# **<mark>Indirect Subsidies</mark>**

A household is assumed to receive a Mortgage Subsidy if it responds in the HSES that it has an outstanding loan for housing, and lives in an apartment or detached house. An extremely small number of households in the HSES fit these criteria (i.e., only 4.6 percent of the sample). To these households, an amount of 5,841,468 MNT is applied to each household. This number is equivalent to an average outstanding loan of 49,927077 MNT and the implicit interest rate subsidy of 11.7 percent (i.e., 19.7 minus 8 percent).<sup>15</sup> Electricity subsidies are applied to households who are connected to the Central System and this information is available in the HSES. There are three types of tariffs available which offer different pricing schedules based on monthly kWh usage and the type of connection they have (i.e., vulnerable household, and households with simple or TOU meter). The survey does no give information about how households are connected and which subsidies they receive, thus eligible households are randomly allocated into these 3 groups. The first price group is for “vulnerable” households. It is assumed that 1% of connected households living in Gers receive this price schedule. Connected households not living in Gers are randomly split 60% into the simple meter schedule and 40% receiving the Time-of-Use meter.<sup>16</sup> In the HSES, interviewed households only report electricity expenditures in the previous month, and only a subset of the sample is interviewed in each month of the year. Since usage is expected to vary over the calendar year, electricity expenditures should be imputed for each eligible household and in each month. The imputation model predictors include housing type, household income decile, area of location (i.e., urban/rural), square meter of the dwelling, number of household members, and the number of electronic assets in the household (e.g., TV, radio, refrigerator). Once electricity expenditures are calculated for each month, kWh usage per month can be backed out. To calculate kWh in each month, the fitted electricity expenditure is divided by the price of kWh as given by the pricing schedule assigned to the household. Households are assumed to receive more subsidies in the winter months since there is higher usage of electricity. Electricity subsidies are calculated as the difference between the estimated production cost (the upper bound of 213 MNT/kWh) of electricity minus the tariff assigned to a household, multiplied by the estimate of monthly consumption. and the household cost. The total subsidies over the year are added together to yield the total amount of electricity subsides received by a household.

Heating subsidies are applied to households reporting the survey to be connected to central heating, which almost completely exclude Ger households. Heating prices and subsidies are applied according to the size of the dwelling in terms of square meters. The subsidy is the difference between the estimated production cost and household average expenditures on heating for a given dwelling size.

> 15 The average outstanding loan is derived from official data provided by the Ministry of Finance in September 2017, indicating that there are 89,156 mortgage borrowers in the banking system, of which approximately 70 percent have preferential loans (i.e., 62,409 cases) with an average outstanding mortgage of 49.9 million MNT as of December 2016.

16 Assumptions about the percentage of households from (Schlirf, Johansen, Georgieva, & Wu, 2018). MONGOLIA Distributional impact of taxes and transfers / May 2018 9