Tuesday, January 27, 2015

The mystery of a sudden rise in LPG connections

Almost 5.2 crore connections were added after Aadhaar was linked to LPG purchase for getting Direct Benefits Transfer. The newly added accounts means more than a third, or Rs15,725 crore, of subsidy at 12 cylinders per consumer per year

For the last several years, domestic consumers of liquefied petroleum gas (LPG) have been put on gas with repeated changes in the delivery process. The latest is named PAHAL (for Pratyaksh Hastantarit Laabh) and was earlier also known as direct benefit transfer (DBT). Most LPG consumers have lost sleep over the heat each change has generated.
Direct Benefit Transfer or DBT is an initiative to replace subsidised goods or services with electronic transfers of subsidy amounts to beneficiary bank accounts. Under the DBT-for-LPG subsidies (DBTL), households are required to place an order of LPG cylinder from their LPG distributor, pay the full (unsubsidized) market price for the cylinder in cash on delivery, and then receive a payment equivalent to the current subsidy amount via electronic transfer to a bank account registered with their gas distributor. 
Why should the existing process be changed in favour of the DBT?
According to the Ministry of Petroleum and Natural Gas, the scheme was created in order to remove incentive for diversion of domestic cylinders for commercial use, protect entitlement and ensure subsidy to the consumer, improve the availability/delivery of LPG cylinders for genuine users and to weed out fake/duplicate connections.

The business process

1 Consumer Books the Cylinder
Gas Refill booking XXXXXX for Con XXXXXX Booking Cleared till 01 Dec.14 at ABC AGENCIES. Ask deliveryman to weigh cylinder before delivery
2 Consumer intimated of Cash Memo
Gas Booking No XXXXXX subsidized Cash Memo XXXXXX; Dt 06.12.14 Rs.450,Refill will be delivered shortly. Ask deliveryman to weigh cylinder before delivery.
3 Consumer intimated of Delivery
Gas refill delivered on 06.12.14 vide Cash Memo no.XXXXXX.If not received, provide your feedback on XXXXXXXXXX. Use of smaller Burner Saves Gas.
SMS messages received by domestic customers at each step of the current business process
(Dates used for representation only)
Pre-DBT, the domestic consumers were required to book their refills with oil marketing companies (OMCs). The OMC would generate a Cash Memo and the Distributor would then deliver the cylinder. The OMC would ask the customer to report if the cylinder was not delivered. 
If the customer was within the limit of 12 subsidised cylinders a year, the cash memo was at a subsidised rate; else it was at the market rate.
If the consumers registered with the distributors were all genuine, this scheme provided little opportunity to distributors to divert cylinders without collusion from consumers who did not consume their quota of 12 subsidised cylinders. However, consumers who were not genuine could enjoy the benefit of subsidised cylinders and any supply of cylinders to them was in effect a diversion of subsidised cylinders to those who did not qualify for them.

The re-engineered process post DBT

Post DBT the domestic consumers are still required to book their refills with the OMCs. The OMCs are still required to generate a cash memo and the distributor is still required to subsequently deliver the cylinder. The OMC is still required to ask the customer to report if the cylinder was not delivered.
The cash memo, however, is now to be at the market price. The OMC is now required, each day, to generate a file based on the refill orders delivered and send it to a “Sponsor Bank” (currently State Bank of India-SBI) for transfer of subsidy amounts to eligible consumers. Consumers, who are Cash Transfer Compliant customers, or those who have a bank account linked to their LPG consumer number, will now receive subsidy into the bank account, they linked with their consumer number.
Does the reengineered process post DBT meet the objectives the government set to fulfil?

Diversion of domestic cylinders for commercial use

This change in the process of providing the consumer subsidy does not alter the ability to prevent diversion. If distributors were diverting cylinders in collusion with consumers who did not consume their quota, they can continue to do so. If non-genuine customers were claiming subsidised cylinders, nothing in the reengineered process has altered the ability to recognise genuine consumers from non-genuine. The non-genuine customers can, therefore still continue to consume subsidised domestic cylinders, thus diverting them from genuine consumers.
The reengineered process, thus, does not prevent the diversion of domestic cylinders for commercial use as desired by the scheme.
Protect entitlement and ensure subsidy to the consumer
Almost 96% of those surveyed in a pilot project by the International Institute for Sustainable Development (IISD) found the DBT required too much paperwork, requests from multiple authorities for a range of documents including electricity bills, ration cards, bank passbooks and identification cards. This represents a non-trivial cost to access the reengineered process. 
It is therefore evident that the reengineered process actually makes it more burdensome for the consumers and in particular the poor and marginalised, to claim their entitlements. It does not protect the entitlement without having to pay a significant cost. 
The paperwork, requests from multiple authorities for a range of documents are barriers easily overcome by those in organised claim of cylinders beyond their own entitlements. Therefore, by increasing the barrier for genuine consumers, the reengineered process actually ensures the subsidy for those who may be fake or duplicate consumers. In fact, with the process it may be possible to draw subsidy without needing to consume LPG (and pay market prices) as long as the file of orders filled sent to the sponsor bank can include desired consumer numbers.
Furthermore, consumers now have to pay the full market price upfront. Despite the claim that there will be an advance after joining the scheme, participants have reported varying experiences, ranging from excess receipts, no receipts, to under receipts of the advance and subsidy amounts. DBT, therefore, does not ensure subsidy.
To handle the new process more government and non-government agencies are involved. To deal with issues involving the delivery of LPG and DBT more government is required, not less. It is clear that the DBT ends up increasing government, rather than minimising it, as the Prime Minister has repeatedly avowed to do.

Improvement of the availability/delivery of LPG cylinders for genuine users 

The IISD study also found that households reported a shift in expenditure and an increase in short-term household borrowing—especially by poorer households— in order to facilitate purchase of LPG cylinders at the new decontrolled price. There were also attempts to limit the consumption of LPG, including substituting it with firewood or other biomass for some heating and cooking tasks. This means the reengineered process will definitely improve the availability of LPG, but by forcing the poor or marginalised to reduce their uptake of cylinders or by obliging those who can no longer access the subsided cylinders to opt out.
Needless to say that it is actually any fake or duplicate consumers who will benefit from any improvement of availability/ delivery of LPG cylinders from the reengineered process.

Weed out fake/duplicate connections

To participate in DBT, the reengineered process requires the consumer provide their Aadhaar number using “Form 2” and to Bank details using “Form 1” to the LPG distributor. If the LPG consumer does not have an Aadhaar number, they can give their Bank details in “Form 4” the gas distributor or their LPG ID using “Form 3” to the bank. 
The provision of this information does not identify a customer as fake or duplicate. The absence of this information does not mean a customer is fake or duplicate either. However, it is trivial for fake or duplicate consumers to provide any of this information. Thus, this linkage with the bank account does not serve to weed out fake or duplicate connections. Furthermore, the Reserve Bank of India (RBI) notification of 28 September 2011 made it possible to open bank accounts without verification. Such accounts can easily be opened by anyone, and in particular by entities that have been enrolment agencies for Aadhaar (since they are in possession of the Aadhaar number, demographic, and biometric details of those real or non-existent persons they have enrolled) as well as anyone with micro ATMs.
It is therefore evident that despite citing it as an objective, there is no step that can weed out fake or duplicates envisaged in the DBT scheme. The DBT obviously fails to protect public interest and deliver good governance.

The reality of connections

LPG consumers increased to 1,387 lakhs in 2011-12 from 845 lakhs in 2004-05 or an average annual increase of about 68 lakh consumers. Between June 2012 and December 2013, over 437.58 lakh new connections were added and 6.51 lakh multiple connections were surrendered (Lok Sabha Starred question No. 401 Dated 21.02.2014). This is 6.4 times the average annual increase of consumers. Between April and November 2014, there were 94.27 lakh new connections and 58.44 lakh Double Bottle Cylinders (DBCs).
This indicates that almost 5.2 crore connections were added after introduction of Aadhaar linkage to LPG consumers and DBT. The newly added accounts, with current practice of calculating subsidy, amount to more than a third, or Rs15,725 crore, of subsidy at 12 cylinders per consumer per year.
It is a well accepted fact that the Aadhaar number is merely a number assigned to unverified and unaudited data submitted by private parties (including banks and LPG distributors) who were paid per record. According to the UIDAI’s own affidavit filed in the Supreme Court, “The implementation of the UID Scheme which inter alia, include generating and assigning UID numbers to residents, defining mechanisms and processes for interlinking UID numbers with partner databases, framing policies and administrative procedures relating to update mechanisms and maintenance of UID database are continuous process involving interaction with agencies, public as well as private and also individuals.” 
Nowhere does this involve certification of identity, address or even existence of individuals.
This gives rise to the possibility that the new connections and linked bank accounts actually include a huge number of fake and duplicate connections. If anything, it is these new accounts that need verification and audit before any reengineered process is effected. 
Furthermore, the possibility of diverting subsidies using the Aadhaar Based Payment Systems (ABPS) for money transfers is real. Even if the government now allows regular bank accounts for making money transfers under DBT, it will still be using the ABPS and this can well allow subsidies to be diverted to fake consumers in bulk. DBT thus appears to serve no public interest but rather stands to benefit private interests who may be involved in organised diversion of subsidy.

The subsidy

How much money is involved? 
The total subsidy budget has risen to Rs46,000 crore for 2013-14 from Rs3,500 crore in 2004-05. This is a 13-fold increase in subsidy. By comparison, the consumers have increased from 845 lakhs to 1,600 lakhs or 1.9 fold in the same period.
How is the subsidy calculated? Public sector OMCs participating in the PDS Kerosene and Domestic LPG Subsidy Scheme, 2002, get to claim a subsidy from the government by submitting data of the confirmed sales. They are expected to pass the subsidy on to the customers.
As per this Scheme, the subsidy amount given to OMCs was to be equal to the difference between the cost price and the invoice price per selling unit (excluding state surcharge, excise duty, sales tax, local levies and delivery charges) computed ex-bottling plant for domestic LPG. The cost price was to be determined on import parity basis as specified in the Scheme and any changes in the cost were to be passed on to the consumer by making changes in the invoice price, which was to be revised periodically by the OMCs.
By calculations implied by this Scheme, it is apparent that only Rs22.58 per cylinder is currently available as subsidy. Additional amounts provided as subsidy beyond this are obviously added to the subsidy claim in deference to government directions that are not in the public domain. 
By allowing any such increase in subsidy by orders of magnitude, contrary to that allowed by the Scheme, has increased the subsidy that is available to divert from genuine consumers.
It is evident that the reengineered process post DBT does not meet any of the objectives the government set to fulfil. What then are the alternatives open to a government that desired minimum government and good governance?
Alternate processes
The OMCs could require consumers to enroll with them, and not with distributors, and have distributors to verify and the government to authenticate such domestic consumers. This would make the process of fake registrations significantly difficult. This one time process would help clean up the consumer database.
Alternately, to ensure that no one is denied subsidised LPG, the government may require that each distributor delivering any entitlement or right will create an ID of the family benefiting from the subsidised cylinder. Such a record would be maintained to identify the beneficiary for future transactions for the delivery of LPG without any hassles as well as to allow any audit of the delivery of LPG. All those having taken benefit would be listed on a public website,, for government authentication and public audit. Each distributor’s list of beneficiaries would be visible on public maps.
Yet another alternate process would be to move subsidy to a tax rebate. It makes little sense to collect the money and then spend it again on a leaky system to give it back. Those who do not want the subsidy will not take the benefit of a tax rebate. This eliminates any cash transfers and registration of fake/ duplicate beneficiaries by different agencies involved in administering subsidies. 
Those who do not file returns could be given a subsidy account linked to their NPR/BPL card by the Finance Ministry to allow them to receive all the subsidies they are eligible for. All such account holders would need physical verification by Branch Managers or Post Masters (if these were postal bank accounts). These accounts would not allow any cash transactions and would only allow claiming the subsidised service at the subsidised price. The Pradhan Mantri Jan Dhan Yojana should actually be this, not the creation of non-operative bank accounts. These beneficiaries too would be listed on for a public audit.
These alternate processes will allow the government to provide good governance with minimum government and thus protect public interest. Is the Prime Minister listening?

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Saturday, January 10, 2015

Net neutrality makes internet valuable

Net neutrality is being threatened in India by mobile phone companies

Your telephone is valuable because it is phone neutral
Won't it be distasteful if your phone company refused to connect you to your bank if your bank had not paid up a special subscription to allow you and its other customers to talk to it? What if your phone company insisted that you talk only to the bank that is their partner company or has paid them for customers to call them? What if your phone company insisted that it was paid a percentage of the transactions you made over your phone, just as your credit card company does? Or it simply decided to charge you different rates for different calls based on whom you called; or whether it was casual, commercial, to call centres or an automated recording?
Absurd, you might say. I would not subscribe to a telephone company that does this. That is just because you are used to the idea of phone neutrality.
As long as your telephone company regards you as their customer it will make no sense to them to indulge in this behaviour. By indulging in such tactics they would simply not fulfil your need to access your bank, or for that matter anyone. It would be an act of charity, or complete incomprehension, on the part of any customers to subscribe to such services.
Any violation of phone neutrality simply means giving up on us as customers, either through ignorance or through intent. No phone company has provided phone neutrality out of charity to its customers; they simply serviced our need because while doing so they could continue to make profits from satisfying our needs. In fact, phones would not have penetrated the market as fast and as much had phone neutrality not existed.
Your Internet is valuable because it is net neutral
Won't it be distasteful if you are prevented access to a whole lot of websites if those who host the websites had not paid your Internet Service Provider to carry their content? Or if your ISP insisted you use their search engine or one their sister company owns, because Google or Yahoo or Duck Duck Go have not paid them for traffic? Or they insisted that for all bills you had paid online, you needed to provide them with a percentage, just as your credit card company does? Or it decides to charge you different rates for data, audio, video, geographical information, encrypted traffic or commercial transactions?
Now, that is exactly what is at stake when, right at our doorstep in India, net neutrality is threatened by mobile phone companies and global partnerships seeking to make the Internet accessible to everyone. In the case of the former, the argument is loss of revenue from telephony and in the latter the argument is cheap Internet for all. Did we ban cell-phones because they ate landline revenues? Also, is it not true that many of the mobile players complaining loss of revenue are actually making up by charging for the Internet? Would you like a cheap phone connection that connects you to a bank you do not wish to bank with? Or one that connects you to telemarketers but not your friends and family?
The ISPs that are promoting to end net neutrality are giving up on us consumers of the Internet as customers. They no longer wish to serve our need to access any website, consume any content or transact on any website. They suddenly see the website hosts, content hosts and e-commerce and e-government hosts as their customers, who must also pay to allow consumers access their websites.
Clearly, the ISPs pushing to end net neutrality do not understand its business value.
The long tail of net neutrality
One of the most interesting fallouts of net neutrality from an economic standpoint is its ability to open a huge market of niche services and products that have very low demand. This has been recognised as the long tail and as being larger than the market of a few services or products that are in high demand. A homestay in Gadchiroli? Amateur music from a remote and hardly known artist? An exotic fruit from Meghalaya? Home-made pickle from a family outlet? A fruit-picking festival in an unknown farm? Including this long tail in the economy can potentially double India's GDP. The net neutral Internet provides a level field to those who offer such niche services or products.
Rural India, when connected, would really have many niche services and products on offer that have low demand. The net neutral web opens up possibilities for millions.
An Internet without net neutrality will make niche markets unviable and restrict the economic growth to the growth of the traditional few services and products in high demand.
Phone penetration
Telephones spread in India not because banks wanted to reach out to their customers. They spread because customers wanted to reach banks, retailers, friends, relatives and participate in a remote conversation.
If somewhere in the early years of telephony, phone neutrality had been compromised to allow telephone companies to earn more revenues from banks, retailers and other commercial interests in telemarketing, telephones would not have penetrated to even half as many people as they have. If phone neutrality had been done away to make cheap telemarketing devices be available to the masses they would have lost their value and significance long ago. Through wisdom or chance successive governments have preserved the value of phone neutrality.
Internet penetration
As the government toys with an ambition to reach Internet to the masses, there could be one best way to kill the plan. End net neutrality. Without net neutrality the value of Internet collapses rapidly to negative. The Internet is valuable not because your bank can reach you but because you can choose which bank to access.
The Internet serves the need of providing a level-playing-field in a world that is full of unequal opportunity. Without net neutrality there is no level playing field. While a Netflix can pay an ISP to stream its videos, the amateur film-maker from Kankona cannot. While the Amazons and Flickrs can pay the ISP from their e-commerce, the garage start-up from Dindori or Cherrapunji cannot.
Without its ability to provide, protect and nourish the level-playing field, the Internet would surely lose its value. As long as the people are customers of the Internet it would be a mistake to forget this need that the Internet serves.
A government strategy to reach Internet to the masses would clearly need to focus on protecting net neutrality. For the masses, Internet access will continue to mean mobile Internet. For the privileged, it will be Internet on the move. Without net neutrality, neither have any value. As was done by the Dutch, post offices offer a terrific way to provide Internet access to those who are occasional consumers seeking equal opportunity to connect to a level-playing field.
Technologies of broadband over power lines (BPL) have shown promise in the US, Europe and even South-Asian countries to reach Internet to every home. Industry experts have highlighted that BPL holds great promise as a ubiquitous broadband solution that would offer a viable alternative to cable, digital subscriber line, fibre, and wireless broadband solutions.
Powerline Internet highways to rural India ensure that it is not just Internet connectivity but reliable power is available to every family across India. If it is government power
lines rather than the fibre of ISPs that carry broadband, net neutrality can be protected.
Irrespective of the broadband technologies deployed the protection of net neutrality will be the deciding factor of the expansion and value of an information superhighway.

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