beyondbrics

Argentina’s first stab at reducing utilities subsidies two weeks ago underwhelmed the market – the $140m cut in a bill of more than $10bn was seen as a timid response to an unsustainable problem.

So Argentina has now announced that more large-scale companies – this time in the refinery, gas processing, biofuels and agrochemicals sectors – will lose their gas, electricity and water subsidies. The move is designed to rake in another $830m.

But there is something new. Apart from the spread – as promised – to other sectors not included in the initial announcement, the novelty is that for the first time, residential customers will have to pay higher utilities bills too.

The government tried to introduce a hike in 2009 and failed amid a consumer backlash, which is why it is trying a more subtle tack this time around.

People living in the Puerto Madero dockside development of Buenos Aires – home to the highest real estate prices in the city – and the ultra chic Barrio Parque neighbourhood of the city, as well as the private gated communities on the outskirts of town known as “countries”, are to be targeted first.

They will be invited to say whether or not they need the subsidies – a methodology Amado Boudou, the economy minister and vice president-designate, believes enables a display of solidarity by the better off in society. The idea is that those who do not need to pay less for their bi-monthly electricity bill agree to pay more. The state will be happy to oblige. Cross-checking people’s utilities bills declarations with the social security and tax registers will enable the government to decide if people qualify for subsidies or not.

The government sees this as a step towards personalising subsidies. It has already said that bus companies that are long overdue in installing electronic ticket machines on their buses will not be eligible for fuel subsidies unless they get the machines installed by next month.Why? Because the government wants the electronic card which passengers can use on buses and trains to differentiate fares according to need. To get the free card, people need to register with their identity document, which can identify them, after cross checks, as recipients of welfare plans and eligible for cheap rates.

The government is clearly showing that it knows it needs to tackle subsidies and has started to act. Part of its last announcement was the transfer of the Buenos Aires underground system, called the “subte”, to the city government – a bid to push the onus onto the opposition mayor, Mauricio Macri, for ticket hikes.

The city government has already said that without subsidies, the cost of a ticket will triple – something that would cause serious problems for poor Argentines and infuriate many others who have grown used to paying the equivalent of around 26 US cents for a ride on the tube, especially with inflation estimated at around 23 per cent.

But with state accounts under pressure, the message is clear: across-the-board subsidies are finally being axed.

Related reading:
Argentina: taking the scissors to subsidies?, beyondbrics
Turbulence forecast for victorious Fernández, FT
Argentina: Cristina’s Catch-22, beyondbrics
Argentina: A high-risk recovery, FT
Argentina’s economic recovery, FT