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Implementing Energy Subsidy Reforms
75 percent, respectively). (Because there was no consensus on the degree of effectiveness of the UCT scheme, two alternative assumptions about its effectiveness were made—100 percent effective and 75 percent effective—the latter scenario assuming that the amount of cash given to every targeted group of households is reduced by 25 percent.) • Scenarios 3.A and 3.B represent the introduction of a conditional subsidy to targeted households for spending on education and health (in the same amount of the UCT), respectively with and without the 2005 reform package. The distributional impacts of the alternative scenarios shows interesting results (see figure 14A.10). Incidence of both urban and rural poverty is significantly lower where the subsidy removal does not include kerosene (Scenario 1.A relative to Scenario 1.B), supporting the evidence reported in the previous section that among the petroleum fuels, kerosene is the most “progressive.” Overall national poverty decreases for all UCT schemes, but urban poverty is shown to increase even with a 100 percent effective UCT scheme (Scenarios 2.A and 2.B). Adjusting somewhat the scheme—providing more support to the urban poor—is shown to prevent the increase in urban poverty while not negatively affecting poverty in rural areas. In contrast with the UCT schemes, subsidizing education and health expenditure, when combined with the 2005 package, would increase both urban and rural poverty by 0.9 and 0.35 percent, respectively (Scenarios 2.A and 2.B). This result may be interpreted as investment in human capital through a longer-term strategy rather than a short-term measure. Hence it is less effective in minimizing the impact of energy pricing reforms.
Social Safety Nets Indonesia has been particularly successful at designing targeted cash transfers that were passed on simultaneously with fuel price increases in 2005. The UCT program is the largest such program in the world— covering 19.2 million households, or one-third of the Indonesian population. The program was introduced after the October 2005 price increases. Before execution of the transfers, each household was given a proxy means test. Recipients were issued smart cards (with instructions printed on the back of the cards), and transfers were delivered through the post office system. The program delivered benefits of US$30 per quarter, significantly more than the increase in energy costs. This served to increase