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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