## 1colea2019004 ## Source details **Canonical URL:** [1colea2019004](https://www.imf.org/-/media/files/publications/cr/2019/1colea2019004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1colea2019004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1colea2019004.pdf.json) --- ### Preface and executive summary - Mission: Fiscal Affairs Department (FAD) technical assistance mission (Chadi Abdallah (head), Fernanda Brollo, Ayal Frank, Delphine Prady) visited Bogota from March 27 to April 9, 2019 to provide technical assistance on energy subsidy reform at request of the Minister of Finance, Mr. Alberto Carrasquilla Barrera. - Principal engagements: meetings with Minister of Finance, Ministry of Mines and Energy, National Planning Department, CREG, UPME, presidential and economic advisors, and private sector representatives at Fedesarrollo. - Context and objectives: - Energy Subsidy Reform is a key pillar of Colombia’s national development plan. - Rising fiscal challenges and adjustment costs associated with recent migration flows from Venezuela risk derailing government commitment to meet: - a headline deficit target of 2.4 percent in 2019 - the structural deficit target by 2022 under the existing fiscal rule - Reform aims: safeguard the fiscal framework, enhance spending efficiency, free up fiscal resources for development needs. - Key quantified fiscal estimates: - Fiscal cost of fuel subsidies: around 0.35 percent of GDP in 2018. - Fiscal cost of electricity subsidies: around 0.3 percent of GDP in 2018. - Subsidies from discretionary fuel pricing interventions: estimated at around 0.33 percent of GDP over 2016-2018, on a cumulative basis. - Accumulated deficit of the FEPC (fuel stabilization fund): around 1.3 percent of GDP as of end-2018 (includes total interest expense—on a cumulative basis—of around 0.2 percent of GDP over the same period). ### Fuel sector — diagnostics and reforms - Market and production: - Crude oil production "roughly doubled between 2007 and 2015." - Crude oil production "reached 851,000 barrels per day in 2017." - Proven crude oil reserves "reached 1.7 billion barrels in 2017—a 17 percent decline relative to 2016." - Ecopetrol: holds "over 60 percent of the country's reserves"; accounts for "around 64 and 68 percent of crude oil and natural gas production, respectively"; indirectly owns—through Cenit—"roughly 80 percent of the crude oil pipeline capacity". - Pricing framework and FEPC: - Automatic pricing mechanisms exist with monthly caps on adjustments: - "±3 percent for gasoline" - "±2.8 percent for diesel" - FEPC created by Law 1151 of 2007; operationalized by Decreto 4939 of 2008; FEPC is extra-budgetary. - FEPC initial capital: "about US$277 million—all of which were rapidly exhausted by end-2010." - FEPC deficit: reached "10.6 trillion Colombian pesos at the end of year 2018." - FEPC deficit as percent of GDP: - "reached around 1.1 percent of GDP as of end-2018" (earlier statement) - "as of December 2018, cumulative deficit reached around 1.3 percent of GDP, on a cumulative basis—including an associated interest expense of around 0.2 percent of GDP." - Deviations and fiscal cost: - Failures to apply smoothing rules consistently generated a fiscal cost of "0.33 percent of GDP over 2016–2018 (on a cumulative basis)." - "Roughly 70 percent of this fiscal cost is attributed to the application of the price smoothing mechanism for diesel." - Reference price and taxation issues: - Current gasoline pricing uses export parity price (FOB) only; recommendation: use "a weighted average of the export parity (FOB) price and the import parity (CIF) price" with weights equal to import/local-production shares. - Retail fuel prices in Colombia are low relative to peers; example tax comparison: "Total taxation paid on one liter of diesel in Colombia is equal to around 13 cents (average for the country)" versus "around 60 cents per liter" average (OECD data). - Border-region subsidies and smuggling: - Direct subsidy scheme targeted at border regions (Resolucion 40727 from 2016; Resolucion 40266 from 2017); fuel sales in border regions are exempt from VAT and the national tax on fuels (Ley 1819 from 2016). - Geographic price disparities generate incentives for large-scale smuggling. - Recommended fuel-sector reforms (summary): - Depoliticize price setting; administered by an independent body immune to political pressures. - Use weighted-average of export parity (FOB) and import parity (CIF) prices in pricing formula for gasoline and diesel. - Reduce price-structure disparities between border and non-border regions. - Switch to a price-band (PB) smoothing mechanism (3 or 5 percent suggested) that smooths retail pump prices directly, with excise tax (or subsidy) as the adjustor; advantages include greater transparency and avoidance of extraordinary financing. - Proposed 2018 price structure (selected figures from Table 1): - Proposed Retail Price (no subsidy): Gasoline 9,798.89 COB per Gallon; Diesel 7,739.5 COB per Gallon. - Difference Relative to the Current Retail Price (subsidy amount in COB): Gasoline 715.11; Diesel 3,367.7. - Required Price Increase to Eliminate the Subsidy (percent): Gasoline 7.9; Diesel 16.3. - Distributional impacts and welfare: - The richest 20 percent of households receive almost half of total gasoline and diesel subsidies; the poorest 20 percent receive 7 percent. - Overall reform equivalent to a reduction of "around 0.6 percent" in real purchasing power of households on average. - Gasoline: "8 percent increase" → "reduction of 0.1 percent in household consumption on average." - Diesel: "16 percent increase" → welfare effect "around 0.5 percent" on average; shielding transport sector from diesel increase would reduce welfare impact by almost two thirds. - Short-term mitigation: - Options: electronic rebate programs; temporary reductions in excise taxes; targeted mitigation drawing on international experience (Turkey, Morocco). - Any tax reductions should be part of a strategy to increase target fuel taxation over time. - Price-band mechanism details: - Price-band caps retail change per period (examples: 3 percent, 5 percent, 10 percent). - Example: with a 5 percent quarterly band, an 8 percent required change yields a 5 percent pass-through that quarter and 3 percent next quarter. - Mechanism should be symmetric for increases and decreases; can reduce smuggling incentives. - Fiscal rule consideration: moving from extra-budgetary smoothing (FEPC) to price-band may record subsidies and windfalls in the budget, posing challenges for meeting short-term yearly headline deficit targets. ### Electricity sector — diagnostics and reforms - Targeting instrument and thresholds: - Strata system (Law 142 of 1994) is main targeting mechanism; dwellings classified into strata 1–6. - Price subsidies to residential consumers: - Strata 1: 60 percent of cost-recovery tariff (applies to consumption below subsistence threshold) - Strata 2: 40 percent - Strata 3: 15 percent - Subsistence threshold by altitude: - 130 kWh in municipalities ≥ 1,000 meters above sea level. - 170 kWh in municipalities < 1,000 meters above sea level. - Strata 4 pay cost-recovery tariff; Strata 5 and 6 and commercial/industrial consumers pay a 20 percent surcharge on cost-recovery tariff. - Funds and fees: - FAER, FAZNI, PRONE, SGR: support non-interconnected zones; fees: FAZNI 1.5 COP/kWh; PRONE 1.9 COP/kWh; FAER 2.1 COP/kWh. - FENOGE: supports renewables; fee 0.4 COP/kWh; tax incentives for investment. - Solidarity Fund finances price subsidies via cross-subsidies and direct budget transfers; contributions cover about 43 percent of total subsidies. - Fiscal cost and projections: - Fiscal cost of electricity price subsidies: about 0.3 percent of GDP per year over 2016-2018. - If unchanged, projected annual fiscal cost ≈ 0.3 percent of GDP over next four years (projection assumptions: electricity consumption grows at same rate as real GDP over 2019-2022; electricity unit costs grow at average observed over 2014-2018). - Market concentration and fiscal risk: - Four companies represent more than 60 percent of generated and consumed electricity. - Electricaribe accounts for 21 percent of total consumption; mismanagement forced government takeover and bailout measures. - Government interventions (e.g., takeover of pension debt, distributor bailouts) pose fiscal risks. - Targeting failures and welfare impacts: - More than 90 percent of households receive electricity price subsidies. - About one third of total electricity price subsidies benefit households in the top 4 income deciles. - 70 percent of households in strata 3 belong to top 4 income deciles. - Strata allocation is based on dwelling exterior characteristics; many municipal strata assignments are outdated (some date to 1997). - Increasing electricity prices to full cost recovery for strata 1–3 would generate an average welfare loss of about 2 percent; poor households in bottom income decile would lose more than 4 percent on average. - Electricity reform scenarios (four illustrative options): - Scenario 1 (Government): remove subsidies from strata 3; reduce subsidy rates to 50 and 40 percent in strata 1 and 2 respectively. - Scenario 2 (Consumption): lower subsistence thresholds to averages for bottom four income deciles (153 kWh/month low-altitude; 118 kWh/month high-altitude); only households below thresholds in strata 1–3 receive subsidies. - Scenario 3 (SISBEN): eligibility requires strata 1–3 AND SISBEN4 score below 16.3; subsidy rates unchanged. - Scenario 4 (Safety Net): target beneficiaries of Familias en Accion, Jovenes en Accion, Colombia Mayor with a flat transfer of 21,531 COP/month. - Scenario fiscal and distributional outcomes (selected figures): - Fiscal savings: - Government scenario: 0.04 percent of GDP. - Consumption scenario: 0.15 percent of GDP (Table 5). - SISBEN scenario: up to 0.13 percent of GDP. - Safety Net scenario: 0.18 percent of GDP. - Progressivity (percent of total transfer to bottom 3 deciles): Status Quo 48; Government 38; Consumption 41; SISBEN 59; Safety Net 62. - Coverage (percent of bottom 3 deciles covered average): Status Quo 76; Government 77; Consumption 51; SISBEN 64; Safety Net 45. - Generosity (percent of total expenditure - bottom 3 deciles average): Status Quo 2.9; Government 2.6; Consumption 1.5; SISBEN 2.2; Safety Net 1.6. - Annex I distributional table (selected rows): - Average loss in bottom decile: Government -0.3%; Consumption -1.5%; Sisben -0.3%; Safety Net -1.7%. - Share of losers in bottom decile: Government 85%; Consumption 24%; Sisben 8%; Safety Net 62%. - Share of winners in bottom decile: Government 0%; Consumption 0%; Sisben 0%; Safety Net 30%. - Implementation caveats and recommendations: - SISBEN4 coverage is incomplete; households must request scores from municipalities (risk of non-take-up). - Distributors cannot currently match strata and SISBEN scores with billing units; billing-system changes required. - Pilot experiments in representative departments recommended before national rollout. - Mitigation increases reform success but reduces fiscal savings; mitigation cost examples (Table 5): Government 0.01 percent of GDP; Consumption 0.02 percent of GDP; Safety Net 0.05 percent of GDP; SISBEN quasi-null. - Complementary measures: appliance replacement, targeted energy-efficiency programs, staged compensation prior to threshold tightening. ### Communication, political economy, and implementation sequencing - Diagnostics: - Insufficient internal coordination hampers persuasive national communication on energy price reforms. - No fully-fledged plan to engage external stakeholders as advocates. - Public opinion doubts existence of subsidies; absence of clear government communication risks opposition. - Overarching principles for reform: - Gradually phase out fuel subsidies. - Improve targeting of electricity subsidies over the medium term. - Achieve net fiscal gains while reducing distortions. - Accompany subsidy removal with social safety net improvements. - Timing and macro coordination: - Gradual phasing-in of price increases recommended to prevent reversals. - Coordinate with Central Bank and consider wage bargaining cycle (wage bargaining generally in December, references annual headline inflation). - Recommendation: implement reforms in the first half of the year to avoid persistence of inflationary effects into wage negotiations and potential wage-price spirals. - Communication strategy recommendations: - Create a dedicated Strategic Communication Unit (SCU) mandated by the president and cabinet to organize and manage reform communication, build capacity, develop messages, and facilitate dissemination. - Establish an inter-ministerial communications group (MCG) chaired by the SCU director. - Build a public-private Partnership Network of external stakeholders (research centers, sector experts, business associations, private companies) to act as advocates. - Research and campaign design: - Pre-implementation research: political-economy analysis; in-depth interviews (IDIs); focus groups; public opinion surveys. - IDI findings (selected percentages): - Fuel sector perceived problems: High Subsidies 44%; Political Interference in Price Setting 17%; Lack of Competition 11%. - Electricity sector perceived problems: Investment Deficit 25%; Culture of non-payment 21%; Poor quality of service 17%. - Communication campaign components: message sequencing, branding, website and social media, infographics, traditional and social media targeting, media relations, advocacy, events, capacity building, crisis communications. - Measurement and monitoring: set measurable goals tied to campaign objectives; track reach, frequency, and impact on public opinion. - Political-economy mapping: - Map stakeholders by Interest and Influence to identify allies and potential blockers; use mapping to target outreach and reduce political risks. ### Case studies, macro analysis, and international lessons - Turkey case study: - Automatic pricing adopted in 1998; full liberalization from 2005; high excise taxes resulted in high retail prices. - Mitigating measures: VAT and excise exemptions for public transport; tax rebates for diesel in agriculture. - Morocco case study (Annex II highlights): - Gradual phasing-out of unit subsidies between September 2013 and December 31, 2014; price revisions regularized and eventual full liberalization. - Accompanying measures: Fund for Social Cohesion; transport-sector measures; ongoing efforts to improve social protection and unified social register. - Lessons: stakeholder consultation, gradual approach, improve social safety-net targeting before removing subsidies with high impact on poor households. - Macro cross-country analysis (Annex III): - Flexible local projection approach (Jorda, 2005); sample: monthly data 2000:1–2014:6; 110 countries. - Key finding: wage flexibility matters for inflationary impacts of retail fuel price shocks: - Effects on inflation are higher where collective bargaining is more centralized. - Effects are more persistent where wage flexibility is lower. *Source: PREFACE and EXECUTIVE SUMMARY, technical assistance mission report (FAD), March 27–April 9, 2019.* ### PREFACE _________________________________________________________________________________________ 6 ### PREFACE AND EXECUTIVE SUMMARY ### Preface - A Fiscal Affairs Department (FAD) technical assistance mission comprising Chadi Abdallah (head), Fernanda Brollo, Ayal Frank, and Delphine Prady visited Bogota from March 27 to April 9, 2019 to provide technical assistance on energy subsidy reform at the request of the Minister of Finance, Mr. Alberto Carrasquilla Barrera. - The mission met with a broad set of government officials and agencies, including: - Mr. Alberto Carrasquilla Barrera, Minister of Finance - Ms. María Fernanda Suárez Londoño, Minister of Mines and Energy - Mr. Juan Alberto Londoño, Deputy General Minister of Finance - Mr. Diego Mesa Puyo, Deputy Minister of Energy - Mr. Juan Camilo Ostos Romero, Deputy Minister of Transportation - Mr. Rafael Puyana, Deputy Sectorial Director at the National Planning Department - Mr. Carlos Enrique Moreno, Presidential Advisor and Director of the Delivery unit - Mr. Andres Pardo, Chief Economic Advisor for the President - Mr. Ricardo Ramirez, Director of the Mining and Energy Planning Unit (UPME) - Mr. Christian Jaramillo, Executive Director of CREG - Mr. Jose Moreno, Director of Hydrocarbons at the Ministry of Mines and Energy - Ms. Catalina Rueda, Deputy Director Mines and Energy at the National Planning Department - The mission engaged with private sector representatives and experts at Fedesarrollo. - Special thanks expressed to Ms. Karen Rodriquez, Advisor to the Deputy General of Finance, and Ministry of Finance staff for hospitality and logistical and technical support. ### Executive summary — Context and objectives - Energy Subsidy Reform is a key pillar of Colombia’s national development plan. - Rising fiscal challenges in Colombia, exacerbated by adjustment costs associated with recent large migration flows from Venezuela, risk derailing the government's commitment to meet: - a headline deficit target of 2.4 percent in 2019 - its structural deficit target by 2022 under the existing fiscal rule - Energy subsidy reform is part of the government strategy to safeguard the fiscal framework, enhance spending efficiency, and free up fiscal resources for development needs. ### Key quantified fiscal estimates - Fiscal cost of fuel subsidies: around 0.35 percent of GDP in 2018. - Fiscal cost of electricity subsidies: around 0.3 percent of GDP in 2018. - Subsidies from discretionary fuel pricing interventions: estimated at around 0.33 percent of GDP over 2016-2018, on a cumulative basis. - Accumulated deficit of the FEPC (fuel stabilization fund): around 1.3 percent of GDP as of end-2018 (this includes a total interest expense—on a cumulative basis—of around 0.2 percent of GDP over the same period). ### Principal diagnostics — Fuel sector - Automatic pricing mechanisms for gasoline and diesel exist, linking retail price evolution to international prices; monthly price adjustments are capped at: - 3 percent for gasoline - 2.8 percent for diesel - Price smoothing is achieved through a fuel stabilization fund (FEPC), but discretionary interventions have often prevented consistent application of smoothing rules, producing pass-throughs smaller than prescribed and effectively creating subsidies. - The pricing mechanism for gasoline uses a lower reference price based solely on the export parity price (FOB) rather than a reference price based on the average of export parity (FOB) and import parity (CIF), implying subsidies when domestic demand is met through both imports and local production. - A direct subsidy scheme exists targeted at border regions. - Geographic price disparities between border and non-border regions generate incentives for large-scale smuggling and stem from lower reference prices and large tax exemptions in border areas. - The FEPC is extra-budgetary; implications: - reinforces public perception that fuel subsidies do not exist since they do not appear in the budget - exacerbates transparency concerns that can hinder public acceptance of price reforms ### Principal diagnostics — Electricity sector - Electricity price subsidies apply only to residential consumption levels below a “subsistence” threshold. - Electricity subsidies are financed through: - a Solidarity Fund via cross-subsidization: residential consumers in stratas 5 and 6 and commercial and industrial consumers pay a 20 percent surcharge on electricity tariffs - direct budget transfers because contributions do not fully cover total subsidy costs - Institutional and market issues: - Market concentration generates large systemic players with potentially large fiscal risks. - Regulatory tariff-setting process is complex and slowed by back-and-forth between CREG and its Executive Committee. - Targeting issues: - The strata system (1 to 6) poorly maps household income distribution. Currently: - about one-third of electricity subsidies benefit households in the top four income deciles - households in the bottom four income deciles receive only about half of total subsidies - A complete removal of electricity subsidies without mitigating measures would generate significant welfare losses among poor households. ### Communication and governance diagnostics - Insufficient internal coordination hampers design and delivery of a persuasive national communication campaign on energy price reforms. - No fully-fledged plan yet to engage external stakeholders as advocates for reform. - Public opinion holds a dim view of potential energy price increases and debates whether energy subsidies exist; absence of clear government communication risks public opposition. ### Reform approach — overarching principles - Carefully designed reforms should: - Gradually phase out fuel subsidies - Improve targeting of electricity subsidies over the medium term - Achieve net fiscal gains while reducing distortions - Accompany subsidy removal with improvements in the social safety net - A gradual (phasing-in) approach to price increases is recommended to ensure success and prevent price reversals. - Coordination with the Central Bank is important to avert negative macroeconomic consequences; timing matters because wage bargaining in Colombia generally occurs in December and references annual headline inflation. - Reforms implemented in the first half of the year are preferable to avoid persistence of inflationary effects into wage negotiations and potential wage-price spirals. ### Identified sector-specific reform options — summary - Fuel sector: - Depoliticize the price setting mechanism; administered by an independent body immune to political pressures and discretionary interventions. - Use the weighted-average of export parity and import parity prices in the pricing formula for gasoline and diesel (this would imply increases in retail prices). - Reduce disparities in price structure between border and non-border regions to reduce smuggling incentives. - Switch to a price-band (PB) smoothing mechanism (of 3 or 5 percent) that smooths retail pump prices directly; under PB, the excise tax (or subsidy) is the adjustor. Advantages versus FEPC: - more transparent and easier for the public to understand - easier to implement and avoids extraordinary financing operations by the Ministry of Finance - Electricity sector: - Audit distribution and retailers’ declarations of contributions (surcharges) to ensure correspondence with municipal strata records to reduce fiscal exposure from distributor mismanagement. - Simplify tariff-setting by giving CREG’s Executive Committee a consultative role. - Complement strata targeting with a socio-economic score (SISBEN4) to reduce leakages to higher-income households while protecting the poor. - Transition toward targeting solely on SISBEN4, then gradually to an electricity earmarked cash transfer; pilot experiments in representative regions are recommended before national rollout. Ultimately integrate electricity subsidies into a well-targeted social safety net. ### Communication strategy recommendations — summary - Create a dedicated communication unit mandated by the president and cabinet to: - organize and manage all reform-related communication campaigns - build government communication capacity - develop messages and facilitate dissemination - Develop and secure a public-private network of external stakeholders to act as advocates and advance the reform agenda by reaching and informing target audiences and shaping the national debate. ### Additional considerations for successful reform - Strengthen the social safety net and shield vulnerable households. - Phase in price increases. - Coordinate timing with monetary policy and the wage bargaining cycle to reduce inflation persistence and avoid wage-price spirals. *Source: PREFACE and EXECUTIVE SUMMARY, technical assistance mission report (FAD), March 27–April 9, 2019.* ### 1. Oil production in Colombia has grown significantly over the last 15 years, making ### 1colea2019004 - 1. Oil production in Colombia has grown significantly over the last 15 years, making ### Oil production, regulatory reforms, and recent trends - Colombia became the third largest oil producer in South America after Venezuela and Brazil following reforms since 2003 that: - Allowed foreign oil companies to obtain full ownership in the upstream industry and compete with Ecopetrol. - Created ANH (Agencia Nacional de Hidrocarburos), releasing Ecopetrol from administrative and regulatory responsibilities and increasing its autonomy. - Consolidated planning and oversight for upstream and downstream activities in the Ministry of Mines and Energy in 2012. - Crude oil production: - "Roughly doubled between 2007 and 2015." - "Reached 851,000 barrels per day in 2017," reflecting depletion of existing fields and lack of new discoveries. - Proven crude oil reserves: - "Reached 1.7 billion barrels in 2017—a 17 percent decline relative to 2016." ### Market structure and key industry actors - Ecopetrol: - Integrated national oil company holding "over 60 percent of the country's reserves." - Accounts for "around 64 and 68 percent of crude oil and natural gas production, respectively." - Indirectly owns—through its subsidiary Cenit—"roughly 80 percent of the crude oil pipeline capacity and most of the existing refineries in Colombia." - Petrochemical production capacity: "475,000 tons per year." - Partly privatized in 2007 via an IPO that "raised around US$2.8 billion in exchange of a 10 percent stake." - "Currently, the government owns about 85 percent of the total outstanding shares." - Downstream market: - "19 wholesale distributors—albeit the market is effectively dominated by three major distributors—Terpel, Distribuidora Andina, and Chevron—that jointly control 80 percent of the market." - "More than 6,000 retail distributors (mostly gas stations)." ### Domestic demand, imports, and consumption trends - Despite being a net exporter of crude oil, Colombia has historically imported refined fuel products to meet domestic demand. - Import shares (data for year 2018): - "Imports of refined products amount to around 5 and 25 percent of total domestic demand for diesel and gasoline, respectively." - Consumption growth (last decade): - "Gasoline consumption increased significantly ... growing by almost 50 percent." - "Diesel consumption ... increasing by only 15 percent." ### Fuel pricing framework and price smoothing mechanism - Historical price setting: - Ministry of Mines and Energy (MME) determines monthly prices for diesel and gasoline. - 1998 regulations (Resoluciones 82438 and 82439) introduced pricing formulas incorporating supply cost ("ingreso del productor", IP) and set prices across the chain. - Application of the 1998 formulas was consistent only from January to July 1999; thereafter political interventions undermined consistent application, resulting in fuel being sold below cost between 1998 and 2006. - Fuel price stabilization fund (FEPC): - Created by Law 1151 of 2007; operational aspects established by Decreto 4939 of 2008. - FEPC is extra-budgetary and the framework for smoothing fuel prices. - MME procedures introduced between 2011 and 2012 (Resoluciones MME 181602 from 2011 for gasoline and 181491 from 2012 for diesel) link producer incomes to international fuel prices. - Price smoothing procedure (multi-step): - i. Estimate daily trend in (the log of) international reference prices over the previous 60 days. - ii. Convert the estimate to an equivalent monthly change. - iii. Use the monthly estimate to set the supply cost for the following month: - If international reference price is above (below) the supply cost and the estimated monthly change is positive (negative), supply cost increases (decreases) by the estimated monthly change. - Changes are capped at "±3 percent for gasoline, and at   ±2.8 percent for diesel." - Note: procedures set how changes to producer’s income should be set, but do not set the level of the producer’s income. ### Financial position and deficits of FEPC - Initial capital and exhaustion: - FEPC was established in 2008 with "an initial capital of about US$277 million—all of which were rapidly exhausted by end-2010." - Cumulative deficits and financing: - Between 2011 and 2018 the FEPC deficit increased sharply, reaching "10.6 trillion Colombian pesos at the end of year 2018." - The fund’s deficit financing: - Deficits were financed from budgetary resources up until year 2011; after 2011 extraordinary credit operations (direct borrowing from the treasury) were required. - A 2016 reform reestablished budgetary financing (Ley 1819 from 2016). - Percentage of GDP estimates: - FEPC’s deficit "reached around 1.1 percent of GDP as of end-2018" (earlier statement). - As of December 2018, cumulative deficit "reached around 1.3 percent of GDP, on a cumulative basis—including an associated interest expense of around 0.2 percent of GDP." ### Deviations from smoothing rule, fiscal cost, and drivers of the deficit - Widening gap between MME reference price and simulated supply cost under the smoothing rule: - Deviations are evident and "more prevalent in the case of diesel and tend to occur during periods of rising international prices." - The simulated reference price was estimated for June 2015 to February 2019 using the multi-step procedure and compared to observed supply cost. - Fiscal cost of deviations and subsidies: - "Failures to consistently apply the price smoothing rule have generated a fiscal cost of 0.33 percent of GDP over 2016–2018 (on a cumulative basis)." - "Roughly 70 percent of this fiscal cost is attributed to the application of the price smoothing mechanism for diesel." - "Overall, deviations from price smoothing rules, as specified under the law, imply the prevalence of subsidies." - Other contributors to FEPC deficit: - (i) A direct subsidy scheme targeted at border regions that specifies a supply cost in retail pricing lower than actual cost for pre-approved fuel volumes. - Resolucion 40727 from 2016; Resolucion 40266 from 2017 sets methodology for subsidized volumes based on population and GDP. - Fuel sales in border regions are exempt from VAT and the national tax on fuels (Ley 1819 from 2016). - (ii) Institutional factors, including inability of FEPC to receive inflows between mid-2014 and early 2016 due to a 2013 Supreme Court ruling (Sentencia C-621/2013) and later legal developments (Ley 1739; Sentencia C-726/15; Ley 1819 from 2016). ### Price levels, taxation, and regional disparities - Retail prices and taxation: - Retail fuel prices in Colombia are low relative to a group of emerging economies and LAC peers. - Causes of low prices: - Lack of full pass-through from international prices due to inconsistent application of smoothing formulas. - Relatively low taxation of fuel products in Colombia. - Example tax comparison: - "Total taxation paid on one liter of diesel in Colombia is equal to around 13 cents (average for the country)" versus "around 60 cents per liter" average across countries (based on OECD data). - Reference price choice: - Current formula incorrectly uses export parity price (FOB) as reference price for gasoline. - A more appropriate reference is "a weighted average of the export parity (FOB) price and the import parity (CIF) price," with weights equal to relative shares of imports and local production in domestic consumption. - Using export parity alone implies a subsidy because Colombia meets demand through both imports and local production. - Regional price disparities: - Border regions benefit from direct subsidies (lower reference price in formulas) and large tax exemptions (Figure 7). - Special regimes aim to limit smuggling from Venezuela and provide economic support to less-developed border regions. - Price disparities create incentives for smuggling from border to non-border regions, which can have large negative consequences that may outweigh perceived benefits. - Recommendation implication: "Special taxation regimes for fuel products may not be the proper approach for addressing issues pertaining to the redistribution of income, and thus should be carefully re visited in the context of the overall tax policy framework." ### Measurement of consumer price subsidies and near-term projections - Consumer price subsidies are calculated using the price-gap approach: difference between the full pass-through price (weighted average of export and import parity prices, plus transport costs, margins and taxes) and the regulated price. - Fiscal cost estimates and outlook: - "The fiscal cost of fuel subsidies is estimated at around 0.35 percent of GDP in 2018." - Expected to "stabilize over the medium term after slightly declining in 2019" due mainly to forecasted international oil price dynamics. - Estimates for 2019–2022 are projections (Figure 8). *Source: IMF staff calculations and excerpts from 1colea2019004.* ### 14. Carefully designed reforms entail a gradual phasing out of subsidies in the case of ### 14. Carefully designed reforms entail a gradual phasing out of subsidies in the case of fuel products. Reform options should aim at reducing the incidence of energy subsidies while at the same time improve their targeting. The approach may differ across sectors. ### Pricing governance and automatic mechanisms - Recommendation: Depoliticize the price setting mechanism to eradicate discretionary interventions and their fiscal costs; the automatic pricing mechanism should be administered by an independent body fully immune from political pressures and discretionary interventions (paragraph 15). - Use the weighted-average of export parity and import parity prices in fuel pricing formulas for both gasoline and diesel as the appropriate reference price for Colombia (paragraph 16). - An automatic fuel pricing mechanism (AFPM) does not necessarily deliver sustained reform and should be embedded in broader reforms (paragraph 23): - Countries have abandoned AFPMs when unwilling to pass sharp international price increases to consumers. - Sustainability is enhanced by accompanying reforms including expansion of targeted social safety nets and social spending programs. - Price smoothing, if applied consistently and symmetrically, implies that on average—over the medium to long-term—there will be no subsidies, but there is a short-run trade-off between fiscal cost volatility and retail price volatility. ### Proposed 2018 price structure and fiscal simulations - Table 1: Proposed Price Structure for Gasoline and Diesel Under the Reform, 2018 (COB per Gallon) — IMF staff calculations based on monthly estimates weighted by consumption shares of border and non-border regions (paragraphs 16, Table 1). - Supply cost - fuel: Gasoline 4,842.45; Diesel 3,521.8 - Supply cost - ethanol/biodiesel: Gasoline 690.49; Diesel 32.6 - Taxes: Gasoline 2,577.61; Diesel 829.2 - Margins: Gasoline 1,105.7; Diesel 1,103.2 - Other costs and fees: Gasoline 582.7; Diesel 552.7 - Proposed Retail Price (no subsidy): Gasoline 9,798.89; Diesel 7,739.5 - Difference Relative to the Current Retail Price (subsidy amount in COB): Gasoline 715.11; Diesel 3,367.7 - Required Price Increase to Eliminate the Subsidy (percent): Gasoline 7.9; Diesel 16.3 - Fiscal impact simulations and mitigation options (paragraph 17): - A reduction in fuel taxation can be an option to initially offset price increases from using appropriate reference prices, but Colombia’s total fuel taxation is well below the average across countries; further reductions would worsen that position. - Any short-run reduction in fuel taxation should be addressed within a strategy to increase Colombia’s target fuel taxation going forward (paragraph 17). - Example: a short-run reduction in the national excise tax should be reversed gradually in the medium term—or be offset by a gradual increase in the current relatively low carbon tax. - Table 2 and Table 3: Alternative scenarios for fuel tax and VAT reductions to offset retail price increases in Bogota under reform (data for 2018) — IMF staff calculations (paragraph 17 and table captions). - Gasoline and Diesel scenarios (selected rows preserved exactly as in source tables): - Scenario 1 (Consumers pay 100 percent of implied retail price increase): - Gasoline: Retail price increase (in percent) 8; VAT (rate) 19; Excise Tax (Impuesto nacional, COB) 4,59459.1 16,19438.8 (table text formatting preserved as in source) - Diesel: Retail price increase (in percent) 8; VAT (rate) 19; Excise Tax (Impuesto nacional, COB) 16,19438.8 (table text as presented) - Scenario 2 (Consumers pay 75 percent of implied retail price increase): - Gasoline: Retail price increase (in percent) 6; VAT (rate) 19; Excise Tax (Impuesto nacional, COB) 2,8323.9 12,1997.2 - Diesel: Retail price increase (in percent) 6; VAT (rate) 16; Excise Tax (Impuesto nacional, COB) 12,1997.2 - Scenario 3 (Consumers pay 50 percent of implied retail price increase): - Gasoline: Retail price increase (in percent) 4; VAT (rate) 19; Excise Tax (Impuesto nacional, COB) 1,9108.68150 - Diesel: Retail price increase (in percent) 4; VAT (rate) 12; Excise Tax (Impuesto nacional, COB) 8,7 - Scenario 4 (Consumers pay 25 percent of implied retail price increase): - Gasoline: Retail price increase (in percent) 2; VAT (rate) 18; Excise Tax (Impuesto nacional, COB) 0490 - Diesel: Retail price increase (in percent) 2; VAT (rate) 9; Excise Tax (Impuesto nacional, COB) 41 - Scenario 5 (Consumers pay 10 percent of implied retail price increase): - Gasoline: Retail price increase (in percent) 1; VAT (rate) 16; Excise Tax (Impuesto nacional, COB) 0250 - Diesel: Retail price increase (in percent) 1; VAT (rate) 17; Excise Tax (Impuesto nacional, COB) 2-2 - Note: Table entries are presented verbatim as in the source tables; column and cell formatting in source contains complex concatenations and spacing that are preserved in the text above. ### Distributional and welfare impacts - Fuel subsidies accrue predominantly to the non-poor (paragraph 19): - The richest 20 percent of households receive almost half of the total subsidies on gasoline and diesel. - The poorest 20 percent receive only 7 percent of these subsidies. - Source for distributional calculation: 2017 ENPH expenditure and income survey, 2010 input-output table prepared by DANE and IMF calculations. - Welfare impact estimates of the proposed reform (paragraph 20): - Overall proposed reforms are equivalent to a reduction of around 0.6 percent in the real purchasing power of households on average. - Gasoline: using the appropriate supply cost measure leads to an 8 percent increase in gasoline prices, equivalent to a reduction of 0.1 percent in household consumption on average. - Diesel: the welfare effect is almost five times larger, averaging around 0.5 percent—reflecting a larger subsidy for diesel (16 percent increase under the reform compared to gasoline 8 percent increase) and higher share of diesel in household spending (direct and indirect). - Most of the welfare effect of the increase in diesel prices is indirect via higher prices of goods using diesel as an input. - Shielding the transportation sector from the increase in diesel prices would reduce the welfare impact by almost two thirds (paragraph 20). ### Short-term mitigation and sectoral considerations - Short-term mitigation options for diesel price increases (paragraph 18): - Electronic rebate programs. - Reductions in excise taxes (temporary). - Examples: Turkish energy subsidy reform tax exemptions/rebates and Morocco experience (Annex 2). - Policy guidance: - Any initial tax reductions should be part of a strategy to increase target fuel taxation over time (paragraph 17). - Fully shielding consumers may require substantial VAT reductions: example estimates indicate reducing VAT on gasoline from 19 percent to around 9 percent and on diesel from 19 percent to 1 percent to fully shield consumers (paragraph 17). - Gradual phasing out of mitigation measures is recommended so that short-term offsets are removed in the medium term. ### Price-band (PB) smoothing option - Proposal: Switch to a price-band mechanism of 3 or 5 percent to smooth retail fuel prices at the pump (paragraph 21). - Price band caps the magnitude of retail price changes in a given adjustment period as a proportion of the current retail price (examples: 3 percent, 5 percent, 10 percent). - Illustration: with a 5 percent quarterly band, an 8 percent required change results in a 5 percent pass-through that quarter and the remaining 3 percent in the following quarter. - Advantages relative to smoothing via the stabilization fund: - More transparent and easier for the public to understand. - Easier to implement and does not require extraordinary financing operations by the ministry of finance. - The mechanism should operate symmetrically for both price increases and decreases and can reduce incentives for smuggling by eliminating the certification mechanism that compensated middle agents ("Mayorista") (footnote 17). - Fiscal rule considerations (paragraph 22): - Moving away from extra-budgetary smoothing (FPEC) to a price-band may record subsidies and windfalls in the budget, posing risks for meeting short-term yearly headline deficit targets under the fiscal rule. ### Communication, timing, and macro coordination - Gradual approach to price increases is highly desirable to avoid sharp opposition (paragraph 24). - Coordination with the Central Bank is important to manage timing and size to avoid converting transitory supply shocks into persistent demand-side shocks and wage-spiral effects (paragraph 24). - Recommendation specific to Colombia: reform energy prices during the first half of the year to avoid overlaps with December wage bargaining that centers on annual inflation. ### Case studies and international lessons - Turkey case study (Box 1, paragraph 26 and box text): - Turkey adopted automatic pricing in 1998 and fully liberalized fuel prices starting in 2005; fuel prices are now among the highest in OECD countries due to relatively high excise taxes. - Mitigating measures included VAT and excise tax exemptions for public transport companies and tax rebates for diesel used in agriculture (2006 corporate tax law and 2007 Ministry of Agriculture rebate program). - These measures helped mitigate indirect impacts of higher diesel prices on lower-income households. --- _Economic and Policy Analysis Unit, IMF staff calculations; sources cited in the chapter: 2017 ENPH expenditure and income survey, 2010 input-output table prepared by the National Administrative Department of Statistics (DANE), Ministry of Mines and Energy, and authorities' data._ ### 28. According to law 142 of 1994, the housing stratification—i.e., strata system—is the ### 1colea2019004 - 28. According to law 142 of 1994, the housing stratification—i.e., strata system—is the ### Housing stratification (strata) and targeting mechanism - Law 142 of 1994 establishes the housing stratification (strata system) as the main mechanism to target subsidies for public utilities, including electricity. - The National Council for Socio-Economic policy—CONPES—established the methodology to attribute stratas to dwellings in 1997; a different methodology was developed for the city of Bogotá. - The final unit of stratification is the dwelling (not the household). - Urban dwellings: stratification derived from averaging results on each side of a block using a form with between 8 and 11 variables describing dwelling exterior (e.g., type of garage, size of garden, type of road). As city complexity decreases, the number of factors used is reduced. - Rural dwellings: two methodologies — one for small city centers and another for farms and dispersed dwellings. - Dwellings are classified into 6 stratas: strata 1 = lowest socio-economic dwellings; strata 6 = highest socio-economic dwellings. ### Electricity subsidies: instruments, rates, thresholds, and funds - Two broad types of electricity subsidies: - Direct subsidies to producers and residential consumers. - Price subsidies to residential consumers in stratas 1 to 3. - Objectives of subsidies: - Encourage producers to install capacity in non-interconnected zones (outside the SIN) and invest in renewable energies. - Help households in stratas 1 to 3 via a price subsidy deducted from electricity bills. - Direct producer and user subsidies: - Channeled through five Funds—FAER, FAZNI, PRONE, SGR and FENOGE. - FAER, FAZNI, PRONE and SGR support electricity producers to serve non-interconnected zones and zones with below-standard service. - FENOGE (created by law 1715 of 2014) supports producers and end-users to promote renewable generation and energy efficiency. - Direct financial support forms: i) direct transfer for capital expenditure investment, ii) subsidized financial tools (e.g., subsidized loans), iii) tax reduction and exemptions. - Direct support to final consumers can be ear-marked cash transfers to purchase efficient appliances. - Price subsidies to residential consumers: - Households in strata 1, 2 and 3 receive price subsidies of 60, 40 and 15 percent of the cost-recovery tariff, respectively. - Subsidy applies only to consumption below a “subsistence” threshold, set according to altitude: - Subsistence threshold is 130 kWh in municipalities that are 1,000 meters above sea level or more. - Subsistence threshold is 170 kWh in municipalities located below 1,000 meters above the level of the sea. - Consumption above the threshold is priced at cost recovery. - Households in strata 4 pay the cost-recovery tariff. - Households in strata 5 and 6, along with commercial users, pay a contribution of 20 percent of the cost-recovery tariff over their entire consumption. - Other funds and fees: - Four Funds to encourage investment outside the SIN: FAER, FAZNI, PRONE, SGR. - Extra fees on final consumers’ bill: 1.5 COP/kWh for FAZNI; 1.9 COP/kWh for PRONE; 2.1 COP/kWh for FAER. - Royalties from extracting sector for SGR. - One Fund to encourage investment in renewables: FENOGE. - Extra fee on final consumers’ bill of 0.4 COP/kWh for FENOGE. - Tax expenditure (income tax deductions up to 50 percent of investment value, accelerated depreciation, VAT and custom duties exemptions). - One Fund to finance price subsidies: Solidarity Fund. - Financed by cross-subsidization by residential consumers in strata 5 and 6 and commercial consumers, and direct budget transfers. - There is a seventh Fund—Fundo de Energia Social (FOES)—that provides an additional flat support of 46 COP/kWH to residential consumers in strata 1 and 2 in areas with sub-standard electricity service. - Example government intervention due to distributor distress: - The government decided that all residential consumers in Strata 4 to 6, and all industrial and commercial consumers, would pay an extra 4 COP/kWh to start bailing out Electricaribe. ### Tariff setting mechanism (summary of Box 2) - The electricity tariff CTC is the sum of: - Fixed commercialization costs Ccf, set to 0 by CREG’s Executive Committee. - Variable cost of generating, transmitting and distributing electricity Ccv, decomposed as: Ccv = G + T + D + Cv + PPer + PRes (components as in the source text). - G: generation cost (spot market price + “reliability charge” from auctions). - T: transmission cost (UPME’s plan to maintain and upgrade the grid). - D: distribution cost (operating expenditure and five-year expansion plan). - Cv: commercialization variable cost (metering, billing, collecting). - PPer: recognized losses, capped per day and per segment. - PRes: “restrictions” recognizing insufficient grid dispatch capacity in certain areas. - CREG process: - CREG proposes general tariff methodologies to CREG’s Executive Committee; once adopted, methodologies remain valid for 5 years and must be translated into tariffs for each electricity agent — translations also submitted to the Executive Committee. - CREG cannot apply a methodology to each company without prior approval of the Executive Committee. - Tariffs are currently set at full cost-recovery levels, enabling companies to cover all OPEX and all past and future capital expenditure. - By law, electricity is exempted from VAT. - Benchmark: At 0.15 USD/kWh in June, Colombian electricity tariffs were on par with the world average of 0.14 USD/kWh and below the average of 0.16 USD/kWh across comparable regional countries. - Subsidy formulas for strata 1–3 (as presented): - CTC1 = Ccv × 0.4 - CTC2 = Ccv × 0.5 - CTC3 = Ccv × 0.85 - Where S is set at 173 kWh/month in low-altitude areas and 130 kWh/month in high altitude areas. ### Fiscal cost, financing gaps, and projections - The fiscal cost of electricity price subsidies was relatively constant at about 0.3 percent of GDP per year over 2016-2018. - Contributions only cover about 43 percent of total subsidies; direct budget transfers are necessary to finance the remainder. - Estimates based on a price-gap approach using aggregate consumption data and average cost-recovery prices and final tariffs. - If the price subsidy scheme remains unchanged over the next four years, their annual fiscal cost is projected to represent about 0.3 percent of GDP. - Projection assumptions noted: - Electricity consumption assumed to grow at the same rate as real GDP over 2019-2022. - Electricity unit costs’ growth set at the average unit cost’s growth observed over 2014-2018 (alternative: half the inflation rate projected for 2019-2022 yields similar projections). ### Market concentration and fiscal risks - Electricity market concentration generates large systemic players which can represent a fiscal risk. - Currently, four companies represent more than 60 percent of generated and consumed electricity. - Electricaribe: the biggest distributor and retailer in the region with 21 percent of total consumption; its mismanagement and financial difficulties forced government takeover and bailout measures. - Government interventions considered that may have fiscal cost: - Taking over debt of Electricaribe’s pension scheme. - Measures potentially reducing electricity market competitiveness (e.g., raising cap on horizontal integration to attract investors), potentially increasing “too big to fail” risk. - Distributor cash-flow risks: - Delayed governmental payments to electricity distributors generate additional financial costs equal to interests on distributors’ outstanding balance (regulated by CREG); these can be passed through to final consumers and weaken distributor finances. ### Distributional targeting failures and distortions - Targeting inefficiency: - More than 90 percent of all households receive electricity price subsidies. - About one third of total electricity price subsidies currently benefit households in the top 4 income deciles. - 70 percent of households in strata 3 belong to top 4 income deciles. - Strata allocation is based solely on exterior characteristics of dwellings and does not use household income variables. - Municipalities are responsible for updating strata allocations; many fail to do so (some allocations date back to 1997). - Government does not audit electricity retailers’ clientele mapping to the strata system before compensating distributors and retailers. - Distortive effects and economic costs: - Electricity price subsidies encourage over-consumption and reduce incentives for energy-saving behavior. - Current subsistence levels are set too high to bind household consumption. - Cross-subsidies from non-residential consumers to households may affect commercial sector competitiveness; some industrial companies still subject to contributions. - In 2018, about 75 percent of all industrial consumers, representing only 20 percent of total industrial consumption of electricity, were still subject to the contribution. - Welfare impact of eliminating subsidies: - Increasing electricity prices to full cost recovery in strata 1, 2 and 3 would generate an average welfare loss of about 2 percent. - Poor households in the bottom income decile would suffer an average welfare loss of more than 4 percent. ### Reform scenarios: fiscal and distributional tradeoffs - Reforming electricity subsidies requires well-designed sequencing given large welfare impacts of complete removal. - Metrics used to evaluate scenarios: - Fiscal metric: amount of fiscal savings generated by the reform. - Three distributional metrics: coverage of the bottom three income deciles; progressivity proxied as the share of total subsidies redistributed to the bottom three income deciles; generosity of the subsidy relative to household income (average in the bottom three income deciles). - Four reform scenarios considered (descriptions as in source): - Scenario 1 (Government): - Government’s proposal to remove electricity subsidies from households in strata 3. - Reduce subsidy rates from 60 and 50 percent to 50 and 40 percent in stratas 1 and 2 respectively. - Note: After the IMF mission ended, the government tried to introduce this reduction in its National Development Plan; the proposal failed in Parliament. - Scenario 2 (Consumption): - Lowers existing subsistence levels to better reflect average consumption levels of households in the bottom four income deciles. - Removes all subsidy from households in strata 1, 2 and 3 whose consumption is above the new subsistence levels. - Scenario 3 (SISBEN): - Complements strata targeting with household SISBEN4 so that only households in stratas 1, 2, and 3 with SISBEN4 score below 16 are eligible to electricity subsidies. - Scenario 4 (Safety Net): - Targets current beneficiaries of at least one of three social assistance programs — Familias en Accion, Jovenes en Accion and Colombia Mayor — and complements their cash transfers with a voucher to pay electricity bills or investments in energy efficiency. - The scenarios are illustrative examples of policy options showing fiscal and distributional tradeoffs; Appendix 1 in the source provides detailed descriptions. *Source: 1colea2019004 - 28. According to law 142 of 1994, the housing stratification—i.e., strata system—is the* ### 38. The Government scenario generates a small fiscal saving of 0.04 percent of GDP ### 38. The Government scenario generates a small fiscal saving of 0.04 percent of GDP ### Scenario results and key fiscal figures - Government scenario: generates a fiscal saving of 0.04 percent of GDP without improving the progressivity of electricity subsidies. - Consumption scenario: generates higher fiscal savings (shown as 0.15 in Table 5) and improves progressivity somewhat. - SISBEN scenario: could generate fiscal savings of up to 0.13 percent of GDP. - Safety Net scenario (using existing social safety net with vouchers): would yield fiscal savings of 0.18 percent of GDP. - Status Quo: reported gross fiscal gains shown as 0 in Table 5. ### Distributional impacts and coverage - Government scenario: does not improve current targeting through stratas; only a small proportion of electricity subsidies benefits strata 3 by design of subsidy rates. - Consumption scenario: adds a consumption component to eligibility reflecting that the majority of households consume less than existing subsistence levels; reform is neutral for the majority of current electricity subsidy recipients (Annex 1), but: - A quarter of households in the bottom decile would face a significant welfare loss (Annex 1). - One third of households in the bottom second decile would face a significant welfare loss (Annex 1). - SISBEN scenario: additional targeting via SISBEN4 proxy-means-test better excludes rich households in stratas 1, 2 and 3 and greatly improves progressivity, conditional on all households having a SISBEN4 score (important caveats apply). - Safety Net scenario: electricity subsidies become more progressive but many households in the bottom two income deciles would bear significant losses of about 2 to 3 percent of their income (Annex 1). - Table 5 reported progressivity and coverage metrics (as presented): - Progressivity (percent of total transfer to bottom 3 deciles): 48, 38, 41, 59, 62 (Status Quo, Government, Consumption, SISBEN, Safety Net respectively as shown). - Coverage (percent of bottom 3 deciles covered average): 76, 77, 51, 64, 45 (Status Quo, Government, Consumption, SISBEN, Safety Net respectively as shown). - Generosity (percent of total expenditure - bottom 3 deciles average): 2.9, 2.6, 1.5, 2.2, 1.6 (Status Quo, Government, Consumption, SISBEN, Safety Net respectively as shown). ### Caveats, implementation constraints and pilot needs - SISBEN4 coverage constraints: - Not all families have a SISBEN score because they must proactively request it from their municipality; risk of non-take-up if households lack information or municipalities lack capacity. - Simulations are based on theoretical SISBEN4 scores computed by authorities—not on actual SISBEN scores from the latest household surveys. - Electricity distributors currently cannot match strata and SISBEN scores with billing units; distributors would need to modify billing systems to apply price subsidies on the bill of eligible households. - Recommendation: pilot experiments in several representative departments to identify issues with superposing SISBEN4 on strata eligibility, give time for billing-system changes, and allow consumers to adapt to a more proactive subsidy scheme. ### Mitigation costs and trade-offs - Compensating losing households in deciles 1 to 3 increases probability of reform success but reduces fiscal savings. - Mitigation cost estimates vary by scenario: - SISBEN scenario: quasi-null mitigation cost. - Government scenario: mitigation cost shown as 0.01 percent of GDP in Table 5. - Consumption scenario: mitigation cost shown as 0.02 percent of GDP in Table 5. - Safety Net scenario: mitigation cost shown as 0.05 percent of GDP in Table 5. - When compensation is delivered via existing safety net programs (Familias en Accion, Juvenes en Accion, Colombia Mayor) as a voucher equal to the average subsidy received by households in the bottom three deciles, fiscal savings estimated at 0.18 percent of GDP reflect the low coverage of current social assistance programs. ### Complementary measures to protect the poor and enhance reform success - Complementary policies to facilitate more efficient energy consumption by households in the bottom two income deciles can reduce welfare impacts and reinforce behavioral change: - Total compensation for old appliance replacement before introducing stricter consumption thresholds. - Targeted programs to help low-income households reduce consumption prior to tariff increases. - Such complementary policies would decrease fiscal savings but increase the chance of reform success, especially if low-income households can reduce consumption before electricity tariffs increase. - For Safety Net voucher schemes: - Dedicated promotion campaigns and partnerships between social services, electricity distributors and commercial partners to increase voucher take-up (via bill reduction or purchase of energy-efficient appliances). - The electricity voucher could complement initiatives financed by FENOGE (example: a 2019 FENOGE pilot to replace inefficient fridges in Stratas 1 and 2 with an objective of 50,000 replacement fridges at a cost of about 150 USD/replacement). ### Effective communication and political economy considerations - Key communication objectives to support reform: - Raise awareness and public support for reform by highlighting fiscal, economic and distributional drawbacks of existing energy subsidies. - Offset public mistrust due to inconsistent messaging. - Build capacity to clearly and effectively relay reform policies nationwide. - Three-step sequencing for a communication campaign: (i) raise awareness and support, (ii) organize and plan, (iii) campaign and measure impact. - Components of an effective communication campaign (Box 4 highlights): - Educate public opinion on energy sector functions, reforms, consequences of subsidies and reasons for price increases. - Engage key stakeholders and build consensus. - Establish consistent government communication channels and messaging. - Create channels for citizen feedback and two-way public dialogue. - Raise public awareness of ultimate reform goals. - Establish reliable and observable reform targets for transparency and accountability. - Communication challenges that the government must address: - Political will to execute the campaign. - Government capacity to coordinate and execute effective communication (e.g., encouraging citizens to obtain SISBEN4 scores and interact with distributors). - Potential lack of support across government entities and inconsistent messaging (risk of perceptions that some measures protect wealthy interests). - Need to explain mitigating measures clearly to protect real purchasing power of households. _ Source: IMF staff calculations based on 2017 ENPH._ ### 49. Prior to implementing the reforms, a series of quantitative and qualitative research ### 49. Prior to implementing the reforms, a series of quantitative and qualitative research analyses should be undertaken in order to collect data for understanding the public sentiment towards the reforms. ### Research phase: objectives and tools - Purpose of research phase: - (i) expand the understanding of the public knowledge about—and attitude towards—the reforms; - (ii) identify challenges and hurdles that may impede a successful implementation of the reforms; - (iii) provide information that can be key to forming the key messages that will help ensure the success of the campaign. - Research tools (Table 6): - (i) a political-economy analysis; - (ii) in-depth interviews (IDIs) with those who have insights into the energy sector; - (iii) focus group discussions; - (iv) public opinion surveys. - Implementation note from mission: - During this technical assistance mission, a series of In-Depth Interviews (IDI) with government and a other external stakeholders were conducted by IMF staff (Figure 25). ### Findings from In-Depth Interviews (IDI) — stakeholder perceptions and risks - Main energy sector challenges identified: - Fuel: Lack of Competition 11%, Political Interference in Price Setting 17%, Important imports weaken Colombia 6%, High Subsidies 44%, Border Zones / Illegal Activities 11%, Lack of Transparency 11%. - Electricity: Culture of non-payment 21%, Large Actors (rents) 12%, Investment Deficit 25%, Poor quality of service 17%, Renewables objective 12%, Strata system 13%. - Is the Energy Sector Performing Well? - Fuel: Yes 30%, No 40%, Neutral 30%. - Electricity: Yes 70%, No 10%, Neutral 20%. - Key energy sector reform political risks: - Fuel: Resistence by Large Incumbents 46%, Resistance to Transpancy by Interest Groups 36%, Investment Deficit 18%. - Electricity: Resistance by Large Incumbents 46%, Investment Deficit 18%, Resistance to Renewables 36%. - Is the government aligned with utilities to ensure consistent messaging? - Fuel: Yes 50%, No 40%, Neutral 10%. - Internal coordination and communication (selected responses): - Is the government effectively coordinated internally on energy sector issues? Yes 30%, No 30%, Neutral 40%. - Is government energy sector policy fair and transparent? Fuel: Yes 40%, No 30%, Neutral 30%. - Is government communications effective on energy sector issues? Fuel: Yes 60%, No 10%, Neutral 30%. - Does the government manage energy sector political risk well? Fuel: Yes 30%, No 30%, Neutral 40%; Electricity: Yes 20%, No 10%, Neutral 70%. ### Research methods: descriptions and sample guidance - Political Economy Analysis: closes knowledge gaps about processes and players affecting design and implementation of policies. - In-depth interviews (IDIs): qualitative one-on-one interviews; generally, 10 to15 in-depth interviews wih individuals from both, the government and non-government sectors, are sufficient to initiate a communication campaign process. - Focus Group: semi-structured discussions with generally 6–12 participants per group; useful to inform large public opinion polls and pretest messages. - Opinion Survey: structured questionnaire face-to-face or by phone using appropriate sampling techniques; provides large scale data points for campaign messages and in-depth empirical analysis. ### Internal organization: SCU and MCG roles and structure - Strategic Communication Unit (SCU) — mandate and objectives: - Tasked to design and lead energy reform campaigns and establish an inter-ministerial communications group (MCG). - Key objectives: - (i) designing an action plan to execute the government’s communications strategy; - (ii) improving the government’s communication capacity to disseminate messages in clear and effective ways; - (ii) developing the content, the branding, and the core messaging in the communication campaign; - (iv) facilitating the dissemination of messages to the public through various channels. - Effectiveness often improved with support from a local public relation agency. - MCG (inter-ministerial communications group): - Works closely with SCU, meets regularly, chaired by the SCU director; includes senior communications officials from relevant ministries and agencies. - SCU staffing and director role: - The SCU director should be the principal government interlocutor with a local public relations agency. - Director responsibilities: - (i) work closely with local public relations agency; - (ii) receive from the agency content and messaging materials for review on behalf of the government; - (iii) approve all materials created by the agency. - SCU should include creative and digital experts, traditional/social media relations strategists and external relations managers. ### External organization: Partnership Network and stakeholder engagement - Purpose: - Create and sustain a public-private “Partnership Network” of external stakeholders to inform target audiences and shape the national debate. - Potential external stakeholders in Colombia: - (i) research centers such as Fedesarrollo; - (ii) sector experts and academics; - (iii) business associations such as Andesco, ANDI and Fenilco; - (iv) private sector entities, including companies such as Enel-Codensa. - Engagement approaches: - (i) Reaching out to those who have indicated interest and/or support for the reforms; - (ii) conducting bilateral senior-level dialogues with those critical to campaign success but not yet supportive; - (iii) seeking support from individuals/organizations that may not want to be publicly active in advocacy. - Partnership Network activities to build consensus and commitment: - (i) Policy and research dialogues; - (ii) conferences and round-tables with government participants; - (iii) capacity building training sessions and workshops on communication matters. ### Communication strategy: objectives, targeting, and messages - Three main objectives for government communication strategy: - (i) raise awareness about the current status quo regarding energy subsidies (their fiscal cost, targeting, negative economic and environmental implications, among others); - (ii) explain the reforms in a very factual manner; - (iii) empower citizens to make optimal energy consumption decisions for their household. - Additional positioning considerations: - (i) whether the government has the appropriate internal organization to conduct an effective campaign; - (ii) whether—and to which extent—the government has credibility with the public. - Target audience segmentation attributes: - (i) geographical distribution; - (ii) education levels; - (iii) media consumption habits; - (iv) age; - (v) income levels; - (v) gender. - Message sequencing: - Target a series of sequenced messages including (i) one suggested “big” message; and (ii) several “core” messages. - Messages must be compelling and evidence-based, focusing on the need to reform energy subsidies and government mitigation efforts for lower-income households. ### Action plan and campaign execution - Core campaign activities: - (i) campaign brand creation and design; - (ii) set-up of campaign website and social media accounts; - (iii) development of content: concepts for website, infographics, publications, documentaries; - (iv) content targeting across traditional media (TV, radio, print) and social media (Facebook, Twitter, YouTube). - Additional activities: - (i) media relations: pitching and placing features, op-eds and interviews; - (ii) advocacy and outreach: engaging influencers and opinion leaders; - (iii) events: concepts and scheduling; - (iv) capacity building: media and public speaking training; - (v) crisis communications: preemptive advisory and media response. - Role of local public relations agencies: - (i) conduct initial research and analysis phase; - (ii) develop communications strategy based on research and analysis; - (iii) develop the action plan of activities driven by the campaign strategy. - Measurement and monitoring: - Action plan must develop measurable goals tied to campaign objectives. - Campaign measurement framework should include, for each objective: - (i) the target audience; - (ii) the number of individuals reached and frequency; - (iii) metrics to determine impact on public opinion. ### Strategic guidance on resource allocation and expectations - Communications aim is to build coalitions and convince neutral or undecided stakeholders rather than win universal support. - Governments should not expend additional resources trying to persuade groups that remain deeply opposed. ### Case study — Ukraine (Box 6) - Context and results: - In 2015, energy subsidies in Ukraine amounted to around 5 percent of GDP. - Public opinion research and focus groups informed a public awareness campaign with evidence-based messaging about the need to reform energy subsidies and mitigation for poor households. - A TV commercial highlighting waste from energy subsidies and energy efficiency aired 400 times per week on 19 different channels across Ukraine in 2016. - Simplification of enrollment procedures and training of welfare officers led to a sizeable increase in enrollment in the Housing and Utilities Subsidy Program over a short-period of time. - Three key lessons: - (i) a high level of government commitment is needed for consistent communication regarding energy subsidy reform; - (ii) an understanding of citizens’ perceptions of reforms is crucial to gaining support for the reforms; - (iii) prioritizing channels that citizens follow (and trust) is crucial to increasing trust and credibility in the reform process. *Source: IMF staff.* ### 61. Mapping the interest and the influence of stakeholders in Colombia helps in better ### 61. Mapping the interest and the influence of stakeholders in Colombia helps in better ### Political-economy mapping of stakeholders - Purpose: understand alignment of stakeholders’ interests with government incentives as Colombia adopts policies to move toward a new steady state; identify and address political economy constraints. - Benefit: improves policymakers’ ability to choose political allies and blunt political influence of groups that can block or reverse reforms. - Basis of mapping: - Most stakeholders: In-Depth-Interviews (IDIs) conducted during the mission. - Remaining stakeholders: interactions between IMF staff and entities (or individuals) at meetings during the mission. - Definitions used in the framework: - The level of Interest: how likely a stakeholder is to welcome the prospect of energy subsidy reform, owing to both material and ideological factors; reactions may be influenced by potential to mobilize and pursue other goals. - The level of influence: extent of political influence, access to means of mass communication, financial resources, perceived credibility, propensity to engage in political protest, and numbers (e.g., followers they can mobilize). - Note: analysis suggests significant variation across the relative powers of groups or entities. ### Visual mapping - Figure 27: mapping of stakeholders in Colombia by extent of their support for reforms (interest) and their ability to influence the reform process (influence). - Source for the figure: IMF staff. ### Annex I. Electricity Price Subsidy Reform Options — scenarios and targeting rules - Scenarios differ in how they target households eligible for electricity subsidy. - Government Option: - Relies only on the strata system to target households eligible to electricity price subsidies. - Compared to the status quo: - households in strata 3 stop receiving price subsidies; - subsidy rates are lowered to 50 and 40 percent for households in Strata 1 and 2 respectively. - Consumption Option: - Relies on both the strata system and household consumption levels. - Compared to the status quo: - subsistence levels set at the average household consumption levels observed in the bottom four income decile: - 153 kWh/month in low altitude areas; - 118 kWh/month in high altitude areas. - Only households in stratas 1, 2 and 3 and consuming below these thresholds receive electricity price subsidies. - Subsidy rates on electricity tariffs per Strata are unchanged. - Note: Current subsistence levels are set by law and could be difficult to change in the short term. - SISBEN Option: - Relies on both the Strata system and household SISBEN4 socio-economic score. - Compared to the status quo: - households in stratas 1, 2 and 3 receive an electricity price subsidy if and only if their SISBEN4 socio-economic score is below the average SISBEN4 score of households in income decile 4 (i.e., 16.3). - Subsidy rates on electricity tariffs per Strata are unchanged. - In practice, households must require a SISBEN score and then claim a price subsidy by signaling this score to their electricity retailer. - Safety Net Option: - Moves away from the strata system and targets households already receiving social assistance transfers from three existing programs Familias en Accion, Juvenes en Accion and Colombia Mayor. - These households receive a flat transfer of 21,531 COP/month, equal to the average subsidy received by households in the bottom four income deciles in the status quo. - The transfer can be used either to pay electricity bills or to improve energy efficiency of recipients’ homes. ### Annex I. Distributional impacts (summary of Annex Table 1) - Source: IMF staff calculations based on 2017 ENPH. - Distributional outcomes by reform option (Government | Consumption | Sisben | Safety Net): - average loss in bottom decile: - Government: -0.3% - Consumption: -1.5% - Sisben: -0.3% - Safety Net: -1.7% - average loss in top decile: - Government: -0.1% - Consumption: -0.1% - Sisben: -0.1% - Safety Net: -0.1% - average gain in bottom decile: - Government: 0.0% - Consumption: 0.0% - Sisben: 0.0% - Safety Net: 1.8% - average gain in top decile: - Government: 0.0% - Consumption: 0.0% - Sisben: 0.0% - Safety Net: 0.0% - share of losers in bottom decile: - Government: 85% - Consumption: 24% - Sisben: 8% - Safety Net: 62% - share of losers in top decile: - Government: 89% - Consumption: 46% - Sisben: 87% - Safety Net: 88% - share of winners in bottom decile: - Government: 0% - Consumption: 0% - Sisben: 0% - Safety Net: 30% - share of winners in top decile: - Government: 0% - Consumption: 0% - Sisben: 0% - Safety Net: 1% - share of neutral in bottom decile: - Government: 15% - Consumption: 76% - Sisben: 92% - Safety Net: 8% - share of neutral in top decile: - Government: 11% - Consumption: 54% - Sisben: 13% - Safety Net: 10% ### Annex II. Morocco: overcoming challenges of fuel subsidy reform — chronology, measures, and lessons - Historical process and timeline: - Prices administratively set for a long period; decision to embark on fuel subsidy reform taken towards the end of year 2012. - Reform focused first on gasoline and diesel subsidies. - September 2013: partial phasing out commenced by putting ceilings on unit subsidies. - January 2014: unit subsidies fully eliminated for mid-grade gasoline and fuel oil. - December 31, 2014: automotive diesel subsidies eventually eliminated. - Price revisions became regular in the context of automatic pricing mechanisms: - initially monthly; - then twice a month until November 30, 2015; - eventually full liberalization of prices, maintained as of September 30, 2018. - Accompanying measures: 1) Establishment of the Fund for Social Cohesion under the Finance Act of 2012, aiming at: - (i) contributing to the financing of medical assistance for the most vulnerable; - (ii) providing conditional cash transfers that require poor families who receive them to send their children to school; - (iii) providing direct unconditional support to vulnerable households. 2) Measures to reduce impact on the transport sector after consultation with stakeholders. - Remaining challenges and ongoing efforts: - social protection measures still need improvement; - LPG subsidies remain on the budget; - efforts to design a unified social register with support from the World Bank, relying on biometric data (drawing lessons from the experience in India) to improve targeting of social safety nets. - Policy lessons from the Moroccan experience: 1) The importance of consultation with all stakeholders during the first stages of reform. 2) The importance of a gradual approach: first focus on products with less impact on lower income households, then control pace of price increases to design and implement mitigating measures. 3) The importance of continuing efforts to improve the targeting of social safety nets, especially before removing subsidies on products that can have greater impact on lower income households (e.g., LPG). ### Annex III. Macroeconomic impacts of retail fuel price shocks on inflation (cross-country analysis) - Methodology: - Flexible local projection approach (Jorda, 2005). - Identify shocks to retail domestic fuel prices assuming innovations to the fuel price series—measured in local currency—are predetermined with respect to macroeconomic aggregates. - Unbalanced panel data contains around 12600 observations. - Wage-flexibility classification: - Construct an index capturing extent of centralized collective bargaining from the 2014 Global Competitiveness Report (WEF). - Indicator ranges from 1 (centralized) to 7 (decentralized). - Countries with scores above the median classified as relatively more flexible wages; otherwise classified as relatively less flexible wages. - Sample and period: - Monthly data over the period 2000:1 to 2014:6. - Sample of 110 countries: 31 high income countries, 42 emerging countries, 37 low income countries. - Model variables: - retail fuel prices (average for diesel and gasoline) measured in local currency; - nominal effective exchange rate (NEER); - consumer price index (CPI); - short-term interest rate (the lending rate). - Key findings: - Wage flexibility matters for impacts of domestic retail fuel price shocks on inflation: a) Effects on inflation are higher in the country group where wage flexibility is an issue (i.e., where more centralized collective bargaining is used). b) Effects are more persistent or long lasting in the country group with lower wage flexibility. - Estimation details: - Impulse response functions shown with 16th and 84th percentiles (dashed lines) from the bootstrap procedure. - Shock size normalized to raise the price of gasoline by 1 percent on impact in all country groups. *Source: IMF staff.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1colea2019004.pdf_