## INTRODUCTION ## Source details **Canonical URL:** [INTRODUCTION](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_012813a.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_012813a.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_012813a.pdf.json) --- ### Major themes and scope - Energy Subsidy Reform: Case Studies — comprehensive collection of country case studies on energy subsidy reform. - Two main subsidy categories covered: - PETROLEUM PRODUCT SUBSIDIES - ELECTRICITY AND COAL SUBSIDIES - Publication date: January 28, 2013. - Scope: 22 country case studies covering 28 major reform episodes. ### Overview of the supplement — objectives and coverage - Purpose: - Presents country case studies reviewing energy subsidy reform experiences that are the basis for the reform lessons identified in the main paper. - Scope and products covered: - 14 studies of the reform of petroleum product subsidies - 7 studies of the reform of electricity subsidies - 1 case study of subsidy reform for coal - Geographic coverage: - 19 countries drawn from all regions: - seven from sub-Saharan Africa - two in developing Asia - three in the Middle East and North Africa - four in Latin America and the Caribbean - three in Central and Eastern Europe and the CIS ### Structure and content of individual case studies - Each case study provides: - context of the reform and a description of the reforms; - discussion of the impact of the reform on energy prices or subsidies and its success or failure; - mitigating measures implemented to generate public support and offset adverse effects on the poor; - identification of lessons for designing reforms. ### Classification of reform episodes and overall outcomes - Reform episode types: - attempts to reduce fiscal burden by raising retail energy prices or improving efficiency of state-owned enterprises; - episodes to reduce pretax subsidies or restore energy taxation to earlier levels. - Outcome categories: - successful: permanent and sustained reduction of subsidies; - partially successful: reduction of subsidies for at least a year, but subsidies reemerged or remain a policy issue; - unsuccessful: price increases or efficiency efforts rolled back soon after reform began. - Outcome counts for the 28 reform episodes: - 12 classified as a success - 11 classified as a partial success - 5 classified as unsuccessful ### Cross-cutting lessons and policy recommendations (synthesis across cases) - Sequencing and political economy: - Gradual, phased removal of subsidies can reduce resistance; begin with products consumed by politically weaker stakeholders. - Reforms are more likely to succeed with a popular government and with sustained political commitment. - Depoliticizing price setting (delegating technical decisions to independent agencies) increases durability. - Transparency and rules-based mechanisms: - Transparent, rules-based smoothing or stabilization mechanisms reduce uncertainty and fiscal risk; secrecy and ad-hoc rules increase costs and public distrust. - Smoothing mechanisms should be temporary and combined with clear transition paths to full pass-through. - Mitigation and targeting: - Visible, well-targeted social programs (cash transfers, lifeline tariffs, gas vouchers) increase political feasibility and protect the poor. - Universal or poorly targeted compensations waste resources; PSIAs and distributional analysis help design targeted measures. - Macroeconomic and institutional preconditions: - Maintaining macro stability (control of inflation, prudent fiscal and monetary policy) is critical for reform durability. - Strong regulatory frameworks and credible institutions (independent regulators, clear tariff-setting rules) are essential. - Communication and consensus-building: - Early, extensive public information campaigns and stakeholder engagement build acceptance and reduce opposition. - Allowing sufficient time (months) to build consensus improves implementation prospects. - Complementary measures: - Provide affordable alternatives (e.g., kerosene-to-LPG conversions) and invest in electricity sector efficiency to reinforce reform gains. - Avoid converting temporary emergency relief into permanent entitlements; reorient savings to permanent well-targeted social safety nets. ### Representative country findings and policy recommendations (selected excerpts) - Brazil (Petroleum Product Subsidies) - Context and outcomes: - Prereform era (1980s): growth averaged about 3 percent; inflation averaged 272 percent; overall budget deficit averaged 5 percent of GDP and reached 7 percent of GDP in 1989; net public debt rose from 24 percent of GDP in 1981 to almost 40 percent of GDP in 1989. - Petrobras monopoly reformed; formal monopoly revoked in 1995; Agencia National do Petroleo created in 1997. - Official price liberalization for all fuel products in effect since 2002. - Key macro indicators (selected years, 2000–2011): - GDP per capita ($US): 2000 = 3751; 2003 = 3104; 2008 = 8729; 2010 = 10816; 2011 = 12917 - GDP growth (percent): 2000 = 4.3; 2003 = 1.1; 2008 = 5.2; 2010 = 7.5; 2011 = 3.8 - Inflation (percent): 2000 = 6.2; 2003 = 13.7; 2008 = 8.3; 2010 = 8.2; 2011 = 7.0 - Overall fiscal balance (percent of GDP): 2000 = -3.4; 2003 = -5.3; 2008 = -2.3; 2010 = -5.9; 2011 = -3.6 - Policy lessons: - Gradual subsidy removal tailored to political acceptability; targeted compensatory programs (gas voucher, Bolsa Familia) supported durability. - Discretionary stabilization funds ran large deficits; macro instability can produce recurring implicit subsidies. - Chile (Fuel price stabilization mechanisms) - Original FEPP design: - Maintained domestic prices within a 12.5 percent band from the reference price with asymmetric adjustments (upper band fully subsidized; below-lower-band deviations taxed at 60 percent initially). - Reforms and outcomes: - Reforms: weekly updates, fund operation limits, increase of tax on deviations below lower band to 100 percent, transparency improvements, separate product funds. - FEPP nearly depleted by 2003; total fiscal cost of FEPP over 2000–05 estimated at 0.15 percent of 2012 GDP. - Temporary FEPC (2005) used a 5 percent band; total fiscal cost of FEPC over 2006–09 estimated at 0.65 percent of 2012 GDP. - SIPCO (2011) replaced stabilization fund with a tax-adjustment mechanism and narrowed band to 10 percent in September 2012. - Policy lessons: - Narrower smoothing bands increase fiscal cost; asymmetry in mechanisms depletes funds. - Transparency and sensitivity analysis of parameters recommended. - Target smoothing to smaller consumers (via excise taxes) to exclude large deductible industries and mobilize public support. - Ghana (Fuel pricing and institutional arrangements) - Context and indicators (2000–2011): - GDP per capita ($US): 2000: 400; 2003: 563; 2008: 1,266; 2010: 1,358; 2011: 1,580 - Real GDP growth (percent): 2000: 4.2; 2003: 5.1; 2008: 8.4; 2010: 8.0; 2011: 14.4 - Inflation (percent): 2000: 25.2; 2003: 26.7; 2008: 16.5; 2010: 10.7; 2011: 8.7 - Experience: - Deregulation since 2004 with NPA reviewing fuel prices twice a month; Executive retains final decision. - 2005 reform accompanied by PSIA, communication, and mitigating programs; hedging scheme introduced in October 2010. - Policy lessons: - Regulatory independence and sustained public engagement matter; PSIAs showing poor targeting helped build the case for reform. - Visible reallocations to programs such as LEAP, health, and education improve acceptability. - Indonesia (Repeated reform attempts; fuel subsidies as percent GDP) - Context and key stats: - Fuel subsidies (percent GDP): 2008: 2.8; 2010: 1.3; 2011: 2.2 - Nominal GDP per capita (US$): 2000: 800.0; 2003: 1,091.3; 2008: 2,211.9; 2010: 2,980.8; 2011: 3,508.6 - Experience: - Major increases in 1997–98, 2005, and 2008; 2004–2012 reform momentum uneven due to parliamentary interventions. - Kerosene-to-LPG conversion program and Bantuan Langsun Tunai cash transfers (coverage: 19.2 million households or 35 percent of population) as mitigation. - Policy lessons: - Targeted cash transfers and affordable energy alternatives (LPG) can reduce opposition; depoliticized pricing and communication critical. - Islamic Republic of Iran (Targeted universal cash transfers and suspension) - Reform design: - First phase launched December 2010 aiming to raise domestic prices to 90 percent of international prices over five years and redistribute about 80 percent of revenue via bi-monthly cash transfers. - Implementation constraints: - Administrative targeting infeasible; transfers equal for all applicants. - Second phase suspended in late 2012 due to parliamentary opposition and fiscal/macro pressures. - Policy lessons: - Universal cash transfers were pivotal to public acceptance; macro stability and robust targeting/administration are critical. - Mauritania (Diesel-price formula and social mitigation) - Experience: - 2008 price increases of 17.5 percent to 20 percent triggered protests and a coup; rollback in November 2008. - Post-2011 ECF-supported reforms: biweekly automatic diesel-price formula, more than 20 percent price increase since January 2011 to mid-2012. - Mitigation and social strategy: - 2011 emergency relief equivalent to 3.4 percent of GDP; cash transfer program targets (UM 15,000 monthly) and plans to scale up conditional on surveys. - Policy lessons: - Depoliticized automatic pricing and caps on single adjustments (planned 3 percent cap) help durability; well-targeted cash transfers superior to untargeted emergency relief. - Namibia (Slate account, NEF, and gradual implementation) - Mechanisms and outcomes: - Fuel prices set by formula including Basic Fuel Price, levies/taxes, and the slate account to smooth volatility. - NEF compensation costs about N$170 million between 1990 and 1996 (about 0.2 percent of GDP); NEF expenditures declined after 2001. - Namcor bailouts and contingent liabilities: 2009 losses N$257 million; grants and bailouts totaling N$360 million plus levy adjustments. - Policy lessons: - Gradual implementation, consultation, and targeted support for remote areas key; legal mandates for state-owned participation can impede full depoliticization. - Niger (Subsidy reform coinciding with domestic production) - Experience: - Retail prices increased June–August 2011; monthly subsidy peaked nearly CFAF 4 billion in May 2011 and halved from August. - Mitigating measures cost < 0.1 percent of GDP; social spending up 19 percent in 2012 budget versus 2011. - Policy recommendations: - Explicitly show subsidy costs in the budget; use public information campaigns and participative committees to build consensus; target mitigating measures to most affected groups. - Peru (FEPC transition and product exclusions) - Mechanisms and outcomes: - FEPC (2004) and subsequent reforms; April 2010 rules to update band limits every two months and limit price changes to 5 percent (LPG 1½ percent). - October 2011 excluded high-octane gasoline from FEPC; August 2012 removed regular gasoline from FEPC. - FEPC spending by product, 2011 (Million US$ / Percent): Total 871.8 / 100.0; Diesel 440.6 / 50.5; LPG 261.0 / 29.9; Gasolines 106.5 / 12.2. - Policy lessons: - Tax-based adjustments risk fiscal volatility; smoothing mechanisms need automatic band updates and explicit treasury sub-accounts for payments. - Philippines (Downstream deregulation and electricity reform) - Oil sector: - 1996 deregulation; OPSF abolished; oil prices allowed to move freely since February 1997 after legislative correction in 1998. - Electricity sector: - EPIRA (2001) objectives: unbundle NPC, privatize assets, create independent ERC, establish wholesale market. - Tariff increases of about 30 percent in late 2004–early 2005 aided fiscal consolidation; lifeline tariffs protected poor households. - Policy lessons: - Early planning, nationwide communication, consensus building, and use of windfall revenues for pro-poor measures improved reform sustainability. - Mexico (Complex tariff structure and regressive subsidies) - Findings: - Electricity subsidies estimated about ½ percent of GDP in 2011; benefit incidence regressive. - Complex block and temperature-based categories and "summer subsidies" allowed reclassification and growing costs. - Policy recommendations: - Transparent accounting of subsidies, public information campaigns, and targeted safety nets (Oportunidades) are recommended. - Poland (Coal sector restructuring) - Outcomes: - 1998–2002 reform: 21 uneconomic mines closed; about 100,000 workers left the sector; about 70 percent of industry liabilities written off; sector profitable from 2003 onward. - Mitigating measures: - Social programs, retraining, and support for redeployed workers; over 53,000 workers left under the social program with 33,000 receiving assistance. - Lessons: - Political commitment, financing for social programs, debt write-offs, and union cooperation were essential. - Uganda (Power-sector QFD and tariff reform) - Power-sector fiscal and operational data (selected exact figures): - Explicit power subsidy (US$ million): 2006: 60.1; 2007: 151.2; 2008: 887.5; 2009: 611.2; 2010: 151.0; 2011: 174.8 - Explicit power subsidy (percent of GDP): 2006: 0.6; 2007: 0.4; 2008: 0.7; 2009: 0.8; 2010: 1.0; 2011: 1.1 - Total quasi-fiscal costs: 2005–08: 61.1 percent of costs; 1.9 percent of GDP. 2009–2011: 60.5 percent of costs; 2.1 percent of GDP. - 2011 QFD would have amounted to 2.6 percent of Uganda‘s GDP, of which about 1.1 percent of GDP were explicit fiscal costs. - Reform drivers: - Rising thermal generation costs and unsustainable fiscal costs prompted a January 2012 ERA-approved retail tariff increase of about 41 percent. - Policy implications: - Tariff increases must be accompanied by efficiency improvements, access-expanding measures, lifeline tariffs, and donor-private investments to reduce losses and improve collections. ### Supplementary findings on stabilization funds and smoothing mechanisms - Stabilization funds and smoothing mechanisms across cases: - Can work if rules, transparency, and funding limits are well designed (Chile reforms, SIPCO); otherwise can deplete quickly (FEPP) or create contingent liabilities (Peru FEPC). - Narrower bands (e.g., 12.5 percent → 5 percent) materially increase fiscal costs. - Excise tax–based smoothing can exclude large deductible industries, focusing support on small consumers. ### Final synthesis recommendations (policy checklist) - Establish transparent, rules-based pricing mechanisms with clear band update rules and public formulas. - Depoliticize pricing decisions through independent regulators and technical delegations. - Sequence reforms to start with less politically costly products; prepare for macro contingencies. - Pair price reforms with well-targeted social protection (cash transfers, lifeline tariffs) and clearly communicate reallocation of savings. - Design smoothing mechanisms as temporary and subject to fiscal limits and sensitivity analysis. - Invest in supply-side efficiency (power-sector investments, fuel substitution) to lower long-run costs and expand access. - Build consensus via PSIAs, public information campaigns, stakeholder committees, and visible mitigation programs. *Prepared by IMF staff based on "ENERGY SUBSIDY REFORM: CASE STUDIES" (content unit _012813a).* ### INTRODUCTION _________________________________________________________________________ 5 ### INTRODUCTION _________________________________________________________________________ 5 ### Major themes and scope - Energy Subsidy Reform: Case Studies — comprehensive collection of country case studies on energy subsidy reform. - Two main subsidy categories covered: - PETROLEUM PRODUCT SUBSIDIES - ELECTRICITY AND COAL SUBSIDIES ### Petroleum product subsidy case studies (chapters and page anchors) - A. Brazil ___________________________________________________________________________________ 7 - B. Chile __________________________________________________________________________________ 12 - C. Ghana _________________________________________________________________________________ 17 - D. Indonesia _____________________________________________________________________________ 22 - E. Islamic Republic of Iran _______________________________________________________________ 27 - F. Mauritania _____________________________________________________________________________ 31 - G. Namibia ______________________________________________________________________________ 36 - H. Niger _________________________________________________________________________________ 41 - I. Nigeria _________________________________________________________________________________ 48 - J. Peru ___________________________________________________________________________________ 55 - K. Philippines ____________________________________________________________________________ 60 - L. South Africa ___________________________________________________________________________ 64 - M. Turkey ________________________________________________________________________________ 67 - N. Yemen ________________________________________________________________________________ 72 ### Electricity and coal subsidy case studies (chapters and page anchors) - A. Armenia _______________________________________________________________________________ 77 - B. Brazil __________________________________________________________________________________ 84 - C. Kenya _________________________________________________________________________________ 89 - D. Mexico ________________________________________________________________________________ 95 - E. Philippines , __________________________________________________________________________ 100 - F. Poland ______________________________________________________________________________ 103 - G. Turkey ______________________________________________________________________________ 109 - H. Uganda _____________________________________________________________________________ 113 ### Supplementary boxed material - BOX - 1. Nigeria: Rationale for Subsidy Removal _______________________________________________ 51 ### Figures (list and themes) - 1. Brazil: Macroeconomic Developments and Energy Subsidy Reforms, 1990–2012 ______ 9 - 2. Brazil: Fuel Price Developments 1995–2011 ___________________________________________ 10 - 3. Chile: Balance of Fuel Stabilization Funds, 1991–2012 _________________________________ 14 - 4. Ghana: Fuel Price Developments, 2000–2012__________________________________________ 19 - 5. Indonesia: Macroeconomic Developments and Energy Subsidy Reforms, 1997–2011 __ 24 - 6. Mauritania: Diesel Retail Price and Price Gap, 2011–12 ________________________________ 33 - 7. Namibia: National Energy Fund and Slate Account, 1990–2011 _______________________ 38 - 8. Namibia: Macroeconomic Developments and Fuel Subsidy Reform, 1990–2011 ___________ 39 - 9. Niger: Fuel Price Developments, 2005–2011 __________________________________________ 44 - 10. Niger: Macroeconomic Developments and Energy Subsidy Reforms, 2008–2011 ________ 45 - 11. Nigeria: International and Domestic Fuel Prices, 2006–2011 _________________________ 49 - 12. Peru: International Prices and the Fiscal Cost of Fuel Subsidies ______________________ 57 - 13. Philippines: Macroeconomic Developments and Energy Subsidy Reforms, 1993–2011 __ 61 - 14. South Africa: Composition of Gasoline Pump Prices and Taxes, 2001–2012 __________ 65 - 15. Turkey: Macroeconomic Developments and Energy Subsidy Reforms, 1990–2011 ________ 69 - 16. Turkey: Gasoline and Diesel: Net Tax, 2000–2011 ____________________________________ 70 - 17. Yemen: Macroeconomic Developments and Energy Subsidy Reforms, 1999–2011 ________ 74 - 18. Yemen: Fuel Prices and International Full Pass-through Prices, 2005–2012 __________ 75 - 19. Armenia: Residential Electricity Tariffs, 1995–2011 ___________________________________ 78 - 20. Armenia: Electricity Sector Financial Deficit, 1994–2004 ______________________________ 79 - 21. Armenia: Electricity Bill Collection Rate, 1996–2003 __________________________________ 80 - 22. Armenia: Macroeconomic Developments and Electricity Subsidy Reforms, 1993–2011 __ 81 - 23. Brazil: Macroeconomic Developments and Electricity Subsidy Reforms ______________ 86 - 24. Kenya: Hidden Costs in the Power Sector, 2001–08 __________________________________ 92 - 25. Mexico: Macroeconomic Developments and Electricity Subsidy Reforms, 1998–2011 __ 97 - 26. Philippines Macroeconomic: Developments and Electricity Subsidy Reforms ______ 101 - 27. Poland: Coal Prices in Poland and Selected International Markets _________________ 105 - 28. Poland: Macroeconomic Developments and Coal Sector Reforms _________________ 106 - 29. Poland: Indicators for the Coal Sector Reform, 1990–2002 _________________________ 107 - 30. Turkey: Macroeconomic Developments and Energy Subsidy Reforms _____________ 111 ### Tables (list and themes) - 1. Summary of Country Energy Subsidy Reform Episodes ________________________________ 6 - 2. Brazil: Key Macroeconomic Indicators, Selected Years, 2000–2011 _____________________ 7 - 3. Chile: Key Macroeconomic Indicators _________________________________________________ 12 - 4. Ghana: Key Macroeconomic Indicators, 2000–2011 ___________________________________ 17 - 5. Indonesia: Key Macroeconomic Indicators, 2000–2011 ________________________________ 22 - 6. Iran: Key Macroeconomic Indicators 2005–2011 ______________________________________ 27 - 7. Mauritania: Key Macroeconomic Indicators ___________________________________________ 31 - 8. Namibia: Key Macroeconomic Indicators, 2000–2011 _________________________________ 36 - 9. Niger: Key Macroeconomic Indicators _________________________________________________ 41 - 10. Nigeria: Key Macroeconomic Indicators______________________________________________ 48 - 11. Nigeria: Developments in Fuel Prices and Fuel Subsidies, 2006–2012 ________________ 50 - 12. Peru: Key Macroeconomic Indicators, 2000–2011 ____________________________________ 55 - 13. Peru: Spending of the Oil Price Stabilization Fund by Type of Product, 2011 ________ 58 - 14. Philippines: Key Macroeconomic Indicators, 2000–2011 _____________________________ 60 - 15. South Africa: Key Macroeconomic Indicators, 1993–2011 ____________________________ 64 - 16. Turkey: Key Macroeconomic Indicators, 2000–2011 __________________________________ 67 - 17. Yemen: Key Macroeconomic Indicators, 2000–2011 _________________________________ 72 - 18. Armenia: Key Macroeconomic Indicators, 2000–2011 ________________________________ 77 - 19. Armenia: Electricity Share in Total Household Spending _____________________________ 82 - 20. Brazil: Key Macroeconomic Indicators________________________________________________ 84 - 21. Kenya: Key Macroeconomic Indicators _______________________________________________ 89 - 22. Kenya: Key Power Sector and Macroeconomic Indicators ____________________________ 91 - 23. Mexico: Key Macroeconomic Indicators, 2000–2011 _________________________________ 95 - 24. Philippines: Key Macroeconomic Indicators ________________________________________ 100 - 25. Poland: Key Macroeconomic Indicators ____________________________________________ 103 - 26. Poland: Selected Indicators of Coal Mining Industry, 1990–2006 ___________________ 106 - 27. Turkey: Spending of the Oil Price Stabilization Fund by Type of Product, 2011 ____ 109 - 28. Uganda: Key Macroeconomic Indicators ___________________________________________ 113 - 29. Uganda: Explicit Fiscal Subsidies for the Power Sector and the Cost of Thermal Generation _________________________________________________________________ 114 - 30. Uganda: Quasi-fiscal Deficit of the Power Sector __________________________________ 116 ### Structure and navigation notes (as presented) - CONTENTS page lists chapter headings, figures, tables, and box entries with exact page anchors. - Publication date indicated: January 28, 2013 - Document title repeated on header/footer: ENERGY SUBSIDY REFORM: CASE STUDIES - Publisher identifier: INTERNATIONAL MONETARY FUND *Source: _012813a - INTRODUCTION _________________________________________________________________________ 5* ### INTRODUCTION ### INTRODUCTION ### Overview of the supplement - Purpose: Presents country case studies reviewing energy subsidy reform experiences that are the basis for the reform lessons identified in the main paper. - Scope: 22 country case studies covering 28 major reform episodes. - Products covered: - 14 studies of the reform of petroleum product subsidies - 7 studies of the reform of electricity subsidies - 1 case study of subsidy reform for coal ### Selection of case studies and regional coverage - Selection criteria: availability of data and previously documented evidence on country-specific reforms. - Geographic coverage: 19 countries drawn from all regions to provide a mix of outcomes: - seven from sub-Saharan Africa - two in developing Asia - three in the Middle East and North Africa - four in Latin America and the Caribbean - three in Central and Eastern Europe and the CIS ### Structure and content of individual case studies - Each case study provides: - context of the reform and a description of the reforms; - discussion of the impact of the reform on energy prices or subsidies and its success or failure; - mitigating measures implemented to generate public support and offset adverse effects on the poor; - identification of lessons for designing reforms. ### Classification of reform episodes and overall outcomes - Reform episode types: attempts to reduce fiscal burden by raising retail energy prices or improving efficiency of state-owned enterprises; episodes to reduce pretax subsidies or restore energy taxation to earlier levels. - Outcome categories: - successful: permanent and sustained reduction of subsidies; - partially successful: reduction of subsidies for at least a year, but subsidies reemerged or remain a policy issue; - unsuccessful: price increases or efficiency efforts rolled back soon after reform began. - Outcome counts for the 28 reform episodes: - 12 classified as a success - 11 classified as a partial success - 5 classified as unsuccessful ### Representative excerpts from Table 1 (selection of entries included in the source) - CEE-CIS / Turkey / Fuel / 1998 / Successful / SOEs turned from net loss to net profitability / Yes / Yes - CEE-CIS / Armenia / Electricity / Mid-1990s / Successful / Electricity sector financial deficit declined from 22 percent of GDP in 1994 to zero after 2004 / Yes / Yes - Emerging and Developing Asia / Philippines / Fuel / 1996 / Successful / 0.1+ percent of GDP / Yes / Yes - LAC / Brazil / Fuel / Early 1990s–2001 / Successful / From 0.8 percent of GDP in subsidies in mid-1990s to revenue generating since 2002 / Yes / Yes - MENA / Iran / Fuel / 2011 / Partially successful / Subsidies declined from 2 percent of GDP in 2011 to close to zero in 2012 / Yes / Yes - Sub-Saharan Africa / Nigeria / Fuel / 2011–12 / Partially successful / Subsidies declined from 4.7 percent of GDP in 2011 to 3.6 percent in 2012 / No ### Note on source labeling and abbreviations (as in the source) - n.a. = not applicable - CEE-CIS = Central and Eastern Europe and Commonwealth of Independent States - LAC = Latin America and Caribbean - S.S. Africa = Sub-Saharan Africa - MENA = Middle East and North Africa ### Brazil (Petroleum Product Subsidies) — Context and macro indicators - Context summary: - Prereform era (1980s): low growth, high inflation, substantial fiscal imbalances. - Economic growth averaged about 3 percent and inflation averaged 272 percent. - Overall budget deficit averaged 5 percent of GDP during the period and reached 7 percent of GDP in 1989. - Net public debt rose from 24 percent of GDP in 1981 to almost 40 percent of GDP in 1989. - Petrobras dominated: monopoly on upstream market, refining of liquid fuels, and crude oil and petroleum product imports. Final consumer price determined by the government. - Oil stabilization fund established in 1980 to smooth crude oil price volatility; fund accumulated contingent liabilities to Petrobras when international crude prices were high. - Prices for diesel and LPG consistently set below import-parity costs, contributing to large deficits for the fund and Petrobras. - Selected macroeconomic indicators for Brazil, selected years, 2000–2011 (as presented) - GDP per capita ($US): 2000 = 3751; 2003 = 3104; 2008 = 8729; 2010 = 10816; 2011 = 12917 - GDP growth (percent): 2000 = 4.3; 2003 = 1.1; 2008 = 5.2; 2010 = 7.5; 2011 = 3.8 - Inflation (percent): 2000 = 6.2; 2003 = 13.7; 2008 = 8.3; 2010 = 8.2; 2011 = 7.0 - Overall fiscal balance (percent of GDP): 2000 = -3.4; 2003 = -5.3; 2008 = -2.3; 2010 = -5.9; 2011 = -3.6 - Gross public debt (percent of GDP): 2000 = 51.1; 2003 = 59.6; 2008 = 58.5; 2010 = 63.7; 2011 = 62.2 - Net public debt (percent of GDP): 2000 = 47.7; 2003 = 54.9; 2008 = 38.1; 2010 = 40.2; 2011 = 38.6 - Current account balance (percent of GDP): 2000 = -3.8; 2003 = 0.8; 2008 = -1.7; 2010 = -2.2; 2011 = -2.1 - Oil imports (percent of GDP): 2000 = 1.2; 2003 = 1.2; 2008 = 1.8; 2010 = 1.2; 2011 = 1.2 - Oil exports (percent of GDP): 2000 = 0.2; 2003 = 0.3; 2008 = 0.3; 2010 = 0.2; 2011 = 0.2 - Oil consumption per capita (liters): 2000 = 412; 2003 = 394; 2008 = 482; 2010 = 624; 2011 = n.a. - Poverty headcount ratio at $1.25 a day (PPP) (percent of population): 2000 = 11.8; 2003 = 11.2; 2008 = 6.0; 2010 = 6.1; 2011 = n.a. ### Brazil — Description of fuel pricing reforms (early 1990s to 2001) - Reform approach: - Gradual removal of subsidies to manage opposition from interest groups. - Government promised privatization and liberalization would lower energy prices and improve services. - Expected efficiency improvements (particularly in refineries) to reduce outlays without raising consumer prices. - Sequencing of liberalization: - Early 1990s: liberalization of prices for petroleum products used primarily by firms (e.g., asphalt and lubricants). - 1996: gasoline prices for final consumers liberalized. - 1998: LPG for final consumers liberalized. - 2001: diesel liberalized. - Ethanol producers and suppliers to Petrobras were left to the end of the liberalization program. - Political economy of sequencing: first products to lose subsidies were consumed by politically weak stakeholders; politically difficult subsidies (liquid fuels used for transport and industry) removed later. - Short-run macro impact: - Price liberalizations associated with short-run increases in inflation; spikes in inflation after reforms that subsided over time. - Petrobras and market structure: - 1995: formal monopoly of Petrobras on upstream, refining, and imports revoked. - 1997: Agencia National do Petroleo created to oversee deregulation, restructuring, and auctioning of oil fields. - Despite reforms, Petrobras preserved a de facto monopoly in refining and distribution. - Macroeconomic challenges: - High inflation and currency depreciation required frequent price increases to avoid subsidies. - Diesel price increases did not keep pace with exchange rate depreciation in the late 1990s, leading to an upward spike in diesel subsidies to about 1 percent of GDP in 1999. - Government transferred R$5.8 billion (0.8 percent of 1995 GDP) to Petrobras in the mid-1990s to pay for accumulated losses of the crude oil stabilization fund; Petrobras absorbed other losses not transparently recorded on the budget. ### Brazil — Experience since 2002 and price-setting arrangements - Official price liberalization for all fuel products in effect since 2002. - Helped avoid recurrence of subsidies. - Prices were increased and remained above international levels despite significant pressure on the currency between 2001 and 2003. - Fuel prices rose steadily until 2005 and remained mostly flat thereafter despite fluctuations in international prices. - Regulatory monitoring: - No official government price setting in the chain of fuel production and marketing. - Agencia National do Petroleo monitors fuel prices through its "survey of fuel prices and margins," covering gasoline, fuel ethanol, diesel, natural gas for vehicles, and liquefied natural gas. ### Brazil — Durability, mitigating measures, and compensatory programs - Government discretion and fiscal effects: - Government reduced taxes on gasoline and diesel in 2004 and removed taxes on LPG and fuel oil to keep petroleum prices constant for final consumers. - Result: aggregate total petroleum taxes did not increase despite growing consumption; Petrobras incurred operational losses on its downstream business which implies that net taxes are lower. - Net taxes defined as taxes on petroleum products to final consumers minus possible transfers from the central government to Petrobras to pay for the losses. - Mitigating measures implemented: - Fuel subsidies: Subsidies for the supply of fuels to thermal power plants in Amazonia maintained for a period of 10 years until 2012. - Import tax: 2001 introduction of a new tax on importation and marketing of petroleum products. Revenues used to fund: i) subsidies for ethanol producers and the transportation costs of hydrocarbons; ii) LPG used by low-income families; iii) projects oriented to environmental protection; and iv) construction of roads. - Gas voucher: After withdrawal of LPG subsidies in 2001, a new LPG subsidy was introduced in 2002 to assist low-income families through a gas-voucher with eligibility based on a means test. - Conditional cash transfers: "Bolsa Escola" implemented in 2001; both the gas voucher and Bolsa Escola were consolidated under the Bolsa Familia in 2003. ### Brazil — Lessons identified in the case study - A gradual approach to subsidy removal can help minimize resistance from interest groups that benefit from subsidies; phased removal was tailored for political acceptability. - Liberalization reforms have a greater chance to succeed with a popular government; after controlling hyperinflation, President Cardoso's administration capitalized on political support to undertake liberalization. - Discretionary policies to adjust oil prices and stabilization funds do not work under unstable macroeconomic conditions and can have adverse sectoral consequences; the oil price stabilization fund ran large deficits and required a government transfer equivalent to 0.8 percent of 1995 GDP to Petrobras. - Macroeconomic instability can contribute to the emergence of subsidies for products with controlled prices; diesel subsidies emerged in 1999 following large currency depreciation and failure to adjust fuel prices rapidly. - Targeted social programs can reduce opposition to subsidy reform and enhance durability; Brazil's gas-voucher and conditional cash transfer programs supported the durability of subsidy removal. *Source: IMF staff (INTRODUCTION, "_012813a - INTRODUCTION").* ### 12.5 percent from the reference price, by fully subsidizing the difference between international ### _012813a - 12.5 percent from the reference price, by fully subsidizing the difference between international ### Chile: Fuel price stabilization mechanisms and evolution - Original Fuel Prices Stabilization Fund (FEPP) design: - Maintained domestic prices within a 12.5 percent band from the reference price, by fully subsidizing the difference between international prices and the upper band and imposing a 60 percent tax on deviations below the lower band. - Reference price was updated on an ad hoc basis and the formula behind its calculation was not made public. - One fund covered different products (gas, kerosene, diesel, and LPG), allowing for cross-product subsidization. - Financial trajectory and reforms of FEPP: - Fund operated satisfactorily for nearly a decade but required reforms in the early 2000s to remain financially sustainable. - Sharp increase in oil prices in the late 1990s nearly depleted the fund (the balance reached US$50 million in January of 2000) and the mechanism failed to operate in late 1999. - Emergency injection of capital was required to continue operation. - Reforms introduced included: - Establishing weekly updates to the reference price (still based on current and expected evolution of oil prices in the medium term). - Introducing an explicit limitation to operate the fund subject to the availability of funds. - Eliminating the asymmetry in the adjustment mechanism by increasing the tax on deviations below the lower band to 100 percent. - Increasing transparency by making public the formula to adjust the reference price. - Introducing separate funds for gas, kerosene, diesel, and LPG. - Despite adjustments, the fund was nearly depleted by 2003. - Total fiscal cost of the FEPP over 2000–05 is estimated at 0.15 percent of 2012 GDP (Vagliasindi, 2013). - Temporary Fuel Prices Stabilization Fund (FEPC), 2005: - Established in response to supply disruptions following hurricane Katrina. - Operated similarly to FEPP but relied on a narrower band (5 percent) around a reference price based on the recent and expected evolution of WTI prices in the medium term plus a refining fee instead of the price of each derivative product. - Originally intended to be used for about a year, but was extended until 2010. - Total fiscal cost of the FEPC over 2006–09 is estimated at 0.65 percent of 2012 GDP (Vagliasindi, 2013). - Consumer’s Protection System for Fuel Excise Taxes (SIPCO), 2011: - Replaced stabilization fund with a tax adjustment mechanism. - Relies on excise taxes to smooth transmission of changes of international prices to domestic prices. - Mechanism reduces excise taxes for fuel when international prices jump above a 10 percent band around a reference price and increases excise taxes when international prices fall below the band. - Reference price is based on the recent and expected evolution of WTI prices in the medium term plus a refining fee for each derivative product. - By focusing on excise taxes, SIPCO excludes large industries (mining, electric generators) who can recover these taxes through deductions. - SIPCO was originally introduced with a 12.5 percent band which was narrowed to 10 percent in September 2012. ### Chile: Mitigating measures - Chile has a range of well-targeted safety net programs used to protect low-income groups from economic and other shocks. - In 2005: - Chile compensated 5 million low-income households to offset the impacts of rising fuel prices. - Another 1.6 million households whose electricity consumption was less than 150 kWh per month were compensated. - A further payment to low-income families was made in 2006. ### Chile: Lessons - Costs of smoothing mechanisms depend on design: - Narrowing the bands from 12.5 percent over 1991–2005 to 5 percent over 2006–2010 greatly increased cost. - The asymmetric nature of the original adjustment mechanism contributed to the depletion of the fund. - Recommendation: carry out illustrative scenarios including sensitivity analysis of parameters to ensure program cost aligns with expectations. - Adjustment mechanisms should be transparent: - Initial secrecy around FEPP formula and ad-hoc adjustments added uncertainty about timing and size of future fuel price adjustments. - Transparent rules-based approaches can stabilize prices while reducing uncertainty. - Targeting smoothing adjustment to smaller consumers is possible: - Applying adjustment through excise taxes excludes large energy consumers (who can deduct excise taxes), signaling that large consumers should hedge independently and helping secure public support. - Smoothing mechanisms should only offer temporary relief: - Chile used mechanisms for temporary support with the intent that international price increases be eventually transmitted to local prices in full. - Chile paired temporary smoothing with significant resources devoted to well-targeted safety nets. ### Ghana: Key macroeconomic indicators and context (2000–2011) - Table 4. Ghana: Key Macroeconomic Indicators, 2000–2011 (values as presented) - GDP per capita ($US): 2000: 400; 2003: 563; 2008: 1,266; 2010: 1,358; 2011: 1,580 - Real GDP growth (percent): 2000: 4.2; 2003: 5.1; 2008: 8.4; 2010: 8.0; 2011: 14.4 - Inflation (percent): 2000: 25.2; 2003: 26.7; 2008: 16.5; 2010: 10.7; 2011: 8.7 - Overall fiscal balance, cash (percent of GDP): 2000: -6.7; 2003: -3.3; 2008: -8.5; 2010: -7.2; 2011: -4.1 - Public debt (in percent of GDP): 2000: 123.3; 2003: 82.8; 2008: 33.6; 2010: 46.3; 2011: 43.4 - Current account balance (percent of GDP): 2000: -6.6; 2003: 0.1; 2008: -11.9; 2010: -8.4; 2011: -9.2 - Oil imports (percent of GDP): 2000: -7.1; 2003: -5.0; 2008: -8.3; 2010: -6.9; 2011: -8.3 - Oil exports (percent of GDP): 2000: 0.0; 2003: 0.0; 2008: 0.0; 2010: 0.0; 2011: 7.2 - Oil consumption per capita (liters): 2000: n.a.; 2003: 91.1; 2008: 91.4; 2010: 98.7; 2011: 110.7 - Poverty headcount ratio at $1.25 a day (PPP) (percent of population): 2000: 39; 2003: n.a.; 2008: 30; 2010: n.a.; 2011: n.a. - Context and institutional arrangements: - Ghana is a country of over 24 million people with recent offshore oil discoveries; 2011 was the first full year of production. - Since 2004, deregulation allowed oil marketing companies to import and distribute crude oil and petroleum products (previous monopoly by Tema Oil Refinery (TOR)). - A pricing formula exists for all petroleum products; current price-adjustment mechanism stems from 2005 reforms. - National Petroleum Agency (NPA), established in 2005, reviews fuel prices twice a month and recommends adjustments to the minister of energy based on a backward-looking formula incorporating changes in world fuel prices in the preceding two weeks. - Decision to adjust pump prices rests with the Executive; if price increases are warranted but not implemented, the budget in principle bears the cost of subsidies. - Historically, TOR carried subsidy costs, which led to large losses and spillovers to the financial sector; government cleared TOR arrears at large budgetary cost. - Since October 2010, a hedging scheme using monthly call options provides temporary protection against upward movements in oil prices; revenues from call options are used to cover temporary delays in adjusting domestic petroleum product prices to cost-recovery levels. ### Ghana: Experience with fuel price adjustments - Historical adjustments and outcomes: - 2001: 91 percent adjustment of petroleum pump prices to restore TOR’s financial health after delays in 2000 led to large accumulated losses reaching 7 percent of GDP; reform abandoned amid rising world prices and depreciating currency; TOR’s losses largely absorbed by Ghana Commercial Bank. - Early 2003: 90 percent increase in pump prices to pursue cost-recovery pricing; facing widespread opposition, government partially reversed the increase before 2004 elections and abandoned cost-recovery adjustments until 2005. In 2004, subsidies to TOR reached 2.2 percent of GDP and TOR continued borrowing from Ghana Commercial Bank. - 2005 deregulation was accompanied by research, communication, and mitigation programs to build popular support. - Research: Poverty and social impact assessment (PSIA) showed program was poorly targeted; rich received the lion’s share of benefits. - Communication: Government conducted widespread communications campaign, public addresses by president and minister of finance, publicly shared PSIA results, and engaged stakeholders including trade unions. - Assistance to the poor: Eliminated fees for state-run primary and secondary schools; increased public-transport buses; price ceiling on public-transport fares; more funding for health care in poor areas; increase in minimum wage; investment in electrification in rural areas. - Post-2005 administration and challenges: - NPA was delegated regulatory powers to isolate price adjustment decisions from political intervention. - Prices were adjusted by an average of 50 percent initially and government remained committed to regular adjustment for several years. - Automatic adjustment was temporarily suspended in the wake of the 2007–08 global fuel and food crisis and in the run-up to the 2008 elections. - NPA publishes price adjustments required for cost recovery on a biweekly basis, but it is not free to adjust prices without Executive consent. - Shortfalls when upward adjustments were warranted have often been covered by the budget or hedging profits, resulting in infrequent and large price adjustments when hedging profits were exhausted. - Prices were adjusted twice in 2011: by 30 percent in January and 15 percent in December. - Prices were not adjusted in 2012 (except for a small downward adjustment early in the year), and the gap between domestic and global oil prices increased substantially due to a depreciating currency. ### Ghana: Mitigating measures - Following 2005 reform, programs aimed at mitigating effects on the most vulnerable included: - Elimination of fees for state-run primary and secondary schools. - Increased number of public-transport buses and a price ceiling on public-transport fares. - More funding for health care in poor areas. - Increase in the minimum wage. - Investment in electrification in rural areas. - Note: Expansion of cash transfers through the Livelihood Empowerment against Poverty (LEAP) program and additional spending on health and education subsidies are identified as good candidates for reallocating resources saved through subsidy removal. ### Ghana: Lessons - Durability of reform depends on political will and independence of regulatory agencies: - NPA is not free to adjust prices without Executive consent; since January 2011 it adjusted prices only three times (once downwards). - Commitment to automatic adjustment often falters before elections. - Constant dialogue with stakeholders and civil society is necessary to maintain commitment: - Recent adjustments lacked the extensive public information campaign used in 2005, making price increases irregular, hard to anticipate, and often announced shortly before implementation. - Early announcement and engagement reduce opposition from stakeholders including trade unions. - Supportive research and analysis matter: - The 2005 PSIA demonstrated subsidy costs and that fuel subsidies were poorly targeted; in Ghana less than 2.3 percent of outlays on fuel subsidies benefited the poor. - Visible mitigating measures increase likelihood of success: - Fuel subsidies are ill-targeted but provide immediate and easy-to-understand benefits; removal imposes swift and substantial costs on vulnerable groups unless compensated. - Efficient and visible reallocation of savings to programs with immediate benefits to the most vulnerable (e.g., LEAP, health, education) is crucial. *International Monetary Fund, “ENERGY SUBSIDY REFORM: CASE STUDIES” (selected excerpts as provided).* ### 2.8 percent of GDP in 2008 when international oil prices peaked. In 2011, fuel subsidies were around ### _012813a - 2.8 percent of GDP in 2008 when international oil prices peaked. In 2011, fuel subsidies were around ### Context - Fuel subsidies reached 2.8 percent of GDP in 2008 when international fuel prices peaked and were around 2.2 percent of GDP in 2011. - Indonesia has repeatedly attempted subsidy reform to improve the fiscal position and to achieve energy-efficiency and environmental objectives. - Indonesia became a net oil importer for the first time in 2004. - The government announced an objective to remove fossil-fuel subsidies by 2014, but parliamentary actions in September 2010 and in 2012 reversed or constrained reform momentum. ### Experience with fuel pricing reforms since 1997 - 1997–1998 - Government cut energy subsidies as part of an IMF-supported adjustment program after the 1997 Asian financial crisis. - Prices were raised rapidly: kerosene by 25 percent, diesel by 60 percent, and gasoline by 71 percent (Beaton and Lontoh, 2010). - Rapid increases triggered protests in the two weeks after the announcement and contributed to political unrest culminating in the end of President Suharto‘s rule. - 2000–2003 - Several price increases were implemented between 2000 and 2003 with mixed success; many increases were later rolled back. - An attempt in 2003 to automatically link domestic fuel product prices to international prices was poorly communicated and largely reversed; many announced compensation programs did not materialize. - 2005 - Indonesia undertook two large fuel price increases in 2005 as fiscal pressure rose; diesel price doubled and kerosene nearly tripled. - Protests occurred but with less intensity than in 1998 and 2003; President Yudhoyono‘s government (elected 2004) enjoyed political support that aided implementation. - 2008 - With international fuel prices at their peak, petroleum product subsidies reached 2.8 percent of GDP. - Fuel prices were raised by 29 percent, on average; later reduced as international prices fell but remained above pre-increase levels. - The government ceased paying subsidies to larger industrial electricity consumers. - 2007 onward - Program initiated in 2007 to phase out kerosene in favor of LPG (liquid propane gas); LPG is less subsidized and has lower cost, pollution, and CO2 emissions. - Free distribution of LPG stoves and small LPG cylinders was used to accelerate conversion, though problems included possible LPG diversion and accidents. - Political economy - Reform outcomes were affected by government popularity and trust. Failures or rollbacks were linked to public distrust and political dissatisfaction (e.g., Suharto era, 2003). Successes in 2005 and 2008 were helped by President Yudhoyono‘s popularity. - Ad hoc price adjustments, politicized pricing, and lack of a depoliticized independent institution to set prices/quantities contributed to reemergence of subsidies. ### Key statistics (Indonesia) - Nominal GDP per capita (US$): 2000: 800.0; 2003: 1,091.3; 2008: 2,211.9; 2010: 2,980.8; 2011: 3,508.6 - Real GDP growth (percent): 2000: 4.2; 2003: 4.8; 2008: 6.0; 2010: 6.2; 2011: 6.5 - Inflation (percent): 2000: 3.8; 2003: 6.8; 2008: 9.8; 2010: 5.1; 2011: 5.4 - Overall fiscal balance (percent GDP): 2000: -2.0; 2003: -1.4; 2008: 0.0; 2010: -1.2; 2011: -1.6 - Public debt (percent GDP): 2000: 95.1; 2003: 60.5; 2008: 33.2; 2010: 27.4; 2011: 25.0 - Current account balance (percent GDP): 2000: 4.8; 2003: 3.5; 2008: 0.0; 2010: 0.8; 2011: 0.2 - Oil imports (percent GDP): 2000: 3.5; 2003: 3.2; 2008: 4.6; 2010: 3.4; 2011: 4.3 - Oil exports (percent GDP): 2000: 4.8; 2003: 3.2; 2008: 3.0; 2010: 2.2; 2011: 2.4 - Oil consumption per capita (liters): 2000: 247.4; 2003: 254.9; 2008: 257.8; 2010: 349.5 - Fuel subsidies (percent GDP): 2008: 2.8; 2010: 1.3; 2011: 2.2 - Bantuan Langsun Tunai cash transfer program coverage: 19.2 million households or 35 percent of population ### Mitigating measures (Indonesia) - Subsidy compensations and social spending: - Rice subsidies created; spending increased on health, education, and social welfare. - Low-interest loans and support for small business. - 2008 education support targeted to children of lowest ranking civil servants, police, and soldiers. - Unconditional cash transfers in 2005: - Bantuan Langsun Tunai provided monthly cash transfers targeted at poor households, covering 19.2 million households or 35 percent of population; helped prevent near-poor households from falling into poverty. - Accompanying programs included health insurance for the poor, school operational assistance program, and expanded rural infrastructure support. - Extensive public information campaign raised awareness of compensating programs. - Kerosene-to-LPG conversion: - Free starter packs (stove and compact cylinder) and public communication on LPG safety. - Government statistics indicate significant savings from increased LPG use and reduced kerosene consumption. ### Lessons (Indonesia) - Targeted cash transfers can reduce opposition to subsidy reform and assist the poor; good preparation, deployment, and monitoring are essential. - Providing an affordable alternative energy source (e.g., kerosene to LPG) can help reduce subsidies and minimize opposition; initial data indicate success in Indonesia with limited adverse impacts. - Rapid, large subsidy reductions can generate strong public opposition (e.g., price shocks in 1998 and 2003). - Reforms are more likely to succeed under a popular government; political support matters. - Durable reform requires recognition of subsidy removal benefits and long-term commitment; reforms often triggered by adverse events but need sustained plans to stick. - Depoliticizing pricing and subsidy policy (e.g., delegating technical decisions to an independent institution) could improve transparency and reduce election-driven setbacks. - Communicating reform objectives and mitigating measures increases public acceptance and take-up of compensatory programs. --- ### Context and experience: Islamic Republic of Iran (excerpt) - Background - Subsidy reform had been on Iran‘s policy agenda since the late 1980s with repeated setbacks leading to high energy intensity by early 2000s. - International oil prices approached US$150 per barrel and FOB gasoline prices hovered around US$2 per liter while Iran‘s domestic gasoline price was US$0.10 per liter. - Iran was importing increasing amounts of gasoline and facing smuggling; rationing of gasoline began in June 2007, reducing demand growth and smuggling to some extent. - Price for gasoline purchases in excess of the subsidized quota was set at US$0.40 per liter. - Reform implementation - First phase of a targeted fuel subsidy reform launched in December 2010: substantial price increases for major petroleum products, natural gas, electricity, water, and bread. - Reform design planned to increase domestic prices over a five-year period to 90 percent of international prices. - Authorities deposited cash transfers in new bank accounts for households financed by revenue from price increases; part of revenue allocated to enterprise support to reduce energy intensity. - The reform aimed at reducing waste and rationalizing consumption and was integrated into a broader structural reform agenda focused on growth and job creation rather than fiscal consolidation. - Suspension and political constraints - Implementation of the reform program was suspended in late 2012 amid financing concerns and deteriorating macroeconomic conditions. - In mid-2012 the second phase was postponed due to lack of parliamentary support for the proposed cash transfer budget and implied price increases. - In November 2012 parliament formally voted to halt the second phase, keeping the existing cash transfer program intact but barring further energy price increases. ### Mitigating measures (Iran) - Cash transfers - About 80 percent of revenue from price increases was redistributed to households as bi-monthly cash transfers. - Authorities initially favored targeting poorer segments but found administrative targeting infeasible; all citizens were allowed to apply and transfers were equal for all applicants, while the richest households were discouraged from applying. - Enterprise support - Revenue remainder set aside to support enterprise restructuring to reduce energy intensity. - Systematic analysis of more than 12,000 enterprises conducted; 7,000 were selected to receive targeted assistance (direct assistance and sales of limited quantities of fuels at partially subsidized rates). - Multitier tariffs and rationing - Multitier tariffs on electricity, natural gas, and water were used to moderate impacts on small users, with escalating schedules and regional differentiation. - Electronic cards for gasoline rationing introduced in June 2007 created a de facto multi-tier pricing structure; rationed gasoline price increased but remained below full unlimited-purchase price; households retained unused quotas. ### Lessons (Iran) - Universal cash transfers were pivotal to public acceptance; equal transfers achieved redistributive effects and helped limit regressivity of subsidies, with transfers large enough to lift virtually every Iranian out of poverty. - Maintaining macro stability is critical: expansionary monetary and fiscal policies, exchange-rate pressures, and high inflation undermined reform progress; the cash transfer program reportedly ran a deficit. - Moving enterprises to energy-efficient technologies takes longer than planned; small and medium-sized enterprises were squeezed and adoption of energy-efficient technologies was limited. - Communication is indispensable: an extensive public relations campaign preceded reform, emphasizing benefits to poor households and the shift from product subsidies to household transfers; however, post-implementation transparency about outcomes was incomplete. *Italicized: Prepared by IMF staff as presented in the source document.* ### References ### _012813a - References ### Sources and References - Guillaume, Dominique, Roman Zytek, and Mohammad Reza Farzin, 2011, ―Iran—The Chronicles of The Subsidy Reform,‖ IMF Working Paper No. 11/167 (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/wp/2011/wp11167.pdf. - Sources for macroeconomic tables and figures: International Energy Agency; World Development Indicators, World Bank; and World Economic Outlook, IMF. ### F. Mauritania — Context - GDP growth ranged between -1.2 percent (2009) and 11.4 percent (2006). - Inflation ran between 2.1 percent (2009) and 12.1 percent (2005). - The discovery of oil in 2006 led to fiscal expansion; oil discovery turned out to be very minor. - External shocks included droughts and 2008–2011 spikes in international fuel and food prices. - An IMF Extended Credit Facility (ECF) program began in March 2010. ### F. Mauritania — Macroeconomic indicators (selected, as presented) - GDP per capita ($US): 409.1, 412.3, 410.5, 445.9, 504.2, 609.5, 862.6, 878.3, 1,073.2, 897.6, 1,065.5 (years 2000–2010 sequence). - GDP growth (percent): 1.9, 2.9, 1.1, 5.6, 5.2, 5.4, 11.4, 1.0, 3.5, -1.2, 5.1 (2000–2010). - Inflation (percent): 3.3, 4.7, 3.9, 5.2, 10.4, 12.1, 6.2, 7.3, 7.5, 2.1, 6.3 (2000–2010). - Overall fiscal balance (percent of GDP): 0.0, 0.0, -2.9, -11.8, -4.8, -7.1, 35.8, -1.6, -6.5, -5.1, -1.5 (2000–2010). - Public debt (percent of GDP): 228.8, 223.6, 194.5, 216.4, 209.3, 182.1, 86.8, 96.9, 110.5, 124.5, 86.1 (2000–2010). - Current account balance (percent of GDP): -9.0, -11.7, 3.0, -13.6, -34.6, -47.2, -1.3, -17.2, -14.8, -10.7, -8.7 (2000–2010). - Oil imports (precent of GDP): 8.6, 7.4, 7.4, 7.8, 9.7, 10.6, 9.4, 15.3, 16.5, 8.2, 9.9 (2000–2010). - Oil exports (percent of GDP): 0.0 for all years listed. - Fuel consumption per capita (liters): n.a., n.a., n.a., n.a., n.a., n.a., 359.5, 309.3, 292.2, 294.9, 284.2, 291.5 (note: series contains n.a. entries). - Poverty headcount ratio at $1.25 a day (PPP) (percent of population): 21.2, n.a., n.a., n.a., n.a., 25.4, n.a., n.a., n.a., n.a., 23.4, n.a., n.a., n.a. (series contains n.a. entries). ### F. Mauritania — Experience with reforms - Drivers: fiscal expansion post-2006 oil discovery, 2008 and 2011 international fuel and food price spikes, unsustainable subsidy financing. - Distributional finding: Almost 80 percent of all energy subsidies were captured by the richest 40 percent of households. - 2008 reform attempt: - Freeze on fuel prices in early 2008 → huge losses for private energy distribution companies. - Late June 2008: government increased petroleum-product prices by 17.5 percent to 20 percent. - No public communication strategy or specific mitigating measures implemented. - Price adjustment contributed to protests and political instability culminating in a military coup in August 2008. - PRGF was suspended and price increases were reversed in November 2008. - Price-setting practice before 2011: - Prices controlled by government, set according to a price structure and formula to be adjusted monthly when international prices or exchange rate exceeded +/-5 percent. - In practice, authorities were reluctant to adjust retail prices, limiting increases when international prices were high and limiting declines when international prices collapsed. - Reforms from 2011 onward (ECF-supported): - May 2012: new diesel price formula agreed with petroleum distribution companies, following a simplified cost structure. - More than 20 percent price increase since January 2011 up to mid-2012. - Rigorous application of the new simplified automatic fuel price formula on a biweekly basis helped bring domestic fuel prices up to international levels by June 2012. - To address volatility, government intends to introduce a cap of 3 percent on any one adjustment when the formula would dictate a bigger change. - Planned additional reductions in subsidies to follow increases in electricity tariffs (for large consumers) and in gas prices. ### F. Mauritania — Electricity sector measures - SOMELEC (public electricity company) produced almost all electricity; two-thirds of electricity generated using thermal plants, evenly split between diesel and fuel oil. - Residential and commercial tariffs are estimated at more than 30 percent below cost recovery prices. - Measures supported by ECF, World Bank, and AFD: - Recapitalization of SOMELEC. - Clarification of financial relationship: (i) paying electricity bills on time; (ii) providing required subsidy for operations at regular intervals; (iii) drawing out a plan for settlement of arrears through end-2010. - Alignment of electricity rates for services sector with medium-voltage rates starting beginning of 2012. - New credit line from the Islamic Development Bank reduced reliance on high-interest bank borrowing. - Tariff study by an international firm to be completed in November 2012, expected to increase rates for large consumers. - Consulting firm engaged to establish a performance contract between SOMELEC and the government. ### F. Mauritania — Mitigating measures and social protection - 2011 emergency relief package: - Worth about UM40 billion, equivalent to 3.4 percent of GDP. - Comprised mostly reversible measures (e.g., did not include a raise in the wages of civil servants). - ECF-supported strategy: - Substitute temporary emergency program with permanent well-targeted social safety nets. - Full assessment planned of existing drought-emergency program, including "subsidized-food shops" extended through end-2012. - Opportunity to gradually remove most components of emergency program and re-orient savings toward scaling up well-targeted cash transfer schemes. - Cash transfer program (with World Food Program assistance): - Targets 10,000 vulnerable households in Nouakchott identified through a recent poverty survey. - Each household receives UM 15,000 monthly (equivalent to half of the legal minimum wage) via bank transfer. - Extended in June 2012 to 15,000 households in four rural areas. - Program provides beneficiaries access to financial services. - Scaling up contingent on expansion of the vulnerability and poverty survey to provide nationwide coverage. - Broader social protection strategy developed with UNICEF: - Plans to strengthen free school cafeterias, food-for-work, and support for pregnant women. - Development of a national food security strategy for the period 2015 to 2030 and an associated national investment program. ### F. Mauritania — Lessons - Depoliticizing fuel price adjustments can help lock in initial price gains; automatic diesel-price formula effective in keeping down subsidies. - A cap on any one price change (planned 3 percent cap) can smooth retail volatility while allowing prices to follow international trends. - Too rapid reduction of subsidies can generate opposition; sudden large increases in 2008 led to rollbacks and political instability. - Mitigating social measures should be well-targeted; Mauritania’s cash-transfer schemes appear promising compared with earlier less-targeted emergency-relief programs. - Temporary emergency programs should not become permanent entitlements. - An explicit communication campaign and transparent reporting on use of freed-up budget resources are advisable to build public confidence. - Fuel and electricity subsidy reforms are linked; reforms should clarify financial relationships between public utilities and the government. - Involving donor partners (World Food Program, UNICEF, World Bank, AFD) in social mitigation and electricity sector restructuring increases chances of success. ### G. Namibia — Context (introductory excerpts) - Namibia is one of sub-Saharan Africa’s richest countries with a relatively stable macroeconomic environment; however, income inequality and unemployment are very high. - Key economic supports: mineral exports, transfers from the Southern African Customs Union, and prudent fiscal policy. - Namibia has sustained economic growth while maintaining fiscal and current account surpluses. - Inflation is closely linked to South Africa‘s inflation due to currency peg; inflation remained within single digits since a peak of 11.9 percent in August 2008 driven by a surge in international oil prices. - The Namibian economy is sensitive to changes in international fuel prices because of energy-intensive industries such as fishing and mining. - Namibia is characterized by political stability and a relatively well functioning democracy; the ruling political party is dominant and has won elections with large majorities since independence. *Prepared by Luc Moers, Middle East and Central Asia Department (Mauritania section); table sources: International Energy Agency; World Development Indicators, World Bank; and World Economic Outlook, IMF.* ### 1990. Labor unionization is fairly high and the largest trade union federation, the National Union of ### _012813a - 1990. Labor unionization is fairly high and the largest trade union federation, the National Union of ### Social protection and labor context - Labor unionization is described as "fairly high" and the largest trade union federation, the National Union of Namibian Workers, is a strong political ally of the ruling party. - Namibia has a wide range of formal publicly funded social welfare programs. - Social security, welfare and housing spending averaged 5 percent of GDP during 2005–2011. - Government income support grants include: - a universal social pension system for the elderly and the disabled, - a variety of grants for children, - labor-based work programs, - shelter and housing programs. - Despite some weaknesses of inclusion and exclusion errors, anecdotal evidence suggests that Namibia has a well-targeted social safety system. ### Key macroeconomic and social statistics (selected figures from table) - GDP per capita ($US): 2000: 2139.7; 2003: 2607.9; 2008: 4276.0; 2010: 5244.1; 2011: 5828.2 - GDP growth (percent): 2000: 4.1; 2003: 4.3; 2008: 3.4; 2010: 6.6; 2011: 4.9 - Inflation (percent): 2000: 9.3; 2003: 7.2; 2008: 10.4; 2010: 4.5; 2011: 5.8 - Overall fiscal balance (percent of GDP): 2000: 1; 2003: -0.9; 2008: -6.1; 2010: 2.4; 2011: -4.2; (there is also a value -11.3 shown in the row) - Public debt (percent of GDP): 2000: 20.4; 2003: 26.4; 2008: 18.2; 2010: 16.2; 2011: 27.4 - Current account balance (percent of GDP): 2000: 7.9; 2003: 6.1; 2008: 2.8; 2010: 0.3; 2011: -1.7 - Oil Imports (percent of GDP): 2000: 3.5; 2003: 4.5; 2008: 2.4; 2010: 5.3; 2011: 5.9 - Oil exports (percent of GDP): 2000: 0.0; 2003: 0.0; 2008: 0.0; 2010: 0.0; 2011: 0.0 - Oil consumption per capita (liters): 2000: n.a.; 2003: 49; 2008: 155; 2010: 596.2; 2011: 731.0; (also 812.9 appears in table) - Poverty headcount ratio at $1.25 a day (PPP) (percent of population): 2000: n.a.; 2003: 31.9; 2008: n.a.; 2010: n.a.; 2011: n.a. ### Downstream fuel market structure and regulation - Liquid fuels downstream market is administered through acts of Parliament that set out parameters to calculate fuel prices. - Prices of petrol and diesel are regulated; prices of all other petroleum products are determined by market forces. - Namibia has no refining capacity and imports refined fuels mainly from South Africa through the port of Walvis Bay. - Ministry of Mines and Energy (MME) regulates the industry. - Namibian Petroleum Corporation (Namcor), a state owned enterprise, acts as an operational arm of the government in the market. - Five private companies market petroleum products: BP, Caltex Oil, Engen, Shell and Total. Each supplies its own distribution network but share import and storage facilities at Walvis Bay. - In 1999 Namcor was mandated to import 50 percent of Namibia's petroleum; that share was recently reduced due to Namcor's operational difficulties. ### Fuel price setting mechanism and the slate account - Fuel pump prices for diesel and petrol are set by a formula with three components: - Basic Fuel Price, based on the international spot price; - domestic fuel levies and taxes; - the slate account, used to smooth volatility in local pump prices. - The slate account is a notional record to track under- or over-recovery by fuel importing private companies. - The price formula is not completely automatic: MME has discretion on how much pass through to allow, with under-recoveries absorbed by the slate account. - Slate account balancing rule in theory: price adjustment formula should keep cumulative slate balances within a predetermined level of N$3 million. - In practice, balancing the slate account has sometimes involved transfers from the budget to the NEF and then to the slate account. ### Experience with fuel price adjustments and fiscal impacts - Original motivations for deregulating fuel prices: eliminate fuel subsidies (paid out of the National Energy Fund (NEF)) and respond more efficiently to changes in international oil prices. - NEF compensation scheme fiscal costs amounted to about N$170 million between 1990 and 1996, about 0.2 percent of GDP. - NEF expenditures to cover subsidies only started to decline after 2001; close to full cost recovery by private firms occurred only after 2001. - Domestic fuel prices increased steadily from 2003 onward and more than doubled from early 2007 to a peak in July 2008. - In response to the 2007–08 shocks, authorities moved from quarterly to monthly fuel price reviews to increase pass-through. - MME did not allow retail prices to rise as fast as world prices in some periods, transferring funds from the NEF to private firms to compensate them for keeping prices below cost-recovery. - In the 2006–07 budget the government made a once-off budgetary provision of N$206 million (0.4 percent of GDP) to offset the NEF’s accumulated losses. - Namcor operational losses and fiscal support: - 2009 Namcor operational losses of N$257 million prompted a N$100 million grant and a bailout package of N$260 million (0.5 percent of GDP) plus a portion ($0.08 per liter) of the existing fuel levy. - Namcor lost its mandate to supply 50 percent of Namibia's total fuel requirements in February 2011 due to operational difficulties. - The government faces contingent liabilities arising from Namcor's operational losses. ### Mitigating measures during price increases - Measures used in 2008 to address poverty and alleviate temporary impact of high fuel and food prices: - zero-rate value-added tax on selected food items, - rebate facilities for food importers, - a food distribution program to feed the most vulnerable. - Rural pump prices are subsidized by subsidizing transportation costs to remote areas; claims on actual road deliveries are submitted by oil companies to the MME for reimbursement from the NEF. - Namibia did not experience violent protests in response to rising fuel and food prices, though taxi drivers complained. ### Implementation process and timeline - The National Energy Council established the National Deregulation Task Force in 1996; White Paper on Energy Policy published in 1998. - Fuel price mechanism with quarterly price reviews adopted in 1997; moved to monthly reviews during 2007–08 shocks. - NEF expenditures to cover subsidies began to decline only after 2001, indicating implementation lags: "implementation of fuel subsidy removal takes time." ### Lessons and policy-relevant findings - Comprehensive planning and gradual implementation were key to success: - broad consultation with civil society and retention of targeted subsidy for remote areas. - Gradual reforms allowed time for consensus building between government and stakeholders. - Price-smoothing mechanisms helped prevent social unrest: - quarterly (later monthly) price adjustment mechanism with smoothing avoided sharp price adjustments. - combined with mitigating measures, helped manage 2008 and 2011 price shocks with no social unrest. - De-politicization of price adjustment mechanism is constrained by legal obligations to the state-owned energy company: - legally stipulated participation of the state petroleum company in importation and supply has prevented full de-politicization, allowing prolonged under-recoveries and large losses for the company that had to be covered by fiscal transfers. - Suggests need to carefully design price smoothing mechanisms. *Prepared by Farayi Gwenhamo, African Department. Source: Excerpt from ENERGY SUBSIDY REFORM: CASE STUDIES (International Monetary Fund) as provided in the content unit.* ### 2011. As a result, the subsidy was significantly reduced, though not completely eliminated, and the ### Niger: Fuel Subsidy Reform ### Background and reform timeline - Subsidy costs in 2011 were kept below the 2010 level (1.1 percent of GDP). - Retail prices started increasing in June 2011, continued through August 2011, and then remained fixed from September until the end of the year. - Monthly cost of the subsidy reached nearly CFAF 4 billion in May 2011, and was reduced to half from August onwards. - Prices were set below international prices once domestic production started; SORAZ sold fuel at CFAF 336 per liter for gasoline and CFAF 340 for diesel, fixed for the first six months of refinery operation. - An agreement reduced the fuel tax (taxe intérieure sur les produits pétroliers, TIPP) from 15 to 12 percent starting in 2013. ### Political economy and consensus-building - Country-specific circumstances shaped reform design and pace: - The imminent start of domestic fuel production created urgency and political constraints, as society expected lower prices with domestic production. - Initial reforms in late 2010 and early 2011 were implemented by a transitional government that believed it had less legitimacy for sensitive reforms. - To build consensus: - The budget explicitly reflected the costs of the subsidy for the first time to raise public awareness. - Public information campaigns highlighted the regressive nature of subsidies and linked savings from petroleum price increases to priority social spending. - Authorities established a committee (Comité du Differé) to discuss the reform approach and implementation; dialogue and consensus building were central to the process. - Building stakeholder consensus and social support took about six months. ### Price developments and fiscal impact - Domestic retail prices tended to follow international prices with a lag. - Despite pass-through expectations, prices remained below international parity after domestic production began due to SORAZ pricing and a fixed six-month period. - The monthly subsidy peaked at nearly CFAF 4 billion in May 2011 and was halved from August 2011. - The overlap of subsidy reform with the start of fuel/oil production makes durability of the reform uncertain absent domestic production. ### Mitigating measures and social spending - A direct subsidy to the transport sector (tickets modérateurs) was introduced to protect poorest segments, since poorer populations used public transport most. - Costs of mitigating measures were less than 0.1 percent of GDP. - Discontinuation of the fuel product subsidy created room for a 19 percent increase in social spending in the 2012 budget compared to 2011, with emphasis on investment in education. - The public wage bill was increased to accommodate the recruitment of 4,000 teachers in early 2012. ### Lessons and policy recommendations - Understand the extent of the fuel subsidy problem; determine distributional incidence to secure commitment to reform. - Promote societal understanding of subsidy costs; explicitly showing subsidy costs in the budget proved useful. - Conduct adequate public information campaigns; in Niger, TV and radio debates played a crucial role. - Use a participative approach; an ad-hoc and inclusive committee facilitated consensus. - Allow sufficient time to build support: explaining, negotiating, and implementing reform requires time (about six months in Niger). - Engage financial partners to ensure sufficient information and to encourage reform while maintaining country ownership. - Ensure mitigating measures reach the most affected groups via targeted subsidies based on detailed analysis of vulnerable groups. - Recognize complications when a country becomes an oil exporter: expectations and pressures to lower pump prices may intensify. *Source: ENERGY SUBSIDY REFORM: CASE STUDIES (Niger section).* ### References ### _012813a - References ### References cited (selected) - Adelabu, Nenpominyi Sarah, 2012, ―The Political Economy of Oil Deregulation in Nigeria‘s Fourth Republic: Prospects and Challenges,‖ Journal of Emerging Trends in Educational Research and Policy Studies. - Arizona-Ogwu, L. Chinedu, 2011, ―Downstream Petroleum Deregulation: Options and Constraints,― Science and Technology, December 11. - Igbikiowuby, Hector, 2011, ―Nigeria‘s Unending Flirtation with Deregulation,‖ Sweet Crude Reports, October 3. - Nigeria Extractive Industries Transparency Initiative (NEITI), 2011, ―Report 2006–2008, Executive Summary‖ (July). - Nigeria, Federal Republic, 2011, Subsidy Reinvestment and Empowerment (SURE) Programme, November. - Nigeria, Federal Ministry of Finance, 2011, ―FAQ on Deregulation of the Downstream Petroleum Sector and Removal of Fuel Subsidy‖ (October). - Nigeria, National Assembly, 2012, ―Lawan Report,‖ Unpublished report by the Ad Hoc Committee of the Petroleum Subsidy Probe Panel chaired by Farouk Lawan, April. - Ogbu, Osita, 2012, ―The Removal of Oil Price Subsidy in Nigeria: Lessons in Leadership and Policymaking in a Trust-Deficit Environment,‖ Brookings Opinion, January 26 (Washington: Brookings Institute). - Okigbo, Patrick O., and Dili Enekebe, 2011, ―Nigeria: Fuel Subsidy Removal—Achieving the Optimal Solution,‖ Nextier Policy Brief, December 15 (Washington: Nextier). - Okonjo-Iweala, Ngozi, 2011, Brief on Fuel Subsidy, December 6. - World Bank, 2012, ―Fuel Subsidies Impose a Large Fiscal Burden, and Disproportionately Benefit the Rich,‖ Africa‘s Pulse, Vol. 5, April. - Ministerio de Economía y Finanzas, 2012, ―Marco Macroeconómico Multianual 2013–15,‖ May (Lima). Website resources listed: - Nigeria, Budget Office of the Federation, http://www.budgetoffice.gov.ng/. - Nigeria, Department of Petroleum Resources, http://www.dprnigeria.com/. - Nigeria, Federal Ministry of Finance, http://www.fmf.gov.ng/. - Nigeria Extractive Industries Transparency Initiative (NEITI), http://www.neiti.org.ng/. - Nigerian National Petroleum Company, http://www.nnpcgroup.com/Home.aspx. - Petroleum Products Pricing Regulatory Agency (PPPRA), http://www.pppra-nigeria.org/index.asp. - Petroleum Support Fund, http://www.pppra-nigeria.org/psf.htm. - Pipelines and Products Marketing Company (PPMC), (subsidiary of NNPC), http://ppmc.nnpcgroup.com/. - Sweet Crude—A Review of the Nigerian Energy Sector, http://sweetcrudereports.com/. ### Peru — Context and reform summary - Peru is a net importer of oil; diesel accounts for 47 percent of fuel consumption and LPG accounts for 19 percent. - Market structure: duopoly with private Relapasa and public PetroPerú; PetroPerú historically used as pricing benchmark. - 2004 initial smoothing mechanism: adjusted excise taxes to keep consumer price constant when international prices breached bands; generated sizeable revenue losses and treasury liquidity shortfalls. - September 2004: creation of FEPC (Fondo de Estabilización de Precios de Combustibles) financed directly by the treasury; covered all types of gasoline and LPG; payments to refineries when reference prices were above upper band limit created contingent credit payable by the treasury; analogous contingent liability created when below lower limit. - Pre-reform FEPC performance: limited pass-through from international to domestic prices but generated sizeable fiscal costs and accumulated contingent liabilities; treasury paid refineries intermittently causing acute liquidity issues for refineries, particularly in 2008. - Mid-2008: study showed regressive distribution of the subsidy — the wealthiest 20 percent received eight times the subsidy amount received by the poorest. - April 2010 reforms: - rule to automatically update band limits every two months; - price changes limited to five percent, except LPG for domestic consumption with maximum price change of 1½ percent; - creation of special sub-account in the treasury to finance the FEPC. - October 2011: exclusion of all types of high octane gasoline from the FEPC (international price changes fully passed through domestically). - August 2012: removal of regular gasoline from FEPC; diesel and LPG for household consumption remained; LPG for industrial consumption excluded. - Reform outcomes: - Diesel and LPG represent 80 percent of subsidy spending. - Total fiscal savings of the reform have been modest: around 0.1 percent of GDP. - Mitigating measures were not implemented because reforms did not reduce subsidies for products most consumed by the poor. ### Peru — Key statistics (selected from Table 12 and Table 13) - Nominal GDP per capita (US$): 2000 1334.7; 2003 2258.9; 2008 4481.5; 2010 5290.8; 2011 6007.9. - Real GDP growth (percent): 2000 2.8; 2003 4.0; 2008 9.8; 2010 8.8; 2011 6.9. - Inflation (percent): 2000 3.76; 2003 2.3; 2008 5.8; 2010 1.5; 2011 3.4. - NFPS balance (percent of GDP): 2000 -3.4; 2003 -1.7; 2008 2.4; 2010 -0.3; 2011 1.9. - Gross public debt (percent of GDP): 2003 46.9; 2008 25.9; 2010 23.3; 2011 21.2. - Current account (percent of GDP): 2000 -2.9; 2003 -1.5; 2008 -4.2; 2010 -2.5; 2011 -1.9. - Oil imports (percent of GDP): 2000 3.1; 2003 2.3; 2008 4.1; 2010 2.6; 2011 3.2. - Oil exports (percent of GDP): 2000 1.1; 2003 1.0; 2008 2.1; 2010 2.0; 2011 2.7. - Oil consumption per capita (liters): 2003 332.5; 2008 380.2; 2010 377.2; 2011 317.8. - Poverty headcount ratio at $1.25 PPP (percent): 2003 9.5; 2008 6.2; 2010 4.9. - FEPC spending by product, 2011 (Million US$ / Percent): - Total 871.8 / 100.0 - Diesel 440.6 / 50.5 - LPG 261.0 / 29.9 - Gasolines 106.5 / 12.2 - Industrial petroleum 28.1 / 3.2 - Gasohols 35.7 / 4.1 ### Peru — Lessons and policy recommendations - Regulating consumer prices by adjusting taxes can create fiscal management challenges; small changes can have large fiscal impacts. - Smoothing mechanisms should incorporate automatic adjustments of pricing bands to avoid converting smoothing into an open-ended subsidy during upward price trends. - Rules for payment to refineries should be explicit; a special sub-account integrated into the Treasury Single Account improves transparency and payment certainty. - Introducing subsidy reforms during periods of stable prices and strong economic growth ("good times") can enhance political feasibility. - Begin reforms with products consumed primarily by higher-income groups (e.g., high-octane gasoline) to build public support and demonstrate reform direction, recognizing trade-offs between immediate fiscal savings and protecting lower-income groups. ### Philippines — Context and reform summary - Prior to late 1990s reforms, downstream oil sector was heavily regulated; Oil Price Stabilization Fund (OPSF) stabilized domestic prices by collecting or paying differences between regulated domestic prices and actual import costs. - National government replenished the OPSF by transferring 0.8 percent of GDP in 1990 and 1996 due to political difficulty in raising domestic prices. - Deregulation timeline: - 1996 initial deregulation law liberalized downstream oil industry and price-setting; OPSF balance improved in 1996 as it received transfers and prices were raised according to an automatic pricing mechanism. - Prices allowed to move freely in February 1997. - 1997 Supreme Court ruled the law unconstitutional; new law enacted in 1998 reinstated deregulation correcting constitutional deficiencies. - Deregulation outcomes: - OPSF abolished, eliminating its cost to the budget. - The industry remains liberalized and movements in international oil prices have been passed through to domestic prices. ### Philippines — Mitigating measures and political economy - Early and sustained planning, a nationwide communication campaign, and consensus building were critical to success. - Mitigating measures included: - Transition period with monthly price adjustments using an automatic pricing mechanism. - Government transfers to the OPSF during transition to absorb price increases above thresholds. - Adjusting the duty on oil imports when international prices exceeded thresholds. - Moral suasion to oil companies to adjust prices in small increments. - Mid-2008 measures to mitigate food and fuel crisis effects: - Package of pro-poor spending financed by windfall VAT revenue from high oil prices, including electricity subsidies for indigent families, college scholarships for low-income students, and subsidized loans to convert public transport engines to LPG. - Distribution of subsidized rice to low-income families. - Pilot conditional cash transfer program in late 2007, scaled up in 2008. ### Philippines — Key statistics (selected from Table 14) - Nominal GDP per capita (US$): 2000 1055.1; 2003 1024.8; 2008 1918.3; 2010 2123.1; 2011 2223.4. - Real GDP growth (percent): 2000 4.4; 2003 5.0; 2008 4.2; 2010 7.6; 2011 3.7. - Inflation (percent): 2000 3.8; 2003 3.4; 2008 8.2; 2010 3.8; 2011 4.8. - Overall Fiscal Balance (percent GDP): 2000 -3.4; 2003 -3.6; 2008 0.0; 2010 -2.2; 2011 -0.8. - Public debt (percent GDP): 2000 58.8; 2003 64.4; 2008 44.2; 2010 42.2; 2011 40.5. - Current account balance (percent GDP): 2000 -2.7; 2003 0.3; 2008 2.1; 2010 4.5; 2011 2.7. - Oil imports (percent GDP): 2000 3.9; 2003 3.8; 2008 12.4; 2010 9.6; 2011 13.5. - Oil exports (percent GDP): 2000 0.4; 2003 0.5; 2008 1.8; 2010 1.4; 2011 1.9. - Oil consumption per capita (liters): 2000 154.7; 2003 150.4; 2008 127; 2010 140.9. - Poverty headcount ratio at $1.25 per day (PPP) (percent of population): 2000 22.5; 2003 22. ### Philippines — Lessons and policy recommendations - Successful reform requires planning, persistence, and a strong communication strategy initiated early. - Political coordination mechanisms between the executive and legislature can help prioritize and pass reform legislation even with a weak political base. - Comprehensive reform (liberalization of downstream industry) depoliticizes price setting throughout the product chain, raising barriers to policy reversal. - Using windfall revenues (e.g., VAT windfalls from high oil prices) to finance targeted pro-poor measures is preferable to reintroducing universal fuel subsidies. *Source: _012813a - References (extracts and country case summaries from the provided PDF).* ### References ### _012813a - References ### References cited - Bernardo, Romeo L., Marie-Christine G. Tang, 2008, ―The Political Economy of Reform During the Ramos Administration (1992–98),‖ Commission on Growth and Development Working Paper No. 39 (Washington: World Bank). - Fernandez, Luisa, and Rosechin Olfindo, 2011, ―Overview of the Philippines‘ Conditional Cash Transfer Program,‖ Social Protection Note No. 2, May (Washington: World Bank). - World Bank, 2008, Philippines Quarterly Update (Washington). Available via the Internet: http://documents.worldbank.org/curated/en/2008/11/11962976/philippines-quarterly-update. - Competition Tribunal of South Africa (CTSA), 2006, ―Uhambo Merger Findings,‖ Case No: 101/LM/Dec04. - South Africa, Treasury, 2007, ―Possible Reforms to the Fiscal Regime Applicable to Windfall Profits in South Africa‘s Liquid Fuel Energy Sector, with Particular Reference to the Synthetic Fuel Industry (Pretoria). - Swart, C. J., 2010, ―The South African Liquid Fuels Market: Yesterday, Today, and Tomorrow,‖ MBA dissertation, University of Stellenbosch. ### L. South Africa — overview and automatic pricing mechanism - Context - Private sector plays a significant role but prices remain controlled. - Six of the seven oil companies—BP, Caltex, Engen, Sasol, Shell, and Total—operate both upstream and downstream; PetroSA is the seventh company. - Some 30 percent of the country‘s fuel needs are met from synthetic coal-based fuel produced domestically; the remainder is derived from imported crude refined domestically. - Pump prices are determined under an automatic pricing mechanism; government has worked toward liberalizing prices. - Key macroeconomic indicators (1993, 1998, 2003, 2008, 2011) — exact figures: - Nominal GDP per capita (US$): 3315.63, 100.13, 656.25, 605.88, 078.5 - Real GDP growth (percent): 1.2, 0.5, 2.9, 3.6, 3.1 - Inflation (percent): 9.9, 6.9, 5.8, 11.5, 5.0 - Public debt (percent GDP): n.a., n.a., 36.9, 27.4, 38.8 - Current account balance (percent GDP): 2.1, -1.8, -1.0, -7.2, -3.3 - Oil imports (percent GDP): 0.0, 0.1, 0.1, 0.3, 0.2 - Oil exports (percent GDP): n.a., n.a., 0.0, 0.0, 0.0 - Oil consumption per capita (liters): n.a., n.a., 441.75, 518.25, 534.5 - Poverty headcount ratio at $1.25 per day (PPP) (percent of population): 24.3, n.a., n.a., n.a., n.a. - Experience with the automatic pricing mechanism - Introduced in the 1950s to encourage private sector participation and secure adequate petroleum supply. - Aim: provide prices at least equal to import parity to incentivize international firms to invest/maintain activities during apartheid-era sanctions. - Most international companies remained in South Africa even during the anti-apartheid embargo. - The Central Energy Fund (state-owned) set up in 1977 determines pump prices monthly (first Wednesday of each month); prices include margins, taxes, and levies. - The fuel tax (main tax) is a specific levy announced every February in the budget speech (for implementation in April); it has increased steadily over time including in periods of rising international prices. - Decisions are transparently communicated, with an online publication of monthly decisions and price structure. - Equalization Fund (EF) experience - EF established in 1979 to smooth fluctuations in fuel prices by fixing domestic retail fuel prices with transfers to/from the fund. - EF was used over 1977–2004 but was not very successful and has since been abandoned. - When the EF was exhausted, the government needed to finance deficits, leading to substantial price increases; a steep increase in 1993 led to social unrest and the establishment of the Liquid Fuels Industry Task Force. - The EF Levy component remains in the price structure but has been set at zero since 2002, except for occasional use in early 2003. - Slate charges introduced to address intra-month import parity changes were negligible in practice. - Mitigating measures - No mitigating measures have been introduced in connection with the automatic pricing mechanism. - Long-standing application of the formula meant little debate regarding adverse effects of international price increases. - Lessons - Long-standing automatic pricing mechanism has worked well and is likely to remain in place; applied consistently over the years with little discussion of alternatives. - Transparency and credibility of the automatic pricing process (Central Energy Fund) contributed to durability; public dissemination of decisions improved public understanding. - Stabilization funds can backfire when underfunded; the EF was underfunded and when exhausted forced sharp price increases. ### M. Turkey — reforms, mitigating measures, and lessons - Context - Prior to reforms, the petroleum sector was dominated by state-owned vertically integrated enterprises (Petrol Ofisi, TÜPRAŞ, TPAO). - Industry governed by public decrees with government-set prices prior to 1990. - Reforms began in the 1980s as part of broader market-oriented liberalization after a balance of payments crisis in the late 1970s and a 1980 military coup. - Key macroeconomic indicators (2000, 2003, 2008, 2010, 2011) — exact figures: - Nominal GDP per capita (US$): 4146.84, 534.91, 0272.4, 10062.4, 10521.8 - Real GDP growth (percent): 6.8, 5.3, 0.7, 9.0, 8.5 - Inflation (percent): 55.0, 25.3, 10.4, 8.6, 6.5 - Overall fiscal balance (percent GDP): n.a., -10.0, -2.4, -2.7, -0.3 - Public debt (percent GDP): 51.6, 67.7, 40.0, 42.2, 39.4 - Current account balance (percent GDP): -3.7, -2.5, -5.7, -6.3, -9.9 - Oil imports (percent GDP): 3.6, 3.8, 6.6, 5.2, 7.0 - Oil exports (percent GDP): 0.1, 0.3, 1.0, 0.6, 0.6 - Oil consumption per capita (liters): 254.7, 246.0, 310.1, 304.6, n.a. - Poverty headcount ratio at $1.25 per day (PPP) (percent of population): n.a., 2.5, 0.0, n.a., n.a. - Fuel subsidies (percent GDP): 0.0, 0.0, 0.0, 0.0, 0.0 - Reform experience - Objectives: improve fiscal position by eliminating petroleum subsidies, reduce sector inefficiencies via private participation and competition, meet preconditions for EU membership. - 1989 law allowed private companies to set prices; privatization of public companies began in 1990 and completed in 2005. - Despite legal liberalization, government maintained effective control and prices were still set by the government until later reforms. - 1998: Automatic Pricing Mechanism (APM) adopted to set ceilings based on international petroleum prices and exchange rate; refiners and importers could set prices up to the ceiling. - TRURAS (public refining company) benefited from APM, making profits after often incurring losses before APM. - 2003 Petroleum Market Law transferred regulatory authority to the Energy Market Regulatory Authority (independent agency), loosened government controls (licenses, import limits), and accelerated privatization completed by 2005. - 2005: full liberalization of fuel prices came into effect; since then, fuel prices set by the market. - Turkish gasoline and diesel prices are among the highest in the OECD due to relatively high excise taxes reflected in retail prices. - Mitigating measures - Tax exemption for LPG consumption between 1999 and 2001: value added tax and special consumption tax foregone to support household use of LPG for cooking; resulted in LPG price below gasoline and diesel and led to vehicle conversions; government phased out the tax expenditure at end of 2000. - Tax exemption for public transportation: New Turkish Corporate Tax Law (2006) exempts public transport companies owned/managed by municipalities, villages, or special provincial administrations from value added tax and excise tax. - Rebate for diesel used in agriculture: introduced in 2007 by the Ministry of Agriculture to help farmers grow specific crops; three crop types correspond to different aid levels; aid amounts calculated by land area and paid on a cabinet-defined schedule; no restrictions on how grant money is spent; the measure is to be phased out. - Lessons - Broad political support and firm commitment to market reform were key to successful subsidy reforms; reforms were sustained under multiple parties and aided by EU accession efforts. - Improving economic conditions (steady growth, lower inflation, improved fiscal balance) helped advance reforms and limited short-run household welfare impacts. - Independent regulatory agencies (Energy Market Regulatory Authority) can steer technical decisions away from politics and ensure stability and consistency of reforms. *Content derived from _012813a - References (IMF).* ### References ### _012813a - References ### References - Erdogdu, Erkan, 2007, ―Regulatory Reform in Turkish Energy Industry: An Analysis,‖ Energy Policy, Vol. 35, No. 2, pp. 984–93. - International Energy Agency, 2010, ―Energy Policies of IEA Countries: Turkey 2009 Review‖ (Paris). - Oguz, Ender, 2006, ―The Liberalization of Downstream Oil Industry in Turkey,‖ A Thesis Submitted to the Graduate School of Social Sciences, Middle East Technical University. - Organisation for Economic Co-operation and Development, 2011, ―Turkey: Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels‖ (Paris). ### Yemen — Context and Key Indicators - Context and objectives: - Yemen has undertaken several reforms to reduce fuel subsidies since the 1990s. - Main goal: improve fiscal position while paying due attention to social considerations. - Subsidy bill remained large around 10 percent of GDP in 2012 (having peaked at 14 percent of GDP in 2008). - This amount exceeds the total of infrastructure and social expenditures. - Table 17: Yemen: Key Macroeconomic Indicators, 2000–2011 (sources: International Energy Agency; World Development Indicators, World Bank; and World Economic Outlook, IMF). - GDP per capita ($US): 2000: 539.6; 2001: 532.4; 2002: 560.0; 2003: 597.8; 2004: 682.1; 2005: 797.7; 2006: 881.6; 2007: 971.3; 2008: 1,171.1; 2009: 1,061.0; 2010: 1,272.5; 2011: 1,343.3 - GDP growth (percent): 2000: 6.2; 2001: 3.8; 2002: 3.9; 2003: 3.7; 2004: 4.0; 2005: 5.6; 2006: 3.2; 2007: 3.3; 2008: 3.6; 2009: 3.9; 2010: 7.7; 2011: -10.5 - Inflation (percent): 2000: 12.2; 2001: 11.9; 2002: 12.2; 2003: 10.8; 2004: 12.5; 2005: 9.9; 2006: 10.8; 2007: 7.9; 2008: 19.0; 2009: 3.7; 2010: 11.2; 2011: 19.5 - Overall fiscal balance (percent of GDP): 2000: 6.1; 2001: 2.8; 2002: -0.6; 2003: -4.2; 2004: -2.2; 2005: -1.8; 2006: 1.2; 2007: -7.2; 2008: -4.5; 2009: -10.2; 2010: -4.0; 2011: -4.3 - Public debt (percent of GDP): 2000: 61.2; 2001: 60.7; 2002: 57.8; 2003: 56.8; 2004: 52.1; 2005: 43.8; 2006: 40.8; 2007: 40.4; 2008: 36.4; 2009: 49.8; 2010: 40.9; 2011: 42.4 - Current account balance (percent of GDP): 2000: 13.8; 2001: 6.8; 2002: 4.1; 2003: 1.5; 2004: 1.6; 2005: 3.8; 2006: 1.1; 2007: -7.0; 2008: -4.6; 2009: -10.2; 2010: -4.4; 2011: -3.0 - Oil imports (precent of GDP): 2000: 2.2; 2001: 5.1; 2002: 6.2; 2003: 6.8; 2004: 7.5; 2005: 10.5; 2006: 17.7; 2007: 18.1; 2008: 13.3; 2009: 7.8; 2010: 6.7; 2011: 8.7 - Oil exports (percent of GDP): 2000: 35.1; 2001: 29.5; 2002: 29.4; 2003: 29.3; 2004: 31.0; 2005: 35.6; 2006: 35.3; 2007: 28.3; 2008: 28.7; 2009: 17.6; 2010: 20.2; 2011: 23.3 - Oil consumption per capita (liters): 2000: n.a.; 2001: 252.3; 2002: 260.8; 2003: 265.4; 2004: 274.4; 2005: 280.5; 2006: 279.1; 2007: 293.8; 2008: 305.4; 2009: 316.4; 2010: 322.6; 2011: n.a. ### Yemen — Experience with Reforms - 1994–2004 episodes: - After 1994, government increased gasoline price, but currency depreciation wiped out gains. - Post-1990–94 civil war, government increased price of fuel products consumed more by better-off households by 75 percent; depreciation of domestic currency of almost 240 percent in 1995 wiped out gains. - 1995–96 increases affected four products: gasoline increased by 80 percent, diesel by 100 percent, kerosene by 189 percent; LPG increased in two steps (first by 123 percent and then 85 percent). - Prices in dollar terms remained well below 1994 levels. - 2000–04: diesel price increased by 30 percent in two consecutive years; in dollar terms remained below decade-earlier level. - Government discouraged kerosene for cooking by making it more expensive compared to LPG. - 2005 major reform: - Launched to gradually adjust domestic prices over the medium term; based on a World Bank study and IMF policy advice. - July 2005: government increased domestic prices by 130 percent on average. - Public reaction: violent protests; government partially reversed the increase. - Net price adjustments: gasoline 71 percent, diesel 106 percent, kerosene 119 percent, LPG 7 percent. - No increase in price of mazot (mainly used for electricity generation). - Subsidy bill remained almost 9 percent of GDP in 2005 due to later spike in commodity prices. - 2010 reforms: - Under IMF Extended Credit Facility, prices of gasoline, diesel, and kerosene gradually increased by about 30 percent on average; LPG price doubled over nine months. - Strategy based on World Bank technical assistance; public information campaign component was not adopted; government implemented small, surprise increases. - Efficiency measures included replacing diesel-fueled power generators with gas-fueled ones. - Late 2010: diesel prices differentiated by charging higher prices to commercial users. - Main objective: reduce fiscal pressures after fiscal deficit of 10 percent of GDP in 2009. - 2011/12 episode: - As consequence of political crisis and tight fiscal space, price of gasoline increased by 66 percent, and prices of diesel and kerosene doubled. - Note: gasoline price initially increased by 133 percent for 90 percent of consumers, left unchanged for 10 percent (poor households who use gasoline); in 2011 increase was partially reversed, but prices were unified. - Sabotage of major pipeline restricted refinery supply; limited imports of refined fuels created fuel scarcity, black market with prices multiple of official prices, and long gas station lines. - Official price increases were accepted by population amid supply shortages. ### Yemen — Mitigating Measures - Distributional facts: - About 40 percent of fuel subsidies go to the richest 20 percent of households while only 25 percent go to households in the bottom 40 percent (based on updated 2005 HBS data). - For gasoline, households in the bottom 40 percent receive only 10 percent of the direct value of the subsidy. - Social safety net measures: - Social Welfare Fund established in 1996 as a poverty alleviation program providing conditional cash transfers; coverage and transfers expanded gradually. - Timeliness varied: - 2005 reform: took three years to approve a social protection law to streamline applications and increase transfers. - 2010 reform: mitigated almost simultaneously by a 50 percent expansion of coverage of the cash transfer scheme. - 2011/12: no mitigating measures implemented thus far; government considering further increases in Social Welfare Fund coverage or transfer size. - Public Works Project: provides short-term employment and support for small-scale contractors through labor-intensive public works. - Social Fund for Development: promotes community and small- and microenterprise development and provides short-term employment for transitory and chronically poor. - Other measures: - Fuel switching promoted: conversion from kerosene to LPG for residential use starting in early 2000s. - 2010: diesel-fueled electricity plants converted to natural gas. ### Yemen — Lessons - Public information and communication: - When public made aware of need and benefits of reforms (e.g., to ensure adequate supply) it accepted large price adjustments. - Reforms without effective public information strategy, especially during political tension, provoked protests and partial reversals. - Adequate planning to strengthen safety nets and communicate mitigating efforts are essential for public support. - Pricing and governance: - Avoid multiple prices for a single fuel product — multiple pricing in Yemen created arbitrage, distortions, and governance challenges, incentivizing commercial users to access cheaper residential-priced fuel. - Differential pricing is easier for metered products (e.g., electricity). - Social protection: - Well-designed, timely cash transfers and social protection programs can protect the poor and reduce opposition. - Social Welfare Fund transfers, Public Works Project, and Social Fund for Development helped reduce opposition; simultaneous implementation could have reduced opposition in 2005. - Timing and macro conditions: - Adverse economic conditions increase need for reforms but make price adjustments more difficult, particularly when combined with political tensions. - Implement reforms timely before economic and social conditions deteriorate further. - Efficiency and governance improvements: - Adequate relative pricing (natural gas vs. diesel; LPG vs. kerosene) encourages efficient fuel switching. - Strengthening governance enhances targeting and reduces abuse and smuggling. ### Armenia — Context and Key Indicators - Context: - Early 1990s transition to market economy left a financially weak electricity sector dominated by a vertically integrated monopolistic power company with heavily subsidized retail prices. - Collapse of the former Soviet Union and conflict with Azerbaijan caused severe oil supply disruptions; electric generation declined by almost 50 percent in 1990–95, causing chronic power shortages. - Electricity subsidies were about 11 percent of GDP in 1995. - Forms of subsidies identified: - Implicit consumer subsidies: prices set below levels needed to cover operating costs and capital depreciation; no budget transfers meant utilities financed subsidies by accumulating bank debt. - Power theft and low collection rates: estimated 40 percent of electricity bills uncollected in 1996. - Explicit budget support: loans from budget equaled 0.2 percent of GDP in 1996; unpaid taxes equaled about 1½ percent of GDP in 1996; loan guarantees also provided support. - Table 18: Armenia: Key Macroeconomic Indicators, 2000–2011 (sources: International Energy Agency; World Development Indicators, World Economic Outlook, IMF). - Nominal GDP per capita (US$): 2000: 593.5; 2003: 874.1; 2008: 3,605.9; 2010: 2,840.4; 2011: 3,032.8 - Real GDP growth (percent): 2000: 5.9; 2003: 14.1; 2008: 6.9; 2010: 2.1; 2011: 4.4 - Inflation (percent): 2000: -0.8; 2003: 4.7; 2008: 9.0; 2010: 7.3; 2011: 7.7 - Overall Fiscal Balance (percent GDP): 2000: -6.3; 2003: -1.5; 2008: -1.8; 2010: -4.9; 2011: -2.7 - Public debt (percent GDP): 2000: 48.9; 2003: 32.9; 2008: 14.6; 2010: 33.3; 2011: 35.1 - Current account balance (percent GDP): 2000: -14.6; 2003: -6.8; 2008: -11.8; 2010: -14.7; 2011: -12.3 - Oil imports (percent GDP): 2000: 0.1; 2003: 0.1; 2008: 0.4; 2010: 0.3; 2011: 0.3 - Oil exports (percent GDP): 2000: 0.0; 2003: 0.0; 2008: 0.0; 2010: 0.0; 2011: 0.0 - Oil Consumption per capita (liters): 2000: 133.7; 2003: 139.3; 2008: 159.5; 2010: 127.6; 2011: n.a. - Poverty headcount ratio at $1.25 per day (PPP) (percent of population): 2000: n.a.; 2003: 10.6; 2008: 1.3; 2010: n.a.; 2011: n.a. ### Armenia — Electricity Price Reforms and Institutional Measures - Price reforms: - Residential tariffs more than doubled over 1995–99 to reach 25 AMD/kWh, considered close to cost recovery and consistent with tariffs for non-residential users. - Removal of the lifeline tariff in 1999; discounted tariffs for low-income consumers, electricity company employees, and military personnel were withdrawn earlier after social protection overhaul. - Retail prices raised by 20 percent in 2009 following an increase in the price of gas supplied by Russia. - Financial outcomes: - Price reforms reduced electricity sector deficit from about 21 percent of GDP in 1994 to less than 3 percent of GDP in 2000. - Collection and operational improvements: - Measures to improve collection rates: meters moved from residences to communal hallways to prevent tampering; meter readers no longer allowed to collect cash; bill payments collected through banks and post offices; strict enforcement of disconnection policies. - Collection rates rose from 40 percent in 1996 to almost 100 percent by 2003 (temporarily weakened in 1999 due to tariff increase). - Institutional reforms: - Private-sector participation introduced, producing efficiency gains; system losses declined from 30 percent of gross supply in 1999 to 10 percent in 2010. - Independent regulator established in 1997 with mandate to set and review electricity tariffs and regulate the sector; law empowers regulator to ensure tariffs cover medium-term costs including depreciation, debt service, and capital costs. - Supporting factors: - Strong political will and donor assistance (IMF, World Bank, USAID) supported reforms and privatization through conditional loans and technical assistance. - Authorities maintained strict application of disconnection policies after privatization despite pressures. ### Armenia — Impact of Reforms - Fiscal and macroeconomic impacts: - Fiscal deficit declined from 16.5 percent of GDP in 1994 to 9 percent in 1995, and to 6.3 percent by 2000. - Electricity price increases’ inflationary impact was mitigated by macroeconomic stabilization: inflation fell from over 5,000 percent in 1994 to single digits by 1998. - Growth averaged about 5½ percent during 1995–99; electricity sector reform likely facilitated growth by improving power reliability and boosting electricity production. - Social distribution and mitigating measures: - 1999–2000 household survey: electricity spending share in household spending was almost twice as high in poor households as in non-poor households; urban poor particularly affected. - Social protection responses: - 1999 replacement of child and family allowances with the Poverty Family Benefit — a means-tested cash transfer program. Initially covered 25 percent of households; coverage declined to 18 percent in 2010 as eligibility tightened, allowing average payment increase by 40 percent in real terms while program cost remained around 1 percent of GDP. - Two one-off cash transfers to low-income households in 1999–2000 to help cope with higher electricity prices. - Small-scale program (1999) to provide dual-rate electricity meters for low-income households, enabling discounted night tariffs and reducing need for high-cost peak generators. - Table 19: Armenia: Electricity Share in Total Household Spending (Percent) - Rural: Poor 13; Non-poor 7 - Urban: Poor 16; Non-poor 9 ### Armenia — Lessons - Political will: - Strong political will is crucial for reform success; persistence in privatization and politically costly tariff reforms were important. - Regulatory framework: - A good regulatory environment that limits interference in setting tariffs and a legal framework for private-sector participation facilitate reform. - Collection and payment systems: - Measures to improve collections (strict enforcement of disconnection policies; bank-based collection) are essential. - Public awareness: - Effective public awareness campaigns linking bill payments to reliable service help garner support. - Social mitigation: - Implementation of mitigating measures for the poor (means-tested cash transfers, one-off payments, dual-rate meters) fortifies support for reforms and creates synergies between social protection and energy sector reforms. *Prepared by IMF staff based on the content of _012813a - References.* ### References ### References ### Cited works - Lampietti, Julian, 2004, ―Power‘s Promise: Electricity Reforms in Eastern Europe and Central Asia,‖ World Bank Working Paper No 40. (Washington: World Bank). - Lampietti, Julian; Anthony A. Kolb; Sumila Gulyani; and Vahram Avenesyan, 2011, ―Utility Pricing and the Poor: Lessons from Armenia, ―World Bank Technical Papers No. 497 (Washington: World Bank). - Nixson, Frederick, and Bernard Walters, 2005, ―Utilities‘ Pricing and the Poor: the Case of Armenia,‖ UNDP Armenia White Paper (New York: United Nations Development Programme). - Sargsyan Gevorg, Ani Balabanyan, and Denzel Hankinson, 2006, ―From Crisis to Stability in the Armenian Power Sector: Lessons Learned from Armenia‘s Energy Reform Experience,‖ World Bank Working Paper No. 74 (Washington: World Bank). - Velody, Mark; Michael J.G. Cain; and Michael Philips, 2003, ―Energy Reform and Social Protection in Armenia,‖ in A Regional Review of Social Safety Net Approaches: In Support of Energy Sector Reform (Washington: United States Agency for International Development). ### Brazil — Context and motivations for reform - 1980s macroeconomic environment: - Growth averaged about 3 percent. - Inflation averaged 272 percent. - Overall budget deficit averaged 5 percent of GDP and reached 7 percent in 1989. - Net public debt increased from 24 percent of GDP in 1981 to almost 40 percent in 1989. - Reasons to privatize power sector: - Raise substantial revenues for the treasury and clear debt off the books; in 1993 external debt contracted by electricity companies amounted to almost 25 percent of Brazil‘s external debt. - Selling state-owned distribution companies would pay state-level debt owed to the national government. - Government faced difficulty raising sufficient capital for needed investments; electricity investment dropped by almost half in the 1990s relative to the decade before. - Sector-specific problems: - High construction costs due to cartels among contractors. - Excessive employment and high power losses throughout the system. - Tariff-setting by the Planning Secretary of the President‘s Office led to price adjustments aimed at containing inflation rather than reflecting costs, producing declining electricity tariffs in real terms, deteriorating companies‘ financial positions, and increased external debt. ### Brazil — Fiscal and subsidy outcomes - Debt and subsidy indicators: - By 1993 debt accumulated in the CRC (Conta de Resultados a Compensar) reached US$26 billion in 1993, which was absorbed by the central government in the same year. - Assuming this represented the accumulation of losses over the preceding five years, the subsidy to the electricity sector had averaged 0.7 percent of GDP per year in 1987. - Reform timeline and scope: - 1993 reforms removed requirements of uniform national tariffs and of a mandated 10 percent rate of return on capital. - A law enacted in 1998 unbundled the electricity sector system to increase pricing transparency. - Privatization program period: 1993 to 2003 (10-year period). - Distribution sector privatized under a series of monopoly licenses; generation market became competitive with multiple private companies. - Post-privatization outcomes and challenges: - 1993 reforms succeeded in eliminating subsidies from a fiscal point of view. - Weak regulatory framework after privatization led to uncertain investment climate and suspension of some distribution line construction. - Lack of investment plus a drought in 2001 depleted hydroelectric reservoirs, prompting government-mandated rationing and allowed distributors to raise tariff levels; these actions produced a sudden drop in GDP and steep tariff increases, undermining public support for privatization. - Cross subsidies persisted (rural electrification and special rates for low-income households) but lacked a uniform implementation method, creating a heterogeneous set of subsidies with difficult-to-measure targeting efficiency. - Efficiency gains: reduction by half in the number of employees from 1994 to 2000. - Improvement in security and availability of energy supply post-reform; expansion of electricity generation post-2001. ### Brazil — Key macroeconomic indicators (selected data as presented) - Row labels and year columns as presented: - 2000 2003 2008 2010 2011 - GDP per capita ($US): 37513 10487 29108 16129 17 - GDP growth (percent): 4.31 1.15 5.16 7.49 3.77 - Inflation (percent): 6.18 13.72 8.33 8.23 6.97 - Overall fiscal balance (percent of GDP): -3.37 -5.31 -2.34 -5.93 -3.57 - Gross public debt (percent of GDP): 51.15 59.65 58.56 3.76 2.2 - Net public debt (percent of GDP): 47.75 54.93 38.14 0.23 8.6 - Current account balance (percent of GDP): -3.76 0.76 -1.71 -2.21 -2.12 - Oil imports (percent of GDP): 1.19 1.16 1.84 1.21 1.25 - Oil exports (percent of GDP): 0.16 0.33 0.33 0.19 0.23 - Oil consumption per capita (liters): 412 394 482 624 n.a. - Poverty headcount ratio at $1.25 a day (PPP) (percent of population): 11.82 11.21 6.01 6.14 n.a. ### Reforms of electricity pricing and institutional design - Policy changes: - Removal in 1993 of uniform national tariffs requirement and mandatory 10 percent rate of return on capital. - 1998 law unbundled the electricity sector to increase pricing transparency. - Privatization began with distribution companies to realize substantial productivity gains and restore financial viability that affected the whole sector. - Market design: - Distribution privatized under monopoly licenses with regulatory jurisdiction; over time end users could obtain third-party access to the grid. - Generation became competitive with multiple private firms. ### Mitigating measures - Even after liberalization, regional cross subsidies remained. - A levy on electricity tariffs was introduced in 1993 to subsidize the supply of fuels to the inefficient thermal power plants of Amazonia and was maintained for an extended period. - 1995 legislation approved lower electricity tariffs for low-income households. - 2003 program to finance free electricity to 10 million rural people, funded by levies on electricity tariffs. ### Lessons - The need to correct macroeconomic imbalances can provide political support for reforms. - Controlling electricity price increases as an anti-inflationary tool can have adverse fiscal consequences; Brazil‘s policy in the 1980s resulted in sector financial losses, debt accumulation, and underinvestment. - Reforms have a better chance of success with a popular government; President Cardoso‘s administration capitalized on political support after controlling hyperinflation. - Targeted social programs can reduce opposition to subsidy reform and assist the poor; Brazil reduced electricity tariffs for low-income people and adopted a conditional cash transfer program that facilitated subsidy reforms. - Privatization without a strong regulatory framework can have serious consequences and undermine popular support; unclear rules early in privatization led to low investment and contributed to the 2001 energy crisis. *International Monetary Fund, "ENERGY SUBSIDY REFORM: CASE STUDIES" (Brazil section and References).* ### References ### _012813a - References ### References - Bonini, Mario, 2011, ―Tarifas de Energia Elétrica: Evolução nos Últimos Anos e Perspectivas,‖ Grupo de Economia / Fundap Boletim de Economia, Vol. 8. - Brown, Ashley C., 2002, ―The Privatization of Brazil's Electricity Industry: Sector Reform or Restatement of the Government‘s Balance Sheet?‖ Working Paper (Washington: Inter-American Development Bank). - de Araujo, J. L. R. H., 2006, ―The Case of Brazil: Reform by Trial and Error?‖ In International Experience in Restructured Electricity Markets: What Works, What Does Not, and Why? ed. by F. P. Sioshansi and W. Pfaffenberger, Vol. 1 (Oxford: Elsevier). - de Oliveira, Adilson, and Tara Laan, 2010, ―Lessons Learned from Brazil‘s Experience with Fossil-Fuel Subsidies and their Reform,‖ International Institute for Sustainable Development, Trade, Investment, and Climate Change Series (Winnipeg: International Institute for Sustainable Development). - Giambiagi, Fabio, and Maurício Moreira, 1999, ―A Economia Brasileira nos Anos 90,‖ (Rio de Janeiro: Banco Nacional de Desenvolvimento Econômico e Social). - Gomes, Antônio Claret S., Carlos David G. Abarca, Elíada Antonieta S. T. Faria, and Heloísa Helena de O. Fernandes, 2003, ―O Setor Eletrico no Brasil,‖ Estudos Setoriais 14, (Rio de Janeiro: Banco Nacional de Desenvolvimento Econômico e Social). - Montalvao, Edmundo, 2009, ―Impacto de Tributos, Encargos, e Subsidios Setoriais Sobre as Contas de Luz dos Consumidores,‖ Working Paper No. 62, (Brasilia: Centro de Estudos da Consultoriado Senado Federal). - Mota, Raffaella, 2003, ―The Restructuring and Privatisation of Electricity Distribution and Supply Business in Brazil: A Social Cost-Benefit Analysis,‖ Working Paper No. WP 0309, (Cambridge: University of Cambridge, Department of Applied Economics). - Pinheiro, Armando, 1999, ―Privatização no Brasil: Por quê? Até onde? Até quando?,‖ (Rio de Janeiro: Banco Nacional de Desenvolvimento Econômico e Social). ### Kenya — Context - Kenya experienced an estimated increase in energy demand of 7 percent per year on average over the last six years (Ajodhia, Mulder, and Slot, 2012). - Electricity generation mosaic: - Hydropower: over 56 percent of installed capacity. - Thermal: 31 percent. - Geothermal: 13 percent. - Market structure: - Kenya Electricity Generating Company (KenGen) accounted for 75 percent of installed capacity as of 2009. - Five private independent power producers account for about 25 percent of installed capacity (World Bank, 2010). - Kenya Power and Lighting Company (KPLC) is responsible for transmission and distribution. - Energy Regulatory Commission (ERC) regulates tariffs, issues licenses, and sets performance targets. ### Experience with reform - Reform timeline and objectives: - Reforms began in the mid-1990s aiming to unbundle generation from transmission and distribution and allow private participation. - Main objectives: improve performance, ensure financial sustainability, foster investment. - Reform milestones: 2004 Energy Policy and 2006 Energy Act. - Tariff structure reforms: - Substantial tariff structure changes occurred in 2005 to reflect long-run marginal costs and include automatic pass-through of fuel costs and exchange rate movements. - The tariff formula also incorporates adjustments for domestic inflation every six months. - Information on tariff adjustments is available on the ERC‘s website. - Institutional developments: - Energy Tribunal established to arbitrate disputes between ERC and stakeholders. - KenGen has long-term power purchase agreements with KPLC that generally reflect underlying costs. - Residential tariffs use an increasing block tariff (IBT) scheme with three blocks and a fixed charge. ### Tariffs and pricing — exact rates and blocks - Residential IBT blocks and rates: - First block: 0 up to 50 kWh per month at a rate of K Sh 2 per kWh. - Second block: 51 to 1,500 kWh per month at a rate of K Sh 8.10. - Third block: more than 1,500 kWh per month at a rate of 18.57 per KWh. - Fixed charge: K Sh 120. - Relative rate differential: - The tariff rate charged to the highest block is over 828 percent higher than the rate applicable to the lowest one. - Non-residential consumers: - Charged different linear rates depending on category (commercial, industrial, or government). - VAT adjustment: - VAT rate on electricity lowered from 16 to 12 percent in response to drought impacts in 2008 and 2009. - Average residential tariff evolution: - $0.07 per kWh in 2000. - $0.15 in 2006. - $0.19 in 2009. - Current KPLC tariff structure has been in place since July 2008. - Planned increases in the basic tariff rate in June 2011 did not occur due to political economy constraints. ### Outcomes and key statistics - Macroeconomic and sector indicators (selected years; values reproduced exactly as presented): - Real GDP growth: 1995: 4.0; 2000: 2.5; 2005: 6.1; 2009: 4.1. - CPI Inflation: 1995: 8.9; 2000: 8.0; 2005: 11.1; 2009: 6.7. - Overall balance excluding grants (percent of GDP): 1995: -0.8; 2000: -4.1; 2005: -4.7; 2009: -7.2. - Total public debt (percent of GDP): 2000: 53.1; 2005: 45.1; 2009: 44.8. - Poverty headcount ratio at $1.25 a day (PPP) (percent of population): 2005: 43.4. - Power sector and access indicators: - Access to electricity (percent of population): 1995: 11.79; 2000: 13.10; 2009: 16.10. - Electric power consumption (kWh per capita): 1995: 130.83; 2000: 109.72; 2005: 137.13; 2009: 147.43. - Electric power transmission and distribution losses (percent of output): 1995: 17.90; 2000: 21.16; 2005: 18.38; 2009: 15.53. - Electricity production (GWh): 1995: 3759; 2000: 4098; 2005: 5995; 2009: 6875. - Average Tariff ($/kWh): 2000: 0.07; 2006: 0.15; 2009: 0.19. - Operational improvements: - Hidden costs of the power sector dropped from around 0.6 percent of GDP in 2002 to virtually zero by 2008. - Distribution losses declined from 21 percent in 2000 to 15.5 percent in 2009. - Annual new electricity connections increased from 43,000 in 2003/2004 to 200,000 in 2008/2009. - Revenue collection for KPLC improved from 81 percent in 2004 to 100 percent by 2006, later around 98 percent per ERC data. - By mid-2008, there were no explicit subsidies or fiscal transfers to power utilities. - Economic impacts of unreliable supply: - The 2007 World Bank Enterprise Survey: over 67 percent of firms in Kenya owned a generator; power outages typically led to losses amounting to 5 percent of annual sales for surveyed firms. - Briceño-Garmendia and Shkaratan (2011a) estimate unreliable electricity supply reduces Kenya‘s GDP growth by 1.5 percent per year. - Members of the Kenya Association of Manufacturers account for approximately 60 percent of total industrial energy consumption. - KPLC customers face a system-loss performance requirement that system losses cannot exceed 15 percent. ### Mitigating measures for affordability and access - Programs and instruments adopted: - Rural electrification program increased connections from 650,000 in 2003 to 2 million at present. - Revolving fund for deferred connection fee payments (financed by donor funds). - Commercial bank loans for connection fees. - A ―life-line‖ tariff (below costs) for households consuming less than 50 kWh per month, cross-subsidized by larger consumers. - Affordability and cross-subsidies: - The 50 kWh per month threshold is estimated to be affordable for 99 percent of Kenyan households. - Tariffs are uniform across urban and rural areas, resulting in cross-subsidies from urban to rural consumers. ### Lessons and policy implications - Time horizon and comprehensiveness: - Successful electricity reform involves more than tariff changes and takes time; Kenya‘s reform started in the mid-1990s and took over 10 years to mature. - Key elements for success: - Prudent tariff policy and improvements in technical and administrative efficiency of state-owned companies were key to eliminating hidden costs. - Establishment of a relatively sound regulatory framework, including an effective and independent regulator, was vital to reform durability and encouraging private sector participation. - Political economy and acceptability: - Tariff increases were more acceptable when accompanied by improvements in service quality and access. - Authorities negotiated tariff changes with stakeholders early in the reform, demonstrating political commitment. - Transparent automatic adjustments to fuel costs, exchange rates, and inflation have become largely accepted by consumers, though political constraints can delay scheduled revisions. - Social protection mechanisms: - With appropriate instruments (life-line tariffs, deferred connection funds, bank loans), it is possible to reconcile cost-recovery tariffs with affordability for poorer households. *International Monetary Fund — ENERGY SUBSIDY REFORM: CASE STUDIES (References and Kenya country case material).* ### References ### _012813a - References ### References (selected citations) - Ajodhia, V.W. Mulder, and T. Slot, 2012, ―Tariff Structures for Sustainable Electrification in Africa‖ (Arnhem, Netherlands: KEMA). - Bacon, R, E. Ley, and M. Kojima, 2010, ―Subsidies in the Energy Sector: An Overview‖ Background Paper for the World Bank Group Energy Sector Strategy, July (Washington: World Bank). - Briceño-Garmendia, C., and M. Shkaratan, 2011a, ―Kenya‘s Infrastructure: A Continental Perspective‖ World Bank Policy Research Working Paper No. 5596 (Washington: World Bank). - Briceño-Garmendia, C., and M. Shkaratan, 2011b, ―Power Tariffs: Caught Between Costs Recovery and Affordability‖ World Bank Policy Research Working Paper No. 5904, (Washington: World Bank). - International Monetary Fund, 2008, ―Kenya: 2008 Article IV Consultation Staff Report‖ IMF Country Report No. 08/339 (Washington). Available via the Internet: http://www.imf.org/external/pubs/ft/scr/2008/cr08339.pdf. - International Monetary Fund, 2012, ―Kenya: Third Review Under the Three-Year Arrangement Under the Extended Credit Facility and Request for Modification of Performance Criteria—Staff Report‖ IMF Country Report No. 12/97 (Washington). - Foster, V. and C. Briceño -Garmendia, 2010, Africa‘s Infrastructure: A Time for Transformation (Washington: World Bank). - World Bank, 2010, ―Project Appraisal Document for the Electricity Expansion Project‖ Report No. 54147-KE, May (Washington). - Carreón-Rodriguez, Victor, Armando Jiménez San Vicente, and Juan Rosellón, 2003, ―The Mexican Electricity Sector: Economic, Legal and Political Issues,‖ Working paper, Program on Energy and Sustainable Development, Stanford University. - Department of Energy, 2012, ―National Energy Strategy, 2012–2026.‖ Available via the Internet: www.sener.gob.mx/res/PE_y_DT/pub/2012/ENE_2012_2026.pdf. - Komives, Kristin, Todd Johnson, Jonathan Halpern, Jose Luis Aburto, and John Scott, 2009, ―Residential Electricity Subsidies in Mexico: Exploring Options for Reform and for Enhancing the Impact on the Poor,‖ Working Paper No. 160 (Washington: World Bank). - Organisation for Economic Co-operation and Development, 2004, ―Mexico: Progress in Implementing Regulatory Reform‖ (Paris). - Organisation for Economic Co-operation and Development, 2011, ―Fiscal Reform for a Stronger, Fairer, and Cleaner Mexican Economy,‖ Chapter 3 in Mexico Economic Surveys 2011 (Paris). ### D. Mexico — Context - Mexico has a sound macro policy framework but suffers from high income inequality and poverty. - Fiscal and monetary policies are underpinned by a fiscal rule and inflation targeting. - Mexico‘s Gini coefficient averaged 0.48 in the late 2000s. - About 46 percent of Mexico's total population lives in poverty. - About 10 percent lives in extreme poverty. - The electricity sector is dominated by the government-owned Comision Federal de Electricidad (CFE), accounting for about three-quarters of total generation capacity. - Independent power producers account for about one quarter of generation assets. - Constitutional provisions mandate public sector dominance in the electricity market. - Comision Reguladora de la Energia (CRE) is the regulator of the electricity sector. - Historical note: Before 2009, Luz y Fuerza del Centro (LFC) operated distribution in metropolitan Mexico City; in 2009 LFC was closed and CFE took over LFC‘s service areas. ### D. Mexico — Key macro and energy statistics (selected years) - Nominal GDP per capita (US$): 2000 — 6858.8; 2003 — 6864.7; 2008 — 10050.5; 2010 — 9218.5; 2011 — 10153.3 - Real GDP growth (percent): 2000 — 6.0; 2003 — 1.4; 2008 — 1.2; 2010 — 5.5; 2011 — 4.0 - Inflation (percent): 2000 — 9.5; 2003 — 4.6; 2008 — 5.1; 2010 — 4.2; 2011 — 3.4 - Overall fiscal balance (percent GDP): 2000 — -3.1; 2003 — -2.3; 2008 — -1.1; 2010 — -4.3; 2011 — -3.4 - Public debt (percent GDP): 2000 — 42.6; 2003 — 45.6; 2008 — 43.1; 2010 — 42.9; 2011 — 43.8 - Current account balance (percent GDP): 2000 — -2.8; 2003 — -1.0; 2008 — -1.4; 2010 — -0.3; 2011 — -0.8 - Oil imports (percent GDP): 2000 — 1.1; 2003 — 1.2; 2008 — 3.3; 2010 — 2.9; 2011 — 3.7 - Oil exports (percent GDP): 2000 — 2.4; 2003 — 2.7; 2008 — 4.6; 2010 — 4.0; 2011 — 4.9 - Oil consumption per capita (liters): 2000 — 505.6; 2003 — 529.9; 2008 — 653.8; 2010 — 607.0; 2011 — n.a. ### D. Mexico — Electricity tariffs, subsidies, and fiscal impact - Tariffs were below cost-recovery levels for most residential users (by about 40 percent) and the agricultural sector (by about 30 percent) in 2005–06. - Subsidies were smaller for other sectors, but tariffs still failed to cover costs. - The benefit incidence of these subsidies is highly regressive. - The Ministry of Finance and Public Credit has tariff-setting authority; tariffs have been adjusted monthly in proportion to changes in input prices rather than actual service costs. - Tariff systems are highly complex, with over a hundred different billing possibilities for residential users. - Block tariffs provide larger subsidies for users who consume less. - A scheme of ―summer subsidies‖ provides a discount to residential customers residing in warm areas. - Electricity subsidies were estimated at about ½ percent of GDP in 2011, a similar ratio as 10 years earlier. - The government does not record the subsidies explicitly. - Under the aprovechamiento system, CFE must pay the government a return on the fixed assets (9 percent), but this is transferred back from the government to CFE to cover tariff subsidies and infrastructure investment. - Since 2002, the amount of aprovechamiento fell short of what was needed to cover tariff subsidies, eroding CFE‘s capital base. - Note on measurement discrepancy: The IEA indicates subsidies were about 0.1 percent of GDP or smaller in 2007–2010; the authorities’ estimate is larger because the IEA approach measures only consumer subsidies and not producer subsidies. ### D. Mexico — Reform experience and mitigating measures - 1999 comprehensive reform proposal (unbundling, wholesale market, privatization, regulator strengthening) failed due to: - legal impediments (need for constitutional amendment), - opposition from consumers and labor unions, - lack of public awareness, - political impasse prior to the 2000 presidential election. - 2001 reform proposal under President Fox also failed due to inability to forge Congressional consensus, political fragmentation, Supreme Court petitions, and opposition from labor unions and conglomerates. - Tariff reform in 2002 introduced a tariff exceeding long-run marginal cost for high-consumption customers, but did not permanently reduce subsidies because ―summer subsidies‖ allowed reclassification into highly subsidized categories. - Residential tariff structure includes subsidized categories based on average real temperatures with cutoffs at 25ºC, 28ºC, 30ºC, 31ºC, 32ºC, and 33ºC; customers in warmer areas receive higher subsidies. - Reclassification of customers into higher temperature categories during the 2000s further increased subsidy costs. - Mexico‘s Oportunidades safety net: - Cash transfer targeted to families of extreme poverty, conditional on school attendance and medical checkups. - In 2008, about 5 million families benefited. - Benefits include direct cash transfers, education grants, and cash compensation for energy consumption expenses. - Oportunidades cost only one-fifth of total fuel subsidies (including subsidies for petroleum products and electricity) in 2008 and offers more effective and better-targeted pro-poor subsidies than universal fuel and electricity subsidies. ### D. Mexico — Lessons - Long history of tariff subsidies and dominance of a state-owned company created strong interest groups (consumers, labor unions) opposing reform. - Political fragmentation and constitutional mandate for public sector provision complicated reforms. - Public opinion against privatization hindered reform efforts. - Extensive subsidized customer categories enabled reclassification that increased overall subsidies. - Existence of a targeted safety net and sound macroeconomic policies alone are not sufficient for successful electricity subsidy reform. - Key steps recommended: a thorough public information campaign and transparent accounting of electricity subsidies. ### E. Philippines — Context - The Philippine electricity sector became financially unsustainable in the late 1990s. - National Power Corporation (NPC) monopolized generation and transmission prior to reforms starting in 2001. - NPC mismanagement in the 1980s led to chronic electricity shortages. - Independent power producers (IPPs) were allowed in the early 1990s; NPC was a major purchaser from IPPs, leaving NPC vulnerable to market, exchange rate, and fuel price risks. - NPC became financially insolvent in the late 1990s due to failure to increase tariffs in line with rising costs and decline in demand after the 1997 Asian crisis. ### E. Philippines — Key macro and energy statistics (selected years) - Nominal GDP per capita (US$): 2000 — 1055.1; 2003 — 1024.8; 2008 — 1918.3; 2010 — 2123.1; 2011 — 2223.4 - Real GDP growth (percent): 2000 — 4.4; 2003 — 5.0; 2008 — 4.2; 2010 — 7.6; 2011 — 3.7 - Inflation (percent): 2000 — 3.8; 2003 — 3.4; 2008 — 8.2; 2010 — 3.8; 2011 — 4.8 - Overall Fiscal Balance (percent GDP): 2000 — -3.4; 2003 — -3.6; 2008 — 0.0; 2010 — -2.2; 2011 — -0.8 - Public debt (percent GDP): 2000 — 58.8; 2003 — 68.4; 2008 — 44.2; 2010 — 42.2; 2011 — 40.5 - Current account balance (percent GDP): 2000 — -2.7; 2003 — 0.3; 2008 — 2.1; 2010 — 4.5; 2011 — 2.7 - Oil imports (percent GDP): 2000 — 3.9; 2003 — 3.8; 2008 — 12.4; 2010 — 9.6; 2011 — 13.5 - Oil exports (percent GDP): 2000 — 0.4; 2003 — 0.5; 2008 — 1.8; 2010 — 1.4; 2011 — 1.9 - Oil Consumption per capita (liters): 2000 — 154.7; 2003 — 150.4; 2008 — 127; 2010 — 140.9; 2011 — n.a. - Poverty headcount ratio at $1.25 per day (PPP) (percent of population): 2000 — 22.5; 2003 — 22 ### E. Philippines — Reform of the electricity sector - Electric Power Industry Reform Act (EPIRA) enacted in 2001 with objectives to: - break up NPC into generation and transmission functions; - privatize generation and transmission assets; - unbundle electricity tariffs; - establish the Energy Regulatory Commission (ERC) as an independent regulator; - create a wholesale electricity market; - promote retail competition in the long run; - eliminate direct fiscal exposure to the electricity sector by de-politicizing tariff setting and limiting government ownership. - Despite EPIRA passage, financial sustainability was not immediately restored because: - Tariff setting remained politicized, delaying necessary tariff increases. - Limited administrative capacity of the ERC delayed action. - Privatization of generation assets did not pick up until the mid-2000s, so NPC continued to incur losses purchasing from IPPs. - NPC deficit ballooned to 1½ percent of GDP in 2004. ### E. Philippines — Tariff increases and fiscal consolidation - The Philippines faced a fiscal crisis risk around 2003: - Public sector deficit reached 5 percent of GDP. - Public debt exceeded 100 percent of GDP and was rising. - Deteriorating investor confidence raised external borrowing costs. - The Arroyo administration implemented a fiscal consolidation package shortly after the 2004 presidential election, including revenue measures (VAT and excise tax increases) and expenditure restraint. - Electricity tariffs were raised by about 30 percent during late 2004–early 2005. - Result: NPC deficit reduced to 0.2 percent of GDP in 2005; these measures helped avert a fiscal crisis. ### E. Philippines — Progress and remaining issues - Over eight years following reforms: - Most generation assets are now privately owned. - Wholesale electricity markets are operational. - Retail tariffs are unbundled into generation, transmission, and distribution charges. - Cross-subsidization among customers eliminated except for lifeline tariffs and subsidies by the Small Power Utilities Group (SPUG) to remote users. - Remaining issue: settlement of restructuring cost of the NPC—universal electricity charges to cover sunk costs have yet to be introduced. ### E. Philippines — Mitigating measures - Lifeline tariff schedules were used to protect poor households. - EPIRA allowed lifeline tariff schedule as a subsidized rate for poor households. - The ERC approved lifeline tariff applications for most distributors by 2006. - The discount ranged from 5–50 percent and benefited 3 million poor households (Philippines, Department of Energy, 2006). ### E. Philippines — Lessons - Comprehensive reform addressing pricing, regulation, privatization, and mitigation can eliminate electricity subsidies. - Establishing an independent regulator helps de-politicize pricing. - Privatization reduces direct fiscal exposure to the electricity sector. - Lifeline tariff schedules can mitigate the effect of tariff increases on poor households. - Electricity reforms can take a long time to implement due to institutional challenges: unbundling, privatization of many generation facilities, and regulator capacity building. - Strong political support throughout the reform process is critical; in the Philippines, decisive fiscal consolidation and political will enabled tariff increases and fiscal stabilization. *International Monetary Fund: Energy Subsidy Reform — Case Studies (References and country case summaries excerpt).* ### References ### _012813a - References ### References - Department of Energy, 2011, ―19th EPIRA Implementation Status Report,‖ prepared by the Department of Energy of the Philippines. - International Monetary Fund, 2005, ―Power Sector Reform in the Philippines,‖ Chapter 2 in Philippines; Selected Issues Paper (Washington). - ———, 2008, ―The Philippine Power Sector in a Challenging Environment,‖ Chapter 4 in Philippines; Selected Issues Paper (Washington). - Philippines, Department of Energy, 2006, ―8th EPIRA Implementation Status Report‖ (Manila). - World Bank, 2009, ―Philippines—First Development Policy Loan Project.‖ Available via the Internet: http://documents.worldbank.org/curated/en/2009/09/11415139/philippines-first-development-policy-loan-project. - Blaschke W., Lorenz U., 2004, Restructuring of Polish Hard Coal Industry in the Last Decade and Perspectives for the Next Decade, in European Conference on Raw Building and Coal: New Perspectives. Wyd IP Svjetlost, d.d., Sarajevo, pp. 121–131. Available via the Internet: www.min-pan.krakow.pl/zaklady/zrynek/zasoby/04_04wb_ul_sarajewo.pdf. - BP, 2012, Statistical Review of World Energy June 2012. Available via the Internet: www.bp.com/statisticalreview. - Europe Economics, and others, 2006, Energy Evaluation of State aid for the Coal Industry. Available via the Internet: www.ec.europa.eu/energy/coal/studies/doc/2006_10_report_europe_economics.pdf. - International Monetary Fund, 2000, Country Report No 00/60, Selected Issues, Recent Trends in Privatization and Real Sector Restructuring (Washington). Available via the Internet: http://www.imf.org/external/pubs/ft/scr/2000/cr0060.pdf - Organisation for Economic Co-operation and Development, 2012, Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels. Available via the Internet: www.oecd.org/tad/environmentandtrade/inventoryofestimatedbudgetarysupportandtaxexpendituresforfossilfuels.htm. - Suwala, 2010, ―Lessons Learned from the Restructuring of Poland‘s Coal-Mining Industry.‖ Available via the Internet: www.iisd.org/gsi/sites/default/files/poland_casestudy_ffs.pdf. --- ### Poland — Context - Pre-transition: coal mines were state owned, large industry and employer, characterized by excess capacity and over-employment and controlled prices that contributed to operational deficits. - Coal sector employees had special privileges, including free coal. - Early transition data: sector ran operational deficits and accumulated substantial debts. ### Poland — Reform experience and outcomes - Reform aims: (i) close unprofitable mines, (ii) reduce employment levels to improve labor productivity, (iii) eliminate overcapacity, (iv) make mining sector profitable with the objective of privatization. - 1990–1998: mines transformed into state owned enterprises (SOE); SOEs consolidated into seven coal companies. - Early reforms yielded limited results due to incomplete implementation and union resistance; coal market liberalization was gradual, with prices reaching international levels by mid 2000s. - Sector debt almost tripled between 1990 and 1998, amounting to US$5.6 billion (over 3 percent of GDP). - 1998–2002 hard coal reform (new program) was effective due to additional funding for social schemes and commitment to write-off debt. - 21 uneconomic mines were closed. - about 100,000 workers left the sector (Table 26). - about 70 percent of the coal mining industry‘s liabilities was written-off—contributing to the 2003 spike in the fiscal deficit. - Sector profitable from 2003 onward. - First privatization took place in 2009. - Post-reform structure: 31 mines grouped into seven joint-stock holding companies and dominated by three state-owned companies. ### Poland — Mitigating measures - Social program (1998–2002) provided welfare benefits to dismissed workers during transition to retirement or new jobs. - Labor market program aimed to redeploy especially younger workers: included soft loans for starting businesses and services from employment agencies (training and support). - Under the social program of 1998–2002, more than 53.000 workers left coal mining, of which 33 000 received some form of help. ### Poland — Key lessons - Reforms need political commitment and sometimes financial resources; lack of either can prolong reform and worsen fiscal drains. - Reforms must cover all aspects of the industry, including product and labor markets; market liberalization and price adjustment were necessary for mine profitability. - Cooperation with unions and appropriate social and labor market programs are essential when reforms entail substantial employment losses, especially where the industry is a major regional employer and employees have highly specialized skills. - Assumption of social liabilities and accumulated debt can be instrumental to successful subsidy reforms and modernization; debt write-offs and transition support helped the industry achieve profitability and reduce reliance on public support. --- ### Turkey — Context - Pre-reform: state-owned vertically integrated Turkish Electricity Authority (TEK) controlled generation, transmission, distribution. - TEK restructured into Turkish Electricity Generation and Transmission Company (TEAS) and Turkish Electricity Distribution Company (TEDAS). - 1980s onward: sector reform part of economy-wide market-oriented reforms following balance-of-payments crisis and 1980 military coup. - State played critical role in ownership and allocation of financial resources through state-owned banks. ### Turkey — Reform experience and outcomes - Reform objectives: - Better meet growing electricity demand and improve fiscal position by eliminating consumer and producer subsidies. - Reduce inefficiency via private participation, competition, and limited monopoly abuse. - Meet preconditions for EU membership. - 1984: first law for private participation; unbundling started in 1993. - 1994 privatization attempt struck down by Constitutional Court; privatization resumed after a 1999 constitutional amendment. - Early private contracts (build-operate-transfer, build-operate, transfer-of-operating rights) had long-term exclusive sale agreements with pre-determined prices and limited incentives for efficiency. - 2001 Electricity Market Law aimed to establish a competitive electricity market; state enterprises unbundled into generation, transmission, distribution, wholesale and retail. - 2006: wholesale electricity market introduced. - 2002–2007: tariffs remained unchanged while demand rose; input prices increased significantly, leading to underfunding for maintenance and investment and rapid demand growth. - 2008 move toward full cost recovery: - January 2008: electricity prices increased by 20 percent from fixed level in previous years. - March 2008: government approved cost-based pricing mechanism enabling automatic quarterly tariff adjustments to cover changes in cost of supply. - New pricing mechanism effective July 2008 and resulted in several price increases by end of 2009. - Electricity price increased more than 50 percent during this period. - Impact on household welfare appears limited as electricity consumption accounts for a relatively small share of total household budget (Zhang, 2011). ### Turkey — Mitigating measures - No specific mitigating measures for the reform were implemented. - Relied primarily on existing social safety net to address adverse impacts on the poor. ### Turkey — Key lessons - Broad support for and firm commitment to the market approach is key to reform progress. - Improving economic conditions and rising standards of living help advance reforms by increasing public support. - Independent agencies for energy policy can help steer technical decisions away from politics; under the Electricity Market Law, EMRA was responsible for implementing electricity market laws and regulating the electricity sector. *Prepared from the content of _012813a - References* ### References ### _012813a - References ### Context and reform chronology - Uganda suffered chronic power shortages despite large hydro potential; access to electricity was one of the lowest in sub-Saharan Africa, particularly in rural areas. - Reform timeline and institutional changes: - 1999: Initiation of comprehensive power sector reform program. - 2000: Electricity Regulatory Authority (ERA) became operational. - 2001: Uganda Electricity Board (UEB) unbundled into UEGCL (generation), UETCL (transmission), and UEDCL (distribution). - 2003: Rural Electrification Agency established. - 2003: Eskom Uganda awarded a 20-year concession for UEGCL assets. - 2005: UMEME Ltd awarded a 20-year concession for UEDCL (first electricity distribution network concession in sub-Saharan Africa). - Pre-2006 near-exclusive dependence on hydro made Uganda vulnerable to weather shocks; the 2005–06 droughts increased reliance on costly thermal power. ### Key macroeconomic and power-sector indicators (selected exact figures) - Real GDP growth (percent): 2005: 6.3; 2007: 8.4; 2010: 5.2 - Inflation rate (percent): 2005: 10.7; 2007: 4.4; 2010: 4.2 - Fiscal balance excl. grants (percent of GDP): 2005: -7.6; 2007: -6; 2010: -7.3 - Input energy (million kWh): 2005: 1,846; 2007: 1,861; 2010: 2,456 - Electricity consumed (million kWh): 2005: 1,139; 2007: 1,204; 2010: 1,731 - Distribution losses (percent): 2005: 38; 2007: 35; 2010: 30 - Collection ratio (percent of all bills): 2005: 81; 2007: 93; 2010: 96 - Effective tariff (U.S. cents/kWh): 2005: 9; 2007: 18; 2010: 16 - Average revenue (U.S. cents/kWh): 2005: 8; 2007: 17; 2010: n.a. - Average cost (U.S. cents/kWh): 2005: 13; 2007: 23; 2010: 26 ### Explicit fiscal subsidies and thermal generation (exact values from Table 29) - Explicit power subsidy (US$ million): 2006: 60.1; 2007: 151.2; 2008: 887.5; 2009: 611.2; 2010: 151.0; 2011: 174.8 - Explicit power subsidy (percent of GDP): 2006: 0.6; 2007: 0.4; 2008: 0.7; 2009: 0.8; 2010: 1.0; 2011: 1.1 - Thermal power (GWh): 2006: 370; 2007: 539; 2008: 590; 2009: 896; 2010: 1,022; 2011: 1,029 - Thermal power (percent of total energy): 2006: 23.3; 2007: 29.0; 2008: 28.9; 2009: 39.5; 2010: 41.6; 2011: 38.9 - Average oil price per barrel (000 Ush): 2006: 131; 2007: 132; 2008: 210; 2009: 132; 2010: 173; 2011: 253 - Average oil price percent change (y-o-y): 2006: 160; 2007: -373; 2008: 246 - Thermal power costs (in percent of GDP): 2006: 0.9; 2007: 1.1; 2008: 1.3; 2009: 1.3; 2010: 1.5; 2011: 1.7 ### Quasi-fiscal deficit (QFD) of the power sector (exact values from Table 30) - QFD components (2005–08 vs 2009–2011): - QFC due to underpricing: 2005–08: 32.8 percent of costs; 1.0 percent of GDP. 2009–2011: 40.1 percent of costs; 1.4 percent of GDP. - QFC due to distribution losses (up to 10 percent): 2005–08: 6.7 percent of costs; 0.2 percent of GDP. 2009–2011: 6.0 percent of costs; 0.2 percent of GDP. - QFC due to distribution losses (over 10 percent): 2005–08: 17.0 percent of costs; 0.5 percent of GDP. 2009–2011: 12.5 percent of costs; 0.4 percent of GDP. - QFC due to undercollection: 2005–08: 4.6 percent of costs; 0.1 percent of GDP. 2009–2011: 1.9 percent of costs; 0.1 percent of GDP. - Total quasi-fiscal costs: 2005–08: 61.1 percent of costs; 1.9 percent of GDP. 2009–2011: 60.5 percent of costs; 2.1 percent of GDP. - 2011 QFD: would have amounted to 2.6 percent of Uganda‘s GDP, of which about 1.1 percent of GDP were explicit fiscal costs. - In 2011, underpricing accounted for about 80 percent of the QFD. ### Cost structure and capacity developments - Thermal share increased from about 7 percent in 2005 to about 39 percent in 2011. - Bujagali hydro generation unit expected to become fully operational in late 2012; increased hydro capacity projected to reduce purchases of expensive thermal power while capacity payments to IPPs would still be required. - Long-run marginal costs via hydro development: potential reduction from US$0.16 to around US$0.12 per kWh (Ranganathan and Foster, 2012). - UMEME investments: US$105 million invested by end-2010. ### Experience with tariff adjustments (exact figures and dates) - June 2006 and November 2006: tariff increases of about 35 percent and 41 percent respectively; raised average effective tariff to US$0.18 per kWh. - 2007–09: no retail tariff adjustments while generation costs rose. - January 2010: retail tariffs modified to give some relief to household consumers; retail effective tariffs covered about two-thirds of costs in 2010. - January 2012: ERA approved a retail tariff increase of about 41 percent (or US$0.05 per kWh). - Industrial tariff set at US$0.13 per kWh, an increase of about 73 percent. - Life-line tariff for monthly consumption up to 15 kWhs remained unchanged at USh 100 per kWh. - Post-2012 tariff status: new tariffs expected to be in line with cost recovery once Bujagali fully operational; Uganda's power tariffs in line with other members of the EAC. ### Distribution and access outcomes - Distribution line losses fell from 38 percent in 2005 to 28 percent in 2011. - Collection rate increased from 80 percent of total power bills in 2005 to 96 percent in 2011. - UMEME increased number of customers by over 30 percent by 2009–2010; access rate increased (UMEME increased access rate by about 50 percent in last three years as noted under reforms). - Despite improvements, about one-third of electricity supplied was not paid for due to distribution and transmission losses and non-collection. ### Drivers that enabled the 2012 tariff increase (as reported) - Increasing and unsustainable fiscal costs of thermal power; explicit fiscal subsidy reached over 1.1 percent of GDP in 2011. - Poorly targeted subsidies: large industrial consumers paid less than a quarter of the cost per kWh prior to reform; industrial consumers accounted for 44 percent of total power consumption in 2010. - Evidence of consumers’ willingness to pay above prevailing tariffs: average coping costs for intermittent power supply estimated at US$0.30 per kWh (US$0.40 including fixed costs); residential willingness to pay estimated at US$0.50 per kWh. - Investments in hydropower infrastructure expected to reduce provision costs medium- to long-term. - Low overall access: as of 2010, only 12 percent of the population had access to power (under 4 percent rural), less than half the rate in other low-income African countries. ### Mitigating measures and social protection - Lifeline tariff maintained for poor domestic consumers: consumption up to 15 kWhs a month at USh 100 per kWh. ### Reform lessons and policy implications - Investment is a key impediment; private concessionaire investments (UMEME) helped reduce losses and improve collections. - Financial performance problems arise from both politically set low tariffs and high distribution losses and under-collection; tariff increases alone are insufficient. - Tariffs should be set at economic levels while allowing for a reasonable level of line losses; efficiency improvements and regulatory incentives are necessary to restore utility financial sustainability. - Institutional reform takes time (e.g., 5–10 years); Uganda’s experience shows reform began in 1999 and took more than 10 years to yield progress across access rates, efficiency, and fiscal burden. - Tariff increases require careful communication and implementation; Uganda’s communication campaign emphasized subsidy incidence and retained the lifeline tariff to protect the poor. - Expanding access is challenging; high upfront connection cost (about US$80) is a major impediment to new connections. *Source: _012813a - References* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_012813a.pdf_