Energy Subsidies: How?

Transcription

1 AEI Maputo Workshop 2009 Energy Subsidies: How? The New Subsidy Matrix A Study for GTZ by iidevelopment Kilian Reiche AEI Lead Adviser The World Bank

2 Why the Clinic? Subsidies 1. Theory: No! Distortions. Except: market failures and affordability 2. Practice: Subsidies ubiquitous, political, controversial, needed for PPI, no guidance 3. Question: How?! Efficient and sustainable means what?! 4. Solution: Practical recommendations for systematic subsidy design No silver bullet! But: avoid mistakes The well meaning give-away The REF that never happened Deserted tenders (Cap Verde, Nicaragua) Renegotiations (RSA ESKOM, Guasch LCR)

3 Why the Clinic? MOTIVATION: Soundbites from Development Practitioners Lifeline tariffs are pro poor and justified because energy is a public good. Any project needs to have an exit strategy to show that no more are needed by project end. When meeting the utilities for the first time, I erroneously suggested 15$ instead of 50$ subsidy per household they accepted it and the project works well ever since. Guatemala s electrification programme was extremely successful as it has subsidized 120,000 new grid connections in only three years. Chile s access programme selects projects to be subsidized exclusively based on economic and social merits. We don t subsidize in our project, instead we provide TA to local SME Source: Reiche/Teplitz (GTZ 2008)

4 Source: Reiche/Teplitz (GTZ 2008) Energy Subsidies Definitions IEA: An energy subsidy in any government action that concerns primarily the energy sector and that lowers the costs of energy production, raises the price received by energy producers or lowers the price paid by energy consumers. WTO: A financial contribution by a government [in which] a benefit is thereby conferred. Distinction made between specific and non-specific (e.g., general infrastructure). UN Statistical Office: Current unrequited payments that government units make to enterprises on the basis of the levels of their production activities or the quantities or values of the goods or services which they produce, sell or import. Practitioners definiton: Subsidies allow supply and demand to meet at (end-user) prices below (supply) costs. Subsidies can close the gap between cost and WTP

5 Why Subsidies: Costs > WTP ypical HH: 5 $/m Kerosene: 5-10 l/m at 0,1-1 $/klmh - Grid: kwh/m

6 Why Subsidies? Downsizing... Figure n 20: Segmentation of the market according to the analysis of needs MINAS GERAIS - Survey 1997 US$/month US$ US$ Wp 55 (1%) US$ 50 US$ 45 US$ 40 US$ 35 US$ 30 US$ 25 US$ 20 US$ 15 US$ 10 US$ Wp (8%) 70 Wp (35%) 25 Wp (37%) 15 Wp (19%) US$ 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cumulative number of households according to decreasing expenditures Source: ESMAP2000

7 Why Subsidies: AEI or LAI?! Barefoot 2009

8 Subsidies How? Direct vs. Indirect Fund Direct cash transfers household household household household Fund = recipient = beneficiary Technical assistance Know-how MoE Know-how Access scheme = recipient Regulation scheme household household household household provide r provider provide r Source: Reiche/Teplitz (GTZ 2008) = beneficiaries (increased access) = beneficiaries (fair competition)

9 Source: Reiche/Teplitz (GTZ 2008) Subsidies How? Exit Strategy EXIT STRATEGIES: Typical strengths and weaknesses exit risk covered for Stand-alone pilot Business startup subsidy 5 years Pump Priming Subsidy 5 years (GEF case) Revolving Fund (community / sector) Basket Fund, phased, declining subsidy ongoing funding for programme (by provider, sector, country)...user - + varies Provider(s) - + varies varies Market - varies - varies Sector - varies - varies varies - Remarks typically worst case re exit strategy. If Pilot NGO stays in situ long time, can be sustainable for users. needs attention to overall market sustainability, see EnDev sustainability criteria for positive example too short may collapse if badly managed or designed may not reach last 10% of users. may drain government ressources and create inefficiencies

10 Source: Reiche/Teplitz (GTZ 2008) Subsidies How? The Matrix Subsides How? New Matrix: Design Performance!

11 Source: Reiche/Teplitz (GTZ 2008) The Subsidy Matrix: Many Uses The Subsidy Matrix can help practitioners in the field to optimize the design of schemes in a structured process; identify those subsidy design options (on the x-axis) that can be influenced; check the effect on performance (y-axis) if design variables are changed; understand that not all performance criteria can be optimized at the same time, because there are inherent trade-offs (for instance, a utility that rolls out grid very fast will usually drive up its unit costs, as it has to procure goods which become scarcer on the local market); weigh the performance trade-offs to find a well balanced design; Score Subsidies for quantitative benchmarking.

12 X-Axis: Program Setup 1. Objectives: Growth Environment Equity (fairness) 2. Funding 3. Institutional Setup 4. Recipient Beneficiaries 5. Type direct vs indirect soft loan vs grant Resource Allocation 6. Selection Competition Procurement Economics 7. Amount Timing Disbursement Criteria 8. Regulation Enforcement Monitoring Adjustments 9. Performance many criteria next slide Tax Sector Levy Windfall Fund Ministry Municip. Providers Users Multipliers Alternatives

13 Y-Axis: Program Performance 1. Effectiveness (speed, trade-offs!!!) 2. Efficiency (minimal distortion, price signals, transaction costs, admin costs) 3. Sustainability (market, provider, user) 4. Resilience, predictability (donor, private sector, population), consistency, simplicity, stability 5. PSP/PSD?! 6. Monitorability (transparency) 7. Political leverage, governance (divestiture), Pragmatic Criteria Tax Sector Levy Windfall Fund Ministry Municip. Providers Users Multipliers Alternatives

14 Z-Axis: Market Boundary conditions REF Case: Independence, central planning, multi-player, clear rules for selection and disbursement Thus: Africa: LAC: Transparent, stable, independent. BUT: Isolated, capacity, fiscal space Few operational. weak governance+sector, isolated (perfect vs good), cookie-cutting? >2/3 operational <1/3 efficient. Funding, central vs decentral, design: see table Case REF? Funding Execution Success Issues Argentina yes SECTOR PRIV/PUB Partial Crisis Bolivia Gov REF Unclear PRIV/PUB No REL: FNDR funding and rules unclear in Law, Decentralization, Crisis Brasil Gov SECTOR PRIV/PUB Yes Eletrobras extremely successful, but massive diesel and overextension of grid Chile Yes Tax PRIV Partial Phase One Success, but no hands-off selection and offgrid too late Guatemala Yes SECTOR PRIV No Escrow worked for funding but free rider issue Nicaragua Yes Windfalls PUB No Privatization proceeds subject to annual decision, sector disfunctional, now Ministry Panamá Yes Tax PRIV/PUB? Perú Gov REF Tax SECTOR PUB Partial Grid electrification works fine, offgrid doesn t El Salvador Yes Tax PUB?? Sources: Foster, Reiche, Rysankova (World Bank)

15 Applying the Matrix Benchmark SHS Subsidy Schemes Benchmarking SHS Schemes ex post: Scores for three different policy priorities balanced Effect! Sustainability! Mechanism Model Score A Score B Score C Nicaragua IDB C 16% 19% 15% Bolivia CRE C 20% 24% 16% EnDev Honduras D 32% 37% 24% EnDev Nicaragua D 37% 44% 26% Bolivia UNDP D 38% 35% 30% Nicaragua PERZA D 52% 59% 42% Bolivia GPOBA Pico D 54% 54% 45% Argentina PERMER C 58% 59% 50% Sunlabob Laos C 63% 70% 52% Sri Lanka RERED D 67% 65% 52% Bolivia IDTR C 68% 78% 61% EnDev Bangladesh II D 71% 79% 51% EnDev Bangladesh D 73% 84% 52% Source: Reiche/Teplitz (GTZ 2008)

16 Applying the Matrix Design a new SHS Scheme today B) Ex ante Performance Comparison of possible SHS Subsidy Mechanisms in Bolivia Mechanism 1 Mechanism 2 Mechanism 3 Mechanism 4 weight Name Classic Concession IDTR MSC UNDP Project Comp Classic Dealer Effectiveness scalability implementation speed Efficiency Admin & Regulation simplicity cream skimming danger cost to user User choice (payment/size) depth of local market penetration Sustainability service sustainable risk allocation sustainable Resilience simplicity Government experience with concept PSD Innovation local market PS has experience with model Local PS survives / improves find clients easily Politics n.a. n.a. n.a. n.a. TOTAL SCORE Source: Reiche/Teplitz (GTZ 2008) Rank

17 Applying the Matrix Consumption - Access - Distribution Table: Comparing Efficiencies of consumption subsidy and access instruments Effective Efficient Coverage Targeting Predictability Distortion Adim costs SCORE A) consumption no disconnection across the board price subsidy Lifeline tariff 2 blocks Lifeline tariff 3 blocks Lifeline tariff floating blocks discount for privilegded consumers burden limit based on actual utility expenditure burden limit based on utility expenditure norms B) access across the board grant to new grid connections fixed grant for all SHS (classical dealer) SHS MSC (progressive area subsidy tender) SHS competition by project small village grid investment subsidy C) non-energy with distributional aim other earmarked cash transfer non-earmarked cash transfer food subsidy public works Source: Reiche/Teplitz (GTZ 2008)

18 Recommendations (I) 1. No one-size-fits-all subsidy! 2. Efficiency + Effectiveness need to be operationalized for practitioners via secondary, pragmatic performance criteria 3. There are unavoidable trade-offs between subsidy performance indicators 4. Where distortive cannot be avoided, practitioners should start from idealized, optimal subsidy recommendations to reach feasible improvements from the status quo (which may stray from the optimum). 5. Access can have better targeting performance than consumption, but experience and advice on access subsidy design is rare to date. Source: Reiche/Teplitz (GTZ 2008)

19 Recommendations (II) 6. SHS can potentially have stellar targeting performance, because they lend themselves to progressive selfselection schemes. 7. Where massive results are intended (for instance to reach MDGs in time), direct can be more effective (with respect to sheer scale) than TA measures on the short term (sic). 8. Where direct are applied, stand-alone small pilots can be risky. Therefore, it has to be demonstrated that long-term gains from replication and learning outweigh the relatively high transaction costs. 9. Proper procedures for provider selection are a prerequisite for sound direct and successful private sector participation but sometimes neglected by small donors. Source: Reiche/Teplitz (GTZ 2008)

20 Thanks! Picture: iidevelopment GmbH 2007