In Thailand, not all fuel subsidies are equalBy Bangkok Pundit Jul 17, 2014 10:00AM UTC
Then former Energy Minister Piyasvasti Amranand in The Nation in June:
“Energy prices reform must be carefully considered. The previous governments have turned energy policies into populist policies. Subsidising diesel and LPG with the Oil Fund finances does not save the country’s expenses, but raise the country’s burden. Diesel subsidies have led to a loss of over Bt100 billion in annual revenue. In three years, the amount has risen to Bt300 billion. Combined with LPG subsidies, that ran up to Bt500 billion. Some parties will need to shoulder the cost if the subsidies continue,” Piyasvasti said at a conference on “energy reform for sustainability”.
Now, Piyasvasti again in July as PTT Chairman continues the theme per Bloomberg:
Thailand’s junta should remove fuel subsidies that have cost $15.6 billion over the past three years to free up funds for crucial infrastructure projects, PTT Pcl (PTT) Chairman Piyasvasti Amranand said in an interview.
“When you have absolute power, it has to be easier” to deregulate energy prices, said Piyasvasti, 61, who was appointed energy minister after a military coup in 2006 and was asked to lead the state oil company’s board after the army again seized power on May 22. “If it’s not done at this time, it will be first coup d’etat that we do not see price reform.”
“The junta government appears more able to move quickly on what would be more politically sensitive reforms under an elected government,” Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch, said yesterday by e-mail.
Thailand imports about 85 percent of its crude oil consumption, according to data from the energy ministry. It subsidizes prices of diesel, ethanol-blended gasoline and liquefied petroleum gas through a state oil fund that levies taxes on fuel users.
The junta’s economic chief, Air Chief Marshal Prajin Juntong, said on May 30 that prices should move in line with the market, raising speculation that subsidies may be removed.
BP: So what are the subsidies? BP could quote this source and that, but when looking for details of energy subsidies and pricing previously all the information is contained in a report last year by International Institute for Sustainable Development. Below are some screenshots and excerpts:
BP: Let’s have a local at diesel first. It is below:
BP: As you can see, it is actually foregone revenue which you can confirm from the below:
This is because of the definition of subsidy from Page 10 of the report:
The Wto definition is the more comprehensive of the two and can be summed up as follows: a subsidy is a financial contribution by a government, or agent of a government, that confers a benefit on its recipients. this means that the word “subsidy” is much broader than just a direct payment made from the government budget to an economic actor; it also includes any other mechanism by which a government can confer a financial benefit, such as tax exemptions, providing goods or services at below-market rates, purchasing goods and services at above-market rates and providing income or price support with regulation.
BP: As long as people understand this it is okay, but the first time that BP read about the diesel subsidy as implemented by the Abhisit government was that it was a subsidy as in the government was subsidising by providing money to reduce the price below the market price. This is not the case. The government now collects an almost non-existent excise tax on diesel although together with other taxes, the amount is just over 2 Baht per litre revenue from diesel, but diesel has been exempted from the excise tax over the last few years and because this is a tax exemption it is called a subsidy.
One problem with defining this as a subsidy is that if the government decided to change the excise tax rate from 5.3 baht a litre .01 Baht a litre it would no longer be called a subsidy so overnight the level of energy subsidies paid would drop by over 100 Billion Baht a year OR if the government never taxed it in the first place it was not be called a subsidy. In terms of diesel reflecting the market price, it almost does in Thailand as the level of tax imposed is quite low. Now, BP thinks that there should be a tax on diesel for environmental reasons – the price of diesel in Thailand is actually quite low compared with other countries – but in BP’s view this tax exemption is different from what many people understand to be a subsidy.
You will see that the diesel price above 29.99 baht a litre. This has more or less been the price over the previous few years as the government has adjusted up and down the level of tax to keep it at this price i.e. below 30 Baht a litre. So what has the junta done to inspire confidence that things will be done different? Well, they cut the price to 29.85 baht although this was not because of a reduction in excise tax, it is forcing energy prices to reduce the prices (this would be called a subsidy though…)
Then on LPG consumption:
Then price comparison:
Despite talk that we need a military government for energy reform, the LPG price has been slowly going up (the above was the plan as represented, although it was later changed to increase the price of LPG for cooking/household use) per TDRI as the plan for this year:
As well, the LPG hike will continue in accordance with government plans to lift the subsidy.
For several years, LPG was fixed at 18.13 baht and 21.38 baht a kilogramme for the household and transport sectors, respectively, as governments wanted to help lower consumers’ burden. But as energy prices continued to increase,the Energy Policy and Planning Office decided to end the subsidy gradually and float the price to reflect real costs.
The cooking gas price began to rise by 50 satang per kg yesterday, and the increase will continue monthly at the same rate until October 2014.
By next February, the price will be the same in both sectors, at 21.38 baht. After that, the increase will continue for both sectors until the price reaches 24.82 baht in October 2014, meeting the cost of the LPG gas-separation plant.
Then on June 9 after the coup, per the Bangkok Post:
The NCPO made a policy U-turn by reducing the price of liquefied petroleum gas (LPG) for household use by 50 satang a kilogramme to 22.63 baht a day after a scheduled increase took effect. The move stoked speculation that fuel price cuts to alleviate the cost of living would be included in an energy reform plan.
BP: This is an actual subsidy.* Again, we have this talk that we need a military government to raise the prices, but it was the previous government that had mandated the price increase 50 satang a month for a period of 12 months for an extra 6 baht a kilogram for the household sector. The junta comes into office and reverses last month’s price increase for the household sector. Whether this will continue is another issue, but this confidence in the military government over price reforms doesn’t match what has been has done in the first two months. Given its happiness policy, it would not make sense to increase energy prices? Maintaining the status quo and perhaps pressuring petrol companies to cut their margins will be easier although this is part of the internal tension in the anti-Thaksin coalition over energy prices/reform.
*This is complicated to explain as there is an oil fund payment made by LPG, but the subsidy is because the government has set the price of LPG way below the ex-refinery price so the government pays the difference to the LPG refiner or importer: