Hidden costs in the power sector averaged 4.4 percent of gross domestic product (GDP) in 2003, down from double that figure in 2000. About half of this decline is due to an increase in GDP, but the remainder is attributed to improved sector performance. Since 2000, hidden costs in the gas and water sectors have changed little—2002 estimates were 1.0 percent of GDP for gas and 1.2 percent for water. Such minor movement in region-wide hidden cost estimates for the gas and water sectors makes trend analysis difficult. However, applying the model to national datasets frequently makes it possible to discern country-wide trends.

# **_Power Sector_**

Throughout the region, tariffs set below cost-recovery rates accounted for 67 percent of aggregate hidden costs in 2003, followed by unaccounted losses at 22 percent, and poor collections at 11 percent. Overall, the aggregate value of total hidden costs declined by about 48 percent from a value of US$ 30.1 billion in 2000 to US$ 15.9 billion in 2003.<sup>1</sup> The largest declines were in Russia (70 percent, from US$ 14.2 billion in 2000 to US$ 4.2 billion in 2003) and Bosnia (62 percent, from US$ 251.5 million to US$ 96 million). Notably, two countries with high hidden costs that differ from other countries by a wide margin are Tajikistan at 16 percent of GDP and Uzbekistan at 12 percent.

- _Tariffs and cost-recovery rates._ In absolute terms the contribution to overall hidden costs due to tariffs set below cost recovery totaled US$10.6 billion in 2003. In relative terms, these costs have declined from 5.4 percent of GDP in 2000 to 2.6 percent GDP in 2003, despite increasing consumption across the region. Two factors contributed to this decline—GDP increased and the gap narrowed between the average cost-recovery price and the weighted average end user tariff. In Turkey tariffs exceeded cost-recovery levels in 2003, and in Moldova, 2002, eliminating this form of hidden cost. Over the same period in Croatia cost-recovery levels and weighted-average tariffs converged significantly. In 2003 high hidden costs persisted, due to tariffs set below costrecovery levels, in Tajikistan—14 percent of GDP, and Moldova—8.0 percent.

- _Unaccounted Losses._ Region-wide, hidden costs due to unaccounted losses initially increased from 2.0 percent of GDP in 2000 to 2.2 percent in 2001, but then steadily declined to 1.1 percent in 2003.<sup>2</sup> During 2003, hidden costs due to unaccounted losses were highest in Former Soviet Union (FSU)-Low Income (LI) countries—Kyrgyz Republic (4.5 percent of GDP), Georgia (3.3 percent), Moldova (3.2 percent) and Armenia (2.2 percent).  Total losses in these countries were in excess of 26 percent of domestic supply. In all other countries unaccounted losses comprised less than 2.0 percent of GDP where total losses ranged between 10 and 20 percent of domestic supply. The largest decline in unaccounted losses (as a proportion of GDP) occurred in Belarus and Bosnia—each more than 100 percent. There was a corresponding decline in total losses in Bosnia.

> 1 Excluding Hungary and Turkmenistan for which no data were available. 2 Excluding Hungary and Turkmenistan—no data available.

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