Montenegro payment arrears are relative low and the collection rate is close to 90 percent<sup>14</sup> .

Each approach has advantages and disadvantages according to a range of criteria. They are coverage, targeting, predictability of a subsidy, the pricing distortion it creates, administrative costs and the ease of implementation. As shown in Appendix Table 1, there no approach that is unequivocally preferable to all other ways of providing utility subsidies. Policy makers face a trade-off between the coverage and targeting performance of electricity subsidies. Coverage is measured by the share of subsidy recipients who are among the poor. A high percentage of beneficiaries among the poor indicates that a program is effective at reaching them. Coverage is high and the error of exclusion of the poor is low in this case. Targeting is measured by the share of the total subsidy going to the poor. A high share indicates that the resources are not leaking to the non-poor, and the error of inclusion of the non-poor among the recipients is low. As shown in Table 5, there is a trade-off between coverage and targeting.

The administrative ease with which a particular tariff scheme could be implemented and predictability of a subsidy should be an important factor in the evaluation of a feasibility of implementing a particular tariff scheme. Non-linear pricing schemes could pose administrative challenges. Although Serbia has implemented an IBT system, the experience in other countries is mixed. Often billing systems cannot handle it without major re-design. Meter readers may have to arrive on exactly the same day of the month at a given consumer, or there could be endless disputes about the monthly consumption vs. the thresholds. Particularly in the case of VDT this can be a prohibitive issue and cause massive corruption.

There is no one-size-fits-all solution to designing an effective mitigation strategy in the course of energy pricing reforms. The general advice of the World Bank and the IMF is to use means-tested subsidies to soften the negative impact of rising utility tariffs on low income households, as this approach does not give rise to price distortions. However, administering a well-targeted means-tested program that delivers direct income transfers to the poor is fraught with implementation problems due to the difficulty in identifying eligible households, especially if households do not accurately report their income for taxation purposes.<sup>15</sup> Thus, implementation issues must be carefully evaluated in the design of a safety net system for the poor.

The targeting and coverage performance of a subsidy depends on the pattern of electricity consumption by different income groups. A systematic review of electricity consumption subsidies in 22 countries reached a conclusion that an IBT, the most common tariff approach to providing subsidies, tends to have high coverage of the poor

> 14 According to EPCG, if old debts are excluded, the collection ratio varied between 62.4 and 89.4 percent between 1999 and 2004, and in 2004 it varied between 69 and 100 percent by region. It is important to evaluate the relationship between tariff increases and arrears to see if high tariffs lead to deterioration in the payment discipline. Such data are not available in the survey data we use in this paper, so we are not able to investigate this relationship.

> 15 For an in-depth discussion of the ways to design a successful means-tested direct income transfers program see Coady, Grosh and Hoddinot (2004). _Targeting Transfers in Developing Countries. Review of Lessons and Experience._ The World Bank. Washington, D.C.

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