metadata: authors: 0: author: Vagliasindi,Maria
count: World
docna: 0: docna: Implementing energy subsidy reforms : an
            overview of the key issues
docty: Policy Research Working Paper
theme: Regulation and competition policy,Debt management and fiscal sustainability,Climate change,Infrastructure services for private sector development,State-owned enterprise restructuring and privatization
majtheme: Financial and private sector development,Environment and natural resource management,Economic management
subtopic: Energy Demand,Energy and Mining,Energy and Environment,Energy Policies & Economics,Access of Poor to Social Services,Disability,Economic Assistance,Services & Transfers to Poor,Oil Refining & Gas Industry
teratopic: Energy,Macroeconomics and Economic Growth,Poverty Reduction,Industry,Social Protections and Labor
abstracts: cdata!: Poorly implemented energy subsidies are
            economically costly to taxpayers and damage the environment.
            This report describes the emerging lessons that could help
            policy makers to address implementation challenges,
            including overcoming political economy and affordability
            constraints. The analysis provides strong evidence of the
            success of reforms in reducing the associated fiscal burden.
            For the selected sample of 20 developing countries, the
            average energy subsidy recorded in the budget was reduced
            from 1.8 percent in 2004 to 1.3 percent of gross domestic
            product in 2010. The reduction of subsidies is particularly
            remarkable for net energy importers. In spite of the
            relatively price inelastic demand for gasoline and diesel,
            fossil fuel consumption in the road sector (per unit of
            gross domestic product) declined in the 20 countries
            examined from 53 (44) in 2002 to about 23 kilotonnes oil
            equivalent per million of gross domestic product in 2008 in
            the case of gasoline (diesel). The most notable decline in
            consumption was recorded in the low-income and
            lower-middle-income countries. This reflects the much higher
            rate of growth in gross domestic product in this group of
            countries. And it underlines the opportunities to influence
            future consumption behavior rather than modifying the
            existing consumption patterns, overcoming inertia and vested
            interests. Similar trends are recorded for power
            consumption. While there is no one-size-fits-all model for
            subsidy reform, implementation of compensatory social
            policies and an effective communication strategy, before the
            changes were introduced, made a difference in securing the
            successful implementation of reforms.
repnme: repnme: Implementing energy subsidy reforms : an
            overview of the key issues
display_title: Implementing energy subsidy reforms
            : an overview of the key issues
listing_relative_url: /research/2012/07/16481583/implementing-energy-subsidy-reforms-overview-key-issues
topicv3: Energy Subsidies m1326386 1627,Energy and Extractives m1326595 507,Power and Electricity Sector m1327094 515,Cash Transfers m1327437 1608,Natural Gas m1583894 4712
publishtoextweb_dt: 2012-07-01T00:00:00Z
historic_topic: Energy,Macroeconomics and Economic Growth,Poverty Reduction,Industry,Social Protections and Labor
no_of_pages: 34
author_keys: 0: author_key: 619680
model_extractions: WPS6122 Policy Research Working Paper 6122 Implementing Energy Subsidy Reforms An Overview of the Key Issues _Maria Vagliasindi_ The World Bank Sustainable Energy Department Energy Unit July 2012
Policy Research Working Paper 6122

# **Abstract**

Poorly implemented energy subsidies are economically costly to taxpayers and damage the environment. This report describes the emerging lessons that could help policy makers to address implementation challenges, including overcoming political economy and affordability constraints. The analysis provides strong evidence of the success of reforms in reducing the associated fiscal burden. For the selected sample of 20 developing countries, the average energy subsidy recorded in the budget was reduced from 1.8 percent in 2004 to 1.3 percent of gross domestic product in 2010. The reduction of subsidies is particularly remarkable for net energy importers. In spite of the relatively price inelastic demand for gasoline and diesel, fossil fuel consumption in the road sector (per unit of gross domestic product) declined in the 20 countries examined from 53 (44) in 2002 to about 23 kilotonnes oil equivalent per million of gross domestic product in 2008 in the case of gasoline (diesel). The most notable decline in consumption was recorded in the low-income and lower-middle-income countries. This reflects the much higher rate of growth in gross domestic product in this group of countries. And it underlines the opportunities to influence future consumption behavior rather than modifying the existing consumption patterns, overcoming inertia and vested interests. Similar trends are recorded for power consumption. While there is no one-size-fits-all model for subsidy reform, implementation of compensatory social policies and an effective communication strategy, before the changes were introduced, made a difference in securing the successful implementation of reforms.

This paper is a product of the Energy Unit, Sustainable Energy Department. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at mvagliasindi@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Implementing Energy Subsidy Reforms An overview of the key issues***

## Maria Vagliasindi**

### **JEL: H2, H30, H31, Q4**

### **Energy and Mining (EM) Sector Board**

* This paper is based on a broader study (Vagliasindi, 2012) aimed at providing the emerging lessons from a representative sample of case studies that could help policy makers to address implementation challenges, including overcoming political economy and affordability constraints, by looking at complementary instruments to compensate vulnerable groups for energy-price increases. My special thanks go to Vivien Foster for her advice and comments. I am most grateful to Nicolas Jost, Evgenia Shumilkina for their research assistance and Ani Balabanyan, Ulrich Bartsch, Husam Beides, Benu Bidani, Kwawu Gaba, Franz Gerner, Mudassar Imran, Ashish Khanna, Migara Jayawardena, Todd Johnson, Eduardo Ley, Rinku Murgai, Kari Nyman, Dejan Ostojic, Silvia Pariente-David, Giovanna Prennushi, Caterina Ruggeri, Jon Strand, Gary Stuggins, Mike Toman, Vlado Vucetic, Ruslan Yemtsov and Ariel Yepes, most helpful comments and suggestions.

**Maria Vagliasindi, Lead Economist, Energy Unit, Sustainable Energy Department, World Bank
# **_i. Introduction_**

Poorly implemented energy subsidies are economically costly to taxpayers and damage the environment through increased emissions of greenhouse gas and other air pollutants. Energy subsidies also create distortive price signals and result in higher energy consumption or production, or barriers to entry for cleaner energy services. Subsidies to consumption, by lowering end-use prices, can encourage increased energy use and reduce incentives to conserve energy efficiently. Universal energy-price subsidies tend to be regressive as benefits are conditional upon the purchase of subsidized goods, and increase with expenditure. The proportional adverse impact of energy subsidy removal can be greatest for the poor, even though the rich receive most of the value of the subsidy (IEA, OPEC, OECD, World Bank, 2010).

This synthesis paper is based on a broader study (Vagliasindi, 2012) aimed at providing the emerging lessons from a representative sample of case studies that could help policy makers to address implementation challenges, including overcoming political economy and affordability constraints, by looking at complementary instruments to compensate vulnerable groups for energy-price increases.

# **_ii. Methodology_**

To achieve this objective, the study selected a representative sample of case studies in 20 developing countries, based on a number of criteria, including the country level of development (and consumption) and energy dependency (distinguishing between net energy exporters and importers), as reported in Table 1 below.

**Table 1 Sample Selection for Case Studies Analysis**

||**Net Energy Importer**|**Net Energy Exporter**|
|---|---|---|
||**Group A**|**Group C**|
|**L d**<br>**AFR**|Ghana*|Nigeria|
|**ow an**<br>**Lower**<br> <br>**EAP**||Indonesia*|
|**Middle**<br>**Income**<br>**ECA**|Armenia*, Moldova*|Azerbaijan|
|**MNA**|Morocco*, Jordan*|Egypt*, Iran, Yemen*|
|**SAR**|India*, Pakistan*||
||**Group B**|**Group D**|
|**Upper-**<br>**Middle**<br>**EAP**||Malaysia*|
|**and High**<br> <br>**ECA**|Turkey*||
|**Income**<br>**LAC**|Chile, Dominican Rep., Peru|Argentina*, Mexico*|

_Note:_ Selected sample based on income, region, energy net import-export

* indicates if the country is characterized by macro unbalances

(either budget deficit higher than respectively 4% of GDP or public debt higher than 40% of GDP).

The case studies were supported by data collection related to direct budgetary subsidies, fuel and electricity tariffs, and household survey data, from official documents, complemented by 2
information publicly available through the websites of the finance and energy ministries and energy service providers.

The criteria to inform the case studies are based on the hypothesis that energy dependence and per capita income appear to be the key drivers of subsidy reforms in developing countries. Of the two criteria, energy dependency is expected to be the most powerful to determine the choice of engaging in energy reforms, whereas the level of per capita income may pose different challenges in relation to distributional impact of such reforms on the poor and on energy efficiency efforts. Energy net importers are expected to have more incentives to undertake energy subsidy reforms, when the fiscal burden of such subsidies reaches a significant percentage of GDP, particularly when there are already macro imbalances related to given thresholds of public budget and debt. Low and middle income countries are expected to display a larger impact of energy subsidy reforms on consumptions. This reflects the opportunities to influence future behavior rather than current consumption trends, due to inertia and vested interests and the presence of affordability issues.

The performance of countries which have embraced substantial subsidy reform is compared to the counterfactual of countries that have done little to phase out energy subsidies. This comparison is undertaken within each group of countries determined by the taxonomy of energy dependence and country annual per capita income. The four groups of countries are referred to as Groups A to D. Groups A and B consist of net importer countries with low and lower middle income and upper middle and high income countries, respectively. Groups C and D represent instead energy net exporters with low and lower middle income and upper middle and high income countries, respectively.

- **Group A: Armenia, Ghana, Jordan, India, Moldova, Morocco** and **Pakistan** .

- **Group B: Chile, Dominican Republic, Peru and Turkey.**

- **Group C: Azerbaijan, Egypt, Indonesia, Iran, Nigeria, Yemen** .

- **Group D: Argentina** , **Malaysia** and **Mexico.**

# **_iii. Key Policy Questions_**

The report is structured around some central policy questions highlighted below.

## **(a) Have energy subsidy reforms succeeded in reducing the associated fiscal burden?**

To address this question the study uses both indicators of explicit and implicit subsidies:

- **Energy Explicit Budgetary Subsidy** (% GDP): Energy subsidies reported as an item of government expenditure in the consolidated general budget (% GDP)

- **Energy Implicit Subsidies** (% GDP) **:** Where available, explicit budgetary subsidies are complemented by estimates by the World Bank and IMF of implicit forms of subsidies. The hidden cost of energy subsidies is defined as the difference between actual receipts and the revenue that the energy company (e.g. a utility involved in the distribution of electric and natural gas) would receive were it to be in operation with cost-recovery tariffs based on efficient operation, with normal losses and with full bill collection. Ebinger (2006) pioneered this approach for Eastern Europe and Central

3
Asia from 2000 to 2003, the AICD Database applied the same methodology for Sub-Saharan Africa and collected data from 2004 to 2009.

### **(b) Have energy subsidy reforms succeeded in restraining energy consumption?**

To provide an answer to this question the study uses both indicators of energy prices and related consumption. In the case of gasoline and diesel, road sector consumption of fuels is reported, as the transport sector is one of the most intensive users of such fuels. In the case of electricity power consumption is provided:

- **Fossil Fuel Prices** (US$ per liter): Gasoline, diesel and kerosene retail tariff (US$ per liter).

- **Electricity Prices** (US$ cent per kWh) – Residential Average Electricity Tariff level (US$ cent per kWh)

- **Road Fuel Consumption** (kt of oil equivalent per capita): Gasoline and Diesel Fuel Consumption (kt of oil equivalent per capita) by the road sector

- **Power Consumption** (kWh per capita) - Electric power consumption measures the production of power plants and combined heat and power plants less transmission, distribution, and transformation losses and own use by heat and power plants. (kWh per capita)

### **(c) Have energy subsidy reforms managed to avoid adverse social impacts?**

To address this final question, evidence from household surveys on the distributional impact of subsidies by income quintile (or deciles, if available) as well as the materiality of energy subsidies, reporting for each fuel how much income is spent by each quintile of the population is used in the case studies.

- **Expenditure of different energy sources** (what proportion of income poor households spend on each fuel), by quintiles or deciles where available divided by rural/urban areas.

- **Welfare impact of removing energy subsidies, by fuels and/or by quintiles or deciles** (what proportion of poor households as a whole receive the subsidy).

- **Benefit incidence of energy subsidies** (how well the subsidy targets benefits to poor households as opposed to other households), **by quintiles or deciles (and fuels where available).**

- **Beneficiary incidence of energy subsidies** (what proportion of poor households as a whole receive the subsidy), **by quintiles or deciles (and fuels where available)**

# **_iv. Summary of the Results_**

## **(a) Have energy subsidy reforms succeeded in reducing the associated fiscal burden?**

### _1. Evidence across Groups_

Some interesting patterns emerge by grouping countries in our taxonomy, distinguishing countries according to their energy dependency and the level of income. As expected, net energy importers (Group A and Group B) have reduced more significantly the burden of energy subsidies in the budget, from 1% of GDP in 2004 to 0.5% of GDP in 2010 for group A and from 0.7% to 0.3% for Group B (see Fig. 1). On the other hand, for net energy exporters (Group C and D), the burden of energy subsidy in the budget increased only slightly from 2.8% of GDP in 2004 to almost 3% of 4
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_2. Cross Country Evidence_

**In the effort to phase out fossil fuel subsidies, substantial increases in the prices of gasoline and diesel have been recorded over time.** Figures 11a and 12a show the domestic retail price for gasoline and diesel from 2002 to 2010. Countries are ranked according to the level of tariff (in US$ per liter) in 2010. The annualized rate of growth of tariffs (the blue bubbles) is measured on the right hand axis.  In our sample of countries, gasoline prices more than doubled from US$ 0.4 per liter in 2002 to US$ 0.9 in 2010 (see Fig. 11a). Diesel prices almost tripled from US$ 0.3 per liter to US$ 0.8 per liter (see Fig. 12.a).

As noted earlier, in our sample of countries, gasoline (and diesel) road consumption per capita increased slightly from 0.08 (0.07) kt oil equivalent in 1998 to above 0.09 kt in 2008. The intensity of road consumption of gasoline (and diesel) in terms of unit of GDP, however, declined dramatically from 44 (53) kt oil equivalent to 23 kt oil equivalent (Fig. 11b and 12b), confirming the much higher income than price elasticity. Our results confirm the result of the economic literature estimating price and income elasticities of gasoline and diesel (Box. 1).

# **Box 1**

# **Evidence from estimations of fossil fuel and price and income elasticity**

Based on a review of 124 developed and developing countries, including the majority of countries which are covered in this report, Dahl (2011a) estimates a range of values for the price elasticity between -0.11 and -0.33 in the case of gasoline and between -0.13 and -0.38 in the case of diesel. Price elasticity tends to be higher the higher the level of price and GDP per capita particularly in the case of gasoline. A possible explanation is that in low income countries it is only rich people who can afford personal vehicles and they tend be less responsive to changes in prices. Income elasticity ranges between 0.66 and 1.26 for gasoline and are estimated to be around 1.3 for diesel. In addition, income elasticity for fossil fuels tends to be lower the higher the level of GDP per capita.

Based on a review of developed countries, Goodwin et al. (2004) also found that income elasticity is greater than the price elasticity, mostly by factors of 1.5-3. The mean of price elasticity for fuel consumption from dynamic estimations is equal to -0.25 (in the short run) and -0.64 (in the long run), and -0.43 from static estimations. The mean of income elasticity of fuel consumption from dynamic estimations is 0.39 (in the short run) and 1.08 (in the long run), and 0.49 from static estimations.

12
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**Evidence of phasing out electricity subsidies is also strong.** Fig. 13a shows the domestic retail price for electricity from 2002 to 2010. Countries are ranked according to the level of tariff (in US$ cent per kWh) in 2010. The annualized rate of growth of tariffs (the blue bubbles) is measured on the right hand axis.  For our sample of countries the average electricity tariffs increased by 50% from US$ 6 cent in 2002 to US$ 9 cent per kWh in 2010. Net importer countries, including Chile, Dominican Republic and Turkey display the highest electricity tariffs. Net energy exporters, including Egypt, Yemen and Iran but also Argentina charge the lowest electricity tariffs. Only Yemen and Argentina recorded a decrease in tariffs. Among the countries that recorded the most dramatic increase in gasoline and diesel tariffs are both net energy exporters, such as Azerbaijan, Indonesia, Iran and Egypt, and net energy importers, such as Chile, Turkey, Moldova, and Dominican Republic.

**In our sample of countries, power consumption per capita increased from 1000 kWh in 1998 to above 1500 kWh in 2008 despite price increases.** Energy intensity in 2008, however, became less than half of the 1998 level, declining from 0.9 kWh to 0.4 kWh (in unit of GDP). These results are in line with the majority of the estimates found in the literature that indicate that income elasticity is higher than price elasticity for electricity. Also, in general, demand for electricity is more responsive to changes in price and income in the long run than in the short run (see Box 2).

**Box 2**

**Evidence from estimation of electricity price and income elasticity**

The results of Dahl (2011b), based on a global survey of electricity demand including more than 450 studies for about 60 countries for the period from 1951 to the present, indicate that the mean price elasticity in the short run is -0.21 and -0.48 in the long run, and that the mean income elasticity is 0.32 (in the short run) and 1.08 (in the long run). The earlier results by Espey and Espey (2004) based on a meta-analysis of residential electricity demand elasticities from 36 studies (mostly from developed countries) found the mean price elasticity equal to -0.35 and -0.85 respectively in the short and long run and the mean income elasticity equal to 0.28 and 0.97 respectively in the short and long run.

Estimates of income elasticity for countries with lower income than the US are higher. As income increases in developing countries, electrification, ownership of appliances, and demand for electricity increase at a fast rate. However, as the access to electricity reaches 100% and ownership of appliances approaches saturation, increases in income have a smaller effect on demand for electricity.

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non poor) regularly consuming in the first two blocks of the 1998 electricity tariff were receiving the income transfer in 1999.

- B.    Improving targeting performance

- To improve the targeting performance of electricity subsidies is to move from traditionally used Inverted Block Tariff to Volume Differentiated Tariff (VDT) structures, where the lowest price for the lowest block is only available to those consuming within the first block (usually the lower-income households). In countries characterized by high connection rates a move from IBT to VDT and the use of meanstested discounts substantially increases the targeting performance of subsidies.

- Angel-Urdinola and Wodon (2005) simulated in the case of Cape Verde the effect of replacing an increasing block tariff with a volume differentiated tariff, where the threshold and the price of those receiving the volume differentiated tariff was the same as that of the first block (40 kWh per month), while all others paid the full cost, namely the price of the second block. In this case the targeting performance increased to 1.06, showing slight progressivity. Komives _et al._ (2009) simulated various alternative subsidy schemes for electricity in the case of Mexico and found that a volume differentiated tariff (as well as the use of means-tested discounts) would increase the value of the targeting performance. The high rate of connections in this case ensured that exclusion rates would be low under any alternative schemes. It should be noted that the results of Cape Verde where electrification rates are high do not apply to other Sub Saharan countries, where instead in most of the cases such a change would have only a limited impact on targeting performance. However, even in the most pessimistic scenario this re-targeting would help in reducing the overall price tag of subsidies, as well as to help to achieve the original poverty objective of subsidies in reaching the poor.

- Where possible, the use of geographical or socio-economic targeting variables substantially improves the targeting performance of subsidies in the case of electricity. Apart from the United States’ Low Income Home Energy Assistance Program’s (LIHEAP described in Box 3), examples include geographically defined subsidies in Colombia, average of provincial means-test subsidies in Argentina and winter heating allowance scheme in Georgia (Tbilisi) are all reaching the poorest quintiles (Fig. 23). Geographical targeting may be more problematic for petroleum fuels, as they may be more difficult to be implemented and more vulnerable to smuggling and fuel adulteration.

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# **Box 3**

# **The US Low Income Home Energy Assistance Program’s (LIHEAP)**

**The Low Income Home Energy Assistance Program’s (LIHEAP) administered by the U.S. Administration for Children and Families (ACF) is a block grant program that aims to assist low-income households, particularly those with the lowest income that pay a high proportion of their household income for home energy, in meeting their immediate household energy needs.** LIHEAP was launched in 1982 and resulted from earlier programs introduced in response to the energy crisis of the 70s. Under LIHEAP, the federal funds are allocated to individual states and disbursed under programs designed by the states. The vast majority of LIHEAP disbursed funds (more than 80%) used to assist eligible households in meeting the costs of home energy, which is defined as a heating or cooling in residential dwellings.

## **i. Eligibility and Coverage:**

- **Households are eligible for LIHEAP under federal standards when incomes do not exceed 150 percent of the poverty level for their state or 60 percent of the state median income** . However, states may set income limits as low as 110 percent of the poverty level. The law requires benefits to be targeted to households with the highest energy costs in relation to income and household size.

- **LIHEAP is targeted in that it assists households with only that portion of residential energy costs that goes for home heating and home cooling.** Funds are available for payment of heating or cooling bills, Lowcost weatherization projects (e.g., window replacement or other home-energy related repair; limited to 15% of allotment unless a grantee has a waiver for up to 25%); services to reduce need for energy assistance (e.g., needs assessment counseling on how to reduce energy consumption; limited to 5% of allotment) Assistance with energy-related emergencies (winter or summer crisis aid)

- **The LIHEAP statute requires the highest level of assistance to be provided to those households that have the lowest incomes and the highest energy costs or needs in relation to income, taking into account family size** .

## **ii. Targeting:**

- **As of 2008 LIHEAP recipient households had average energy expenditures of US$ 2,104, about 12 percent higher than the average for low income households** . The mean individual energy burden for LIHEAP recipients was about 17 percent, more 9 percentage points higher than the mean individual energy burden for all households and about 3 percentage points higher than the mean individual energy burden for low income households.

- **LIHEAP recipients spent a higher proportion of their annual residential expenditures for space heating and a lower proportion for space cooling than did other groups** . LIHEAP recipient households spent 40 percent of their annual residential expenditures for space heating, 8 percentage points more than did the average low income household.

- **The performance indicators used to measure the achievement of the program goals include recipiency targeting index, benefit targeting index and burden reduction targeting indexes. Recipiency targeting index can be used to examine the effectiveness of the outreach initiatives to households with vulnerable members and households with high energy burdens** . The recipiency targeting index is computed by dividing the percent of LIHEAP recipient households that are members of a target group by the percent of all LIHEAP income eligible households that are members of the target group and then multiplying by 100. Benefit and burden reduction targeting indexes are used to examine the effectiveness of benefit determination procedures in serving households with vulnerable members and households with high energy burdens.

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# **Box 4 The Importance of Communicating Subsidy Reforms**

Careful communication strategies including media and public campaigns in order to reach out to the poor and those who will be most affected by the subsidy reform has represented a pivotal element of reforms (World Bank, 2010).

## **i. Ghana**

- In 2004, the government launched a poverty and social impact assessment (PSIA) for fuel. Guided by a steering committee of stakeholders from ministries, academia, and the national oil company, the PSIA was completed in less than a year. By the time the government announced the 50% price increases in February 2005, it could use the PSIA findings to make its case to the public for liberalizing fuel prices (Coady et al., 2006). The Government of Ghana used budgetary savings to expand the existing rural electrification scheme. This was a prominent component of the expenditure package introduced simultaneously with fuel price increases. The incidence of the benefits from these expenditures was found to be strongly progressive (Coady et al., 2006). The mitigation measures, transparent and easily monitored by society, included an immediate elimination of fees at government-run primary and junior secondary schools and a program to improve public transport. Extra funds were made available to an existing program, the Community Health Compound Scheme, to enhance primary health care in the poorest areas (Bacon et al., 2006). The minister of finance launched a public relations campaign via broadcast explaining the need for the price increases and announcing measures to mitigate their impact.  In November 2007, prices were increased again by 35%.

## **ii. Indonesia**

 Indonesia has a history of violent protests against attempts to implement fuel price increases like the time when President Megawati was forced to roll back the prices in 2003. However, an important lesson that emerges from the case of Indonesia is that decisive leadership and government popularity along with appropriate compensation measures and an effective informational campaign works to counteract citizen disenchantment and prevent any impending riots. Current President Yudhoyono’s credibility helped successfully increase fuel prices, the savings from which he then directed toward the UCT program in 2006. Additionally, before introducing UCT the government initiated an extensive nationwide information campaign about the benefits of the program, which helped citizens learn about the value of the program and prevented possible unrest.

## **iii. Jordan**

- Jordan is the one of the few countries in the MENA region to have succeeded in implementing fuel subsidy reforms. Price regulation was replaced with automatic monthly adjustments of the domestic price to reflect changes in international prices, which have generated significant savings for the government. The transition has been relatively smooth and peaceful. One of the key elements in the reform was the large public communication campaign undertaken in order to inform the people and appease them to prevent protests. A wide-ranging compensation package was introduced to prevent increases in poverty, and to secure the consent of the non-poor. In absolute terms, energy subsidies were highly regressive, but the poor spent a higher proportion of their income on fuel. Reforms were also successful because they were coordinated with various stakeholders and preceded by consultations with parliament, the local NGOs, the business community and labor representatives. The political will and determination to phase out subsidies and not backtrack on reform was there, as the emphasis was placed on the regressive nature of the subsidy and the leakage to higher income groups.

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**_3. Ensuring the Sustainability of Subsidy Policy through Broader Sectoral Reforms_**

- Efforts aimed at reducing the burden of subsidies can be affected by situations of crises, posing formidable challenges to the sustainability of such reforms. For instance, both Argentina and Mexico were severely affected, respectively, by the global crisis of 2008 and the domestic crisis of 2001. In the case of Argentina, despite important market reforms were made in the 80s and the 90s after the 2001 crisis tariffs were frozen as a way of cushioning the social costs of the devaluation of the peso. In the case of Mexico, the government abandoned the gradual adjustment of the price of gasoline (taking into account inflation and taxes) and in 2009 it froze its price.

- In the power sector engaging in broader reforms to improve service ahead of reforming energy subsidies, particularly where the quality of electricity services is low, lends credibility and improves consumer willingness to pay. Steps such as improving metering, billing and payment collection bill collection and quality of the service to make tariff increases more acceptable once subsidies are removed (see Box 5).

- Reforming the power sector by engaging in regulatory reforms, vertical and horizontal unbundling, and introduction of private sector participation should not be seen as an end in itself but to the extent to which it delivers improvements in access, quality, operational and financial efficiency of the services (Vagliasindi and Besant-Jones, 2012).

- Improving energy efficiency will also help to reduce the costs of removing subsidies both for energy suppliers and consumers.

- Cost based tariffs in line with actual costs will serve as effective price signals to reduce energy  wasteful consumption

- Better insulation in household buildings where energy is used for heating will reduce the energy bill

- Providing discounts for energy saving equipment will help reduce energy use. In line with technology improvements, use of smart meters will help households keep track of expenditures and manage their energy bills more effectively

- More generally, rationalizing the fuel mix for electricity and transport, discouraging private transport in favor of public transport may help supporting reforms, as it would the prioritization of structural expenses that benefit the poor (including sectoral road and rural electrification schemes, but also social expenditure, including health and education).

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# **Box 5 Lessons from broader sectoral reforms in Eastern Europe and Central Asia**

Engaging in broader reforms including improving metering, billing and payment collection bill collection and quality of the service to make tariff increases more acceptable once subsidies are removed. The selected examples provide an excellent illustration.

## **i. Turkey:**

- The impetus behind electricity sector reforms, among other factors, has been Turkey’s longstanding ambition to join the EU. A reform program to harmonize its electricity sector with EU Energy Acquis became especially prominent after 2001 with Turkey’s announcement of the Electricity Market Law As part of the gas and electricity markets reform, Turkey has moved towards a fully cost-reflective tariff structure (Bagdadioglu et al. 2007, World Bank, 2009b).  Hidden costs coming from underpricing, lack of collection and unaccounted losses were substantially reduced as the results of such reforms, from the peak of 2.1% of GDP in 2001 to 0.6% of GDP in 2003. Natural gas hidden costs have remained a challenge, as natural gas is mainly used for heating and has been subsidized to protect consumers.

## **ii. Armenia:**

- Privatization brought several benefits through a reduction in the need for government implicit and explicit subsidies. The decline of the once sizeable quasi-fiscal subsidies showed direct improvements in the performance of the energy sector. Collections rates increased to close to 100% by the end of 2004 while commercial losses decreased to 4% of total production. Armenia’s electricity reform is touted as a success story in part because of the timely execution of the reform and the commendable results that it has delivered. The case of Armenia is especially applicable to countries reforming their electricity sectors once part of larger and more integrated systems such as that of the Soviet Union as well as countries seeking to curb electricity demand growth and increase efficiency.

## **iii. Moldova:**

- The overall results of the restructuring of the Moldovan energy sector were positive, with payment collections increasing, especially for electricity in both privatized and state-owned electricity distribution companies. Privatization of the distribution had a positive impact on both the service quality and the government budget. The poor benefited more than the non-poor from the reforms, having increased their consumption more than the non-poor despite rising costs (Lampietti _et al._ , 2007). During the reforms, between 1998 and 2003, energy efficiency improved, as high volume consumers reduced consumption following the price increases.

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# _v. References_

Abouleinein, Soheir; El-Laithy, Heba; Kheir-El-Din, Hanaa (2009) The Impact of Phasing Out Subsidies of Petroleum Energy Products in Egypt. Egyptian Center for Economic Studies, Working Paper No.145.

Angel-Urdinola, D. and Q. Wodon (2005) Do Utility Subsidies Reach the Poor? Framework and Evidence for Cape Verde. Paper prepared for the Poverty Reduction and Economic Management Department, Africa Region, World Bank, Washington, DC.

Bagdadioglu, Necmiddin and Necmi Odyakmaz (2009) “Turkish electricity reform” Utilities Policy 17, 144–152.

Bagdadioglu, Necmiddin, Basaran, Alparslan and Price, Catherine Waddams (2007) “Potential Impact of Electricity Reforms on Turkish Households”, CCP Working Paper No. 07-8 Bacon, R. and Kojima, M., (2006) “Phasing Out Subsidies”, Viewpoint Note 310, Public Policy for the Private Sector, World Bank, Washington D.C.

Benitez, Daniel, Chisari, Omar (2010) “Recycling Universal Energy Subsidies on Residential Consumers Alternative Fiscal Policies to Help the Poorest”, mimeo, The World Bank.

Coady, David, Moataz El-Said, Robert Gillingham, Kangni Kpodar, Paolo Medas, and David Newhouse (2006) “The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka.” IMF Working Paper WP/06/247. Washington, DC: International Monetary Fund.

Dahl, C.A. (2011). A global survey of electricity demand elasticities. Presented at 34th IAEE International Conference: Institutions, Efficiency and Evolving Energy Technologies, 2011, Stockholm School of Economics, Sweden.

Dahl, C.A. (2012). Measuring global gasoline and diesel price and income elasticities. _Energy Policy_ , 41, 2-12.

Del Granado, J., D. Coady and R. Gillingham (2010), The unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries. IMF Working Paper, WP/10/202.

Ebinger, Jane (2006) “Measuring financial performance in infrastructure: an application to Europe and Central Asia”, World Bank Policy Research Working Paper, 3992.

Esprey, A. and Esprey, M. (2004). “Turning of the light: a meta-analysis of residential electricity demand” _Journal of Agricultural and Applied Economics_ , 36, 1.

Goodwin, P., Dargay, J., and M. Hanly (2004) “Elasticities of Road Traffic and Fuel Consumption with Respect to Price and Income: A Review”. Transportation Reviews, 24, 275–292.

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IEA, OPEC, OECD and World Bank (2010) _Analysis of the Scope of Energy Subsidies and Suggestions for the G-20 Initiatives_ , submitted to the G-20 Summit Meeting Toronto, 26-27 June 2010.

IMF (2009) Islamic Republic of Iran: Article IV Consultation – Iran. International Monetary Fund, Washington, DC.

Komives, Kristin; Foster, Vivien; Halpern, Jonathan; Wodon, Quentin and Roohi Abdullah (2007) Utility Subsidies as Social Transfers: An Empirical Evaluation of Targeting Performance. Development Policy Review 25 (6), 659-679.

Komives, Kristin, Todd M. Johnson , Jonathan D. Halpern, Jose Luis Aburto and John R. Scott. 2009. “Residential Electricity Subsidies in Mexico” World Bank Working Paper No. 160. Washington, DC.

Lampietti, Julian A., Sudeshna Ghosh Banerjee and Amelia Branczik (2007) People and Power: Electricity Sector Reforms and the Poor in Europe and Central Asia. The World Bank, Washington, DC.

Moradkhani, Narges, Zakariah Abd Rashid , Taufiq Hassan and Anuuar Md Nassir (2010) “The Impact of Increasing Energy Prices on the Prices of Other Goods and Household Expenditure: Evidence from Malaysia” Faculty of Economics and Management, University Putra Malaysia.

Vagliasindi, Maria (2012) _Implementing Energy Subsidy Reforms: Evidence from Developing Countries_ , forthcoming Directions in Development, World Bank, Washington DC.

Vagliasindi, Maria and John Besant-Jones (2012) _Revisiting Policy Options on the Market Structure in the Power Sector_ , forthcoming Direction in Development, World Bank, Washington DC.

Yusuf, Anshory (2008) “The Distributional Impact of Environmental Policy: The Case of Carbon Tax and Energy Pricing Reform in Indonesia”, Research Report No. 2008-RR1.

Wodon, Quentin (2009) “Electricity Tariffs and the Poor: Case Studies from sub-Saharan Africa” Working Paper 12, Africa Infrastructure Country Diagnostic, Washington, DC: World Bank.

World Bank (2005) Energy Sector Management Assistance Programme (ESMAP), “Household Energy Supply and Use in Yemen: Volume I, Main Report”, Report 315/05 , Washington, DC.

The World Bank (2009) “First Programmatic Electricity Sector Development Policy Loan – Program Document” The World Bank Sustainable Development Unit, Turkey Country Unit and Europe and Central Asia Region. Washington, DC.

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