesia’s political economy and governance capacity – to implement reforms, address corruption and clientelism and achieve economic development – provide the foundation that underlies the history of fuel subsidy reform in the country. The politics of fossil fuel subsidy reform are intertwined with Indonesia’s history of oil production, whereby the government redistributed wealth earned from oil revenues through subsidies to reduce poverty (IEA 2016). The public acceptability of the reforms is therefore interlinked with the belief that the public is entitled to a redistribution of wealth from the production of national resources, national patrimony through subsidies or government compensation for increasing fuel and commodity prices through other forms of social assistance (Lockwood Reference Lockwood2015). Throughout the periods examined in this chapter, the government of Indonesia’s provision of either subsidies or social assistance as a complement to fuel subsidy reform is used to increase political support for the government rather than provide development and poverty alleviation.

The political economy of fossil fuel subsidy reforms provides insights into the various special interest groups that benefit from fuel subsidies and may challenge or create obstacles to subsidy reform. One of the sizeable interest groups in the Indonesian middle class that has an interest in maintaining subsidised fuel increases is owners of motorbikes or scooters (referred to as ojeks in Bahasa). There are an estimated 76 million scooters in Indonesia, which is approximately one scooter for every three people (Schlogl and Sumner Reference Schlogl and Sumner2014). Indonesia is strongly reliant on private transportation, and the government has systemically promoted motorbike ownership through substantial subsidies for transportation fuels, underinvestment in public transportation or rail systems and ‘public-sector hostility to non-motorized modes of transportation’ (Hook and Repogle Reference Hook and Replogle1996: 80). The motorbike owners who benefit from subsidised fuels have vested interests in maintaining subsidies and have actively opposed and protested fuel price hikes, although their opposition has been manipulated by political parties to protest subsidy reform.

Vested interests in industries that benefit most from subsidised fuels – such as the state-owned oil company Pertamina, the Indonesian oil-trading lobby, vehicle manufacturers and distributors and freight and public transport – remain opposed or ambivalent towards reforms and have lobbied intensively against them (IEA 2016). Pertamina’s interest in maintaining the fuel subsidies relates to the company’s inability to compete effectively in the downstream market due to insufficient investment in the company’s refining capacity, as well as a reliance on the certainty of continued subsidies. According to the IEA (2016: 72), Pertamina’s management has indicated that liberalisation of the fuels market would probably need to be accompanied by some protection for the company. In other words, according to Pertamina management, a clear timeframe for reform would have to be accompanied by greater public investment in upgrading Pertamina’s refining capacity. Other vested interests include vehicle manufacturers – who are closely engaged with the Ministry of Industry – that have an interest in maintaining the supply and demand for vehicles, which run on low-octane fuels, such as the subsidised RON88 fuels (IEA 2016). Transitioning out subsidised low-octane fuels would require an upgrade of vehicles to run on non-subsidised fuels.

Indonesia’s history of oil production and fossil fuel subsidies has created the country’s ‘oil and gas mafia’, known for its corruption, including embezzlement of funds from the Ministry of Energy, extortion, tax fraud and smuggling (Cassin Reference Cassin2014; Sukoyo Reference Sukoyo2014). One of the issues is the black market created by subsidised fuels – cheap, subsidised oil is smuggled and sold at below-market prices for a profit – to businesses or consumers who are not eligible for the subsidy or need more than their quota. Fuel smuggling contributes to distorted fuel prices and is a frequent negative externality of fossil fuel subsidies (Sdralevich et al. Reference Sdralevich, Sab, Zouhar and Albertin2014).

These vested interests and overarching macroeconomic factors have affected decisions taken on the reform of fossil fuel subsidies. The next sections delve into the historical perspective of the aftermath of the Asian financial crisis in 1997, when the first attempt to reform subsidies was implemented. They then examine SBY’s reforms and the introduction of social assistance, as well as more recent reforms under President Jokowi. Socio-economic and macroeconomic factors play an important role in the durability of these reforms.

11.4.1 Managing the Asian Financial Crisis

In the six months following the Asian financial crisis between July 1997 and January 1998, the rupiah collapsed from 2,500 against the USD to nearly 10,000, dramatically increasing prices and halting imports (Pisani Reference Pisani2014: 47). To abate the financial crisis, President Suharto committed to a 50-point agreement with the International Monetary Fund (IMF) to qualify for an emergency loan (Beaton and Lontoh Reference Beaton and Lontoh2010; IMF 2013). Some of the points included dismantling state and private monopolies and cutting subsidies of basic commodities, including fossil fuels. While the IMF package envisioned a gradual phase-out of subsidies between 1998 and 1999, the government dramatically raised prices on kerosene (25 per cent), diesel (60 per cent) and gasoline (71 per cent) in May 1998, prior to the first IMF loan disbursement meeting (Beaton and Lontoh Reference Beaton and Lontoh2010). The government pursued severe austerity and dramatic increases in fuel prices, creating inflation, without adequate buffers for the public or vulnerable populations, demonstrating the urgency in reducing government expenditures.

The result was disastrous. Student groups in cities across Indonesia went to the streets in protest of rising prices, which they deemed as resulting from corruption. The subsidy reform and fuel price increases were the tipping point in discontent with the rampant corruption under Suharto’s regime. For three months, protestors demanded the resignation of Suharto and eventually occupied Parliament. Suharto resigned and handed power to his vice president, B.J. Habibie, in May 1998 (Mydans Reference Mydans1998). The new government had a steep agenda, as the economy was in a state of freefall with high inflation, food shortages, bankruptcies and economic paralysis due to the rupiah’s dramatic depreciation. Nearly all subsequent attempts to reform subsidies by Presidents Wahid and Sukarnoputri (Megawati) between 2000 and 2003 resulted in violent demonstrations as students and the public felt that the price increases were linked to powerful interest groups (Bacon and Kojima Reference Bacon and Kojima2006; Beaton and Lontoh Reference Beaton and Lontoh2010). The government promised to use budget savings to help low-income households, but in reality, subsidies for rice and education were low in this period, and many compensation programmes did not materialise (Bacon and Kojima Reference Bacon and Kojima2006; Beaton and Lontoh Reference Beaton and Lontoh2010).

During this period, the external shock of the Asian financial crisis and the conditionality attached to the IMF stabilisation loan were the major factors driving the adoption of fossil fuel subsidy reform. However, despite the fact that the economic crisis was important in creating the urgency for reforms, it was unsuccessful in shifting fuel subsidy reform to ‘low politics’; the problems with corruption of the government surrounding this period were too severe for reforms to be disassociated from the dissatisfaction with the political system. The legacy of corruption and lack of governance capacity had left the public in outrage. Nevertheless, the fossil fuel subsidies became a symbol of oil wealth redistribution, particularly in the absence of adequate policies to reinvest oil welfare in infrastructure development or social welfare programmes. Subsidy reform therefore represented to the public further failures of the government and its ongoing corruption. Lastly, there was an absence of social assistance or political leadership adequately explaining reforms during this period, which further demonstrated the poor implementation of reforms and lack of governance capacity.

11.4.2 Yudhoyono and the Beginning of Social Welfare Politics

As Indonesia grappled with the damage of the Asian financial crisis, the second period (2004–13) marked the beginning of a shift in Indonesian energy policy, whereby the need to reform subsidies overrode the lack of political favourability for reform. In this period, the Indonesian government began initiating a social welfare system to compensate poor populations for the indirect economic burden of subsidy reforms. These programmes were important in shifting popular opinion in favour of subsidy reform, which helped make substantial price changes possible.

In 2004, Susilo Bambang Yudhoyono was elected as the Indonesian president in the same year that Indonesia shifted from a net oil exporter to a net oil importer. The government’s subsidies on imported fuels had a disastrous impact on the budget and energy security; it exposed the government budget to major fluctuations in prices on the international market, to tariff barriers and to potential geopolitical vulnerabilities with security of supply. Spending on fossil fuel subsidies for gasoline, diesel and kerosene rose to USD 8 billion (out of total government expenditures of USD 374 billion; Beaton and Lontoh Reference Beaton and Lontoh2010: 8; World Bank 2017a). The SBY government was forced to remove fuel subsidies to alleviate the budget deficit (Interview 1). Fuel prices were increased in March by 29 per cent and then in October 2005 by 114 per cent, which reduced the deficit by USD 4.5 billion and then USD 10 billion, respectively (Beaton and Lontoh Reference Beaton and Lontoh2010).Footnote ² This reform was politically possible – without major backlash from the public – arguably because of the introduction of social assistance programmes. These types of programmes not only provide a buffer for the resulting economic shocks from fuel prices increases, but they also provide credibility for the government’s commitment to social welfare (Perdana Reference Perdana2014).

The provision of social assistance also illustrates the government of Indonesia’s prioritisation of poverty alleviation and its shift towards a welfare state. In the early 2000s, in the post-Suharto era, the government became increasingly accountable to the public, and candidates in local and national elections promised ambitious social welfare assistance for education, poverty reduction and healthcare (Aspinall Reference Aspinall2013: 114). Social assistance became a salient issue in politics. SBY’s tremendous public support can be attributed to heavy investment in social programmes, which improved his poll figures (Mietzner Reference Mietzner2009). To overcome the political challenges of subsidy reform and to alleviate the burden of price increases on the poor, SBY’s administration started to provide cash-transfer and compensation programmes, including clean cookstove dispersals for kerosene-to-LPG conversion, and it increased spending on health, education and social welfare (Budya and Arofat Reference Budya and Arofat2011; World Bank 2013).

While this period showed the positive impacts of social welfare in shifting the political support for subsidy reform, increasing global oil prices also limited the fiscal impacts of fuel subsidy reforms. For example, in 2008 and 2011, when oil prices breached USD 100 per barrel, the fiscal burden of energy subsidies rose as well. In response to high oil prices, Indonesia attempted to initiate energy subsidy reforms and raise prices. In May 2008, the Indonesian government raised prices of diesel and kerosene and then lowered prices of diesel by 12 per cent, when international oil prices decreased (Beaton and Lontoh Reference Beaton and Lontoh2010; IMF 2013; ADB 2015). Although an unconditional cash transfer, a ‘rice for the poor’ programme and a loan-interest subsidy for small enterprises were dispersed through social assistance programmes, the fluctuations in oil prices were too volatile and affected prices at the pump; the subsidy reform was repealed (Figure 11.1).

Figure 11.1 Indonesia fuel prices compared to international oil market prices

(Sources: EIA 2017; World Bank 2017b.)

These reforms illustrated the importance of political leadership with strong communication campaigns and social assistance programmes as a buffer against the indirect effects of fuel subsidy reform. However, the government had not incorporated a buffer to reduce the overall impacts of international oil price fluctuations on the population, meaning the continued cycle of fossil fuel subsidy reforms, price shocks and public unrest necessitated social assistance programmes or the repeal of subsidies. To fully remove subsidies and price controls, better implementation of subsidy reform coupled with buffers and the reinvestment of the subsidies budget in development was still needed.

11.4.3 Oil Market Fluctuations and Widodo’s Subsidy Reform Policy

Energy subsidies on imported fuels leave fiscal policy vulnerable to fluctuations in global oil prices as well as currency exchange markets. A weakening of the rupiah means a higher price of energy products on the domestic market and subsequently a higher share of subsidies if domestic prices are not adjusted (Diop Reference Diop2014: 2). This was evident in the 2008 financial crisis, when the Indonesian rupiah lost 28 per cent of its value against the dollar between October and November 2008 (Basri and Rahardja Reference Basri, Rahardja, Ito and Parulian2011). Figures 11.1 and 11.2 show the response of the Indonesian government to volatility in the oil market through subsidisation.

Figure 11.2 Fuel subsidies in Indonesia (2006–15)

(Source: Prawiraatmadja Reference Prawiraatmadja2015.)

The Jokowi administration implemented its last series of reforms in 2014, under the rhetoric of the need to reallocate public finances towards infrastructure investment; the aim was to let domestic fuel prices follow the global oil market and to remove price controls (Interviews 2 and 3). In the lead-up to the implementation, the Ministry of Energy created the Oil and Gas Task Force to reform the oil and gas sector and reduce corruption, particularly within Pertamina. Faisal Basri was appointed as the head of the Task Force, and the technocratic team was made up of 11 members, including ministers, academics, bureaucrats and activists (Sipahutar Reference Sipahutar2014; Interview 4). The Task Force made the following recommendations for reforms in the oil and gas sector: the dissolution of Petral (Pertamina’s oil trading arm), the creation of the integrated supply chain unit within Pertamina to take over procurement of crude oil and petroleum products from Petral, a gradual fossil fuel subsidy phase-out with a social welfare programme, the creation of a buffer to better manage price fluctuations and more efficiency from upstream petroleum regulator SKK Migas (Cahyafitri Reference Cahyfitri2015; Interview 4). Fossil fuel subsidy reform would also be the most effective way to deal with the oil smuggling if domestic fuel prices matched international prices, as this would remove the incentive to smuggle fuels. Many of the recommendations of the Task Force were put in place, including the removal of gasoline subsidies from the budget (which de facto transferred the budget to pay off debts to Pertamina), the dissolution of Petral, increases in gasoline and diesel prices and other changes to address corruption in the oil and gas sector.

The major opposition to subsidy reform during this period was launched by Prabowo Subianto – Jokowi’s competitor in the 2014 elections and the son-in-law of Suharto (Kapoor Reference Kapoor2014). His ‘Red-White coalition’ opposes fuel subsidy reforms with a misleading argument that reforms are unnecessary in light of low oil market prices and the assertion that reforms will increase poverty (Wikipdr 2014). However, their opposition is likely linked to corruption and vested interests from the old so-called corruption, collusion and nepotism regime (commonly known as the ‘KKN’ regime) under Suharto (The Economist 2014).

The plans to fully reform fossil fuel subsidies in Indonesia preceded the crash of the global oil market in 2015. Scholars argued this was the best moment to implement the reforms because price shocks would be low (Benes et al. Reference Benes, Cheon, Urpelainen and Yang2015). The price for oil dropped to USD 30 per barrel in August 2015 but then rebounded to USD 49 per barrel in October 2016; in parallel, gas price fell from USD 400 to USD 318 per metric ton in June 2016, opening up the window for LPG subsidies reform (Lontoh and Toft Reference Lontoh and Toft2016). Furthermore, in 2015, the Indonesian rupiah depreciated to levels not seen since the Asian financial crisis, but then the currency rebounded in 2016 to IDR 13,271 against the USD from IDR 14,000/USD 1 (Nangoy and Suroyo Reference Nangoy and Suroyo2015; Lontoh and Toft Reference Lontoh and Toft2016).

The macroeconomic fluctuations have not led to dramatic changes in the subsidies policy in the budget, but there are changes in who bears the cost of subsidy policy and the transparency of the policy. Since the removal of subsidies was already signed into law in 2015, the 2016 budget did not include a budget line for gasoline subsidies, but it kept subsidies for 3-kilogram LPG tanks, diesel and new and renewable energy; a fixed diesel subsidy of IDR 1,000 per litre had a dramatic change in managing diesel subsidies (APBN 2016; Interviews 2 and 5). Between January and March 2015, the government implemented a series of prices changes, mainly decreasing domestic consumer prices in line with lower market prices. However, when international market prices increased, a price gap was created. The financial burden of the subsidies’ price gap was transferred to Pertamina, covering the difference from the production costs and market price of oil, which amounted to USD 1 billion (IDR 15 trillion; Otto Reference Otto2015; Samboh and Cahyafitri Reference Samboh and Cahyafitri2015; Witular Reference Witular2015). This was not a formal policy but rather seen as a response to the transitional period while the government continued to apply the three-month price adjustments (Interview 6). The government informally compensated Pertamina by keeping pump prices the same when global oil prices fell to account for price gaps and Pertamina’s deficit (Interview 6). While the long-term plan to peg the domestic pump prices to international prices will ameliorate this issue, there is still a great deal of policy support needed to make this transition. Stronger fiscal policy combined with investment in infrastructure and directed social assistance is still needed to successfully remove price controls and ensure the permanent reform of fossil fuel subsidies in Indonesia.

12.4.1 Status of Consumer Enrolment in the Scheme

Results from the distributor survey indicated an enrolment rate of about 85 per cent, with the highest rate reported in Kerala (87 per cent), followed by Gujarat (85 per cent) and Haryana (81 per cent). The findings correspond well with official data reported by the MoPNG, validating the representativeness of the survey.

However, in the consumer survey, a higher proportion of households (94.6 per cent) reported being enrolled in DBTL. The higher reporting could be partly attributed to those households who had submitted their application and perceived themselves as being enrolled, even though the enrolment process was not yet completed for them. This is reflective of the scheme’s ongoing process but also highlights the lack of information of consumers regarding their state of enrolment.

Households that reported as not being enrolled in the DBTL scheme (5.6 per cent) stated that lack of interest in the subsidy and lack of awareness about the enrolment process were major reasons. Further, rejection of documents by the banks and lack of a bank account were other reasons. Non-enrolment due to a lack of interest indicates the scheme’s potential in weeding out households that do not need the subsidy, a positive externality. This provides an important lesson that instead of providing a subsidy as a default, the government should ask for enrolment to receive subsidy benefits, which can help weed out non-deserving populations to some extent.

Though very few respondents cited the absence of bank accounts as a reason for non-enrolment, it highlights the fact that households without bank accounts could be left out of the scheme and, hence, miss out on the subsidy benefits. The important lesson here is to keep the scheme design inclusive when drafting such reform.

12.4.2 Stakeholder Experiences during the Implementation Process

12.4.2.2 LPG Distributors

Given the strict timelines for the scheme’s implementation, 88 per cent of the surveyed distributors reported facing one or more challenges during implementation (Figure 12.1). We further found that 75 per cent of distributors reported that the Aadhaar-based seeding process was easier than the bank seeding process. Under the former, distributors have to enter only the Aadhaar number, whereas under the latter, they are required to enter several data fields related to bank account details, which is relatively tedious and error prone. This highlights the importance of simple and easy procedures for ensuring hassle-free programme implementation.

Figure 12.1 Challenges for distributors during the DBTL scheme rollout in India.

(Source: Authors’ analysis of survey data)

Document verification or form submission at banks was reported as the major challenge under both categories. Banks often delayed the verification process and rejected high volumes of applications due to spelling mismatches. This suggests the importance of considering the procedural details and the resulting challenges in order to put contingencies and flexibilities in places. In this case, to meet the scheme’s timeline, the MoPNG directed OMCs and distributors to enrol customers through direct bank seeding, skipping the banks’ verification process in the short run, and later conducted the verification retrospectively.Footnote ⁷ Although this significantly increased the rate of enrolment, it also led to wrong entries of bank details by the distributors and thus affected the effectiveness of the subsidy-transfer process.

The absence of bank accounts for customers also posed difficulties to the distributors. It put the onus of guiding the customers (about opening new accounts) on the distributors, who had strict timelines to achieve the enrolment targets. Furthermore, about 36 per cent distributors did not find banks to be cooperative in handling and solving the customer complaints. At the national level, the Department of Financial Services (under the Ministry of Finance) was in alignment with the MoPNG to make the DBTL scheme a success and issued two sets of guidelines for banks to prepare themselves for DBTL scheme enrolment. However, it was found that banks were not entirely prepared for effective implementation of the scheme.

Due to delays or non-receipt of the subsidy in bank accounts, distributors had to tackle customers’ subsidy-related queries without sufficient information or capacity. Subsidy-related queries were specifically cited as a major challenge by 22 per cent of the surveyed distributors (see Figure 12.1). This shows the importance of an active communication system not only between implementing agencies but also with the customers to establish trust and empower the implementers.

While distributors reported various difficulties, the majority (87 per cent) acknowledged that the OMCs provided adequate support during the entire process. Based on our interviews with LPG leads, we found that OMCs supported the distributors in terms of both capacity building and financially (for the enrolment process). Field officers played a critical role in training and supervising the distributors.

12.5.1 Effectiveness of Subsidy Disbursal to Consumers

Direct subsidy disbursal into the bank accounts of the beneficiaries was largely successful. Based on the consumer survey, 75 per cent of the households who purchased LPG cylinders after enrolling in the DBTL scheme reported receipt of subsidies in their bank accounts. The share was marginally lower in rural areas (73 per cent).

Notably, a significant proportion (16.6 per cent) of households was unaware of the status of their subsidy receipt, and a substantial share (8.6 per cent) reported non-receipt of subsidies for any cylinder purchased. We found that the issue was the lack of proactive information flows to consumers about their subsidy transfers, which was also confirmed by the findings from the distributor survey. Upon being asked about the main improvement area for the DBTL scheme, a quarter of the surveyed distributors highlighted the need to improve timely delivery of the subsidy as well as the information to consumers. Instances of non-receipt of subsidy were repeatedly cited as an issue by distributors, field officers and LDMs. However, all stakeholders mentioned that the rate of complaints significantly decreased over time.

12.5.2 Impact on Diversion of Cylinders

A majority (85 per cent) of the distributors reported that the scheme had a significant impact on reducing the diversion of cylinders. Our analysis of publicly available sales dataFootnote ⁸ of non-domestic LPG and auto-LPGFootnote ⁹ confirmed these findings.

The growth in the sales of non-household-packed LPG has been declining since 2009–10, with a negative growth rate in fiscal year (FY) 2013–14 and FY 2014–15. That began to turn around after November 2014, when the modified DBTL scheme was introduced. Since December 2014, the non-household-packed LPG sales have shown a significant positive growth rate, continuing for FY 2015–16, with an annual growth of 39.3 per cent (Figure 12.2). Such a marked increase in the growth of non-household-packed LPG can be attributed to the DBTL scheme’s impact in constraining the diversion of subsidised LPG from the distributors’ end; lower oil prices also had a partial impact by boosting demand.

Figure 12.2 DBTL scheme’s impact on growth of sales for non-domestic and auto-LPG in India.

(Source: Authors’ analysis based on Petroleum Planning and Analysis Cell data.)

Similarly, the LPG sales for transportation (auto-LPG), which have witnessed a declining growth rate since 2010–11, revived in January 2015 (concurrent to the nationwide launch of the modified DBTL scheme). For FY 2015–16, the overall growth in auto-LPG sales has been 4.3 per cent compared to a negative growth rate of 24.4 per cent in FY 2014–15 (Figure 12.2).

Even though the DBTL scheme has tried to facilitate a uniform market price of household LPG cylinders, there still is a difference between the market price for household and non-household LPG. The difference is due to the different tax structures applicable to household and non-household LPG and could still remain as an incentive to divert household LPG for non-domestic purposes. A reform in LPG taxation would be necessary to ensure entirely uniform pricing and further reduce the diversion of household LPG for unintended uses.

12.5.3 Impact on Eliminating Multiple and Fake Connections

LPG is a regulated commodity in India, and each household is allowed to have only one LPG connection. Duplicate connections, siphoning off subsidised commodities, have been a major challenge in LPG distribution. During the distributors’ survey, 84 per cent of the distributors reported that the scheme had a significant impact on controlling duplicate or multiple connections.

The government of India claims that the DBTL scheme has been able to eliminate close to 33 million ‘ghost’ (fake or duplicate) connections (MoPNG 2015f). All these ghost connections are basically inactive LPG connections (no refills done in the past six months). However, to estimate the extent of the scheme’s impact on controlling multiple connections, it is important to consider the number of inactive connections before the relaunch of the DBTL scheme (i.e. before November 2014).

An inactive connection also might not necessarily mean a ghost or duplicate/multiple connection. An unintentional impact of the DBTL scheme could be the conversion of some genuine LPG consumers into inactive connections, especially those from poorer economic backgrounds who have insufficient cash flows to buy LPG cylinders at the market price.

Under the scheme, the initial subsidy amount is transferred to the household’s bank account in advance to ensure that there is no additional outlay by the consumer while refilling a cylinder at the market price. However, in many rural areas, withdrawing money from the bank could mean losing out on half a day’s salary (as bank branches are far away). Consequently, some poorer LPG consumers might reduce LPG consumption, although our study did not test this hypothesis.

Thus, of the 33 million inactive connections, a significant proportion could be fake or duplicate. However, a more careful assessment is required to estimate the impact of the DBTL scheme in eliminating such connections while acknowledging the possible withdrawal of genuine households away from LPG due to reasons discussed earlier.

12.5.4 Impact on Availability and Delivery of LPG Cylinders

One of the four key objectives of the DBTL scheme was to improve the availability/delivery of LPG cylinders for genuine users. To assess this, we asked consumers about the change in delivery time of the cylinders in the previous two months. More than half the households reported that the timely delivery of cylinders had improved. Another 39 per cent of households reported no change in delivery time, whereas close to 9 per cent felt that the service had deteriorated. Interviews with senior officials at the OMCs suggest that the consumer perception of improved regularity in cylinder delivery could be attributed to the avoidance of collusions at the dealers’ and/or deliverymen’s end as a result of the DBTL scheme.

Overall, we found that the DBTL scheme was fairly successful in achieving its objective of direct transfer of subsidies to consumers, although some gaps remain. The scheme also succeeded in limiting the diversion of subsidised products and eliminating duplicate connections, although the extent of this needs to be carefully evaluated. Finally, the consumer perception of improved timely delivery of LPG cylinders following the scheme’s implementation could also be attributed to the DBTL scheme.

12.6.1 Political Leadership and Framing of the Narrative

We find that strong leadership from the national government was a prime factor behind the successful and smooth implementation of the world’s largest cash-transfer scheme, as it infused a momentum throughout the entire range of actors along the LPG supply chain involved in the implementation process. For instance, the scheme’s implementation was regularly reviewed by the Prime Minister (Prime Minister’s Office 2015) and monitored directly by the Minister of Petroleum and Natural Gas (MoPNG 2015d).

Unlike earlier initiatives for subsidy reforms, the DBTL scheme was implemented without any political backlash due to several factors. The dramatic fall in oil prices played a significant role in allaying public fears of any potential fallouts of the scheme. The government used this opportunity and framed the narrative on subsidy reforms as a measure to plug wasteful leakages and improve service delivery. Customer perception on this front was confirmed in our survey. The narrative was well timed, given popular sentiments against corruption (Sukhtankar and Vaishnav Reference Sukhtankar and Vaishnav2015).

For consumers, the scheme only changed the mode of subsidy disbursal and did not amount to subsidy withdrawal or reduction, which implied that only those accessing subsidies illegally were affected. These include local but unorganised commercial entities, which could not mobilise any opposition. While the LPG consumers who lacked access to banking services, mainly rural poor, might have been adversely affected, these cases were relatively few and diffused, given the low penetration of LPG in rural areas.

Thus, timely recognition of the opportunity for reform, smart framing of the narrative and direct monitoring by the political leadership at the national level were critical to the timely and successful implementation of the DBTL scheme.

12.6.2 Institutional Coordination

The scheme’s implementation involved multiple stakeholders, including several government ministries, the entire LPG retail supply chain, the banking sector and the district-level administration. Effective coordination across different institutions, with often different mandates, was essential for the scheme’s success.

For instance, regular meetings between the MoPNG and the Department of Financial Services were critical in ensuring overall alignment of banks in the scheme. The OMCs played a leading role in identifying and resolving bottlenecks by coordinating with all the relevant stakeholders throughout the scheme’s implementation. As one of the field officers interviewed suggested: ‘The entire implementation was under mission mode. From top to bottom, the momentum was buil[t] and leveraged, as everyone was pushing the roll-out collectively.’ An elaborate multi-tiered structure of project management teams was put in place to facilitate coordination and enable troubleshooting during implementation.

12.6.3 Exploiting Motivations at the Individual Level and Supporting Capacity Building

One of the interesting lessons from the DBTL scheme is that giving individual ownership and responsibility to stakeholders could be instrumental in the implementation of such large-scale public programmes. For instance, the senior and middle managers of the OMCs, along with the officials and Minister at the MoPNG, were the guardian officers for one district each (MoPNG 2015c). This created a sense of individual responsibility for effective implementation of the scheme in their respective districts. Further, the annual performance appraisal of the field officers of the OMCs was linked to the enrolment rate under the DBTL scheme.

Close to 16,000 LPG distributors across the country were mobilised, given individual targets and monitored on a daily basis for the scheme’s implementation. They also received periodic training and supervision from the field officers of the OMCs, along with adequate financial compensation to cover the costs incurred. Similarly, the bank personnel were trained by the LDMs, in coordination with the field officers. While an absence of dedicated bank personnel for the DBTL scheme led to delays and difficulties in the enrolment process, this was eventually overcome through continued efforts by MoPNG, Department of Financial Services, banks and LDMs.

The experience with the DBTL scheme provides an important lesson about effectively using different individual motivational drivers to facilitate effective and timely implementation of a government scheme.

12.6.4 Learning from Past Experience

As discussed in Section 12.2, the modified DBTL scheme incorporated insights from a review of the scheme’s first round of implementation. For instance, it included an alternative enrolment procedure, which addressed the politically sensitive issue of exclusion of LPG consumers lacking an Aadhaar number. Further, the review identified the difficulties faced by different stakeholders. This helped the OMCs to devise robust systems (such as improved information technology systems and software), along with teams of experts, to quickly respond to real-time on-the-ground enrolment issues. A comprehensive grievance-redressal system was also established in line with the recommendations of the committee to help resolve customer issues.

This shows the importance of reviewing reform programmes and incorporating the feedback of key stakeholders, particularly end consumers, to improve the scheme design and implementation processes.

12.6.5 Leveraging Existing Systems and Schemes

The DBTL scheme rested on the effective use of several other government schemes and efforts. Any digital cash-transfer scheme requires a branchless banking network and a robust authentication system (Banerjee Reference Banerjee2015). In the case of the DBTL scheme, the Core Banking SolutionFootnote ¹⁰ enabled electronic transfer of money to beneficiaries’ bank account, while the efforts towards the financial inclusion of the households ensured that most LPG consumers had or could open a new bank account to enrol in the DBTL scheme. In fact, about 14 per cent of enrolled households did not possess an existing account and had opened a new bank account to take advantage of the subsidy. About half of these accounts were opened under another national scheme for financial inclusion, Pradhan Mantri Jan Dhan Yojana. This highlights the benefits of convergence and the need for greater coordination between different government schemes. Furthermore, the OMCs conducted a ‘know your customer’ drive before the DBTL scheme’s launch that created a digital database of beneficiaries (LPG consumers) and enabled the enrolment of customers under the DBTL scheme. The Aadhaar numbers, meanwhile, facilitated the online authentication of beneficiaries by linking their bank accounts to the core banking server (Banerjee Reference Banerjee2015).

While there was a clear convergence of past and ongoing schemes, sustained efforts must continue to improve the banking infrastructure and services for all households, particularly as rural and/or economically poor households will make up the majority of future LPG adopters in India.

12.6.6 Strong Emphasis on Awareness Generation

The DBTL scheme was well publicised through an intensive information education campaign. This comprised advertising through different media and direct outreach to consumers through the use of text messages, calls and public announcements (MoPNG 2014, 2015d). An information education campaign was devised and implemented for each district. The effectiveness of the awareness campaign was reflected in the consumer survey, in which all surveyed households knew about the DBTL scheme. However, there were gaps in awareness about the enrolment process and the status of subsidy transfer, which could be overcome through proactive information flows. The messaging in the awareness campaigns, which focused on ensuring households that they would retain their deserving subsidy benefit, also improved compliance with the scheme.

13.3.1 Historical Subsidies to the Coal Sector and Eskom

Coal mining benefited historically from various apartheid laws that lowered the cost of doing business, including exemptions from the usual environmental protections and the ability to pay very low wages to mine workers and provide them with little or no labour, health or safety protections. State take via royalties did not exist until 2010.Footnote ² This created a system of cheap fossil fuels, with benefits accruing to either coal suppliers or electricity users, who were frequently the same firms and who enjoyed unparalleled access to the state, including Anglo American and Gencor (later BHP Billiton) (Fine and Rustomjee Reference Fine and Rustomjee1996; Burton Reference Burton2011).

Eskom’s coal costs were furthermore kept low via two contracting models. In the first model, Eskom provided capital to ‘cost-plus mines’, supporting coal producers by financing production and guaranteeing off-take. Eskom remains responsible for capital investment in these mines, as well as for liabilities such as mine rehabilitation. The second model involved fixed-price contracts with mines, where coal sold to Eskom was subsidised from exports, with low coal costs passed through Eskom to benefit electricity users (Eberhard Reference Eberhard2011; Matthews Reference Matthews2015).

The allocation of coal contracts was politicised. Contracts were shared out among companies and were used to develop local mining capacity and companies with political/ethnic ties to the state, creating new (white) ‘Afrikaner’ capital as distinct from (white) English or ‘imperial’ interests (Fine and Rustomjee Reference Fine and Rustomjee1996). The coal sector has evolved since 1994, but it remains reliant on Eskom as the largest user of coal, and there are crucial similarities that persist. There are links between coal mining interests and the ruling African National Congress (ANC) Party. Eskom also uses its market power to promote Black Economic Empowerment in coal. Black Economic Empowerment describes economic policies that are intended to redress the racial inequities of apartheid through privileging black or historically disadvantaged individuals. Eskom’s procurement policy is explicitly distributive and favours new black-owned mining firms that may or may not have competitively priced coal; Eskom’s support for new producers is thus based on racial economic development objectives (Burton and Winkler Reference Burton and Winkler2014).

Eskom’s provision of support for mining is seldom analysed in terms of the distributive consequences for the broader economy. This is similar to liquid fuels pricing, discussed later, where a regulated price is maintained due to concerns about downstream employment and new black ownership in the retail sector.

Recent examples of direct transfers to Eskom are shown in Table 13.2. Government support of Eskom is not new; when the utility was undertaking a large expansion programme in the 1970s and 1980s, it received subsidies through government guarantees for foreign loans and through state-supplied forward cover on currency risk (Steyn Reference Steyn2001).Footnote ³ As we explain, current support includes transfers to ensure the financial stability of Eskom and promote supply security in the electricity sector, which have been necessary given the utility’s financial and supply problems.

In response to rolling power cuts in 2008, the national government issued a loan of USD 5.45 billion to Eskom (RSA 2008: 2) to recommission three mothballed coal plants and finance two new coal power stations. In 2014, the state converted a portion of the loan to equity (USD 2.52 billion) (Nene Reference Nene2015), resulting in direct transfers of USD 840 million between 2008 and 2011. We estimate that interest foregone on the loan between 2009 and 2014 totals USD 2.29 billion (Lott et al. Reference Lott, Burton and Rennkamp2016).

Eskom received a further direct transfer in 2015 when Parliament enacted the Eskom Special Appropriation Act to assist Eskom in expanding electricity generation capacity (RSA 2015: 2). The value of this bailout was USD 1.63 billion.

Potential direct transfers can also be identified in the provision of government loan guarantees. These loan guarantees link Eskom’s debt to the sovereign’s investment rating, lowering Eskom’s cost of borrowing by lowering the risk associated with Eskom debt. The government assumes a financial liability in the case of default. Eskom has borrowed a total of USD 12.8 billion against the total loan guarantee of USD 23.8 billion (National Treasury 2016b).

Direct transfers of USD 47.5 million from the National Treasury and Department of Water Affairs were made for water infrastructure in the Waterberg mining basin. The water infrastructure is explicitly for supplying water to Eskom’s Matimba and Medupi coal power plants and for de-bottlenecking coal supplier Exxaro’s existing pipeline. Phase two of the project is ‘a prerequisite to enable the further development of the Waterberg coalfields’ (TCTA 2014: 47; see also National Treasury 2014b, 2015: 40, 2016a: 953).

The National Treasury considers such transfers a ‘funding mechanism’ for ‘strategic projects’ that contribute to water and energy security (National Treasury 2016c). User charges go to pipelines and transfer schemes, and the government supplies guarantees to enable strategic projects. To what extent user charges cover the full costs is not known; in rail, Transnet has indicated that contracts do not fully cover the costs of new rail expansions on the coal line (Creamer Reference Creamer2015). Since these developments are run through SOEs, there is very little information publicly available on long-term financing.

Support for fossil fuels in the electricity sector has seldom been understood as a ‘fossil fuel subsidy’. Rather, subsidies have been used for energy security and industrial development in sectors that are considered by the state to be important drivers of development. Quantifying and reframing this support as a subsidy to fossil fuels are thus key in promoting discussion and debate in South Africa about the role of this support.

13.3.2 Historical Subsidies to the Liquid Fuels Sector and Sasol

The liquid fuels industry has received considerable historical support from the South African government in terms of direct and indirect subsidies. A favourable regulatory regime guaranteed ‘the profitability and the financing of every segment of the fuel value chain’ (Roberts and Rustomjee Reference Roberts and Rustomjee2010: 63).

The liquid fuels subsidy regime that developed between 1950 and early 2000 privileged synthetic fuelFootnote ⁴ producers Sasol and Mossgas/PetroSA. In addition, so-called other oil companies (OOCs) operate in South Africa, including Shell, BP, Total, Chevron and Engen. These actors also historically benefited from favourable policies and regulations, though to a lesser extent. The regulated price of petroleum was introduced to encourage industrialisation and import substitution by providing favourable pricing to OOCs. Profits for OOCs had to be maintained through the regulatory regime to ensure that domestic refining capacity would remain in apartheid South Africa. As such, fuel pricing in South Africa has historically been based on an import parity priceFootnote ⁵ that guarantees returns for domestic refiners. However, the synthetic fuel producers emerged as the primary beneficiaries of direct and indirect subsidies due to the state’s interest in reducing the country’s dependence on imported fuel. The emphasis on energy security grew in the 1970s in response to the oil crises and apartheid oil embargoes.

Support for Sasol took several forms. The first was the provision of an import parity price to Sasol when it was established in 1947. Sasol also enjoyed tariff protection when the price of oil fell below a defined threshold, which was first introduced when the coal-to-liquid plant Sasol 1 was commissioned. The South African government further stipulated that the OOCs uplift (purchase and sell) 100 per cent of production from Sasol.Footnote ⁶ Importantly, each of these provisions was extended when Sasol expanded in the 1980s. The upliftment agreements, designed to give preference to Sasol’s synthetic fuels in the inland market,Footnote ⁷ were ‘effectively a government-brokered and sanctioned form of private regulation’ (Competition Tribunal 2006: 19). To accommodate Sasol’s production, the OOCs mothballed 30 per cent of their refining capacity, receiving state compensation in the form of levies and guaranteed returns on investment paid to the refiners (Competition Tribunal 2006: 22).

In 1992, the government commissioned state-owned Mossgas. Similarly to Sasol, Mossgas received tariff protection and upliftment agreements with the OOCs, as well as transfers through levies on the fuel price (Rustomjee et al. Reference Rustomjee, Crompton, Maule, Mehlomakulu and Steyn2007: 61). In 1999, PetroSA was formed as a merger between Mossgas and the state-owned oil and gas exploration company Soekor. PetroSA continues to receive state support.

The apartheid state’s emphasis on the development of local refineries and petrochemicals capacity established the synthetic fuel producers as entities through which the government could pursue these objectives. Post-apartheid energy policy reform has not been accompanied by any fundamental pricing reform, highlighting the persistence of regulatory support for the sector.

Indeed, although South Africa altered its fuel pricing regime in 2003 to be a more accurate reflection of an import parity price, it is well documented that this price remains above a competitive price and confers a benefit to liquid fuel producers through market price transfers (Competition Tribunal 2006: 51). The Department of Energy set a 2010 deadline for the deregulation of pricing (Competition Tribunal 2006: 31), but this goal has not been met in part because the department claims deregulation will affect the sector’s new Black Economic Empowerment entrants by removing protection for retailers (where small black-owned firms are active). Sasol is therefore protected by its own important supply position in the inland market (where refinery and pipeline capacity limits conventional supply) and by the other distributive policies of the state regarding Black Economic Empowerment, even though Sasol benefits only indirectly from these latter objectives. The company’s own lobbying efforts are also important; the Competition Commission, for example, has noted Sasol’s opposition to pricing reform.

Sasol is presently the primary beneficiary of fuel pricing regulation due to its low production costs, which has resulted in the company receiving economic rents through the import parity price (on top of the direct subsidies it received). Sasol’s excessive profits as a result of the pricing rules have been a bone of contention (Competition Tribunal 2006). We estimate the value of the market price transfers to Sasol for 2012 (the only year for which data were available) at USD 127.44 million (in 2016 USD) (Lott Reference Lott2016: 78).

Support to the liquid fuels sector has also taken the form of direct transfers to finance infrastructure in support of energy security. The Department of Energy, for example, transferred USD 411.46 million to Transnet – the operator of state-owned ports, railways and pipelines – between fiscal year 2011 and fiscal year 2013 to support the commissioning of a large new pipeline.

Finally, SOEs also received direct transfers for personnel training, the promotion of oil and gas exploration and production and research and development on hydraulic fracturing and carbon capture and storage (PetroSA 2010, 2012, 2013; Maqubela Reference Maqubela2014: 18; National Treasury 2014a, 2015, 2016a). These subsidies are shown in Table 13.3.

14.4.1 Discursive Forms of Power

Exploiting natural resources has been a key pillar of modernisation efforts in Latin America since the 1950s and remains an essential component of economic development models across the region, notably with the global boom in commodity prices of the 2000s (Veltmeyer and Petras Reference Veltmeyer and Petras2014). The relationship between extraction and economic development has been a key narrative used by the region’s governments to legitimise the existence of incentives to the extractives sector.

In Colombia, the development model shifted noticeably towards the extractives sector during the Uribe administration (2002–10). A special role in fuelling economic development was given to both hydrocarbons and minerals extraction. The development of the energy and mining sectors, together with the democratic security policy,Footnote ² was seen as the path for Colombia to become one of the leading economies in Latin America by 2019 (Insuasty Rodriguez et al. Reference Insuasty Rodriguez, Grisales and Gutierrez León2013). The government’s discourse on the special role of the mining sector in Colombia’s economic development was accompanied by statements on the need for foreign investment to fully develop Colombia’s mining potential – and therefore on the need to increase the country’s competitiveness by providing incentives to foreign investment.

During the first administration of Juan Manuel Santos (2010–14), resource extraction maintained its central role and was framed as one of the ‘locomotives of development’ in the National Development Plan (NDP 2010). In this period, the government also increasingly used the concept of ‘responsible mining’ (Presidencia de la República 2013; Santos Calderón Reference Santos Calderón2014). Since 2015, however, this metaphor was abandoned in response to the economic and legitimacy issues of the mining sector. A new ‘peace’ frame was introduced: the national government now justifies the importance and incentives given to the extractives sector based on its expected contribution to funding the peace process and its associated social programmes (González Espinosa Reference González Espinosa and Isaza2015).

This new frame not only ensures that the extractives sector is perceived as a key partner, or even an enabler, of the country’s new development era after the peace deal with FARC, but it also leads to distorted public perceptions about the actual importance of coal in Colombia’s economy and its actual contribution to the state’s income, as well as to the diffusion or suppression of some of the concerns raised about the sector’s socio-economic impacts. As the leading mining industry, coal has benefited from being included in a broader mining and energy package that levels out the particularities and differences between minerals and hydrocarbons. For instance, the differences in terms of revenues generated and scope of payments between the hydrocarbons and the mining sector are considerable. The extractive sector paid COP 35 trillion (USD 18.5 billion) to the Colombian state in 2013, but only COP 2.3 trillion (USD 1.2 billion) was from the mining sector. Of that, 85 per cent was paid by the three main coal companies, Cerrejón, Drummond and Prodeco (MME 2015a).

14.4.2 Instrumental Forms of Power

A key political factor behind the maintenance of subsidies to the coal sector in Colombia is the strengthening of a broad constellation of actors that include mining business associations and others that benefit from the subsidies regime. Traditionally, lobbying through business associations has been an effective way for mining companies to secure significant subsidies for the sector, as described in Section 14.5. Until 2014, there were three main business associations defending mining interests: the Colombian Chamber of Mining, the Association of Large-Scale Mining Sector and the Miners’ Association (Asomineros). However, they combined to create the Colombian Mining Association in order to improve bargaining positions and communication to the general public. This fusion implies that the Colombian Mining Association is now representing a very large portion of the mining industry, articulating and representing interests from operators, producers and goods and services providers to the sector.

As was the case with framing strategies, coal producers have partnered with the rest of the mining industry to benefit from a more powerful position when negotiating with the government. However, this partnering strategy also creates additional challenges for the large-scale coal sector. While facing its own reputational challenges, it now also indirectly faces criticism that was traditionally linked to other mining subsectors, such as the disastrous environmental impacts of mercury use in gold extraction. While the coal sector’s strategy had been to keep a low profile to reduce financial and operational risks deriving from social acceptance issues (González Espinosa Reference González Espinosa2013), large companies are now increasingly engaging in communication activities, using the media to respond to accusations and improve their image.

The large-scale coal sector has also been involved in important partnership initiatives with public institutions aimed either at improving the performance of the sector (e.g. the EITI) or at engaging in social programmes (e.g. Alianza Social, a programme through which mining companies made voluntary commitments with the National Agency for Overcoming Extreme Poverty). These initiatives have been useful platforms for the sector to interact with key policymakers at the national level. At the local level, coal companies and political leaders have historically been closely linked, including through the revolving-door channel (when policymakers join industries they used to regulate and vice versa) or through political campaign financing (Transparencia por Colombia 2014). For example, several former governors and other local political leaders have had a long-standing relationship with Cerrejón, from when the state still had a stake in the company (González Espinosa Reference González Espinosa2013).

14.4.3 Institutional Forms of Power

One key element in understanding government support to coal mining, including subsidies, is the historical legacy of internal conflict and the Colombian state’s weakness and lack of legitimacy among large sections of the population. In 1991, the country underwent a constitutional reform that sought to increase the presence of the state by devolving fiscal and political power to lower levels of government and expanding basic social services (Torres del Río Reference Torres del Río2015). These measures, together with defence efforts to deal with drug trafficking, paramilitary activities and guerrilla warfare, required considerable resources. The state thus needed revenues urgently and introduced successive fiscal reforms that would prioritise rapid revenue production (or limit specific expenditures such as regional transfers) instead of tax efficiency, a situation that has prevailed since the 1990s despite several attempts at structural reform (Olivera et al. Reference Olivera, Pachón and Perry2010). Indeed, royalties became one of the most important public revenues in resource-rich regions. In La Guajira, royalties reached an annual average of USD 23.6 million between 1985 and 2004; this amount increased along with production between 2005 and 2007 to an annual average of USD 105 million (FCFI 2009: 10).

At the same time, conditions established in loan agreements with the International Monetary Fund in 1998 and 2003 led to a series of privatisations and restructuring of the state. Compared to other Latin American countries, where structural adjustment and pro-market economic policies aimed to reduce the role of the state, Colombia intended to use these measures to strengthen the state’s administrative functions (Flórez Enciso Reference Flórez Enciso2001). This pursuit of short-term revenues partly explains why the economic policy of the 2000s prioritised the extractives sector and introduced incentives for mining. The thinking was that development of this sector would deliver a steady flow of rents for the state, as long as conditions were made attractive enough to foreign investors (Caballero Argáez and Bitar Reference Caballero Argáez and Bitar2015).

Another key dimension here is the fragmentation of political parties and lack of programmatic discipline, a result of modifications to the Constitution of 1991 concerning political parties’ representation in the Congress and also of powerful lobbying by interest groups (Pizarro Leongómez Reference Pizarro Leongómez and Gutiérrez2002). These political dynamics have favoured the expansion of nominal tax rates while simultaneously expanding tax exemptions (Salazar Reference Salazar2013).

14.5.1 Plan Vallejo

Plan Vallejo was introduced under the Alberto Lleras administration at the end of the 1950s in response to a deep economic crisis characterised by a drop in the price of coffee, a crisis in foreign trade, structural unemployment and a decades-long agrarian conflict. The Plan, combined with tighter currency controls and import restrictions, aimed to boost the transformation of imported raw materials and subsequent export, as well as to expand Colombia’s export capacity (Garay Salamanca Reference Garay Salamanca1998). This effectively represented a shift from the import-substitution industrialisation model to a new model based on the promotion of non-traditional exports. As a result, non-coffee exports started to increase exponentially after the 1967 modifications to the currency exchange policy (Amézquita Zárate Reference Amézquita Zárate2009). This framing remains today: the Minister for Trade announced an expansion of the Plan at the end of 2016 with the aim of increasing exports from sectors other than mining and energy (Lacouture Reference Lacouture2016).

The 1960s economic policy change was also the result of a significant shift in the country’s politics. At that time, a political agreement known as the National Front (1958–74) had emerged after years of bipartisan violence and military dictatorship, where the two main political parties (the Liberal and Conservative Parties) alternated power during four presidential terms. Under these special political circumstances, clientelism deepened (Leal Buitrago and Dávila Ladrón de Guevara Reference Leal Buitrago and Dávila Ladrón de Guevara2010), bringing economic elites together and safeguarding the interests of the emerging bourgeoisie and old landowners around the patrimonial order and the generous profits from coffee exports and industrial production (Leal Buitrago Reference Leal Buitrago and González1996).

Although the Plan has gone through a series of modifications since its introduction, especially regarding its administration, its main terms are still being applied five decades later. However, the definition of ‘non-traditional exports’ has not been adjusted over time, even as the actual export mix has changed, and as a result – against the spirit of the initiative – the industry benefiting most from the policy has been coal mining. Along with the internationalisation of Colombia’s economy, the share of coal exports under Plan Vallejo increased from 3.2 per cent in 1985 to 27.2 per cent in 1990 (Garay Salamanca Reference Garay Salamanca1998). In 2015, over one-third of the exports made under the Plan consisted of coal (Granada López et al. Reference Granada López, Zárate Farias and Sierra Reyes2016).

The maintenance of Plan Vallejo was called into question by the World Trade Organization, whose Trade Policy Review Body identified the Plan as an export subsidy in 1996 and reported it to the Committee on Subsidies and Countervailing Measures (see also Chapter 7). Colombia was given until 2003 to phase out Plan Vallejo and other export-related incentives. Thanks to ‘heavy diplomatic artillery’, the country was granted a three-year extension (El Tiempo 2002). After further negotiations, Colombia managed to keep the Plan for raw materials and services, although it had to limit the scope with regard to capital goods and spare parts. Subsequently, during negotiations about a free trade agreement, the United States initially requested elimination of the Plan for raw materials. Once again, however, Colombia managed to keep it rolling; after negotiations, the trade agreement allowed Plan Vallejo to remain in place (El Tiempo 2005).

Pressure on the Plan not only came from outside but also from inside the country. In 2004, at a Presidential Summit of the Andean Community, President Uribe suggested dismantling Plan Vallejo if other Andean countries would do the same with similar instruments. This generated strong opposition not only from the coal sector but also from other export-oriented sectors that rely heavily on the Plan’s incentives to maintain their competiveness (Correa Reference Correa2004). This suggests that an important factor for the maintenance of the Plan is support and lobbying from other industries, such as flowers and textiles production, through broader business associations such as the National Association of Exporters (Analdex).

In summary, framing and instrumental strategies have been essential in ensuring that the industry keeps the conferred benefits despite both internal and external pressures. The strength of the discourse around the contribution of Plan Vallejo for Colombia’s industrial development, along with effective lobbying from a coalition of exporting industries, has enabled the Plan to remain legitimate in a different economic model than the one in which it originated. This example also illustrates how a policy that was not designed as a subsidy to the coal sector when it was introduced became one as a result of changes in the domestic and global economic context.

14.5.2 Royalties Rebate

In 2005, a decision by the National Tax and Customs Directorate allowed mining companies to deduct the royalties they pay from their income taxes. This measure was introduced in response to a formal request by Carlos Alberto Uribe, who was then the president of Asomineros (and is not a close relative of the ex-president). The business association argued that royalties are a cost for companies – although the Colombian Constitution establishes that royalties constitute a mandatory compensation to the state generated by the exploitation of non-renewable natural resources.

The decision marked a significant change in the institution’s interpretation of Colombia’s tax law, since it had itself responded negatively to the same request on two earlier occasions, in 1998 and 2004 (Proyecto de Ley 071 2014). In 2005, however, the National Tax and Customs Directorate argued that mining companies should be given the same treatment as the national oil company Ecopetrol and be allowed to discount royalties from their income taxes.

There have already been at least four attempts to remove the subsidy since its introduction: in November 2011, when the Senate discussed the government take from mining activities; in 2012, when the Liberal Party led a proposal to reform the royalties system; in 2013, when a group of congressmen and academics submitted a simple invalidity action to the State Council, and again in 2014 through a legislative proposal from Senator Julio Guerra Soto. The lawsuit filed in 2013 was ultimately successful. In October 2017, the State Council canceled the measure (Morales Manchego 2017).

This last example not only illustrates how powerful and well-organised private interests contributed to the introduction of a key subsidy to coal production in Colombia through instrumental strategies, but it also shows how the mining sector, dominated by coal companies, has made use of institutional means to get new subsidies in place. It also raises questions about accountability and democracy in relation to the subsidy’s introduction; despite the subsidy’s significant impact on the state’s spending capacity, and resulting indirect impacts on the Colombian population’s well-being, its adoption was made by a non-representative authority.

15.3.1 The Nature and Pace of Reforms: Stakeholders Matter Most

The failure to reform fossil fuel subsidies is primarily due to the political economy aspects of reform (Victor Reference Victor2009). Many analysts (from the IMF, the World Bank and the Global Subsidies Initiative) point to a maze of conditions that explain why reforms are successful or not, including timing, political regime, internal coordination, interest-group behaviour and technical characteristics of reform (Beaton et al. Reference Beaton, Gerasimchuk and Laan2013; IMF 2013a, 2013b; Kojima Reference Kojima2016). While it is clear that different conditions affect each other and that a successful reform outcome is causally complex, it is possible to understand (and, to a certain extent, predict) the political arena by understanding the dynamics among stakeholders. A behavioural realist stakeholder assessment has the advantage of recognising that stakeholders reach decisions in heterogeneous ways.

What does this mean? In general, it means that a political economy analysis of subsidy reform starts with how stakeholders actually behave rather than with how they should rationally behave to achieve the economically best possible subsidy reform process. It is logical that organisations concerned with macroeconomic stability (such as the IMF and World Bank) prescribe gradual reform as a key to successful long-term subsidy reform. This would be the wisest path from an economically rational standpoint. A behavioural realist school of thought argues that this does not coincide with the political reality under which many subsidy reforms take place.

Behavioural realism argues that different stakeholders make choices in different ways. Some stakeholders act rationally and will decide on exercising pressure based on the distributive impact of reforms, their interest and their potential influence (Baron Reference Baron2013). As described later, in the Egyptian context, the military and political opposition parties behaved in a more rational way. Other stakeholders, however, do not necessarily act as economically rational individuals. This is where behavioural realism innovates: by looking at the psychological drivers of citizens. It is without a doubt that citizens can be a powerful opposition group to subsidy reforms. This was particularly the case in Egypt, where they had demonstrated their power twice in three years’ time.

Therefore, behavioural realism argues that analysing stakeholders’ interests from a mere conventional rational choice point of view is insufficient to predict political outcomes (Kahneman Reference Kahneman2013). To assess the behaviour of citizens, behavioural realism relies on ‘system justification theory’ and ‘loss aversion’. The latter is the notion in behavioural economics that explains people’s preference for avoiding losses instead of acquiring equal gains. The former explains how individuals tend to behave when various belief systems conflict with one another. For example, while reform might be economically disadvantageous, citizens may have different dominant belief systems at the time of reform (such as fear of physical security or patriotism). System justification theory finds that people are often willing to accept rationally negative consequences to remain consistent with such dominant belief systems at the time of reform (Blasi and Jost Reference Blasi and Jost2006).

System justification theory and framing are closely related. A key insight of the framing literature is that individuals do not just make decisions based on individual preferences but in evaluation of a social context (Madrian Reference Madrian2014). System justification theory would assess what types of conflicting and dominant belief systems are shared among citizens so that frames can be developed to maximise reform acceptance. In this way, the behavioural realist framework employed here focuses on the role of actors opposed and in favour of reform and how framing may influence such actors within the window of opportunity to change socio-political structures – the social contract – in Egypt (see Chapter 1).

15.3.2 A Behavioural Realist Framework for Studying Fossil Fuel Subsidy Reform in Egypt

Researching Egypt’s 2014 subsidy reforms benefits from a behavioural realist approach. As Table 15.1 shows, the Egyptian reforms were of a ‘big bang’ nature. Egypt’s 2014 reforms are a good example of opportunistic reform. Many subsidy reforms in countries with traditionally low prices happen in shocks and during windows of opportunity, most often at the time of an observable fiscal crisis or after an election. Public choice scholars often speak of the ‘crisis hypothesis’ and the ‘honeymoon hypothesis’ to explain why structural reforms tend to be implemented in such an opportunistic fashion (Williamson Reference Williamson1994).

As the government is primarily responsible for the planning and implementation of reforms, the possibility of reform ultimately depends on its assessment of the need for reform, as well as whether key stakeholder groups are ready to accept such reforms without threatening the government’s legitimacy. In Egypt, I argue that legitimacy depends on three key stakeholder dynamics: (1) the social contract that guides the relationship between the state and its people, with the state composed of the government and the military, but with government primarily responsible towards its citizens, (2) the relationship between the military and the government and (3) the presence or absence of political alternatives to the government (Figure 15.1).

Figure 15.1 Stakeholder dynamics in Egypt.

First, the historical contract between the state and the people of Egypt has closely resembled that of other countries in the region. The key characteristic of that social contract is the exchange of people’s loyalty to the country’s authoritarian regime for a government-driven distribution of welfare. In practice, this means that the state was given a monopoly on Egypt’s economy, including the exploitation of hydrocarbons and other resources. In practice, the ruling government exploited the economy for its own benefit and without profound public oversight. In exchange, the government was expected to provide public employment and subsidised food, energy, housing, social security and so on (Fattouh et al. Reference Fattouh, Moerenhout and Sen2016). Taking away fossil fuel subsidies not only hurts people’s welfare, but it can also be a symbolic measure indicative of a changing social contract. Much of what Sisi has done so far is change the social contract unidirectionally: less distribution of welfare but a maintaining of authoritarian power.

Second, the relationship between the Egyptian military and government is one of checks and balances. The government needs the military to protect the country and, importantly, to support it in the domestic application of its policies. In simple terms, the government uses the security sector to be the ‘stick’ to ensure civil acquiescence to its regime. When people revolt against the state because of breach of the social contract, they often do this in the first place against the government and only secondarily against the military. This is because the military is believed to provide checks and balances to the government. In Egypt during the Arab Spring, for example, the army acted against Mubarak and Morsi. In reality, the military is a huge institutional apparatus that protects the political and economic power it shares with government. In practice, such interests are often linked to the energy sector, to large infrastructure projects and so forth. This makes the military a key stakeholder in large reforms.

Third, the government acts to silence political opposition. Political opposition attempts to manifest as a realistic alternative to rule the country. It seeks to influence the perception of stakeholder groups that it can cover their interests better than the current government.

15.4.1 Why the Military Mattered to the Implementation of the July 2014 Reforms

Support of the military for fossil fuel subsidy reforms was necessary for two reasons. First, the military had strong interests in fossil fuel subsidies and could therefore be an opposing actor. Second, the military was needed to showcase strength and prevent unrest following reforms. The fact that President Sisi spent his life as an officer in the Egyptian army improved relationships. The military had been historically involved in non-military manufacturing, including energy-intensive industries (CMI 2013: 2), and in fuel black markets. Under Mubarak, however, many business deals went to private capitalists or internal security forces (Makara Reference Makara2013: 345–46). This was one of the reasons why the military ultimately did not suppress the Arab Spring protests (Barany Reference Barany2011; Akkas and Ozekin Reference Akkas and Ozekin2014: 83).

After Mubarak’s ousting, the military government re-established its economic and political position. In his one-year rule, President Morsi tried to reverse some of these steps and centralise power at the expense of the military’s political power (Brown Reference Brown2013: 45–50). He also pushed an Islamist agenda in which he counted on military support in safeguarding security. This challenge on two fronts made the military increasingly wary of its relationship with Morsi (CMI 2013: 4). At the same time, Morsi sought more oversight over the Suez Canal expansion project at the expense of the military (Marshall Reference Marshall2015: 11–12). Eventually, the military opposed Morsi and the Muslim Brotherhood and started actively supporting massive demonstrations with the assistance of Saudi Arabia and the United Arab Emirates (Marshall Reference Marshall2015: 18).

After his election as president, Sisi immediately extended the military’s influence on major manufacturing, transportation and infrastructure projects. Their leading role in the Suez Canal expansion project was also reaffirmed. He also involved the military in other projects, such as national bank loans to a subsidiary of Tharwa Petroleum, the only state-owned national oil company involved in upstream activities (Marshall Reference Marshall2015: 14–18). As such, fossil fuel subsidy reform could be advantageous for the military because it would strengthen the capacity of Egypt’s oil sector to pay off its debts to foreign operators. Via Tharwa Petroleum, the military would then benefit from foreign investors re-entering the Egyptian market (McMurray and Ufheil-Somers Reference McMurray and Ufheil-Somers2013). At the same time, following frequent negotiations with the military, Sisi decided to drop liquefied petroleum gas (LPG) from the 2014 subsidy reforms. It is believed that this is because the military was a key stakeholder benefiting from black markets for LPG cylinders (James Reference James2014). In exchange for these benefits, not only did the military support fossil fuel subsidy reform, but it also supported Sisi’s reign, which resembles that of a return to a repressive and authoritarian state (Khalaf Reference Khalaf2016).

15.4.2 The Absence of Political Alternatives and Prior Subsidy Reform Under Morsi

Because of its strong organisation, the Muslim Brotherhood was able to boost the numbers of protesters when it united with nationalistic civil society movements to oust Mubarak. It is also a key reason why it won the subsequent elections. However, the goal of replacing the Mubarak regime with an Islamic regime appeared far less important for most demonstrators than the primary economic reasons and the secondary demands for civil and political freedom (Beissinger et al. 2014: 4). The Muslim Brotherhood, however, spent most of its one-year reign on consolidating power. When the military intervened and removed Morsi from power, they also subsequently crushed the Muslim Brotherhood. Thereby, they effectively nullified the most organised opposition party.

In retrospect, the short time period that the Islamist government under President Morsi was able to govern mostly served as a catalyst for the subsequent El-Sisi presidency to actually implement substantial reforms. It confirmed the nationalistic sentiment that had been prevalent in the wake of the Arab Spring (Akkas and Ozekin Reference Akkas and Ozekin2014: 80) and the need for economic reforms. This is the platform on which Sisi would announce fossil fuel subsidy reforms. At the same time, the Brotherhood had become the scapegoat for the enduring financial crisis, with most political parties supporting its removal from power (Butter Reference Butter2013: 13). It also increased the popularity of the army, which gave Sisi a huge amount of political capital at the start of his presidency to actually implement reforms.

That said, Sisi benefited from some key fossil fuel subsidy reforms Morsi had initiated. In the 2012–13 period, prices for gasoline more than doubled for high-end vehicles, fuel oil prices increased by one-third for non-energy-intensive industries and by half for energy-intensive industries, while they rose by one-third for electricity generation. Electricity prices for households also increased on average by 16 per cent (Sdrazlevich et al. Reference Sdrazlevich, Randa, Younes and Albertin2014: 45). Natural gas prices also increased for residential, commercial and industrial consumers. However, the real prices for all refined products actually decreased due to inflation (Clarke Reference Clarke2014). In addition to actual price increases, some institutional innovations were prepared. One success was the development of an electronic tracking system to monitor fuel movements between suppliers and filling stations aimed at cutting fuel smuggling to Turkey and Gaza (James Reference James2014). The result was the uncovering of hundreds of fuel stations that only existed on paper (Butter Reference Butter2013: 14–15).

15.5.1 A Crisis of Unprecedented Proportions and the July 2014 Reforms

By the time Morsi was ousted, Egypt’s debt surpassed 100 per cent of its GDP, the Egyptian government risked defaulting on its debts, GDP growth had dropped from 5 per cent pre-revolution to around 2 per cent in 2012–14 and unemployment had risen, particularly among the country’s youth (about 40 per cent of those aged between 20 and 24). At the same time, there was widespread inflation (rates were around 10 per cent after the Arab Spring) and a record-level budgetary deficit (nearly 14 per cent of GDP in 2012–13). Rural-urban income disparities also were on the rise, and there were considerable disruptions in fuel and electricity supply (Butter Reference Butter2013: 4; Paciello Reference Paciello2013: 2; ERPIC 2014; James Reference James2014; Muthuthi Reference Muthuthi2014). The only economic indicator that looked somewhat acceptable was the balance of payments, and that was only due to a generous financial support package from Gulf countries.

Energy subsidies were one of the main causes of this bleak picture. Expenditure on fuel subsidies had grown with a compound annual growth rate of 26 per cent between 2002 and 2013 (Clarke Reference Clarke2014), amounting to about USD 21 billion, which represented 8.5 per cent of GDP (Griffin et al. Reference Griffin, Laursen and Robertson2016: 2) and 20 per cent of public expenditure (El-Katiri and Fattouh Reference El-Katiri and Fattouh2015). The July 2014 reforms were steep price increases affecting various consumer groups and nearly all fuels and energy products, with LPG being the one notable exception. Among the main transport fuel price increases were a 64 per cent hike in diesel prices, a 78 per cent hike in gasoline-80 and a 40 per cent hike in gasoline-92. Kerosene prices also rose for all users by 64 per cent. Fuel oil prices did not increase for the electricity sector but did for the cement sector, food industry and other users. Natural gas prices increased substantially for all energy-intensive industries and for electricity generation. Residential natural gas prices were staggered by consumption levels, with larger consumers paying more; still, small-scale consumers saw their price double. Finally, electricity prices increased for all consumer groups but were also blocked to eventually allow for cross-subsidisation (Clarke Reference Clarke2014: 4–5).

15.5.2 Modest Mitigation Measures to Cover Distributional Losses

Besides using communication campaigns to affect belief systems (see below), the government also introduced several compensation measures to ease stakeholder reluctance about reform. As Egypt’s non-subsidy social safety net was poorly developed, a few short-term measures that strongly resembled conventional social contract politics were used to send out a message that Egypt’s government wanted to cushion the effects of the reform. With the crucial help of a USD 12 billion package from Gulf countries, Egypt implemented two stimulus packages in August 2013 and January 2014. Minimum wages in the public sector were raised, even though it increased the budget deficit (Muthuthi Reference Muthuthi2014: 4). This financial assistance from the Gulf also included USD 3 billion in fuel supplies to reduce the fuel shortages that had been so prominent during Morsi’s reign (Butter Reference Butter2013: 13–14).

Right before the fossil fuel subsidy reform, the government also extended the food subsidy system to include 20 new products (Clarke Reference Clarke2014). This was intended to reduce concerns about food price increases as a consequence of fossil fuel subsidy reforms. At the same time, the fact that it was implemented before and explicitly linked to the fossil fuel subsidy reform reduced the risk of protest due to loss aversion among the people. When a compensation measure is implemented before subsidy reforms and explicitly linked to such reforms, people are more likely to become attached to this compensation measure and, consequently, feel relatively less averse towards the associated subsidy reforms. Finally, there was a promise to keep LPG – a fuel widely used by poorer households – subsidised (El-Katiri and Fattouh Reference El-Katiri and Fattouh2015). As far as transport goes, there were several concerns (see below). In response, the government offered some free transport in army buses (James Reference James2014).

15.5.3 Psychological Drivers of Citizens at the Time of Reform

Relative to the size of the fossil fuel subsidy reforms, the aforementioned compensation measures were largely insufficient to ease the welfare losses of a large part of Egyptian households. The reason why the Egyptian population was willing to accept such reforms goes beyond mitigation measures. It is difficult to know whether Egyptians were simply tired of conflict or they were genuinely open to redrawing the blueprints of how Egypt was managed. However, it does seem likely that the government’s use of the carrot and stick – as well as the characteristics of reform – certainly played into the belief systems of Egyptians and, as such, increased the acceptability and support for reform. It did so in primarily four interdependent ways.

First, the timing of reform meant that Sisi could take full advantage of the so-called honeymoon period. In the wake of Morsi’s ousting, General El-Sisi and the military had gained popularity. Unlike Morsi, El-Sisi was also elected in one round and with about 90 per cent of the vote, giving him extensive political capital (James Reference James2014). El-Sisi used a large part of this political capital immediately by addressing fossil fuel subsidies, which had been left untouched by the transitional government (Paciello Reference Paciello2013: 3). System justification theory supports the notion that to be consistent with their electoral choice, people more easily trust the newly elected leader, even if his choices contradict their material interests (Blasi and Jost Reference Blasi and Jost2006).

Second, the immediate announcement of fossil fuel subsidy reform and the communication around subsidy reform left no space for people to doubt that reform was actually happening. By pressing the inevitability of reform, Sisi reduced a status quo bias as change was imminent, not just a potential plan. Behavioural psychology has shown that when change is certain, people adjust more easily to the idea of it (Blasi and Jost Reference Blasi and Jost2006). Egyptians were also aware that there were no real political alternatives. After three years of political turmoil, Sisi had a firm grip on power. In a ruthless display of power, he had cracked down violently on the apparatus of the Muslim Brotherhood. At the same time, public protests had been banned in 2014. This discouraged demonstrations (fear as a dominant belief system), particularly with the awareness that the leading general had just been elected president.

Third, the framing of reform and complementary measures linked back to the key demands protesters called for during the Arab Spring. Communication campaigns addressed the inequitable nature of fossil fuel subsidies by explaining how they disproportionally reached the rich. This argument fell in line with the protesters’ argument for more socio-economic justice. It also stressed the urgency of the measure to revive the Egyptian economy, which also played into the major concern that had caused the country’s two popular uprisings. Right after his election, Sisi also increased taxes on the wealthy and imposed a new capital gains tax on business. These moves got him praise, as they showed a contrast with the Mubarak regime (Marshall Reference Marshall2015: 19) and increased the belief that the government was serious about its intention to revive the Egyptian economy.

Fourth, a key element of Sisi’s strategy was to target the nationalistic sentiment that had been so dominant in the uprisings (patriotism constituting a dominant belief system). Sisi stressed the responsibility and need for ‘shared sacrifice’ (a key slogan in the fossil fuel subsidy reform communication campaign) to repair Egypt’s economy, while admitting that the price increases themselves were unpopular. He mixed the promise of renewed economic opportunity with a Nasseresque national pride to gain the most effective support for reform possible. One notable example outside of fossil fuel subsidy reform is the Suez Canal expansion project, which increased national sentiment by limiting sales of investment certificates to Egyptian nationals.

15.5.4 Intra-Governmental Coordination and External Support for Subsidy Reform

It is a consensus among international experts (such as the IMF, World Bank and the Global Subsidies Initiative) that subsidy reform requires a large level of international coordination and a supportive coalition. Stakeholder interests and influence gave the government a nearly blank cheque for economic reforms in July 2014. On the side of the government, Sisi had a predominantly technocratic cabinet that also favoured reform. This in itself already reduced internal competition within the high ranks of government. Sisi also took on leadership over reform and profiled himself as such externally. That said, even before Sisi’s election, Egypt’s government was working with internal and external experts (such as the Global Subsidies Initiative and the World Bank’s Energy Sector Management Assistance Programme) to prepare an extensive public relations campaign. This effort was essential given the severe lack of awareness about the costs and inequity of fossil fuel subsidies. Apart from some initial inconsistencies, there generally was consistency in messaging, from everyday governmental communication in the media to Sisi’s widely broadcasted televised speech (Clarke Reference Clarke2014).

Sisi could also count on the supporting stance of several other stakeholders. Already for years an informal coalition of businesses, industry, commentators and academics had argued in favour of meaningful subsidy reform (Clarke Reference Clarke2014). The media were also generally supportive of Sisi’s proposed reforms (Marshall Reference Marshall2015: 19) and mainly focused on the impact on households and on what the government could do to protect the poor. Both the general media and social media appeared to react in a balanced manner towards the reforms (Clarke Reference Clarke2014). Because of this wide coalition and consensus, other political stakeholders generally did not strongly oppose reform. Most political parties saw their role marginalised following Sisi’s landslide election. Some leftist political parties did oppose reform, but mainly on the grounds that they wanted more preparation, particularly with regard to the impact on households (Clarke Reference Clarke2014). Similarly, the wealthy elite did not oppose reforms, even though there was a clear direction from the government to target subsidies better. As in many parts of the middle class, a fatigue and desire for order and stability made the wealthy favour Sisi’s proposed reforms (The Economist 2015).

The most vocal actor opposing subsidy reform was the transportation sector. Transport operators believed that they were providing a public service and that this ought to remain supported. President Sisi and the prime minister negotiated with transport operators to make sure that they would not resort to increasing prices in the face of uncertainty. However, transport operators did increase their prices when subsidy reform was announced and even resorted to strikes and demonstrations in Cairo, Sinai and Alexandria (Clarke Reference Clarke2014). Many drivers, however, are not linked to particular political parties or associations, and the drivers’ union was fairly weak. This explained how their opposition was relatively well contained during the implementation process.

15.5.5 How People’s Belief Systems Changed, but Only Temporarily

Even though many people remained sceptical about the ability of the government to redistribute and invest savings from the subsidy reforms (El-Katiri and Fattouh Reference El-Katiri and Fattouh2015), system justification theory (Blasi and Jost Reference Blasi and Jost2006) suggests that people can easily extend the acceptability of a government within one issue (overthrowing Morsi, favouring economic recovery, measures targeting the rich, etc.) to another (actually being able to achieve tangible economic progress via subsidy reforms). The characteristics of reforms and actions by Sisi, as mentioned earlier, fundamentally altered the framing of subsidy reform from a measure that affirmed corruption during Mubarak to a necessity for economic revival under Sisi.

As in other countries in the Middle East and North Africa, the gradual acceptance that subsidy reforms were necessary to counter deteriorating economies represented a significant shift in the belief systems of Egyptian people (Moerenhout et al. Reference Moerenhout, Vezanis and Westling2017). The communication campaign approach used by Sisi was also in stark contrast to Morsi’s approach and generally to how the earlier social contract had operated for decades. It showed an understanding on the part of the government that convincing the Egyptian people of a particular policy had become a necessity to progress on impactful reforms.

At this stage, the social contract began to shift tangibly. The Egyptian people accepted that the government would no longer support a subsidy-based distribution of welfare, and in exchange, the government spent more effort to communicate its policies to the people. Nonetheless, the people’s expectations were high. The government promised more economic opportunity and more targeted social safety mechanisms for those in need. In the years after the subsidy reforms, these expectations were not met. Consequently, and also as a result of Sisi’s repressive mode of governing, a large part of the Egyptian people started to notice that the social contract was changing unidirectionally.

16.3.1 Actors

Multiple actors influence subsidy reform agendas. The group advocating for subsidy reform usually includes international development agencies (Lockwood Reference Lockwood2015), multilateral financial institutions and environmental groups. Traditionally, the group of actors that have championed its maintenance has included labour and elite interest groups and energy-intensive industries (de Moor Reference de Moor2001; van Beers and de Moor Reference de Moor2001; Lockwood Reference Lockwood2015). Politicians, especially in developing states, tend to shape policy based on which group of actors has a greater sway on public opinion (Lockwood Reference Lockwood2015), except – as we will see later – when it is financially impossible to maintain the subsidy. In developing states, especially where information on the real cost and economic inefficiency of the subsidy is not readily available, politicians are able to use subsidies to gain or keep political patronage with the poor population. In spite of the inefficiency of subsidies, powerful groups were mobilised to strike and stage social disturbances during recent attempts in Nigeria in 2012, Indonesia in 2013 (see Chapter 11) and Yemen in 2014 to reduce fuel subsidies and use the savings for improved social services (Lockwood Reference Lockwood2015).

16.3.2 Frames

Arguments for and against fuel subsidy reform have been framed in different ways, with actors employing frames related to (1) climate as well as energy redistributive justice, (2) environmental stewardship and (3) economic prudence. Subsidies may be a (contested) way to redistribute national wealth in energy-producing states (climate and energy redistributive justice) or a fillip to environmental pollution (environmental stewardship). They can also contribute to fiscal imbalances and economic inefficiency and irresponsibility in the case of consumer subsidies (economic prudence); in the case of producer subsidies for the hydrocarbons industry, subsidies may help buttress falling government revenues (economic prudence).

‘Climate justice’ refers to the burden-sharing arrangement for climate change impacts and mitigation actions among states, non-state actors and individuals within both wealthy and poor states (Okereke Reference Okereke2010; Barrett Reference Barrett2013; Baptiste and Rhiney Reference Baptiste and Rhiney2016). It draws from political philosophy on fairness (Rawls Reference Rawls2005) in the distribution of resources and responsibilities, rights and obligations for mitigation and adaptation (Caney Reference Caney2010). ‘Energy redistributive justice’ concerns energy access and affordability and applies ethical and justice arguments to the fields of energy policy (McCauley et al. Reference McCauley, Heffron, Stephan and Jenkins2013), energy use and energy production (Sovacool and Dworkin Reference Sovacool and Dworkin2015). Rising energy prices have a larger impact on the poor, who have less disposable income (Boardman Reference Boardman2010) and are less able to challenge energy policy related to mitigation measures (such as measures that make fossil fuels more expensive to reduce the demand for them). Poorer countries need low-cost energy resources for economic development. Energy justice may be qualified by climate justice duties that are everyone’s responsibility: negative duties correspond to polluters, and positive duties apply to all capable of contributing to reducing emissions (Duus-Otterström and Jagers Reference Duus-Otterström and Jagers2012). The greenhouse development rights model, for example, may be interpreted as warranting the poor to adopt a part, albeit proportionately minimal, of the burden of higher energy costs that come with the removal of fuel subsidies. In that model, in 2030, least developed countries would have a 1.2 per cent ‘responsibility capacity’ (the measure used for burden sharing) to reduce emissions compared to 25 per cent for the United States (Baer et al. Reference Baer, Athanasiou, Kartha and Kemp-Benedict2008). Thus, energy and climate justice frames can be used to argue both for and against fossil fuel subsidy reform.

Those in favour of keeping fossil fuel subsidies have also used energy redistributive justice frames. Most members of the Organization of the Petroleum Exporting Countries (Hochman and Zilberman Reference Hochman and Zilberman2015) appeal to justice. This is particularly powerful when there is little public confidence in the government’s ability to transfer savings from subsidy removal to other social programmes. Lower energy prices contribute to lower transport and food prices (Soile et al. Reference Soile, Tsaku and Yar’Adua2014). Energy subsidies, according to this frame, allow citizens to their entitlement – i.e. citizens (including the poor) own the resource (Whitley Reference Whitley2013). Fuel and electricity subsidies, according to this argument, may also help boost export competitiveness by contributing to lower production costs for small manufacturers (who are disadvantaged by a lack of economies of scale and distance from global markets). Removing subsidies is unappealing to the poor because the short- to medium-term distributional effects of the removal are harder on low-income groups, at least when remedial measures are not adopted (Mathur and Morris Reference Mathur and Morris2014; Siddig et al. Reference Siddig, Aguiar and Grethe2014; Jiang et al. Reference Jiang, Ouyang and Huang2015).

Small island developing states contribute minimally to carbon emissions (World Bank 2017), but from the perspective of climate justice, and acknowledging the principle of common but differentiated mitigation responsibilities under the United Nations Framework Convention on Climate Change, they should also be environmental stewards and avoid fuel subsidies where possible. From the environmental stewardship perspective, fuel subsidies are environmentally harmful: they contribute to global warming, local pollution, traffic congestion and road accidents and damage (see Chapters 3 and 8).

From an economic prudence perspective, fuel subsidies are suboptimal: they reduce economic growth by artificially supporting inefficient national production and have a negative impact on national welfare and the economy (Arzaghi and Squalli Reference Arzaghi and Squalli2015). Specifically, fuel subsidies are inefficient wealth-transfer mechanisms (Saboohi Reference Saboohi2001; Dube Reference Dube2003) because the wealthy use more high-energy-consuming goods and benefit most from direct fuel subsidies (Gangopadhyaya et al. Reference Gangopadhyaya, Ramaswamia and Wadhwaa2005; Arze del Granado and Coady Reference Arze del Granado and Coady2012; Rao Reference Rao2012). Savings from removing subsidies – redirected, for example, to health and education programmes – and direct transfers to targeted groups are more efficient ways to distribute national energy wealth (Commander Reference Commander2012).

International development agencies that provide financial and technical assistance to developing states commonly exert pressure and use narratives for reform within frames of economic prudence and environmental stewardship: subsidies are inefficient social transfer mechanisms, and energy subsidies encourage overuse and increase emissions.

16.3.3 Contexts

The third part of the framework addresses contexts. For many energy-producing developing states, energy subsidies have been simple – with visible administrative mechanisms to transfer the state’s resources to the poor (Victor Reference Victor2009) – and easily justifiable to voters (Cheon et al. Reference Cheon, Lackner and Urpelainen2015). However, they tend to be non-transparent (Koplow and Dernbach Reference Koplow and Dernbach2001). Reform advocates recommend several measures, including

• Public and stakeholder consultations for hydrocarbon or energy sector reform (Commander Reference Commander2012);

• Clear communication of the nature and benefits of the subsidy removal (Jakob et al. Reference Jakob, Chen and Fuss2015);

• Substituting targeted support to the poor, including direct and indirect transfers (AlShehabi Reference AlShehabi2012; Yates Reference Yates2014);

• Steps to transparently channel savings into improved infrastructure, health and education (Plante Reference Plante2014; Siddig et al. Reference Siddig, Aguiar and Grethe2014; Jiang et al. Reference Jiang, Ouyang and Huang2015); and

• Institutional reforms in the hydrocarbons sector to remove political influence over energy pricing (Gangopadhyaya et al. Reference Gangopadhyaya, Ramaswamia and Wadhwaa2005).

Successful reform, however, often depends on national contexts, including the administrative capacity to channel savings towards targeted social assistance, the availability of timely and accurate economic data on the cost of the subsidy and potential savings (IMF 2013), the power of an antireform lobby to block or hinder reform, the availability or attractiveness of substitutes for the subsidy, the level of trust and buy-in that the government has from the population to transfer savings to more efficient social programmes (Vagliasindi Reference Vagliasindi2013), the force of external macroeconomic pressures to reduce government disposable income and the health of the economy and its ability to sustain subsidies. In developing states, contexts are often less favourable, and reform may pose administrative burdens for poorer governments.

16.4.1 Actors

Following the framework just outlined, this section identifies the main actors involved in the subsidy reform debate in Trinidad and Tobago and their positions on the issue. These actors include the International Monetary Fund (IMF) (IMF 2016), the Energy Chamber – the energy and hydrocarbon industry’s trade association, which is particularly vocal on consumer subsidies (Long Reference Long2013), the environmental lobby, including academics and economists that comment on government policy, government agencies more directly involved in climate policymaking, such as the Ministry of Planning and Development and the Ministry of the Environment and Water Resources (Solaun et al. Reference Solaun, Gómez and Larrea2015; GORTT 2017a) and companies from the other member states of the Caribbean Community Common Market (Khelawan Reference Khelawan2013; Collister Reference Collister2016).

Other actors have, at times, been opposed to the removal of the transport subsidy, including some labour unions such as the National Workers Union and the Federation of Independent Trade Unions and Non-Governmental Organisations (C News 2016; NWU 2016), minibus associations (Phillip Reference Phillip2016) and groups representing low-income communities (Sturge Reference Sturge2016; Taitt Reference Taitt2016). The manufacturing sector comprises about 400 companies and contributes to approximately 8 per cent of the country’s gross domestic product (TTMA 2017). Small retail businesses and manufacturers and sub-national chambers of commerce – which are less able to absorb higher transport costs – argue that removing the subsidy will mean higher prices for consumers and inflationary pressure on the economy (Ali Reference Ali2016). Larger manufacturers have more recently begun to argue for removal of the subsidy, citing its inefficiency, negative environmental consequences and unsustainability (referring to the drop in petroleum prices and consequent drop in government revenue from the hydrocarbons sector; Harrinanan Reference Harrinanan2015). Figure 16.1 presents the main actors in the subsidy removal debate in Trinidad and Tobago.

Figure 16.1 Actors in fuel subsidy reform in Trinidad and Tobago.

16.4.2 Frames

In Trinidad and Tobago, economic prudence and environmental stewardship frames are used to object to the transport and electricity subsidies. Actors in favour of those subsidies use climate and energy redistributive justice frames. Those in favour of the producer subsidy (the hydrocarbons sector) also use economic prudence frames. However, there is very little evidence of public debate on producer subsidies. Low-income groups focused more on the maintenance of social transfers related to health, education and employment, which are also being contested as inefficient and in need of reduction by the IMF, the larger manufacturers and the government.

The economic prudence frame dominates the fuel subsidy debate. Estimates in parliamentary debates put subsidies for fuel, unemployment relief, electricity and water at 50 per cent of national expenditure (Imbert Reference Imbert2016c). The fuel subsidy may have continued as long as the government was able to finance it, but the global financial crisis of 2007–8 gave greater prominence to economic prudence frames. In a 2016 budget debate, the Minister of Finance noted that the government is taking steps to reduce expenditure on other social programmes, including spending on tertiary education (the Government Assistance for Tuition Expenses Programme) and on job creation (the Community-Based Environmental Protection and Enhancement Programme and the Unemployment Relief Programme; Imbert, Reference Imbert2016b, 16). Past IMF Article IV consultations – in which the IMF’s staff study the country’s economic and fiscal policy and trajectory – repeatedly called for the removal of the transport subsidy to improve the fiscal climate and to increase savings to the country’s sovereign wealth fund, which was created to encourage state savings from petroleum revenues (IMF 2016). The political response has changed over the years from being wary of the IMF’s intrusion into domestic policy (Trinidad Guardian 2013) to a commitment to a phased removal of the transport subsidy. Subsidy removal will be coupled with a new pricing mechanism for transport fuels to reduce transport costs for low-income groups (Imbert Reference Imbert2016b).

National debates have very recently begun to introduce data on the subsidy’s cost that confirm its inefficient design (GORTT 2012a) and the opportunity costs to taxpayers (Scobie Reference Scobie2017). However, the lack of data on the inefficiencies gave the climate and energy redistributive justice frames greater appeal over the years. The country has a small carbon footprint and relies on its petrochemical sector; thus, some argue that fuel, electricity and transport prices should be very affordable to the poor, to local businesses and manufacturers (Trinidad Guardian 2011; Newsday 2016) and to the population in general (Thomas Reference Thomas2003; NWU 2016). Successive governments have deferred subsidy reform in part because of the prominence given to these redistributive justice frames in public opinion.

Actors who support keeping the transport subsidy have used energy redistributive justice and environmental stewardship frames. Private minibus associations – the main source of public transport – objected to early attempts to remove the fuel transport subsidy because removal would reduce their small profit margins. They argued that such a move would force them to increase fares, which would hurt the low-income groups that depend upon this public transport. In 2003, for example, in response to proposals to reduce the transport subsidy, two minibus associations covering important parts of the minibus network threatened to increase transit fares or refuse to offer their services (Thomas Reference Thomas2003). Labour unions representing low-wage earners have traditionally been hostile to the government’s reform policy, which in their view includes austerity measures that take national wealth away from the poor. The National Workers Union, for example, argued that ‘the government in an effort to keep us away from an IMF standby programme is implementing all the measures the IMF would have imposed. An IMF programme is being implemented even though no loans have been made by the IMF’ (NWU 2016). It also issued a statement in 2016 objecting to fuel subsidy reform, which it views as part of a larger move by the government to reduce pro-poor programmes, such as the ‘extending of [a value-added tax] on thousands of items, the increases in fuel prices, the job losses in the public sector, the reduction of social welfare programmes and the speeding up of divestment/privatisation of state enterprises’ (NWU 2016). Small businesses (mainly retailers) benefit from savings in transport and electricity costs.

On the other side of the debate, companies from other Caribbean states – as well as the regional airline Leeward Islands Air Transport (LIAT, which is not based in Trinidad and Tobago) – have been critical of the unfair advantage that the transport and electricity subsidies have given to companies from Trinidad and Tobago and to the Trinidad and Tobago airline (Caribbean Airways) on the regional common market (Collister Reference Collister2016). Opposition to subsidies from the regional business community has had little resonance in parliamentary debates and on reform policy (Scobie Reference Scobie2017).

The economic prudence frame that holds that the electricity subsidy creates an artificial sense of security and inefficiencies in production has traditionally had less resonance. Unlike transport fuels, electricity prices have not been adjusted since 2009, and the electricity subsidy received less attention in public debates. Environmental stewardship and economic prudence, however, are used in the literature around subsidy reform for transport fuels and electricity. The government’s carbon emissions reduction strategy proposed introducing renewables to reduce dependence on natural gas for electricity generation, but uptake has been slow because the fuel subsidy makes traditional electricity sources more economical (Humpert and Espinosa Reference Humpert and Espinosa2016: 11). Small businesses and manufacturers used climate and energy redistributive justice frames to argue that the electricity subsidy supports the local small business sector, given electricity generation’s small carbon footprint and the economic challenges and lack of economies of scale faced by small island developing state exporters. Local small businesses need government assistance to be competitive in an increasingly globalised world, to provide local jobs, to help the country’s diversification away from the dwindling hydrocarbons sector and to contribute to social and economic development.

The producer subsidy is firmly entrenched, and there is little national debate on its reform – its maintenance is part of the economic prudence frame employed by the hydrocarbon companies. This demonstrates that frames are used differently by different actors in different contexts. Economic prudence frames employed in the context of producer subsidies suggest that the country should provide incentives to industry to boost output and government revenue (IMF 2016: 7). The Energy Chamber supported the removal of the transport subsidy but was silent on production subsidy reform or removal. Generally, these transfers to the industry are not framed as subsidies but rather as incentives needed to keep the hydrocarbons sector and exports as near to current levels as possible. The hydrocarbon companies argue for a fiscal regime that would reduce exploration risk and encourage foreign direct investment; producer subsidies thus should remain, in their view, especially in the context of a hydrocarbon-dependent economy in an epoch of economic downturn. Trinidad and Tobago has over 40 active production-sharing contracts and joint-venture partnerships with several energy companies, including Petro-Canada, BHP Petroleum, BG and many others (Petrotrin 2015; Ministry of Energy and Energy Affairs 2017). Large multinational and local energy actors are now negotiating production-sharing contracts with attractive investment terms for riskier investments in new oil fields (Energy Chamber 2017). When the state-owned oil company – the Petroleum Company of Trinidad and Tobago Limited (Petrotrin) – released a call for expressions of interest in March 2017 to assist with enhanced oil and gas recovery, it received responses from 29 firms in China, Canada, the United Kingdom, the United States and Trinidad and Tobago (Energy Chamber 2017).

Voices against the petroleum subsidy have been negligible in comparison, with one Member of Parliament going on record to complain that the subsidy was unfair to the state. The energy industry, he argued, generated as much as TTD 150 billion but ‘the State was only receiving [TTD] 18 to [TTD] 19 billion in revenue, something was wrong with the system because somebody else (not the State) was getting [TTD] 132 billion’ (Small Reference Small2016: 30; Taitt Reference Taitt2016).

Climate justice and environmental stewardship frames have been used by the government and are embedded in the country’s low-carbon development policy. The environmental stewardship–related goal is to move towards a low-carbon development pathway by removing dependence on the hydrocarbons sector. Restructuring fuel subsidies (Solaun et al. Reference Solaun, Gómez and Larrea2015) is part of the government’s 2011 National Climate Change Policy, Low Carbon Development Plan and Carbon Reduction Strategy (GORTT 2012b). Resource and capacity constraints hinder the implementation of several climate policy initiatives in small island developing states (Scobie Reference Scobie2016). This is true for Trinidad and Tobago, which is struggling with the national Carbon Reduction Strategy target to reduce emissions from the power, industrial and transport sectors by 15 per cent by 2040 compared to 2000 levels – targets also included in the country’s nationally determined contribution submitted under the Paris Agreement (GORTT 2015). A recent report on renewables in Trinidad and Tobago noted that to achieve the stewardship goal, it needed to better incentivise the use of wind, solar and wave energy (Solaun et al. Reference Solaun, Gómez and Larrea2015). Table 16.2 summarises how the frames just discussed have been used by groups of actors to support positions on the reform/removal debate in Trinidad and Tobago.

16.4.3 Contexts

While some actors have become more vocal in the use of economic prudence and environmental stewardship frames to advocate for subsidy removal – and although pro-subsidy advocates who appeal to climate and energy justice frames concede that fuel subsidies are not the most efficient form of pro-poor government spending – it does not follow that reform will be the next step (Scobie Reference Scobie2017; see also Chapter 6). Several of the contextual factors identified in the literature have made reforms more challenging and have favoured subsidy lock-in, such as the unavailability of timely and accurate economic data on the cost of the producer and consumer subsidies and potential savings, the power of the antireform lobby to influence government policy, the unavailability of appropriate substitutes for the subsidy and the low level of trust and buy-in that the government has had from the population to transfer savings to more efficient social programmes (Scobie Reference Scobie2017). However, other contextual factors have favoured the removal of the transport subsidy. Notably, external macroeconomic pressures (the global financial crisis of 2007 and the subsequent fall in petroleum prices) increased pressure to reduce inefficient government spending. Moreover, the dependence on the hydrocarbon sector for national income and the resulting falling government revenue reduced the state’s ability to sustain subsidies (IMF 2016).

The information deficit on subsidy costs can be seen as another contextual factor influencing the public debate. It reduced the persuasive power of economic prudence frames to lower-income groups and made energy redistributive justice arguments more appealing. Two recent developments may pave the way for a greater understanding of the true costs of the subsidy and may improve transparency. The first is a National Tripartite Advisory Council, created in March 2016 to improve transparency and promote regular consultation between the private sector, labour groups and the government. The second is the creation of an autonomous National Statistical Institute to reduce the backlogs in the state-owned Central Statistical Office. Both bodies have not yet addressed the fuel subsidy, but they have the potential to contribute to improved data availability for policymaking.

One of the elements of subsidy reform suggested in the literature is the substitution of inefficient fuel subsidies with targeted pro-poor transfers (AlShehabi Reference AlShehabi2012). In the Trinidad and Tobago context, this raises two problems. First, there is already a generous and comprehensive set of social programmes (Imbert Reference Imbert2016b: 32); the social safety net includes conditional cash-transfer programmes, housing-assistance programmes, infrastructure projects in needy communities and a suite of social services in the areas of health, alimentation, education, employment and sanitation (Imbert Reference Imbert2016b). Second, the system of transfers has been heavily criticised for being inefficient, with the employment programmes distorting and undermining the local labour market (IMF 2016) and programmes being subject to fraud and corruption (Imbert Reference Imbert2016c: 14). While it is true that subsidy removal savings may be redirected to improve the quality and delivery of existing social relief programmes, this is more difficult to measure, justify and support given the existing inefficiencies in public administration and the lack of public trust in the way public funds are administered in social programmes.