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�Social Safety Nets to Support Energy Subsidy Reform in Libya: Lessons from International Experience� ��

Amr Moubarak, Social Protection Economist�

Philippe Auffret, Sr. Economist �

Social Protection and Labor Global Practice

March 30 -31, 2017

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Outline

State of Subsidies and Social Safety Nets in Libya

The Current Fiscal Deficit : Unsustainable Subsidies
Current Challenges for Social Protection

International Experiences: Social Safety Nets as a key ingredient for subsidy reform

Using fiscal space to support the expansion of social safety nets: common approaches to compensation in Jordan, Iran, Indonesia

Options for Building Social Safety Nets in the Libyan Context

Social Assistance (Cash Compensation and Regular Assistance to the Poor)
Support to community-driven development and productive inclusion

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State of Subsidies and Social Safety Nets in Libya

Section I

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Subsidies in Libya are Unsustainable

Oil exports contribute to the equivalent of 91% of the state budget and are the main source of foreign currency. More than 97% of total Libyan export are oil exports.
Total volume of subsidies during the period 2012 - 2015 is about 53.7 billion dinars of which a total 39.4 billion dinars are for fuel (73.4%)
With a budget deficit of 60-70% of GDP over the last 3 years, Libya may have the highest fiscal deficit in the world. This deficit is financed from an oil fund which is expected to be depleted within two years if the fiscal deficit is not addressed.
It should be noted that a large proportion of fuel is being smuggled into neighboring countries (causing waste of public money, security risk). The National Oil Corporation data indicate that the imported quantities of gasoline rose from 4.5 billion liters in 2012 to 5.1 billion liters in 2015, with a 13% increase.

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Fuel Subsidies Dominate Subsidy Expenditures – and it appears to only increase

Total subsidies amount to Libyan Dinar (LYD) 6.32 billion in 2016 (about US$4.5 billion) (LYD4.2 billion for hydrocarbon; LYD702 billion for electricity; LYD702 billion for pharmaceuticals and LYD1,004 billion for others including sewage (LYD 230 billion) and subsidies to Beida (LYD180 billion).

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Subsidy Category	2016 (LYD)	2017 (est) (LYD)	% of total�in 2017
Pharmaceuticals	416	700	9.8%
Hydrocarbon	4,200	4,800	67.4%
Electricity	702	780	11.0%
Other	1,004	840	11.8%
Total	6,322	7,120
Total Budget		3700

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Simulations of energy subsidy reforms

The direct cost of a complete elimination of subsidies to households is estimated at 2.5 billion LYD, equivalent to the total amount of direct subsidies received by household

Households would lose one fifth (20%) of their purchasing power should energy subsidies be eliminated, with the rich losing more in absolute terms but the poor losing more as a share of their income

A 30 percent reduction in subsidies on each product would cost households 0.75 billion LYD

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Incidence and Impact Analysis for Energy Subsidies

Energy subsidies in Libya are regressive, or pro-rich

It is more clearly seen when looking at the distributional analysis on a per-capita basis

The regressive feature of energy subsidies is less pronounced for the cases of kerosene and diesel

0

100

200

300

400

The total benefits per capita

.01

.198

.386

.574

.762

.95

Household Percentiles

Gasoline

Diesel

Electricity

GAZ_GPL

Kerosene

Per Capita Benefits Accruing From Subsidies on Energy Products (LYD)

Bank staff calculation: Verme et al, 20112

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Simulations of energy subsidy reforms

Energy subsidy reform could have a substantial impact on poverty

Impact of Energy Subsidy Reform on Poverty

Bank staff calculation: Verme et al, 20112

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The main results of the two scenarios of energy subsidy reform

Bank staff calculation: Verme et al, 20112

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Subsidy Reform and Social Protection

Given the fiscal challenges facing Libya, expansion or reform of social protection interventions will accompany subsidy reform
Currently, the Government is evaluating plans to implement a 3-year reform to progressively increase oil prices by 50%, 80% and 100% per annum.

Households are expected to be compensated and all receive LYD130 (about US$100) per month.
compensation scheme may be part of a larger package of measures including exchange rate adjustments (devaluation of the Dinar) and some fiscal measures.

In addition to subsidies, there is a pressure to transfer funds to citizens which includes: (i) transfers to former combatants and soldiers; (ii) additional civil servants added to payroll

This results in: (i) increases the wage bill; and (ii) undermines the administration of the “regular” civil service

Yet, the early studies show that the public is in favor of subsidy reform (70% of the respondents were in favor of a policy that would eliminate subsidies and replace them with cash transfers)

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Social Protection

Current state of Social Protection Several agencies and social assistance schemes were established prior to the revolution. Given the current political and security challenges, it is less clear whether these programs are fully operational in all regions in Libya.
Programs appear to have overlapping mandates and design features that have not adapted to meet the current fragility and social protection challenges posed by the increasing violence in country
Monitoring and evaluation of programs efficiency is unclear; no feedback loops to Tripoli and ministry or social fund level
Relying on previous targeting approaches used for programs will be less feasible given changing circumstances of households
There is no clear community-led approaches to provision of social protection

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International Experiences: Social Safety Nets as a key ingredient in subsidy reform �

Case Studies from: Iran, Jordan and Indonesia

Section II

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Options for compensatory schemes

Set up a new safety net cash transfer program

Jordan, Indonesia, Iran, Saudi Arabia

Build on an existing safety net to make it more flexible, adequate, accessible or consolidate programs

Ukraine new HH benefit, Dominican Rep. CCT, Romania reformed GMI, Armenia Family Poverty Benefit, Brazil Auxilio Gas/ Bolsa Familia

Move from the generalized subsidies to targeted vouchers, integrating it with SSNs, using technological innovations (registries and smart cards)

India LPG compensation, Malaysia smart cards, Egypt ration cards

Develop new measures aimed at “vulnerable”

Improved, expanded and better targeted employment (Romania) and education programs through bloc grants (Indonesia)

.

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Jordan

JORDAN successfully phased out subsidies from 5.6 percent of GDP in 2005 to complete elimination of gasoline and electricity subsidies by 2012
It introduced a mechanism to progressive align domestic prices to international prices. A wide-ranging compensation package was introduced along with the subsidy withdrawal. They included an increase in civil service wages particularly the lowest wages, one-time bonuses to government employees and pensioners with low incomes, a life-line electricity tariff structure, cash transfers to low-income households, and increased allocations to the government’s social assistance fund. �Particular care was taken to identify key stakeholders and to address their concerns.
The estimated cost of compensatory measures was substantial representing 3.5 percent of GDP at the onset.
By 2012, reduction of direct beneficiaries for the compensation decreased from 80% to 60%

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Jordan

UNIFIED NATIONAL REGISTRY (NUR) database: towards broad compensation and social safety nets.

NUR was initially set up to cover almost 80 percent of the households in the country. This allowed consolidation of data (imported off-line) from various public sources in a short time-span in 2012-2013. That system was the precurser for a more comprehensive information system of the National Unified Registry (NUR) that would allow information exchange and consolidation of data on clients of social programs in Jordan. However, due to falling international fuel prices, cash compensation scheme administered by ISTD was suspended in December of 2014. At the same time, given the delays in the institutionalization of the NUR Unit within ISTD, the implementation of the component's activities were put at halt.
Today, Jordan is look at ways to utilize the registry for expansion of NAF beneficiaries as well as introduction of the registry as a mechanisms for future compensation and for targeting and service delivery to the poor

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Iran: Innovation in Design but mixed results

Iran is another high profile example of using cash transfers as compensating tools during subsidy reform, though can be considered an example of a well-designed program being ultimately undermined by politics. Iran subsidized its fuel products for a very long time. The subsidies created large macroeconomic distortions and also smuggling of fuel products. In 2005, the government of Iran started to implement a four-pronged strategy to phase out energy subsidies involving (i) introduction of a nationwide rationing scheme, (ii) a major upgrading of public transportation, (iii) the conversion of vehicle engines from gasoline to natural gas, and (iv) a phased increase in domestic fuel prices
The design initially set up a significant portion of the resources saved under the reform program were to be transferred directly to low-income families, and for industry restructuring.

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Iran Subsidy Reform Compensation

A large cash transfers program was implemented to mitigate the impact on the population. The price of all major energy products, public transportation, water, and some food items (such as bread) increased substantially (2010).
Little savings were left: Incremental revenues estimated at US$60 billion were redistributed: US$30 billion under the form of cash to all households starting one month before the price increase (the Government decided to extend benefits to the overall population fearing backlash from the middle and upper classes who were the biggest consumers of energy), US$18 billion to enterprises to restructure and reduce energy intensity, while the remaining US$12 billion were used by the Government to pay for higher energy bills and improve energy efficiency in the public sector.
Intention was to focus such transfers on poorer households. In reality, these transfers were more universal in nature as over 80 percent of the population received the transfer. This was accompanied by an intensive programme of public communication, coupled to explicit warnings about the consequences of non-cooperation.
Cash transfers to households increased demand and particularly benefited the poor reinvigorating economic activities in small towns and villages. Early reports indicate that energy consumption may have declined by up to 20 percent.
In the 18 months following introduction of the price reforms, inflation accelerated, in part as a consequence of the way in which the reform has been carried out. Far larger than intended monthly transfers to most Iranian households, as well as cross-border smuggling of fuel, have eroded the fiscal gains.
By 2012, energy subsidies had swollen to around 17.5 percent of GDP. Despite some cleverly designed features of the reform, Iran illustrates the difficulty in staying the course.

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In December 2010, Iran became the first major energy-exporting country to substantially cut indirect subsidies. A large cash transfers program was implemented to mitigate the impact on the population. The price of all major energy products, public transportation, water, and some food items (such as bread) increased substantially. Incremental revenues estimated at US$60 billion were redistributed: US$30 billion under the form of cash to all households starting one month before the price increase (the Government decided to extend benefits to the overall population fearing backlash from the middle and upper classes who were the biggest consumers of energy), US$18 billion to enterprises to restructure and reduce energy intensity, while the remaining US$12 billion were used by the Government to pay for higher energy bills and improve energy efficiency in the public sector.
The government did not advertised a reduction of subsidies, but a mere substitution of subsidies with unconditional cash transfers. The unconditional cash transfer program that was implemented along with the price increase was instrumental to the success of the reform. Cash transfers to households increased demand and particularly benefited the poor reinvigorating economic activities in small towns and villages. Early reports indicate that energy consumption may have declined by up to 20 percent.
Intention was to focus such transfers on poorer households. In reality, these transfers were more universal in nature as over 80 percent of the population received the transfer. This was accompanied by an intensive programme of public communication, coupled to explicit warnings about the consequences of non-cooperation.
In the 18 months following introduction of the price reforms, inflation accelerated, in part as a consequence of the way in which the reform has been carried out. Far larger than intended monthly transfers to most Iranian households, as well as cross-border smuggling of fuel, have eroded the fiscal gains.
By 2012, energy subsidies had swollen to around 17.5 percent of GDP. Despite some cleverly designed features of the reform, Iran illustrates the difficulty in staying the course.

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Indonesia: timeline of subsidies reforms and compensation schemes

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During the 1980s, Indonesia was a significant oil-exporting country with a history of subsidizing domestic prices. However, the combined effect of rising domestic consumption together with falling production converted Indonesia to a net oil-importer status starting at the beginning of 2000. Attempts to reduce subsidies in 1998 and then 2003 met with such fierce public opposition that the price increases had to be rolled back. However, the rise in international oil prices in 2003 and 2004 led to a rapid increase in subsidies reaching an estimated 5 percent of GDP. Like in many other countries, the subsidies were highly regressive: high income groups benefited the most from them. As a consequence, the upper classes were the biggest opponents to a subsidy reform. Starting in 2008, the government took progressive steps to reduce fuel subsidies. An initial increase in prices in mid-2008 freed-up fiscal resources amounting to about 0.6 percent of GDP, while reducing smuggling incentives. A quarter of the savings was used to finance monthly cash transfers to 19 million poor households through December 2008, another quarter financed block grants to schools, basic health care and health insurance for the poor and expanded the rice distribution program. The remaining half was not spent and helped reduce the fiscal deficit. The government also introduced several tax incentives and trade measures aimed at limiting food price increases, such as the reduction of import duties on rice, wheat, and soybeans, as well as VAT exemptions. Some key factors contributed to the reform program’s success. First, it was led by a new government that was seen as strong and credible. Second, the government outreach strategy to explain the subsidy reform and publicize the mitigating scheme muted public discontent. Third, the magnitude of the cash transfer was such that it more than compensate targeted poor households for the increase in fuel prices. However, the rapid implementation of the cash transfer program led to some difficulties initially.

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How Indonesia used subsidy reforms to expand and improve SSNs

Introduced a large temporary cash transfer program (BLT/BLSM), that is switched on with every major subsidy reform, covering the poorest one-third of households.
A unified database of the poorest 40% of the population (UDB) was developed, and later updated, for this program and to target new and existing safety nets.
This database is now being used to build a dynamic registry of the poor and vulnerable for social programs
Cash payments were channeled through post offices and, starting with the 2014 subsidy reform, payments are increasingly being made digitally.
A CCT pilot program (PKH) was introduced following the first major subsidy reform in 2005, and later expanded to 3 million households and now to 6 million (the target is to reach 12 million households by 2018)
Scholarships for the poor (BMS/KIP) and health insurance for the poor (Jankesmas/KIS) were expanded and improved following subsidy reforms.
In 2013, social assistance spending (excluding health insurance for the poor but including BSLM) was only 8% of spending on energy subsidies.
Reallocated some budgetary savings to education, health, and infrastructure programs benefitting broader population.

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Key Messages: Jordan, Iran, Indonesia

Subsidizing energy has been common in many developing countries including the MENA region. It has been justified in a variety of ways including equity and poverty reduction motives. However, increasing fiscal pressures coupled with findings that it is the middle and upper classes that tend to mostly benefit from subsidies has led governments to progressively eliminate energy subsidies. The cases of Jordan, Iran and Indonesia are particularly instructive.

Country studies unequivocally show that the social impact of energy subsidy reform can be devastating for the poorer segments of the population and that it is imperative to simultaneously adopt social protection measures to mitigate the impacts of the reform on the most vulnerable groups. They show that critical elements for a successful reform are:
A thorough preparation of the reform and accompanying measures including an analysis of its impact on the overall population;
building the institutional capacity to effectively implement the reforms and mitigating measures; and
an effective communication strategy to buy-in the population. The cases of Jordan, Iran and Indonesia are particularly instructive.

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Key Considerations for Subsidy Reform and Design of Social Safety Nets in the Libyan Context

Section III

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In the case of Libya, sequencing Social Safety Nets with subsidies as mitigating measures is clear..�

.. But program targeting and design should be contextualized to current challenges.�

In Fragile and Conflict affected countries, simple SSN interventions increase the likelihood of success given changing country context and anticipated shocks at the institutional and household level
Social Assistance can go beyond compensation programs for subsidy reform to target households in regions affected by conflict and violence
Considerations should include community based targeting given lac
Strong plans are in place but implementation in changing context will be very challenging: This calls simple design and implementation approach vis-à-vis existing or future programs

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Three important steps: Careful Planning, Careful Implementation, Excellent Communication �

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Readiness of SSNs for Subsidy Reform

Identifying SSN Interventions (program selection and financing)

Benefit Incidence Analyses of Subsidy Reform and Simulating the effect of SSN expansion

Assessment of Delivery System for Rapid Expansion of SSNs�(includes payments, grievance redress, IT system)

Assessment of Institutional and Governance Aspects

Identifying Beneficiaries to Target based on Incidence analysis and available programs / country context

Strategic communication before and during subsidy reform

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1. Cash Compensation Mechanism to mitigate the impact of Subsidy reform and assist Poor and Vulnerable

Need to carefully plan the cash transfer program to compensate households for increasing domestic oil prices taking into consideration:

Results of impact assessment (direct and indirect effects of subsidy reform)
Feasibility of design : reasons for any complex design elements and feasibility of implementation
Existing programs and options ( four main options: increase benefit, increase size, alter program, create a new program)
Elements of Delivery chain
IT systems
Payment Mechanisms
Grievance and Redress

Overall political economy including non-citizen stakeholder (e.g., industries), sequencing subsidy reform, strategic communication will need to be taken into account in design and implementation of cash transfer program

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Govern

Implement

Decide

Assess

Outreach

Assessment

of needs

& conditions

Personal

Identification

Information (ID)

Grievance Redress

Program

Case Management

Service Transaction

& Payments

Socio-Economic Information

Other Information on needs & conditions

Intake &

Registration

AND Updating

Business Processes for Determining Eligibility

(Population = all clients / potential beneficiaries)

Business Processes for Program Delivery

(Population = beneficiaries)

Enrolment

Decision & Notification

Determine Benefits & Service Package

Oversight & Controls

Monitoring of Processes & Outcomes

Delivery Chain: most social programs pass through similar implementation phases or “business processes”

1. Assessing the Delivery System

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2. Community Driven Development (CDD) : Possible Approaches

Provide social and economic services to those regions most affected by the conflict -- where possibly the Govt’s structures are not operative. Algeria implemented national programs – including community-driven projects – to show unity in the mid-1990s;
Consider a short-term employment scheme to provide some revenues to those who do not have any income (such schemes were created in Algeria during the internal conflict of the 1990s to provide temporary jobs to people in socially precarious situations. Beneficiaries are also entitled to social insurance benefits).

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2. EXAMPLE: CDD in Algeria – Programme du développement communautaire

The participatory approach was to involve local communities in all phases of implementation of a community micro-project:

community development of a community investment plan consisting of a list of micro-projects Prioritized in order of importance;
selection of a micro-project to be financed by the Social Net Support Project using a participatory community method;
Design, and management of the selected micro-project

The selected micro-projects include the construction of community facilities, pre-school facilities, community development centers, school expansion and repair, road improvement, land servicing, and social services. Training and institutional support activities.

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3. Leveraging Global Trends in Safety Nets for Social Safety Nets

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Build efficient delivery systems and platforms

ID, IS, targeting, registries, payment systems
Public good value beyond SPL (connector to other sectors)

Labor intensive social safety nets (Yemen, Egypt, Ethiopia, etc)
Resilience through ex-ante crisis preparation (Ethiopia, Sahel, Indonesia)�

Safety Nets +

Human Capital Development

Catalytic role for SP/safety nets for HD investments
Strengthen access to human capital services among poor, vulnerable (ECD, HNP, Education)

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Key Lessons from International Experience

Phasing out subsidies and replacing them with direct transfers can work.
The package of measures should go beyond price/compensation logic and develop strategy to invest in modern social safety nets.
Readiness assessment to inform reform is an indispensable tool
Road ahead: modern delivery systems

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Quite wide range of targeting mechanisms: Means test, proxy-means test, categorical, geographic, sectoral, etc. Most programs don’t use a single method, but a combination of methods

Administrative capacity requirements and performance vary across targeting methods: Means test, proxy-means test perform better but also require a higher administrative capacity. During recent years proxy-means test started to be implemented successfully in lower income countries (sometimes in combination with geographic targeting

Leakages to the non-poor (errors of inclusion) can never be totally eliminated, but targeting is needed to minimize leakages and ensure that the poor are compensated for a reasonable portion of their losses.

Full coverage of the poor is difficult to achieve. Under-coverage of the poor (errors of exclusion) is likely to happen (as shown by Indonesia, Armenia, and others)

Vulnerable to low-level corruption of the administration

Household take-up depends on good public information service

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Thank you

Amr Moubarak

amoubarak@worldbank.org