## Energy Subsidy Reform in Sub-Saharan Africa: Experiences and Lessons (_afr1302)

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### Executive summary — purpose and central message
- Reforming energy (fuel and electricity) subsidies in sub-Saharan Africa (SSA) is critical to ensuring future energy supply and realizing Africa’s growth potential.
- Energy subsidies in SSA are:
  - Poorly targeted—main beneficiaries are the better off.
  - A disincentive for maintenance and investment in the energy sector, perpetuating energy shortages and low access.
- Reform must combine credible packages of measures and public engagement to build support.

### Key quantitative findings (fiscal and sectoral)
- Fiscal and sector burdens:
  - Fiscal cost of fuel subsidies (direct subsidies and foregone taxes): 1.4 percent of the region’s GDP in 2012 (IMF staff estimates, Appendix 1).
  - Quasi-fiscal deficits of state-owned electricity companies in SSA: 1.4 percent of GDP in 2009–10 (Appendix 1).
  - Nigeria fuel subsidies example: $9.3 billion, or 4.1 percent of GDP in 2011.
  - In Niger, oil tax revenue fell from 1 percent of GDP in 2005 to 0.3 percent of GDP in 2010.
- Box/Appendix aggregated survey (selected aggregates preserved exactly):
  - Sub-Saharan Africa (aggregate): Petroleum 2012 1.4; 2011 (pass-through) 1.5; 2011 (benchmark) 1.2; Externality costs 0.4; Quasi-fiscal deficit 1.4.
  - Median: Petroleum 2012 0.7; 2011 (pass-through) 1.6; 2011 (benchmark) 0.1; Externality costs 0.0; Quasi-fiscal deficit 1.7.
  - Oil exporters: Petroleum 2012 3.2; 2011 (pass-through) 3.2; 2011 (benchmark) 2.0; Externality costs 0.5; Quasi-fiscal deficit 1.5.
  - Oil importers: Petroleum 2012 0.3; 2011 (pass-through) 0.4; 2011 (benchmark) 0.8; Externality costs 0.3.

### Distributional incidence and welfare impacts
- Distributional patterns:
  - Energy subsidies mostly benefit higher-income groups because they consume the most (Figure 11).
  - Electricity subsidies are particularly regressive because grid connection is highly skewed toward higher-income groups.
  - On average, households in the top consumption quintile capture about 45 percent of fuel subsidies, while the bottom 40 percent receive about 20 percent.
  - Under universal subsidy schemes, providing 1 dollar of relief to the poorest 40 percent requires the government to spend 5 dollars, of which about half would accrue to the richest quintile.
  - Example per capita spending (PPP 2005 U.S. dollars, sample averages):
    - Diesel Q1–Q5: 0.3, 0.5, 0.9, 1.3, 6.9 (ratio Q5/Q1: 20.0)
    - Gasoline Q1–Q5: 0.1, 0.4, 0.9, 1.7, 3.0 (ratio Q5/Q1: 27.4)
    - Kerosene Q1–Q5: 1.5, 1.9, 2.0, 2.1, 2.7 (ratio Q5/Q1: 1.8)
    - Electricity Q1–Q5: 0.5, 1.3, 2.2, 3.9, 8.9 (ratio Q5/Q1: 17.0)
- Welfare-impact simulations (Table 3):
  - Total welfare impact of fuel price increases (impact in percent of total household consumption) by quintile:
    - Bottom: 5.6; 2: 5.3; 3: 5.3; 4: 5.3; Top: 5.3; All: 5.3
  - Direct impact by quintile:
    - Bottom: 2.2; 2: 2.0; 3: 2.0; 4: 1.9; Top: 1.9; All: 2.0
  - Direct impact components (All = aggregated where shown):
    - Gasoline All: 0.3
    - Kerosene All: 1.2
    - LPG All: 0.3
    - Electricity All: 0.2
  - Indirect impact by quintile:
    - Bottom: 3.4; 2: 3.3; 3: 3.3; 4: 3.4; Top: 3.4; All: 3.3
- Additional incidence facts:
  - Households with access to electricity spend 4.4 percent of their budgets to electricity consumption (rather than the 0.4 percent implied by an analysis including all households regardless of access).
  - Figure 11 percent shares of total fuel subsidy by quintile:
    - Poorest quintile: 7.8%; Quintile 2: 11.5%; Quintile 3: 15.3%; Quintile 4: 21.2%; Richest quintile: 44.2%.

### Economic efficiency and growth implications
- Efficiency and macro effects:
  - Energy subsidies lead to overconsumption and resource misallocation and crowd out more productive government spending.
  - Negative relationship observed between fuel subsidies and public spending on health and education (Figure 16).
  - Overconsumption encourages less fuel-efficient choices (e.g., vehicle choice) and accelerates depletion of nonrenewable resources.
  - Africa’s power infrastructure lags other regions; improving electricity to a regional leader’s level could increase SSA’s annual potential output growth by two percentage points (World Bank estimate).
  - Subsidies invite rent seeking, corruption, cross-border smuggling, and can be procyclical in oil-exporting countries.

### Electricity sector: costs, QFDs, and service outcomes
- Unit costs and affordability:
  - Average cost of supplying one kWh in SSA (excluding South Africa) was about US$0.15 a kWh (data for 2008–10).
  - Average cost in primarily thermal systems: US$0.21 a kwh (data for 2008–10).
  - Residential tariffs in SSA cover, on average, only about 70 percent of the cost of power (based on data for the latest year in 2005–09).
- Losses, collection, and private generation costs:
  - Distribution losses around 25 percent on average—well above the international norm of 10 percent.
  - In some cases, line losses can reach half of power injected.
  - Average collection rate around 85 percent; household survey evidence indicates as much as 60 percent of poorer households do not pay their electricity bills.
  - Costs of own generation (by firms) estimated in the range of US$0.3–US$0.7 a kWh—about three to four times as high as public-grid prices.
- Quasi-fiscal deficits (QFDs):
  - Median QFD about 1.7 percent of 2009 GDP (latest available data for 2008–10).
  - Cross-country variation: about 11 percent of GDP in Zimbabwe (2009) to less than 0.5 percent of GDP in Botswana and Chad.
  - Kenya reduced its QFD by about 0.7 percent of GDP through power sector reforms.
- Trends 2005–06 versus 2009–10 (QFD components, percent of GDP):
  - Underpricing: 1.1 (2005–06) and 0.8 (2009–10)
  - Distribution line losses: 0.7 (2005–06) and 0.8 (2009–10)
  - Undercollection of bills: 0.2 (2005–06) and 0.2 (2009–10)
  - Total QFD (excluding Zimbabwe): 1.9 (2005–06) and 1.8 (2009–10)
  - Median total QFD: 1.7 (2005–06) and 1.7 (2009–10)
- Access and capacity:
  - Combined generation capacity of the 48 SSA countries about 80 gigawatts.
  - Less than 3 in every 10 Africans have access to electricity.
  - Per capita consumption of electricity averaging 40 kWh a month and only 10 kWh if South Africa is excluded.
  - Per capita installed generation capacity in SSA (excluding South Africa) about one-third of that in South Asia and one-tenth of that in Latin America.

### Methodologies and key measurement concepts (Box 1)
- Fuel subsidy estimation methods:
  - Price pass-through analysis: dynamic inference using changes in domestic retail prices and international prices between two points in time; empirical note: "in 2011, the median SSA country lost 1.6 percent of GDP in fuel tax revenue because of increased subsidization of fuel relative to end-2008."
  - Price benchmark analysis: benchmark price = CIF import prices + margins + costs + indirect taxes; this study’s posttax benchmark uses "the sub-Saharan Africa average of gross tax (i.e., VAT and excises) per liter."
- Electricity subsidies and QFD decomposition:
  - QFD = Cost of underpricing + Cost of nonpayment + Cost of excessive line losses.
  - QFDe = Q*(AC - Pe) + Q*Pe*(1 - c) + Q*Pe*(L - Ls) = Q*(AC – Pe * [1 - (1 - c) - (L - Ls)]) with Ls assumed at 10 percent for SSA.
- Price pass-through definition:
  - Absolute change in domestic retail prices divided by absolute change in international prices, both in domestic currency; pass-through above (below) 100 percent implies net fuel taxes are increasing (decreasing).
- Pretax vs posttax fuel subsidy:
  - Pretax: cost-recovery benchmark excluding taxes.
  - Posttax: cost-recovery benchmark including an SSA average gross tax per liter; sensitive to choice of gross tax benchmark.

### Why universal energy subsidies are prevalent and hard to remove
- Political and administrative reasons:
  - Subsidies are visible, administratively simple, and used to avoid transmission of international price spikes, to expand access, or due to weak financial control of state-owned energy companies.
  - More prevalent in oil-exporting countries because of availability of financing, lower institutional quality, and political expectations of sharing oil wealth.
  - Longstanding subsidies become entrenched—benefits capitalized into consumers’ technologies and businesses—raising opposition to removal.
  - Common concerns against reform: potential loss of competitiveness and higher inflation.

### Lessons from SSA country experiences and case studies (design, sequencing, and instruments)
- Transparency and public communication:
  - Publicizing subsidy size and incidence helps kick-start reform (examples: Nigeria, Niger, Ghana).
  - Research (PSIA), dissemination, and stakeholder engagement improve reform credibility.
- Preparation, consultation, and sequencing:
  - Careful preparation and consultation are critical (examples: Kenya consultations with unions; Namibia National Deregulation Task Force leading to White Paper).
  - Gradual phasing and sequencing typically work best for large/longstanding subsidies (examples: Namibia scaled back starting in 2001; Kenya eliminated electricity subsidies over 7–8 years).
- Complementary sector measures for electricity:
  - Improve efficiency, reduce distribution losses, improve revenue collection, invest in cheaper generation, exploit regional pools, and establish independent regulators.
  - Tariff increases alone are insufficient—efficiency and service improvements increase public acceptance.
- Targeted mitigation:
  - Conditional cash transfers are most appropriate but may be infeasible short-term; other instruments include lifeline tariffs, subsidized connections, donor-financed connections, and temporary sector-specific subsidies (examples: Kenya lifeline tariff for <50 kWh a month; Niger transport subsidy costing 0.1 percent of GDP).
- Durability mechanisms:
  - Monitor and publicly report use of subsidy savings (example: Nigeria’s commission for SURE monitoring).
  - Explicitly account for subsidy costs in budgets (examples: Niger, Mali).
  - Automatic, transparent price adjustment formulas and depoliticized mechanisms (examples: South Africa monthly formula; Ghana published formula).
  - Independent regulatory bodies can help sustain reforms but require political backing (examples: Tanzania, Kenya).

### Country highlights and outcomes
- Kenya:
  - New energy policy in 2004; tariff increase in 2005; automatic pass-through for fuel costs; reconstituted Electricity Regulatory Commission.
  - Distribution losses declined from 18 percent in 2005 to 16 percent in 2011; collection rates increased from 85 percent to 99 percent; access increased nearly 140 percent between 2005 and 2011.
  - Quasi-fiscal costs reduced to 0.2 percent of GDP by 2011.
- Uganda:
  - Electricity Act (1999), regulator (2000), unbundling (2001), concessions (2003–05).
  - Electricity supplied increased (2005 = 1,741 GWh; 2011 = 2,387 GWh); electricity billed increased (2005 = 1,075 GWh; 2011 = 1,732 GWh).
  - Distribution losses declined from 38.3 percent (2005) to 27.5 percent (2011); collection rate improved from 80.0 percent to 95.3 percent.
  - Quasi-fiscal costs: 2005 = 1.6 percent of GDP; 2011 = 2.6 percent of GDP; 2012e = 0.7 percent of GDP.
  - January 2012 tariffs raised to move toward cost recovery; lifeline tariff preserved (15 kWh/month).
- Nigeria:
  - Subsidy costs rose from 1.3 percent of GDP in 2006 to 4.7 percent of GDP in 2011 (fuel subsidies by billion Naira: 2006 = 1; 2011 Est. = 797).
  - January 1, 2012 gasoline price raised by 117 percent, later scaled back to 49 percent (new maximum retail price N97 a liter).
  - SURE Program proposed to channel savings into infrastructure and safety nets; implementation and credibility issues limited public support.
- Niger:
  - Domestic refinery SORAZ started in early 2012; net fuel tax contribution fell from 1 percent of GDP in 2005 to 0.3 percent in 2010.
  - Agreed reform: pass-through from June 2011 and gradual unwind over 12–18 months; fuel prices increased by about 8 percent in mid-2011.
  - Mitigating measures: direct subsidy to transport costing <0.1 percent of GDP; social spending increased 19 percent in 2012 budget.
- Ghana:
  - 2005 deregulation accompanied by PSIA, communication, and mitigating measures (school fee elimination, transport measures, LEAP expansion proposals).
  - PSIA found fuel subsidies poorly targeted; less than 2.3 percent of outlays benefited the poor.
- Namibia:
  - Slate account and NEF used to smooth prices; NEF fiscal costs about N$170 million between 1990 and 1996 (about 0.2 percent of GDP).
  - Namcor mandated to import 50 percent of fuel (later reduced); fiscal interventions and bailouts required for Namcor in 2009.

### Appendix survey and empirical notes
- Survey coverage:
  - Questionnaire circulated June 2012; quantitative appendix draws on responses covering 35 countries (~80 percent of African Department countries).
- Typical magnitudes from survey:
  - Fuel subsidies typically amount to 1 percent of GDP (survey/desk responses).
  - Direct electricity subsidies tend to be less than 0.5 percent of GDP; direct power subsidies average 0.4 percent of GDP, reached 0.8 percent (Mali) in some cases.
  - Contingent liabilities: petroleum average 0.5 percent of GDP (five responses); electricity average contingent liabilities 1.7 percent of GDP (with cases >7 percent, e.g., Senegal).
- Pass-through empirical summary (end-2008 to end-2011):
  - Median pass-through in SSA: 66 percent.
  - Median increase in fiscal cost: 1.6 percent of GDP in SSA (median country lost 1.6 percent of GDP in fuel tax revenue relative to end-2008).
  - Median pass-through for oil exporters much lower than for oil importers; increase in fiscal cost in SSA oil-exporting countries almost twice as high as in SSA oil-importing countries.
- QFD decomposition median trends:
  - Net effect: median power sector QFD remained unchanged between 2005 and 2010; slight reduction in underpricing offset by increased distribution losses.

### Policy recommendations and good practice guidance (synthesized from text)
- Undertake comprehensive research and publicize results:
  - Measure fiscal and nonfiscal costs, distributional incidence, and likely effects of removal using household surveys, national accounts, and willingness-to-pay studies.
- Consult stakeholders and design a package:
  - Engage unions, large consumers, provincial/state authorities, and civil society to build consensus and mitigate opposition.
- Sequence and pace reforms to country conditions:
  - Use gradual phasing where subsidies are large/longstanding or administrative targeting is weak; rapid reform where fiscal stress or credibility allows.
- Combine price reform with sector reforms:
  - For electricity, pair tariff adjustments with loss reduction, metering, revenue recovery plans, efficiency measures, investment in generation/transmission, and regulatory strengthening.
- Protect the poor with targeted measures:
  - Conditional cash transfers where feasible; lifeline tariffs; subsidized connections; temporary, targeted transport subsidies (example: Niger).
- Improve durability:
  - Publish transparent accounting of subsidy costs; consider automatic price adjustment formulas with smoothing rules; depoliticize price-setting via independent regulators; monitor use of savings.
- Design retail fuel price-setting mechanisms per Appendix 2:
  - Prefer full liberalization or transparent automatic adjustment mechanisms.
  - Base formulas on actual efficient supply costs; update regularly; include explicit tax components; include smoothing mechanisms (moving averages, price bands, triggers).
  - Avoid excessive smoothing that undermines fiscal revenues; IMF simulations suggest narrower bands (+/− 3 percent) balance volatility and fiscal stabilization.

_Italic: Source: IMF staff paper “Energy Subsidy Reform in Sub-Saharan Africa: Experiences and Lessons” (content unit: _afr1302, excerpts and supporting boxes, appendices, and country case material as provided)._

### 1. Energy policy—Africa, Sub-Saharan. 2. Electric utilities—Government

### Energy Subsidy Reform in Sub-Saharan Africa: Experiences and Lessons

### Executive summary — purpose and central message
- Reforming energy (fuel and electricity) subsidies in sub-Saharan Africa (SSA) is critical to ensuring future energy supply and realizing Africa’s growth potential.
- Energy subsidies in SSA are:
  - Poorly targeted—main beneficiaries are the better off.
  - A disincentive for maintenance and investment in the energy sector, perpetuating energy shortages and low access.
- Reform must combine credible packages of measures and public engagement to build support.

### Key quantitative findings (fiscal and sectoral)
- Fiscal cost of fuel subsidies (direct subsidies and foregone taxes): 1.4 percent of the region’s GDP in 2012 (IMF staff estimates, Appendix 1).
- Quasi-fiscal deficits of state-owned electricity companies in SSA (difference between actual revenue and revenue required to fully recover operating costs and capital depreciation): 1.4 percent of GDP in 2009–10 (Appendix 1).
- Nigeria fuel subsidies example: $9.3 billion, or 4.1 percent of GDP in 2011.
- In oil-exporting countries, oil tax revenue example: fell from 1 percent of GDP in 2005 to 0.3 percent of GDP in 2010 (Niger case).

### Distributional incidence and welfare impacts
- Energy subsidies mostly benefit higher-income groups because they consume the most (Figure 11).
- Electricity subsidies are particularly regressive because grid connection is highly skewed toward higher-income groups.
- Eliminating subsidies without compensating measures would significantly hurt the poor because the share of total energy in poor households’ total consumption is the same as for the rich, despite differences in product mixes (Table 3).
- Welfare impacts of fuel price increases vary by consumption quintile (Table 3; Figures 11–12).

### Economic efficiency and growth implications
- Energy subsidies lead to:
  - Overconsumption and resource misallocation.
  - Crowding out of more productive government spending—negative relationship between fuel subsidies and public spending on health and education (Figure 16).
  - Vicious cycle of underinvestment, poor maintenance, and inadequate supply, notably in electricity and oil refining—widening the wedge between tariffs and cost recovery.
- Africa’s power infrastructure lags other developing regions; improving electricity to regional leader’s level could increase SSA’s annual potential output growth by two percentage points (World Bank estimate).

### Why universal energy subsidies are prevalent and hard to remove
- Subsidies are a visible, administratively simple mechanism to provide benefits to important population segments.
- Used to avoid transmission of international price spikes to domestic economies, to expand access, or due to weak financial control of state-owned energy companies.
- More prevalent in oil-exporting countries due to availability of financing, lower institutional quality, and political expectations of sharing oil wealth.
- Longstanding subsidies become entrenched—benefits capitalized into consumers’ technologies and businesses—raising opposition to removal.
- Concerns raised against reform include potential loss of competitiveness and higher inflation.

### Recent developments in fuel pricing and fiscal implications (end-2008 to end-2011)
- International oil and oil products prices rose sharply in 2003–2012 with two sequences; peaked mid-2008, fell to end-2008, then rebounded.
- Fuel price pass-through in SSA since end-2008 has been lower than in advanced economies and emerging Europe, but in line with the rest of the world.
- Median pass-through in SSA from end-2008 to end-2011: 66 percent.
  - This was about the same level as in Latin America and Asia and Pacific, but well above that in the Middle East and Central Asia.
  - Pass-through was higher than 100 percent in advanced economies and emerging Europe.
- Less than full pass-through implies a reduction in the tax per liter (or increase in subsidy per liter); fiscal costs increased in SSA as a result of relatively low pass-through during this period.

### Lessons from SSA country experiences and case studies
- Transparency and public communication on the size and incidence of subsidies help kick-start reform.
  - Examples: Nigeria (publicized $9.3 billion subsidy), Niger (oil tax revenue decline highlighted), Ghana (independent poverty and social impact analysis made public).
- Careful preparation, public education, and consultation with stakeholders are critical.
  - Example: Kenya—consultation with unions avoided utility staff retrenchment; large consumers supported tariff increases when extra revenues were committed to expand supply.
  - Namibia—National Deregulation Task Force (1996) led to White Paper on Energy Policy (1998).
- Gradual phasing and sequencing work best, especially for large or long-standing subsidies.
  - Example: Namibia scaled back fuel subsidies starting in 2001, three years after policy white paper; Kenya eliminated electricity subsidies over 7–8 years via tariff increases, improved collections, and reduced technical losses.
- Strong institutions and independent regulators are needed to sustain reforms.
  - Example: Tanzania—specialized regulatory entity that issues licenses, reports prices, and monitors market functioning helped sustain fuel subsidy reforms.
- Electricity subsidy reduction requires more than tariff increases:
  - Improve efficiency, reduce distribution losses, improve revenue collection.
  - Invest in cheaper generation where feasible; exploit regional production/distribution pools for economies of scale.
  - Independent regulator to assess how much subsidy removal should come from tariffs versus cost containment.
- Credible commitments to compensate vulnerable groups and to use savings for targeted development interventions are essential.
  - Timing subsidy reform with improvements in power services increases success probability (Kenya).
  - Kenya maintained a “lifeline” tariff for households consuming less than 50 kWh a month (cross-subsidized by larger consumers) and used donor-financed subsidies for connections.
  - Conditional cash transfers are the most appropriate mitigation instrument for the poor but may be infeasible short-term due to administrative constraints.
  - Other measures used include subsidies for public transport to protect affordability (Niger, Ghana).

### Structure of the broader paper and supporting materials
- Chapter 1: Stylized facts—(quasi-)fiscal costs, distributional incidence, impact on efficiency.
- Chapter 2: Policy issues on reforming the power sector and associated subsidies.
- Chapter 3: Strategy for energy subsidy reform.
- Supplement: Case studies—Fuel: Ghana, Namibia, Niger, Nigeria; Electricity: Kenya, Uganda.
- Appendix 1: Survey and quantification of fuel and electricity subsidies and contingent liabilities.
- Appendix 2: Good practices in retail fuel price-setting mechanisms.

*Source: IMF staff paper “Energy Subsidy Reform in Sub-Saharan Africa: Experiences and Lessons” (Executive Summary, Introduction, and selected excerpts).*

### Box 1 . Methodologies and Key Concepts

### Box 1 . Methodologies and Key Concepts

### Methodologies — Fuel Subsidies
- Two primary estimation methods:
  - Price pass-through analysis:
    - Dynamic; infers evolution of fuel subsidies or tax revenues over a period.
    - Data requirements: domestic retail prices and international fuel price for two points in time.
    - Mechanism: compare changes in domestic retail prices against changes in international prices to obtain changes in fiscal tax/subsidy levels.
    - Advantages: simplicity.
    - Limitations:
      - Assumes no changes in the cost structure of domestic fuels over time (e.g., transportation and distribution costs).
      - Sensitive to the choice of the starting point for the analysis.
    - Empirical note from text: "in 2011, the median SSA country lost 1.6 percent of GDP in fuel tax revenue because of increased subsidization of fuel relative to end-2008."
  - Price benchmark analysis:
    - Relies on detailed cost structures to determine cost-recovery fuel price benchmarks.
    - Benchmark price = CIF fuel import prices + national margins and costs (e.g., transportation, distribution) + indirect taxes (variants exclude or include indirect taxes to obtain pretax or posttax subsidies).
    - Pretax subsidies (negative taxes) indicate operating losses within the supply chain and/or sale of fuel products below cost-recovery.
    - Posttax subsidies seek to measure fiscal cost (and sometimes other costs); highly sensitive to the choice of benchmark fuel taxation level.
    - This study’s posttax benchmark: "the sub-Saharan Africa average of gross tax (i.e., VAT and excises) per liter."
    - Alternative (IMF, 2013) benchmark: national VAT rate plus a corrective (Pigouvian) tax for externalities (CO2 emissions, local pollution, traffic congestion, accidents).

### Methodologies — Electricity Subsidies
- Utilities in SSA are quasi-fiscal entities; transfers to consumers occur via underpricing, uncollected bills, and inefficiencies (e.g., large power distribution losses).
- Total cost of such transfers often implicit or involuntary (e.g., power theft) and not fully reflected in the budget.
- Unified measure computed: quasi-fiscal deficit (QFD) defined as:
  - "the difference between the actual revenue charged and collected at regulated electricity prices and the revenue required to fully cover the operating costs of production and capital depreciation."
- QFD decomposition:
  - QFD = Cost of underpricing of electricity + Cost of nonpayment of bills + Cost of excessive line losses
  - Cost of underpricing of electricity = Q*(AC - Pe); where:
    - Q = quantity of electricity billed to all types of consumers
    - AC = average cost of producing one kWh of electricity, including capital depreciation
    - Pe = weighted average effective tariff per kWh applied by the power utility
    - Effective tariff Pe is the price per kWh when all charges—variable and fixed—are taken into account.
  - Costs of nonpayment of power bills = Q * Pe * (1 - c); where:
    - c = collection rate (varies between 0 percent and 100 percent)
  - Costs of excessive line losses = Q * Pe * (L - Ls); where:
    - L = actual line losses as percent of total consumption
    - Ls = standard line losses, "assumed at 10 percent in case of sub-Saharan Africa"
  - Consolidated expression in text:
    - QFDe = Q*(AC - Pe) + Q*Pe*(1 - c) + Q*Pe*(L - Ls) = Q*(AC – Pe * [1 - (1 - c) - (L - Ls)])

### Some Key Concepts and Measurement Definitions
- Price pass-through:
  - Defined as the absolute change in domestic retail prices divided by the absolute change in international prices, both in domestic currency.
  - Pass-through above (below) 100 percent implies that net fuel taxes (i.e., taxes less subsidies) are increasing (decreasing).
  - Calculated using end-of-period data on domestic retail prices, international prices, and domestic exchange rates (example: pass-through from end-2008 to end-2011 uses changes in that period).
- Pretax fuel subsidy:
  - For gasoline, kerosene, diesel: difference between an estimate of cost-recovery price (CIF import price plus margins and costs) and domestic retail prices, multiplied by fuel consumption.
  - In computing total fuel subsidies both positive and negative values are added (products with positive taxes partially offset those with negative taxes).
- Posttax fuel subsidy:
  - For gasoline, kerosene, diesel: difference between an estimate of cost-recovery price (CIF import price plus margins and costs plus the SSA average of gross tax per liter) and domestic retail prices, multiplied by fuel consumption.
  - Posttax measure aims to capture fiscal cost or unutilized fiscal space.
  - Note: posttax subsidy estimates are sensitive to choice of gross tax benchmark.

### Empirical Findings and Key Statistics (from supplied text)
- Dynamic pass-through and fiscal cost:
  - "In 2011, the median SSA country lost 1.6 percent of GDP in fuel tax revenue because of increased subsidization of fuel relative to end-2008."
  - The median increase in fiscal cost was 1.6 percent of GDP in SSA; SSA had the second highest median fiscal cost (behind Middle East and Central Asia).
  - Oil-exporting vs oil-importing countries:
    - Median pass-through for oil exporters was much lower than for oil importers in the period end-2008 to end-2011.
    - "The increase in fiscal cost in SSA oil-exporting countries was almost twice as high as in SSA oil-importing countries."
- Pretax fuel subsidies (end-2012):
  - "Most SSA countries do not have 'pretax' subsidies on fuel."
  - Only 10 percent of oil importers have pretax subsidies; almost all oil exporters do.
  - "The median cost of the subsidies for [oil-exporting] group is 0.8 percent of GDP."
- Posttax fuel subsidies (2012):
  - "Posttax fuel subsidies are significantly higher and more widespread across the region."
  - At "1.9 percent of GDP, these subsidies were almost five times higher in oil-exporting countries than in SSA oil importing countries (0.4 percent of GDP)."
- Electricity sector:
  - Direct power subsidies average 0.4 percent of GDP for SSA, but can reach up to 0.8 percent (Mali).
  - Observed service and capacity gaps:
    - Per capita installed generation capacity in SSA (excluding South Africa) is about one-third of that in South Asia and one-tenth of that in Latin America.
    - Per capita consumption of electricity in SSA (excluding South Africa) is "merely 10 kWh a month," compared with about "100 kWh in developing countries" and "1000 kWh in high-income countries."
  - Pricing and governance:
    - Most SSA countries implement some form of administered pricing for electricity, most frequently ad hoc nonautomatic price setting schemes.
    - Even where automatic pricing formulas exist, automatic mechanisms are frequently suspended or intervened.
    - Most electricity utilities are state owned; policymakers often reluctant to adopt market-based pricing due to concerns about access, affordability, and institutional capacity.
  - Hidden costs (quasi-fiscal deficits) constrain utilities’ ability to invest, expand access, and improve service quality.

*Source: Box 1 . Methodologies and Key Concepts (extracted content).*

### 0.6 percent of  GDP) and debt accumulation (on average 1.5 percent of

### Energy Subsidy Reform in Sub-Saharan Africa: Experiences and Lessons (excerpt)

### Factors Contributing to the Under-Recovery of Power Costs
- Average cost of supplying one kWh in SSA (excluding South Africa) was about US$0.15 a kWh (data for 2008–10).
- Average cost of power in countries relying primarily on thermal generation was US$0.21 a kwh (data for 2008–10).
- Contributing factors to high unit costs: inefficiencies in power companies, high use of costly emergency power generation (example: Uganda until early 2012), low economies of scale in generation, and limited regional integration.
- Effective power tariffs are generally set well below the historical average cost of supplying electricity.
- Residential tariffs in SSA cover, on average, only about 70 percent of the cost of power (based on data for the latest year in 2005–09).

### Distribution Losses, Collection Rates, and Operational Inefficiencies
- Distribution losses (amount of electricity injected into the distribution network that could not be billed) are around 25 percent on average—well above the international norm of 10 percent.
- In some cases, line losses can reach half of power injected into the distribution system.
- Average collection rate was around 85 percent.
- Household survey evidence indicates as much as 60 percent of poorer households do not pay their electricity bills (Briceño-Garmendia and Shkaratan, 2011).
- Costs of own generation (by firms) are estimated in the range of US$0.3–US$0.7 a kWh—about three to four times as high as the price of electricity from the public grid.

### Power Sector’s Quasi-Fiscal Deficits (QFDs)
- Using latest available data for 2008–10, the median quasi-fiscal deficit (QFD) was about 1.7 percent of 2009 GDP.
- Large cross-country variation: about 11 percent of GDP in Zimbabwe (2009) to less than 0.5 percent of GDP in Botswana and Chad.
- Kenya reduced its QFD by about 0.7 percent of GDP through power sector reforms during the last decade.
- These estimates of total subsidy are about three times as large as levels reported as direct fiscal transfers in the AFR survey (Appendix 1).

### Trends and Composition of QFDs (2005–06 versus 2009–10)
- Quasi-fiscal deficit generated by:
  - Underpricing: 1.1 (2005–06) and 0.8 (2009–10)
  - Distribution line losses: 0.7 (2005–06) and 0.8 (2009–10)
  - Undercollection of bills: 0.2 (2005–06) and 0.2 (2009–10)
- Total quasi-fiscal deficit (excluding Zimbabwe): 1.9 (2005–06) and 1.8 (2009–10)
- Total quasi-fiscal deficit (median): 1.7 (2005–06) and 1.7 (2009–10)
- Net effect: median power sector QFD remained unchanged between 2005 and 2010; slight reduction in underpricing was mostly offset by increased distribution losses.

### Affordability Versus Cost Recovery
- Average residential tariffs in SSA are already higher (in some cases twice as much) than in other regions, while average per capita incomes in Africa are substantially lower.
- Long-run marginal costs estimated by the World Bank are about 12 percent less than historical costs and as much as 50 percent less in some cases (examples: Malawi, Cameroon, Botswana, Tanzania).
- Cost-recovery tariffs can be achieved when combined with better services from power utilities.
- Households and firms spend considerable amounts to cope with intermittent supply and shortages (purchase and operation of petroleum-powered generators).
- Own-generation costs for firms: US$0.3–US$0.7 a kWh.

### Distributional Incidence: Who Benefits from Energy Subsidies?
- Fuel and electricity consumption is highly skewed toward higher income households.
- Household survey evidence (nine African countries) shows richest quintile spent on a per capita basis close to 20 times more on fuel and electricity than poorest quintile (kerosene exception).
- Example per capita spending by household income groups (PPP values in 2005 U.S. dollars, sample averages):
  - Spending on diesel fuel Q1–Q5: 0.3, 0.5, 0.9, 1.3, 6.9; ratio of Q5 to Q1: 20.0
  - Spending on gasoline Q1–Q5: 0.1, 0.4, 0.9, 1.7, 3.0; ratio of Q5 to Q1: 27.4
  - Spending on kerosene Q1–Q5: 1.5, 1.9, 2.0, 2.1, 2.7; ratio of Q5 to Q1: 1.8
  - Spending on electricity Q1–Q5: 0.5, 1.3, 2.2, 3.9, 8.9; ratio of Q5 to Q1: 17.0
- Countries in the sample (survey years): Cameroon (2007), Côte d’Ivoire (2008), Ethiopia (2004), Ghana (2005), Mozambique (2009), Rwanda (2005), Senegal (2005), Uganda (2010), Zambia (2010).
- About two-thirds of SSA countries use increasing block tariffs (IBTs); progressivity is limited partly because of relatively large fixed monthly charges, producing modest differences in effective tariffs across widely different consumption levels.
- On average, households in the top consumption quintile capture about 45 percent of fuel subsidies, while the bottom 40 percent receive about 20 percent of the subsidy benefit.
- Under universal subsidy schemes, providing 1 dollar of relief to the poorest 40 percent requires the government to spend 5 dollars, of which about half would accrue to the richest quintile.
- Example distribution access disparity: among the poorest 40 percent of households, electricity access rate is below 10 percent; for the richest quintile it is close to 80 percent.
- Policy simulation: an increase of $0.25 a liter in fuel prices in SSA countries would reduce, on average, the 40 percent poorest households’ real income by 5.7 percent; over half of this purchasing power loss would occur through indirect effects (pass-through into food and transportation costs).

_Italic: Source: Excerpt from "Energy Subsidy Reform in Sub-Saharan Africa: Experiences and Lessons" (prepared by Mumtaz Hussain; section draws on Briceño-Garmendia and Shkaratan, 2011; Eberhard and others, 2008; World Bank data)._

### 4.4 percent of  their budgets to electricity consumption (rather than the 0.4

### _afr1302 - 4.4 percent of  their budgets to electricity consumption (rather than the 0.4

### Distributional impacts of fuel price changes
- Households with access to electricity spend 4.4 percent of their budgets to electricity consumption (rather than the 0.4 percent implied by an analysis including all households regardless of access).
- Although the overall impact of a fuel price increase looks similar across income groups, there is significant variation across fuel products:
  - A gasoline price increase produces a more pronounced direct impact on richer households (welfare loss is progressive).
  - A kerosene price increase produces a much larger impact on households in the bottom quintiles (welfare loss is regressive).
- Figure 11 (distribution of benefits from fuel subsidies in Sub-Saharan Africa) reports percent shares of total subsidy by quintile:
  - Poorest quintile: 7.8%
  - Quintile 2: 11.5%
  - Quintile 3: 15.3%
  - Quintile 4: 21.2%
  - Richest quintile: 44.2%
- Household survey evidence: as much as 60 percent of households at the bottom with service do not pay their electricity bills, compared with about 20 percent of those in the highest consumption quintile.

### Welfare impact by consumption quintile (Table 3)
- Total welfare impact of fuel price increases (impact in percent of total household consumption) by quintile:
  - Bottom: 5.6
  - 2: 5.3
  - 3: 5.3
  - 4: 5.3
  - Top: 5.3
  - All: 5.3
- Direct impact by quintile:
  - Bottom: 2.2
  - 2: 2.0
  - 3: 2.0
  - 4: 1.9
  - Top: 1.9
  - All: 2.0
- Direct impact components (percent of total household consumption, all quintiles aggregated where shown):
  - Gasoline: 0.1, 0.2, 0.3, 0.4, 0.7, All: 0.3
  - Kerosene: 1.7, 1.3, 1.2, 1.0, 0.6, All: 1.2
  - LPG: 0.3, 0.3, 0.3, 0.3, 0.4, All: 0.3
  - Electricity: 0.2, 0.2, 0.2, 0.2, 0.2, All: 0.2
- Indirect impact by quintile:
  - Bottom: 3.4
  - 2: 3.3
  - 3: 3.3
  - 4: 3.4
  - Top: 3.4
  - All: 3.3

### Economic efficiency, misallocation, and growth
- Energy subsidies create welfare deadweight losses: subsidy of size s lowers market price and increases quantity consumed; consumer surplus increase (areas A+B) is smaller than the fiscal cost (A+B+C), area C is deadweight loss.
- Overconsumption arises from distorted price signals; extent depends on demand elasticity. Literature examples:
  - Burke and Nishitateno (2011): long-run price elasticity of gasoline demand between –0.2 and –0.4 (sample of 132 countries).
  - Golombek, Hagem, and Hoel (1995): price demand elasticities around –0.9 for OECD countries and –0.75 for non-OECD countries.
- Evidence in SSA suggests lower fuel taxes (higher subsidies) are associated with higher per capita road-sector energy consumption.
- Lower gasoline prices induce consumers to switch to less fuel-efficient vehicles (Burke and Nishitateno, 2011; Beresteanu and Li, 2011).
- Dynamic effects: overconsumption accelerates depletion of nonrenewable resources, necessitating higher future prices.

### Supply effects, underinvestment, and infrastructure outcomes
- Underpricing and subsidies can lead to:
  - Low profitability for energy firms, underinvestment, poor maintenance, persistent shortages, reduced quality, and deteriorating infrastructure (examples: Nigeria’s and Ghana’s dilapidated petroleum refining infrastructure; huge electricity supply shortage across SSA).
- Survey evidence:
  - In the AFR survey, 28 countries had frequent or significant electricity shortages (load shedding or blackouts), while only 4 had infrequent or insignificant shortages.
- Cost recovery by electricity firms correlates with service rationing:
  - Figure 15 indicates longer average number of days to get an electricity connection where electricity firms’ ratio of effective tariff to average cost is low.
- Even when governments directly finance subsidies to refineries and power companies, problems persist:
  - Direct transfers can create soft budget constraints and reduce incentives for restructuring and improving collection rates.
  - Refining is capital-intensive; shutting inefficient refineries has occurred (examples: Madagascar and Tanzania).

### Macroeconomic and fiscal implications
- Energy subsidies can crowd out productive government spending:
  - Figure 16 shows a negative relationship between fuel subsidies and public spending on health and education.
  - In Nigeria, fuel subsidies exceeded federal capital expenditure by 20 percent in 2011.
- Subsidies introduce uncertainty, complicating business planning and deterring investors.
- Competitive advantage from fuel subsidies is likely temporary and unsustainable; sectors benefiting during high world prices lose advantage when international prices fall.
- Subsidies can invite rent seeking, corruption, and politically costly termination (examples: copper-mining in Zambia; aluminum-smelting in Cameroon, Ghana, South Africa; recent abuses in Nigeria’s fuel subsidy regime).
- Fuel subsidies affect balance of payments and exchange rates:
  - Overconsumption of petroleum products may pressure the balance of payments of oil-importing countries and limit oil available for export in oil-exporting countries.
- Subsidies are often procyclical in oil-exporting countries (positively correlated with oil prices); implicit subsidies offset against oil-export revenue can hide fiscal exposure.
- Monetary policy complications:
  - Subsidies drive the inflation rate down and hide the true stance of monetary policy; sudden removal can spike prices and affect inflation expectations.

### Distributional and economy-wide distortions, spillovers, and unintended beneficiaries
- Subsidies can be captured by unintended beneficiaries:
  - Burkina Faso: fuel subsidies mainly sustain the cartelized truck transport sector.
  - Seychelles: large foreign-owned hotels benefit.
  - Equatorial Guinea: international airlines benefit (kerosene as substitute for jet fuel).
- Kerosene diversion and mixing:
  - Kerosene subsidized for equity reasons can be diverted as jet fuel substitute or mixed with diesel, damaging engines.
- Cross-border spillovers:
  - Large gasoline subsidies in Nigeria encourage smuggling to neighboring countries (e.g., official gasoline sales accounted for only 10–15 percent of total sales in Benin in 2011); Beninese government lost revenue of about 2 percent of GDP.
- Labor market and sectoral effects:
  - Subsidies may generate perverse labor shifts toward urban sectors benefiting from subsidies and away from agriculture, potentially raising food prices.

### Environmental externalities
- Energy subsidies produce negative local externalities: traffic congestion, accidents, road damage, air pollution, urban sprawl, adverse health effects.
- Global externalities: higher CO2 and greenhouse gas emissions contribute to climate change.
- Figure 17 indicates lower fuel taxes (higher subsidies) are associated with higher CO2 emissions in SSA countries.
- Caveat: SSA countries emit low levels of CO2 relative to the rest of the world.

*Source: Excerpts from "Energy Subsidy Reform in Sub-Saharan Africa: Experiences and Lessons" (IMF staff chapter).*

### Introduction

### _afr1302 - Introduction

### Overview of power sector challenges in Sub-Saharan Africa (SSA)
- Combined power generation capacity of the 48 SSA countries is about 80 gigawatts, less than that of Spain.
- Less than 3 in every 10 Africans have access to electricity.
- Per capita consumption of electricity is extremely low, averaging 40 kWh a month and only 10 kWh if South Africa is excluded.
- Power reliability issues:
  - 15 percent of installed capacity is not operational because of lack of maintenance of aging equipment.
  - Power outages are frequent.
  - Expensive own generation constitutes a significant portion of total installed capacity.
  - In the Democratic Republic of the Congo and Equatorial Guinea, back-up generators account for half of installed capacity.
  - For West Africa as a whole, back-up generators account for 17 percent of installed capacity.
- Cost and tariffs:
  - The average tariff in SSA is $0.17 per kWh, about twice that in other developing countries (Eberhard and Shkaratan, 2012).
- Structural causes:
  - Immediate reason for shortfalls is underinvestment in the power sector.
  - In 1974–2008, per capita production of electricity in SSA increased only marginally, lagging developments in other developing countries.
  - By 2009 SSA ranked below all other regional groupings in power supply.
  - High production costs are a main driver of high tariffs.
  - Reliance on small generation units (lacking economies of scale) and operation of expensive thermal plants using heavy fuel oils or diesel rather than cheaper natural gas.

### Underinvestment, subsidies, and cost recovery
- Underinvestment is, in part, related to subsidies for electricity consumption that have been largely borne by power utilities and prevented cost recovery.
- Insufficient cost recovery has been a disincentive for new private sector investment.
- Insufficient cost recovery has reduced the capacity of state-owned utilities to properly maintain plants and equipment and left virtually no resources to expand operations to meet growing demand.
- Objectives of electricity sector reforms typically aim to:
  - Reduce budgetary costs of energy subsidies.
  - Increase energy supply to meet excess demand.
  - Expand access to foster inclusive economic growth.
  - Make energy more affordable.
- Given already high tariffs in SSA, improving cost recovery will need to lean more heavily on reducing costs and improving efficiency rather than large tariff increases alone.

### Policy and institutional challenges to address simultaneously
- Strengthening sector planning.
- Reenergizing reform of public utilities to enhance technical and operational efficiency.
- Improving access.
- Expanding regional trade in power.
- Need for a holistic approach to electricity sector reform to avoid false trade-offs (for example, between cost recovery and affordability).

### Evidence from country reforms: Kenya and Uganda (Box 2)
- Reforms implemented in early 2000s focused on improving power sector performance.
  - Kenya:
    - New energy policy in 2004.
    - Substantial increase in power tariffs in 2005 to reflect long-run marginal costs.
    - Introduction of an automatic pass-through mechanism to adjust tariffs for changes in fuel costs.
    - Reconstitution of the Electricity Regulatory Commission.
  - Uganda:
    - Passage of a new Electricity Act (1999).
    - Establishment of a regulatory agency (2000).
    - Unbundling of the power utility (2001) and concessioning of its parts (2003–05).
    - In 2006, power tariffs were almost doubled, raising the average effective tariff to US$.018 per kWh to reflect long-run marginal costs of power.
- Reform outcomes (post-mid-2000s):
  - Power generation increased steadily; private sector involvement and higher tariffs contributed to increased power supply.
  - Distribution losses declined and bill collection rates improved.
    - Kenya: line losses declined from 18 percent in 2005 to 16 percent in 2011; collection rates increased from 85 percent of total power bills in 2005 to 99 percent in 2011.
    - Uganda: distribution losses declined from 38 percent in 2005 to about 27 percent in 2011; collection rates increased from 80 percent of total power bills in 2005 to 95 percent in 2011.
  - Access expanded:
    - Uganda: number of customers with access to grid-supplied power increased by 41 percent between 2006 and 2011.
    - Kenya: access increased by nearly 140 percent between 2005 and 2011.
  - Quasi-fiscal costs:
    - Kenya: tariff increases in 2005 combined with the automatic price adjustment mechanism and improved efficiency helped eliminate quasi-fiscal costs by 2009.
    - Uganda: quasi-fiscal deficit of power sector increased steadily until 2011 because of higher fuel costs and lack of adjustments in power tariffs; in January 2012 tariffs were raised to cost recovery levels and a pass-through mechanism to adjust tariffs in response to variation in generation costs was being developed.

### Key performance numbers from post-reform tables (Uganda and Kenya)
- Uganda (years and indicators shown in table):
  - Electricity supplied (GWh): 2005 = 1,741; 2006 = 1,503; 2011 = 2,387; 2012e = 2,477; Cumulative change = 599.3; Average annual change (Percent) = (blank in source).
  - Electricity billed (GWh): 2005 = 1,075; 2006 = 990; 2011 = 1,732; 2012e = 1,886; Cumulative change = 751; Average annual change (Percent) = 1.2
  - Distribution losses (percent of total power): 2005 = 38.3; 2006 = 34.1; 2011 = 27.5; 2012e = n.a.; Cumulative change = –20; Average annual change (Percent) = –4.4
  - Collection rate (percent of total bills): 2005 = 80.0; 2006 = 84.0; 2011 = 95.3; 2012e = n.a.; Cumulative change = 132.5
  - Number of customers (in thousands): 2005 = 292; 2006 = 298; 2011 = 420; 2012e = 459; Cumulative change = 416.8
  - Of which: industrial customers (in thousand): 2005 = n.a.; 2006 = 1.0; 2011 = 1.8; 2012e = 2.18; Cumulative change = 212.0
  - Quasi-fiscal costs (percent of GDP): 2005 = 1.6; 2006 = 1.9; 2011 = 2.6; 2012e = 0.7
- Kenya (years and indicators shown in table):
  - Electricity supplied (GWh): 2005 = 534; 2006 = 756; 2011 = 977; 2012e = 1,303; Cumulative change = 375.2
  - Electricity billed (GWh): 2005 = 437; 2006 = 945; 2011 = 806; 2012e = 1,231; Cumulative change = 405.6
  - Distribution losses (percent of total power): 2005 = 18.1; 2006 = 19.6; 2011 = 16.2; 2012e = n.a.; Cumulative change = –11; Average annual change (Percent) = –3.9
  - Number of customers (in thousands): 2005 = 735; 2006 = 802; 2011 = 1,753; 2012e = n.a.; Cumulative change = 13914.5
  - Quasi-fiscal costs (percent of GDP): 2005 = 0.6; 2006 = 0.6; 2011 = 0.2; 2012e = n.a.

### Policy implications emphasized
- Tariff changes alone are insufficient; reforms must also focus on reducing costs and improving operational efficiency.
- A holistic, simultaneous approach across planning, utility performance, access expansion, and regional trade is required to increase supply, expand access, and enhance financial sustainability of electricity enterprises.
- Utilities and authorities can take several actions to lower subsidy costs and enhance cost recovery while promoting access and efficiency (these actions are explored in following sections of the chapter).

*Source: _afr1302 - Introduction*

### Box 2: (continued)

### _afr1302 - Box 2: (continued)

### Country-specific reform considerations
- Reform design must reflect country characteristics: geography, thermal system size, population size, exposure to weather shocks, and prevalence of technical or commercial losses.
- Examples of country-focused responses:
  - Burkina Faso: focus investment on transmission to increase network capacity through imports.
  - Ghana, Sierra Leone: target engineering and commercial aspects where technical or commercial losses are the main issue.
  - Uganda: where reliance on hydropower creates exposure to weather shocks, emphasize “reenergizing” power pools and invest in transmission to route heavy seasonal loads efficiently.

### Power planning and institutional structure
- Purpose of power planning:
  - Project yearly energy balance in the medium to long term to optimize sector development.
  - Explore least-cost options to meet projected demand and identify economies of scale.
- Strategic decisions in planning should cover:
  - Domestic production mix (fuel oil, coal, hydro, etc.).
  - Private sector participation in generation (depends on pricing policy and regulatory capacity).
  - Load planning: harness supply during rainy season and provide alternatives during dry season.
  - Financial planning: quantify financing gaps and identify financing mix, including donors.
  - Off-grid options for expanding access where grid expansion is prohibitively costly.
  - Regional solutions, including participation in power pools or enhancing integration in regional markets.
- Institutional arrangement guidance:
  - Choose organization that creates incentives to enhance efficiency given country conditions.
  - Unbundling and privatization are not universally appropriate; unbundling makes economic sense only for countries large enough to support multiple generators at efficient scale.
  - Thirty-three out of 48 countries have a total installed capacity of less than 500MW, and 11 have an installed capacity of less than 100 MW.
  - Hybrid model recommendation: incumbent state-owned utility acting as single buyer from IPPs; allow more flexibility for IPPs to sell directly to large customers as well as to the national utility.
  - Almost half of medium- to long-term power sector transactions in SSA involving the power sector are IPPs.

### Enhancing efficiency, reducing costs, and raising revenue
- General priority: define action plans to achieve sustainable quality in supply, reduce losses, and increase collection rates.
- Efficiency challenge:
  - In the median utility, payment is received for only half of all electricity generated (Eberhard and others, 2008).
- Improving operational efficiency:
  - Deploy information management systems (IMS) to manage business operations and monitor performance.
  - IMS usage examples: KPLC in Kenya (CMS, IRMS, ERP); ZESCO in Zambia (CMS, IRMS, ERP); ZETDC in Zimbabwe (CMS, IRMS); UMEME in Uganda (CMS, IRMS); EEPCO in Ethiopia (CMS); EAS Sonel in Cameroon (CMS). EMD in Mozambique may install IMSs in 2013.
  - Main barriers to IMS: managerial and staff reluctance in monopolistic utilities; lack of transparency enabling corruption and overstaffing.
  - Tariff regulation can establish incentives to improve efficiency; multiyear tariffs can include an allowance for losses so companies that reduce losses keep the difference until the next review.
- Reducing costs and demand management:
  - Distinguish technical losses (engineering: dissipation in lines, transformers, measurement) from commercial losses (theft, nonpayment, accounting errors).
  - Energy mapping and investments for monitoring energy flows can yield high internal rates of return and reduce load shedding.
  - Promotion of energy-saving solutions (e.g., free compact fluorescent bulbs, CFLs) has reduced demand and costs in Cape Verde, Ethiopia, Malawi, Uganda, and Rwanda.
    - Ethiopia distributed 5.3 million CFLs; one CFL cost $0.83 and saved $3.5 per month to the sector. When half of the CFLs were distributed, the load reduction was about 80 MW (equivalent to total capacity in Sierra Leone and a multiple of Liberia’s capacity).
    - CEET in Togo started in 2012 the distribution of 400,000 CFLs to 100,000 households on a pilot basis.
  - Nongrid options often provide cheaper and faster access expansion; success requires integration into power planning and supportive regulation for small-scale off-grid operators.
- Enhancing revenue:
  - Implement a revenue recovery and protection plan (RRP) focusing first on “high-value” large customers (all consumers on high- and medium-voltage lines and the largest low-voltage consumers, typically large industrial and commercial enterprises, mining, state-owned enterprises, public institutions).
  - RRP requires investment in metering, communication devices, software, and creation of a specialized unit staffed with skilled personnel with high integrity.
  - Extend systems developed for high-value customers progressively to medium- and low-value customers.
  - Prepaid electricity has improved payment discipline and collection rates in Nigeria, Kenya, Uganda, Senegal.
  - At low capacity (particularly in fragile states), bill collection could be outsourced as a concession; example: National Power Authority of Sierra Leone issued a concession to a local commercial bank, resulting in higher collection rates in 2011 and avoiding hiring collection staff.

### Tariff design, changes, and targeting
- Competing objectives: sound pricing to meet investment needs versus equity and affordability.
  - Chad, Mozambique, Rwanda, and Uganda: did well on cost recovery but poorly on affordability and equity.
  - South Africa, the Democratic Republic of Congo, Tanzania, and Zambia: did well on social objectives but not on cost recovery.
  - Kenya demonstrates progress is possible on both cost recovery and affordability.
- Common tariff regimes and issues:
  - Increasing block tariffs (IBTs) are common but often regressive because lifeline (first) block subsidies can benefit higher-income households; lifeline block sizes vary widely (e.g., 15 kWh in Uganda; 300 kWh in Ghana and Zambia).
  - Volume-differentiated tariff (VDT): consumption above a threshold triggers a higher price on all consumption; effective for targeting lifeline blocks (example: Cape Verde) but requires metering improvements.
  - Correct calibration of block sizes and prices requires Household Expenditure Surveys.
  - Alternatives to consumption-based targeting: geographic targeting (example: Liberia) or means testing.
- Shift toward subsidizing connections rather than tariffs:
  - Prohibitive connection costs (e.g., around $1,000 in Liberia) are a main barrier to access.
  - “Willingness to pay” analyses show households often willing to pay because of savings from switching from alternative energy sources (e.g., Ethiopia).
  - Subsidization options: interest-free loans (e.g., Kenya) or deferred payments by installments (e.g., Liberia).
    - Interest-free loan in Kenya contributed to doubling the customer base from 800,000 to 1,600,000 in the five years since 2006.
  - Expanding customer base near main lines can improve ratio of paying to nonpaying customers with limited infrastructure investment (examples: Liberia, Kenya).
- Special pricing for commercial and industrial consumers:
  - Commercial and industrial consumers often account for one half or more of revenue; special tariffs for large users (e.g., mining) may not be reflected in general tariff structures and can impose significant fiscal cost (example: Copperbelt Energy Corporation in Zambia).

### Access
- Access statistics and challenges:
  - Only 30 percent of the population in SSA is connected to the grid (International Finance Corporation, 2012).
  - Africa’s off-grid population: approximately 590 million people and more than 10 million microenterprises have no connection to their national electric grid (International Energy Agency, 2011).
  - Universal access to the grid is decades away for most SSA countries; large and dispersed rural populations make grid expansion prohibitively expensive; urban coverage also limited, especially in poor neighborhoods due to affordability.
- Institutional approaches:
  - Over the last decade, several countries established special-purpose agencies and funds for rural electrification. On average, countries with rural electrification agencies and dedicated funds have made greater progress.
    - Half the 40 countries in the World Bank’s Africa Infrastructure Country Diagnostic (AICD) sample have rural electrification agencies, and more than two-thirds have rural electrification funds (Eberhard and others, 2011).
  - Rural electrification programs and alternative solutions implemented in Mali, Kenya, Ethiopia, Liberia, Rwanda, Uganda.
- Box 3 — Mali: Rural Electrification Program outcomes:
  - Rural access in Mali around 13 percent in 2009.
  - Traditional rural energy sources cost about $1.5/kWh, more than 10 times the price from the grid.
  - Government established a rural electrification agency and a Rural Electrification Fund providing partial start-up capital for private operators of mini-grids.
  - Results as of May 15, 2010:
    - 43,311 off-grid connections for households and public lighting, providing electricity to about 650,000 people.
    - About 803 public institutions received off-grid access, including 172 schools and 139 health centers.
    - Multifunctional platforms installed by local operators in 64 communities resulted in 7,200 connections.

### Regional electricity trade
- Cross-border trade potential:
  - Cross-border power trade can reduce cost of energy supply; importing power at prices below domestic production could reduce cost per kWh by US$0.01 to US$0.07 depending on country and neighbors.
  - Gains from trade could be larger by exploiting economies of scale in exporting countries and avoiding expensive small-scale options in importing countries.
- Rationale:
  - Energy resources are unevenly distributed across the region; regional trade and integration can lower production costs and improve reliability.

*Source: _afr1302 - Box 2: (continued).*

### Box 3. (Continued)

### Box 3. (Continued)

### Renewable energy uptake and regional power pools
- Diesel motor platforms combined electricity production with services such as milling, husking, pumping water, charging batteries, running lights, and powering tools.
- In six years, more than 7,926 households and 500 institutions were connected to solar systems.
- Membership of the power pools (date of establishment in parenthesis):
  - Southern Africa Power Pool (1995): Angola, Botswana, the Democratic Republic of the Congo, Lesotho, Mozambique, Malawi, Namibia, South Africa, Zambia, and Zimbabwe.
  - Nile Basin-East African Power Pool (2005): Burundi, Djibouti, Egypt, Ethiopia, Sudan, Rwanda, Kenya, Tanzania, and Uganda.
  - West African Power Pool (2000): Benin, Burkina Faso, Côte d’Ivoire, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, and Togo.
  - Central African Power Pool (2003): Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon.
- Resource endowments cited: hydropower mostly in the Democratic Republic of the Congo and Ethiopia; coal deposits in South Africa; geothermal energy in Kenya, Ethiopia, and Djibouti; wind power potential in Southern Africa.
- Observation: the 43 countries participating in the four African power pools have generated less trade than initially hoped. Constraints include few countries having excess supply to trade; recommended improvements include increased investments in grid interconnections, a legal framework for cross-border electricity exchange, and mechanisms for dispute resolution.

### Political economy of subsidy reform: constraints and dynamics
- Political constraints often prevent or derail reform despite compelling economics.
- Reasons for governmental resistance and entrenched opposition:
  - Subsidies are highly visible and broad based.
  - Entrenched interests benefiting from the status quo.
  - Poor electricity services, weak social programs to compensate for subsidy removal, and lack of government credibility on effective use of subsidy savings.
- Subsidies’ persistence is reinforced by capitalization of benefits (e.g., adoption of energy-intensive technologies, purchase of cars, taxis, refrigerators, televisions), leading to strong opposition from urban middle classes and trade unions.
- Competitiveness concerns:
  - Short-run loss of competitiveness is a policy concern, particularly for electricity-intensive production.
  - Temporary assistance to energy-intensive traded sectors may be required to allow transition (example cited: Iran).
  - Consumer willingness-to-pay surveys indicate willingness to pay higher tariffs for better service when higher tariffs may still be lower than costs of self-generation.
  - In the medium term, subsidy reform can boost competitiveness by freeing resources for productive investment and eliminating price distortions.
- Inflation concerns:
  - The persistent impact of higher energy costs depends on “second-round” effects on wages and input prices.
  - Appropriate monetary and fiscal policies can contain second-round effects and anchor inflationary expectations.
  - Subsidy reform supports fiscal consolidation by reducing budget deficits and containing demand pressures.
- Particular challenges in petroleum-exporting countries:
  - Population expectation to consume petroleum products below international market prices as a form of distributing oil wealth.
  - Oil-exporting countries may have more resources to finance subsidies and lower institutional quality, contributing to higher reliance on subsidies.
  - Example: Niger set ex-refinery prices below international levels after beginning refined fuel production in 2012; prices fixed for first six months and were not changed thereafter.
- Additional knotty aspects:
  - Difficulty conveying rationale that products should be sold at opportunity cost rather than cost of production.
  - Subsidies may be implicit (absorbed in state oil company revenue), making costs obscure to the public.
  - Subsidy costs, although potentially high, are often affordable for government, complicating political pressure to remove them.

### Why energy subsidies are attractive and difficult to remove
- Common rationales for subsidies:
  - Desire to avoid transmission of price spikes to the domestic economy; but shocks to petroleum prices can be persistent, making subsidies long lasting.
  - Subsidies are a readily available fiscal tool requiring little administrative capacity and provide a highly visible benefit to citizens, especially where targeted social welfare mechanisms are limited.
  - A desire to expand access to energy products (notably electricity), sometimes used to lock in large-scale projects.
  - Subsidies avoid addressing structural and governance problems in energy companies, particularly state-owned ones; transfers become an easy, often protracted fix.
- Fuel subsidies especially prevalent in oil-exporting countries due to available oil revenue and sometimes used to kick-start resource-based industries.

### Strategy for energy subsidy reform: core elements and lessons
- Overall approach:
  - Detailed research and stakeholder consultation are crucial in designing reform.
  - At implementation, appropriate timing, a sound public communications strategy, and well-targeted compensating measures facilitate public acceptance.
  - Actions and reforms are needed to ensure reform durability.

- Undertake comprehensive research:
  - Research should determine the cost of subsidy (including nonfiscal costs), distributional incidence, and likely effects of removal.
  - Key data sources: household income and expenditure surveys, national accounts, willingness-to-pay analyses (particularly for electricity).
  - Research results should be publicly disseminated to improve understanding.
  - Examples:
    - Uganda: World Bank report found average coping costs for intermittent power supply and high willingness to pay for improved service.
    - Ghana: government commissioned an independent PSIA in 2005 to assess winners and losers from subsidies and removal.
    - Nigeria: National Assembly resisted removal in December 2011 citing lack of firm data underpinning subsidy size and incidence; lack of information on refining industry and subsidy mechanism hampered reform case.
    - Niger: subsidy impacts were poorly known until authorities published fiscal cost estimates in the 2010 budget and IMF Fiscal Affairs Department conducted a PSIA.
  - Transparency examples and figures:
    - Nigeria: fuel subsidies were 4.7 percent of GDP in 2011, exceeding federal capital expenditure, used to call for reform.
    - Niger: oil tax revenue shrank from 1.0 percent of GDP in 2005 to 0.3 percent of GDP in 2010, contributing to reform impetus.
    - Ghana: state-owned refinery debt was 7 percent of GDP at end-2002; fuel subsidies in 2004 were 2.2 percent of GDP (more than the budget of the Ministry of Health), prompting price rises in 2003 and 2005.
    - India: a study found around 40 percent of subsidized kerosene (with a fiscal cost of $3.5 billion) was diverted to the black market, prompting action.

- Consult a broad range of stakeholders:
  - Identify stakeholders and interest groups; develop strategies to address concerns and build consensus through close consultation and participation.
  - Examples:
    - Namibia: National Energy Council established National Deregulation Task Force in 1996, leading to White Paper on Energy Policy in 1998 after broad consultation.
    - Niger: authorities co-opted stakeholders and established the Commité du Differé to discuss reforms and implementation.
    - Kenya: consultation with unions allowed electricity reform without utility staff retrenchment; tariff increases negotiated with large consumers with commitment to use extra funds to expand supply.

- Timing and pace of reform:
  - Consider subsidy size, duration, available mitigation instruments, government credibility, and external conditions.
  - Gradual phasing may be preferable when subsidies are large, longstanding, or delivery instruments for compensation are weak; allows firms time to adjust and helps manage inflation expectations.
  - Electricity reform is typically complex and gradual (examples):
    - Kenya: subsidies eliminated over about 7–8 years via tariff increases, improved collections, and reduced technical losses.
    - Uganda: reform process underway since 2001.
    - Namibia: fuel subsidies scaled back gradually over several years starting in 2001, three years after white paper adoption; reform timed when oil prices were stable and low.
    - Brazil: phased removal during the 1990s with politically weaker products losing subsidies first.
  - Credibility matters:
    - Fast-paced reform feasible where government credibility exists (example: Ghana’s 2005 fuel price adjustment).
    - In cases of weak credibility, improve governance, spending quality, and public financial management before reform.
    - Example: Nigeria’s attempted one-step fuel price deregulation in January 2012 (initially raising prices by 115 percent) had to be scaled back after widespread protests; an electricity tariff increase the same year proceeded without major reaction after service quality improved.
  - External conditions and financing constraints affect timing:
    - A gradual approach may be infeasible if costs are unmanageable.
    - Power crises or mounting quasi-fiscal costs can force rapid reform (example: Kenya).
    - Some countries used low international prices as opportunities for rapid reform (examples: Vietnam in late 2008 introduced market-based pricing; Ethiopia eliminated fuel subsidies).

- Public communication campaign:
  - A comprehensive public information campaign well ahead of implementation is needed to explain rationale, objectives, mitigation measures, planned use of savings, and broader benefits (growth, productivity, public resources for physical and human capital).
  - Examples:
    - Nigeria (2011/12): communication included presidential statements, budget presentations highlighting subsidy cost and mitigation plans (rehabilitation and building of refineries), and the Subsidy Reinvestment and Empowerment (SURE) program. A SURE brochure summarized the case for removal and intended spending but was released only about six weeks before reform; state and local governments receiving approximately half of subsidy savings were silent on intended use.
    - Ghana (2005): communication included State of the Nation address, radio broadcasts by the minister of finance, newspaper advertisements comparing Ghanaian prices with West African neighbors, interviews with government and trade-union officials, and posting the PSIA online.
    - Niger (2010): public information campaigns on radio and TV highlighted the regressive nature of fuel subsidies and priority social spending funded by savings.
  - Electricity-specific communication:
    - Emphasize that reducing subsidies aims to increase supply and expand access.
    - Place tariff adjustments in the wider context of addressing costly generation, state utility inefficiencies, and corruption.
    - Convince consumers reforms will improve financial viability of utilities and lead to better services and access.
    - Media and public education on billing, collection, and energy saving can mitigate price increase impacts.
    - Example: Uganda’s 2012 electricity tariff adjustment communication emphasized inability to afford more than 1 percent of GDP to subsidize electricity to which only 12 percent of the country had access; lifeline tariffs maintained and some media treated the tariff hike as pro-poor given expected reliability improvements.

*Prepared by Trevor Alleyne and Christian Josz.*

### Box 4. Increased Fiscal Space from Energy Reform and Its Uses

### Box 4. Increased Fiscal Space from Energy Reform and Its Uses

### Uses of Fiscal Space from Subsidy Reduction
- Fiscal space from reduction of energy subsidies can:
  - Improve the overall fiscal position.
  - Be mobilized to introduce more productive, efficient, and equitable government spending.
- Two oil-exporting country approaches highlighted:
  - Nigeria: Use fiscal space for productive public spending to build physical and human capital.
  - Iran: Replace subsidies with more efficient and equitable universal transfers.

### Nigeria: SURE Program and Spending Priorities
- Main plank in the 2012 fuel subsidy reform: Subsidy Reinvestment and Empowerment (SURE) Program.
- SURE envisaged channeling the federal government’s share of savings from fuel subsidy reduction into programs to:
  - Stimulate the economy.
  - Alleviate poverty through critical infrastructure and safety net projects.
- Infrastructure projects financed by SURE selected in line with Vision 2020 development strategy in:
  - Power, roads, transportation, water, and downstream petroleum sectors.
- Social safety net programs identified by SURE focused on:
  - Urban mass transit, maternal and child health services, public works, and vocational training.
- 2012 SURE program achievements:
  - Facilitated completion of a major north-south national railway project.
  - Improved maternal and child care services in 500 primary health care centers.
- Additional mitigating measures linked to Nigeria’s reform:
  - Government kept the price of kerosene unchanged when it increased fuel prices in January 2012.
  - SURE program included expansion of social safety net programs: maternal and child health services, cash for public works, women and youth employment programs, vocational training, and urban mass transit schemes.

### Iran: Universal Cash Transfers and Enterprise Support
- Main objective of the 2010 fuel subsidy reform:
  - Replace price subsidies with across-the-board cash transfers for households to distribute some oil wealth to citizens and reduce incentives for excessive energy consumption and smuggling.
- Implementation details:
  - Bank accounts opened for most citizens prior to the reform.
  - Compensating cash transfers deposited prior to implementation of price increases.
  - About 80 percent of the revenue from elimination of the subsidy was redistributed via cash transfers.
  - Transfers were not targeted to avoid triggering public discontent among the biggest energy users.
- Use of remaining savings:
  - Remaining balance set aside to provide support for enterprise restructuring to reduce energy intensity.
  - Seven thousand energy-dependent enterprises were selected to receive some form of targeted assistance to restructure operations.

### Improve Enterprise Efficiency (Electricity Sector)
- Successful subsidy reform, especially in electricity, depends on enhancing state enterprise efficiency:
  - Strengthen firms’ governance.
  - Improve demand management and revenue collection.
  - Better exploitation of scale economies.
- Use performance targets and incentives (e.g., improved revenue collection, reduced power outages) to increase manager accountability.
- Country examples:
  - Kenya and Uganda: Reducing line losses and increasing collection rates instrumental in eliminating quasi-fiscal deficits and helped reduce need for higher tariff increases.
  - Cape Verde: Electricity power company allowed to keep resources from overperformance for investment.
  - Introducing competition by permitting independent private producers in electricity generation can strengthen sector performance.

### Develop Mitigating Measures to Protect the Poor
- Mitigating measures are critical to build support for subsidy reform.
- Conditional cash transfers targeted to the most needy income groups are most appropriate but may be infeasible short-run due to limited administrative capacity.
- Power sector protections:
  - Better targeting of lifeline- and volume-differentiated tariffs.
  - Mechanisms to assist lower-income customers finance connection costs.
- Country examples and measures:
  - Namibia: Fuel prices track international prices; cross-subsidies in transport and distribution costs equalize fuel prices between cities and rural areas.
  - Niger (2010): Provided a direct subsidy to the transport sector following negotiations, costing 0.1 percent of GDP versus fuel subsidies costing 0.7 percent of GDP.
  - Ghana (2005 fuel price increases): Mitigating measures included cross-subsidies favoring kerosene and LNG; increase in daily minimum wage; price ceiling on public transport fares; elimination of school fees for primary and secondary education; and other measures—resulting in much less social tension than previous increases.
  - Kenya: Lifeline tariff for households consuming less than 50 kWh a month; rural electrification program; revolving fund for deferred connection fee payments (financed by donor funds).
  - Uganda: Lifeline tariff applies to poor domestic consumers for power consumption up to 15 kWh a month.

### Cautions on Cross-Subsidization Across Fuel Products
- Cross-subsidization or different subsidy/tax levels across products should be approached with caution:
  - Some countries retained subsidies on kerosene and LNG perceived as used by the poor.
  - Different levels of subsidization/taxation across fuel products create incentives for fraudulent fuel adulteration or unintended consequences.
- Examples of unintended consequences:
  - Ghana: Mixing subsidized kerosene and LNG with transport fuels became common when subsidized kerosene price fell significantly below diesel, creating kerosene shortages.
  - Brazil (1970s–1980s): LNG subsidy stimulated prohibited uses (industry, transport, heating pools/saunas), leading Brazil to become a net exporter of gasoline and a large importer of diesel and LNG at some point.

### Develop Mechanisms to Promote Durability of Reform
- Reforms can be fragile even when supporting actions are followed.
- Example: Ghana eliminated gasoline subsidies in 2005, but when oil prices surged in 2007–2008, the government froze price ceilings and later fuel taxes were reduced after electoral politics, bringing prices below neighboring countries.
- Niger (2011): Became a fuel producer and reduced fuel prices below international levels.
- Policies to improve durability during transition:
  - Monitor and disseminate information on use of subsidy savings:
    - Nigeria established a commission including civil society representatives to monitor and audit savings generated by gasoline subsidy reduction and its use for SURE projects.
  - Be transparent in accounting for subsidy costs:
    - Maintain transparency where subsidies persist; Niger and Mali introduced explicit accounting of fuel subsidies in the budget.
    - Establish a ceiling on possible subsidy size to reduce fiscal risks.
  - Implement an automatic price adjustment mechanism:
    - If full deregulation not feasible short run, determine energy prices by transparent price formulas and an adjustment mechanism tied to international fuel prices.
    - Ghana published the price formula including weights of components (cost of crude, refiner’s margin, excise duty, etc.).
    - Consider incorporating smoothing mechanisms to mitigate impact of very sharp international price increases.
  - Depoliticize price setting by establishing an independent authority:
    - Tanzania: Specialized regulatory entity to issue licenses, technical regulations, inform public about prices, and review market functioning—played a role in sustaining reforms.
    - South Africa: Prices adjusted monthly via transparent automatic formula based on international prices, freight, insurance, other costs, and exchange rate movements; price information regularly published on Department of Energy website; no political interference apparent.
    - Kenya: Independent Energy Regulatory Commission (ERC) regulates electricity tariffs, publishes tariff adjustment calculations, issues licenses, and sets performance targets for KPLC (e.g., revenue collection, average waiting period for new connections, system losses); negotiations for tariff-setting and power purchase agreements described as transparent.
    - Ghana: Established a semi-independent National Petroleum Authority to administer pricing framework; however, the framework did not survive populist pressure during the sharp rise in fuel prices in 2007–08—highlighting that independent bodies are effective only with unwavering political will.

### Appendix: Survey of Fuel and Electricity Subsidies in Sub-Saharan Africa (June 2012)
- Survey overview:
  - Questionnaire circulated to IMF country desks in June 2012 covering subsidies, price-setting policies, market structure, contingent liabilities, and recent trends for petroleum products and electricity.
  - Quantitative appendix draws on responses covering 35 countries (about 80 percent of the countries in the African Department at the IMF).
  - Findings indicate fuel and electricity subsidies are pervasive in the region.
- Price-setting policies:
  - Most SSA countries implement some form of administered pricing mechanism for electricity and fuel, most frequently ad hoc nonautomatic price setting schemes.
  - Even where de jure pricing is based on an automatic formula, automatic mechanisms are frequently suspended in difficult times.
  - Policymakers are more reluctant to adopt market-based pricing for electricity; countries with liberalized petroleum markets (e.g., South Africa and Uganda) often set electricity prices administratively.
- Prevalence of explicit subsidies:
  - Subsidies for petroleum products pervasive: 21 countries (60 percent of sample) adopting some form of explicit subsidy.
  - Over 60 percent of countries for which responses were available adopted policies to explicitly subsidize electricity prices.
- Appendix Table 1: Post-tax subsidies for petroleum products and quasi-fiscal deficits of power sector (Percent of GDP) — selected figures preserved exactly as reported:
  - Angola: Petroleum 2012 (price benchmark method) 4.0; 2011 (pass-through) 1.5; 2011 (benchmark) 2.5; Externality costs 0.8; Quasi-fiscal deficit 1.2.
  - Benin: Petroleum 2012 0.9; 2011 (pass-through) 4.3; 2011 (benchmark) 0.2; Externality costs 0.0; Quasi-fiscal deficit 1.8.
  - Botswana: Petroleum 2012 0.9; 2011 (pass-through) 1.5; 2011 (benchmark) 0.9; Externality costs 0.5; Quasi-fiscal deficit 0.4.
  - Burkina Faso: Petroleum 2012 0.2; 2011 (pass-through) 5.6; 2011 (benchmark) 0.3; Externality costs 0.1; Quasi-fiscal deficit 1.2.
  - Burundi: Petroleum 2012 0.7; 2011 (pass-through) 0.3; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit n.a.
  - Cameroon: Petroleum 2012 2.8; 2011 (pass-through) 4.2; 2011 (benchmark) 2.5; Externality costs 0.3; Quasi-fiscal deficit 2.7.
  - Cape Verde: Petroleum 2012 0.2; 2011 (pass-through) 3.0; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit 2.9.
  - Central African Republic: Petroleum 2012 –; 2011 (pass-through) 0.1; 2011 (benchmark) 3.6; Externality costs 0.0; Quasi-fiscal deficit n.a.
  - Chad: Petroleum 2012 1.7; 2011 (pass-through) 6.3; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit 0.3.
  - Comoros: Petroleum 2012 0.6; 2011 (pass-through) n.a.; 2011 (benchmark) n.a.; Externality costs n.a.; Quasi-fiscal deficit n.a.
  - Congo, Dem. Rep.: Petroleum 2012 0.8; 2011 (pass-through) 0.9; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit 2.8.
  - Congo, Republic of: Petroleum 2012 2.1; 2011 (pass-through) 1.5; 2011 (benchmark) 2.1; Externality costs 0.6; Quasi-fiscal deficit 1.1.
  - Côte d’Ivoire: Petroleum 2012 0.7; 2011 (pass-through) 0.9; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit 2.3.
  - Equatorial Guinea: Petroleum 2012 1.2; 2011 (pass-through) 3.2; 2011 (benchmark) 1.9; Externality costs 1.2; Quasi-fiscal deficit n.a.
  - Ethiopia: Petroleum 2012 1.6; 2011 (pass-through) 1.1; 2011 (benchmark) 0.6; Externality costs 0.1; Quasi-fiscal deficit 1.5.
  - Gabon: Petroleum 2012 1.6; 2011 (pass-through) 2.1; 2011 (benchmark) 0.7; Externality costs 0.3; Quasi-fiscal deficit n.a.
  - Gambia, The: Petroleum 2012 1.2; 2011 (pass-through) 3.9; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit n.a.
  - Ghana: Petroleum 2012 3.2; 2011 (pass-through) 0.9; 2011 (benchmark) 1.9; Externality costs 0.9; Quasi-fiscal deficit 2.3.
  - Guinea: Petroleum 2012 0.5; 2011 (pass-through –0.2); 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit n.a.
  - Guinea-Bissau: Petroleum 2012 0.1; 2011 (pass-through) 1.5; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit n.a.
  - Kenya: Petroleum 2012 0.8; 2011 (pass-through) 3.3; 2011 (benchmark) 0.5; Externality costs 0.1; Quasi-fiscal deficit 0.8.
  - Lesotho: Petroleum 2012 0.7; 2011 (pass-through –0.6); 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit 1.1.
  - Madagascar: Petroleum 2012 0.7; 2011 (pass-through) 6.2; 2011 (benchmark) 0.4; Externality costs 0.1; Quasi-fiscal deficit 1.4.
  - Malawi: Petroleum 2012 –; 2011 (pass-through) 2.5; 2011 (benchmark) 0.6; Externality costs 0.1; Quasi-fiscal deficit 2.2.
  - Mali: Petroleum 2012 0.5; 2011 (pass-through) 3.8; 2011 (benchmark) 0.2; Externality costs 0.0; Quasi-fiscal deficit 2.4.
  - Mauritius: Petroleum 2012 –; 2011 (pass-through) 1.0; 2011 (benchmark) 1.1; Externality costs 0.0; Quasi-fiscal deficit n.a.
  - Mozambique: Petroleum 2012 0.0; 2011 (pass-through) 2.2; 2011 (benchmark) 0.2; Externality costs 0.1; Quasi-fiscal deficit 7.2.
  - Namibia: Petroleum 2012 –; 2011 (pass-through) 0.6; 2011 (benchmark –0.7); Externality costs 0.0; Quasi-fiscal deficit 0.8.
  - Niger: Petroleum 2012 0.4; 2011 (pass-through) 0.6; 2011 (benchmark) 0.2; Externality costs 0.0; Quasi-fiscal deficit 0.6.
  - Nigeria: Petroleum 2012 3.4; 2011 (pass-through) 4.2; 2011 (benchmark) 2.0; Externality costs 0.5; Quasi-fiscal deficit 1.5.
  - Rwanda: Petroleum 2012 0.0; 2011 (pass-through) 1.1; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit 0.5.
  - Sao Tome and Principe: Petroleum 2012 1.8; 2011 (pass-through) 4.3; 2011 (benchmark) 0.6; Externality costs 0.1; Quasi-fiscal deficit n.a.
  - Senegal: Petroleum 2012 –; 2011 (pass-through) 1.1; 2011 (benchmark) 4.9; Externality costs 0.0; Quasi-fiscal deficit 2.5.
  - Seychelles: Petroleum 2012 –; 2011 (pass-through) 0.7; 2011 (benchmark) n.a.; Externality costs 0.0; Quasi-fiscal deficit n.a.
  - Sierra Leone: Petroleum 2012 1.2; 2011 (pass-through) 2.8; 2011 (benchmark) 0.5; Externality costs 0.1; Quasi-fiscal deficit 3.5.
  - South Africa: Petroleum 2012 –; 2011 (pass-through) 0.2; 2011 (benchmark –1.0); Externality costs 1.1; Quasi-fiscal deficit 0.5.
  - Swaziland: Petroleum 2012 –; 2011 (pass-through) 0.5; 2011 (benchmark –0.9); Externality costs 0.0; Quasi-fiscal deficit n.a.
  - Tanzania: Petroleum 2012 0.1; 2011 (pass-through) 1.6; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit 1.7.
  - Togo: Petroleum 2012 0.8; 2011 (pass-through) 3.9; 2011 (benchmark) 0.7; Externality costs 0.0; Quasi-fiscal deficit n.a.
  - Uganda: Petroleum 2012 0.2; 2011 (pass-through) 3.3; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit 2.3.
  - Zambia: Petroleum 2012 0.2; 2011 (pass-through) 1.1; 2011 (benchmark) 0.0; Externality costs 0.0; Quasi-fiscal deficit 3.4.
  - Zimbabwe: Petroleum 2012 3.3; 2011 (pass-through) n.a.; 2011 (benchmark) n.a.; Externality costs n.a.; Quasi-fiscal deficit 11.0.
- Aggregate summary statistics (as reported):
  - Sub-Saharan Africa (aggregate): Petroleum 2012 1.4; 2011 (pass-through) 1.5; 2011 (benchmark) 1.2; Externality costs 0.4; Quasi-fiscal deficit 1.4.
  - Median: Petroleum 2012 0.7; 2011 (pass-through) 1.6; 2011 (benchmark) 0.1; Externality costs 0.0; Quasi-fiscal deficit 1.7.
  - Unweighted mean: Petroleum 2012 0.8; 2011 (pass-through) 2.2; 2011 (benchmark) 0.5; Externality costs 0.2; Quasi-fiscal deficit 2.2.
  - Oil exporters: Petroleum 2012 3.2; 2011 (pass-through) 3.2; 2011 (benchmark) 2.0; Externality costs 0.5; Quasi-fiscal deficit 1.5.
    - Median (oil exporters): 1.9; 2.7; 2.0; 0.4; 1.4.
    - Unweighted mean (oil exporters): 2.2; 3.0; 1.5; 0.5; 1.5.
  - Oil importers: Petroleum 2012 0.3; 2011 (pass-through) 0.4; 2011 (benchmark) 0.8; Externality costs 0.3; Quasi-fiscal deficit 0.?
    - Median (oil importers): 0.4; 1.5; 0.0; 0.0; 1.8.
    - Unweighted mean (oil importers): 0.4; 2.0; 0.3; 0.1; 2.4.

*Source: IMF Fiscal Affairs Department, Technical Assistance Reports on Fuel Subsidy Reform; survey prepared by Antonio C. David and Brian Moon, based on IMF African Department desk survey responses (June 2012).*

### Appendix 1

### Appendix 1

### Recent reform efforts
- About 14 countries (out of 31 responses) have recently attempted to reform fuel subsidies, mainly by changing pricing formulas to increase pass-through of international prices and reduce subsidies.
- Examples: Nigeria widely covered in media; new formulas introduced in 2011 in Niger and Rwanda.
- Twelve countries (out of 26 responses) have recently attempted to undertake reforms to reduce electricity subsidies.
- Uganda introduced an automatic adjustment for electricity tariffs in early 2012 that effectively eliminated subsidies going forward.

### Quantifying fuel and electricity subsidies
- Data limitations constrained the survey’s scope; estimates are based on available responses across countries (latest available information used, spanning different periods from 2009 to 2012).
- Petroleum products:
  - Meaningful responses obtained for:
    - Tax revenue losses: 8 responses reported (see Figure A4 caption).
    - Overall direct subsidies (aggregate of budgetary and off-budget transfers): 10 responses reported (see Figure A4 caption).
  - On average:
    - Tax revenue losses are about 1 percent of GDP.
    - Direct fuel subsidies are about 1 percent of GDP.
  - Variation across countries:
    - Lost revenue close to 2 percent of GDP in Sierra Leone.
    - Direct subsidies can surpass 2.5 percent of GDP (Cameroon).
- Electricity:
  - Very limited data: only two estimates of lost tax revenue obtained (more than 1 percent of GDP in Côte d’Ivoire).
  - Direct electricity subsidies (larger sample available):
    - Average estimate: 0.4 percent of GDP.
    - Reached as high as 0.8 percent of GDP (Mali).

### Quantifying contingent liabilities
- Survey responses limited (at most three observations per fuel category; between five and seven for electricity).
- Aggregate measure built from cumulative debt, arrears, and operating losses of relevant state-owned enterprises.
- Petroleum products (five country responses):
  - Average contingent liabilities: 0.5 percent of GDP.
  - Reached up to 1 percent of GDP in Ghana, Republic of Congo, and Burkina Faso.
- Electricity (responses covering relevant cases):
  - Average contingent liabilities: 1.7 percent of GDP.
  - Surpassed 7 percent of GDP in Senegal (this includes SENELEC stock of liabilities amounting to CFA franc 341 billion at end-2011, plus SENELEC payment arrears amounting to CFA franc 157 billion as of end-March 2012).

### Conclusions from the survey
- Survey of 35 countries indicates direct and indirect costs of fuel and electricity subsidy policies are significant, though data limitations prevent precise estimates.
- Typical magnitudes observed among countries that set fuel prices:
  - Fuel subsidies typically amount to 1 percent of GDP.
  - Direct electricity subsidies tend to be less than 0.5 percent of GDP.
- Contingent liabilities:
  - Median values tend to exceed 0.6 percent of GDP for both fuel and electricity.
  - In some cases, liabilities have built up to much larger levels (e.g., electricity contingent liabilities surpassing 7 percent of GDP in Senegal).

### Appendix 2 — Good practices in retail fuel price-setting mechanisms (summary of key policy guidance)
- Preferred long-run schemes:
  - Full liberalization, or
  - Transparent and simple automatic adjustment mechanisms for administered prices.
- Preconditions for successful liberalization:
  - Strengthen regulatory frameworks to inhibit anticompetitive behavior.
  - Recognize that weak regulatory capacity and small markets in low-income countries may make full liberalization difficult.
- Design principles for automatic pricing mechanisms:
  - Base price adjustment formulas on actual costs of supply, including transport, storage, and other costs incurred assuming efficient operations.
  - Update cost estimates at regular intervals to reflect changes in market input prices.
  - Include a desired level of taxes on petroleum products reflecting revenue, efficiency, equity, and externality considerations.
  - Make price adjustments automatic and frequent to limit distortions and fiscal costs; include smoothing rules to avoid sharp adjustments.
- Common smoothing mechanisms:
  - Pricing based on a moving average of past international/import prices.
  - Price bands imposing caps on maximum price adjustments at any given time (example: +/– 5 percent).
  - Price adjustment triggers (example: adjust retail price whenever the mechanism price exceeds the prevailing price by 5 percent).
- Trade-offs and empirical insights:
  - Excessive smoothing (e.g., long moving averages) lowers pass-through and can increase volatility of net fiscal revenue and build up liabilities.
  - IMF Fiscal Affairs Department simulations for 2006 through 2011 indicate narrower price bands (+/− 3 percent) provide best results in reducing retail price volatility while stabilizing fiscal revenue and mitigating fiscal costs (references to Tuladhar and Eyraud, 2010; and Figure A6 for Mali).
  - In prolonged international price increases, all smoothing mechanisms will have adverse effects on net revenue.
- Implementation risks and governance:
  - Automatic price adjustment mechanisms are often suspended or not fully implemented for extended periods as international prices rise (examples of suspension: Mozambique, Togo, Zambia).
  - Pricing formula implementation should be insulated from political influence, potentially delegated to an independent body including representatives of stakeholders (importers, distributors, transporters) with appropriate public disclosure.
  - South Africa has adopted an institutional setting that contains some (but not all) of these governance features.

*Source: Author’s calculations based on IMF African Department desk survey; prepared content from Appendix 1 and Appendix 2 of the provided IMF chapter.*

### Bibliography

### _afr1302 - Bibliography

### Bibliographic entries (selected from page)
- World Bank, 2010a, “Republic of Congo Public Expenditure Review: Using Oil Wealth Effective to Accelerate and Diversify Growth” (Washington: World Bank).
- World Bank, 2010b, “Project Appraisal Document for the Electricity Expansion Project,” Report No: 54147-KE (Washington: World Bank).
- World Bank, (n.d.), Mali: Household Energy and Universal Access Project, http://www.worldbank.org/projects/P073036/household-energy-universal-access-project?lang=en, various years.
- World Bank, 2012, Africa’s Pulse, Vol. 5.

### Ghana — Context (Chapter 1)
- Population: over 24 million people.
- Natural resources: arable land and minerals; recently discovered offshore oil reserves; 2011 was the first full year of production.
- Jubilee field production expected peak: 120,000 barrels a day.
- Infrastructure development: building up infrastructure for commercial use of gas reserves to reduce energy costs and develop downstream industries.
- Since 2004, deregulation allowed oil marketing companies to import and distribute crude oil and petroleum products; prior monopoly by the Tema Oil Refinery (TOR).
- Pricing framework: a pricing formula exists for all petroleum products; current price-adjustment mechanism resulted from 2005 reforms.
- National Petroleum Agency (NPA), established in 2005, reviews fuel prices twice a month and recommends adjustments based on a backward-looking formula incorporating changes in world fuel prices in the preceding two weeks.
- Decision to adjust pump prices: at the discretion of the executive.
- Historical fiscal treatment: when price increases were not implemented, the cost of subsidies in principle borne by the budget; in the past TOR carried the subsidy cost, underpricing saddled TOR with large losses that spilled into the financial sector as nonperforming loans, and government ultimately cleared TOR’s arrears to the banking sector at large budgetary cost.
- Since October 2010: hedging scheme using call options purchases monthly call options that generate revenue in the event of upside shocks to global oil prices; this revenue used to cover temporary delays in adjusting domestic petroleum product prices to cost-recovery levels (IMF, 2011).

### Experience with Fuel Price Adjustments — Key events and outcomes
- 2001:
  - 91 percent adjustment of petroleum pump prices.
  - Background: delays in adjusting prices during 2000 led to large accumulated losses for TOR, which reached 7 percent of GDP (IMF, 2001).
  - Reform abandoned due to rising world prices and depreciating currency; TOR’s losses largely absorbed by Ghana Commercial Bank, threatening its solvency.
- Early 2003:
  - Government renewed commitment to cost-recovery pricing with a 90 percent increase in pump prices.
  - 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; TOR continued to borrow from Ghana Commercial Bank (IMF, 2005).
- 2005 deregulation:
  - Accompanied by strategic measures: research, communication, and mitigation programs for vulnerable groups.
  - NPA delegated regulatory powers to isolate price-adjustment decisions from political intervention.
  - Prices adjusted by an average of 50 percent and government committed to regular adjustments for several years.
- 2007–08 crisis and 2008 elections:
  - Automatic adjustment temporarily suspended.
- Post-2010 developments:
  - When upward adjustments required, shortfalls often covered by the budget or hedging profits, leading to infrequent and large price adjustments when hedging profits were exhausted.
  - Prices adjusted twice in 2011: 30 percent in January and 15 percent in December.
  - Prices not adjusted in 2012 (except a small downward adjustment early in the year); gap between domestic and global oil prices increased substantially due to a depreciating currency (IMF, 2012a, 2012b).

### Mitigating measures implemented following 2005 reform
- Research:
  - A poverty and social impact assessment (PSIA) showed the subsidy program was poorly targeted; rich received the lion’s share of benefits (Coady and Newhouse, 2006).
- Communication:
  - Widespread communications campaign including public addresses by the president and the minister of finance.
  - PSIA results made public and discussed with stakeholders, including trade unions.
  - Government explained reallocation of resources freed from subsidies to social priorities (Global Subsidies Initiative, 2006).
- Assistance to the poor (programs introduced):
  - Elimination of fees for state-run primary and secondary schools.
  - Increase in public-transport buses.
  - 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.
- Suggested reallocations (lessons section):
  - Expansion of cash transfers through the Livelihood Empowerment against Poverty (LEAP) program.
  - Additional spending on health and education subsidies.
- Note on targeting:
  - LEAP characterized as among the most well-targeted safety net programs; poorly targeted fuel subsidies reached weekly levels in August 2012 that matched LEAP’s annual budget (World Bank [2012]).

### Lessons and governance implications
- Durability of reform:
  - Depends crucially on political will and independence of regulatory agencies from political interference.
  - NPA is not free to adjust prices without executive consent; it adjusted prices only three times (once downward) since January 2011.
  - Commitment to automatic adjustment often falters in the run-up to elections.
- Stakeholder engagement:
  - Constant dialogue with stakeholders and civil society about the cost of subsidies is necessary to maintain commitment.
  - Recent adjustments lacked extensive public information campaigns similar to 2005; irregular and short-notice price increases provoke strong opposition and undermine reform efforts.
  - The 2005 campaign succeeded by engaging civil society and demonstrating subsidy costs through the PSIA.
- Role of research:
  - Supportive research and analysis are important to convince the public of reform benefits.
  - PSIA during 2005 was crucial in demonstrating the costs of subsidies and that fuel subsidies were a poor poverty-targeting tool: in Ghana, less than 2.3 percent of outlays on fuel subsidies benefited the poor.
- Visibility of mitigating measures:
  - Efficient and visible reallocation of resources saved from removing fuel subsidies to programs with immediate benefits for the most vulnerable increases likelihood of success.
  - Fuel subsidies are direct and immediately understandable transfers; their removal imposes swift and substantial costs on poor households unless compensated.
  - Key recommended reallocations include expanding LEAP and increasing health and education subsidies.

*Italic: Content derived from _afr1302 - Bibliography and Chapter 1 (Ghana) as provided in the source PDF.*

### Bibliography

### _afr1302 - Bibliography (Namibia case study extract)

### Context
- Namibia is one of sub-Saharan Africa’s richest countries with a relatively stable macroeconomic environment; income inequality and unemployment are very high.
- Key structural features:
  - Mineral exports, transfers from the Southern African Customs Union, and prudent fiscal policy helped sustain growth while maintaining fiscal and current account surpluses.
  - Inflation is closely linked to South Africa’s inflation (currency pegged to the South African rand); inflation reached a peak of 11.9 percent in August 2008.
  - Economy sensitive to international fuel prices because of energy-intensive industries such as fishing and mining.
  - Political environment: stable democracy with a dominant ruling party since independence in 1990; high labor unionization and strong National Union of Namibian Workers.
  - Social programs: social security, welfare, and housing spending averaged 5 percent of GDP in 2005–11; universal social pension for elderly and disabled, various child grants, labor-based work programs, and shelter/housing programs.
- Downstream fuel market structure:
  - Petroleum-price regime set by acts of parliament: petrol and diesel regulated; other petroleum products market-determined.
  - No refining capacity; imports mainly from South Africa via Walvis Bay.
  - Ministry of Mines and Energy (MME) regulates; Namibian Petroleum Corporation (Namcor) is state-owned operational arm.
  - Five private marketing companies: BP, Caltex Oil, Engen, Shell, and Total; shared import and storage at Walvis Bay.
  - In 1999 Namcor mandated to import 50 percent of Namibia’s petroleum (recently reduced due to Namcor operational difficulties).

### Price setting and the slate account
- Fuel pump price formula components:
  - Basic fuel price based on international spot price.
  - Domestic fuel levies and taxes.
  - Slate account used to smooth volatility in local pump prices; notional record of under- or overrecovery by fuel-importing private companies.
- MME discretion: price formula not completely automatic; MME can influence pass-through and underrecoveries may be absorbed by the slate account.
- Slate-account operational target: cumulative slate balances intended to be kept within a predetermined level of N$3 million.
- In practice balancing the slate has sometimes required transfers from the budget to the National Energy Fund (NEF) and then to the slate account.
- Wholesale prices of petrol grades and diesel published in a government gazette at each price adjustment; tax revenue data published in budget documents.

### Experience with fuel-price adjustments and fiscal outcomes
- Original motivations for deregulating fuel prices:
  - Eliminate fuel subsidies paid out of the NEF.
  - Respond more efficiently to changes in international oil prices.
- Fiscal cost of NEF compensation scheme:
  - NEF fiscal costs about N$170 million between 1990 and 1996, about 0.2 percent of GDP.
  - Note: this excludes transfers paid directly to Namcor and quasi-fiscal costs from Namcor losses.
- Slate account and cost recovery:
  - NEF expenditures to cover subsidies declined only after 2001; close to full cost recovery by private firms came after 2001.
  - Domestic fuel prices rose steadily from 2003 and more than doubled from early 2007 to a peak in July 2008.
  - In response to 2007–08 shocks, quarterly fuel-price reviews were replaced by monthly reviews to increase pass-through; MME nonetheless sometimes limited retail pass-through, transferring NEF funds to private firms to compensate for underrecovery.
  - In July 2008 MME announced NEF under financial pressure and unable to cushion increasing fuel prices.
- Government fiscal interventions and Namcor liabilities:
  - 2006–07 budget: one-off budgetary provision of N$206 million (0.4 percent of GDP) to offset NEF accumulated losses.
  - Namcor operational losses in 2009: N$257 million, prompting:
    - N$100 million grant.
    - Bailout package of N$260 million (0.5 percent of GDP).
    - Transfer of a portion (7.6 cents a liter) of the existing fuel levy to Namcor.
  - February 2011: Namcor lost its mandate to supply 50 percent of Namibia’s total fuel requirements because of operational difficulties.
- Figure and data note:
  - Figure 2 (NEF and slate account, 1990–2011) shows sharp swings in resources devoted to smoothing fuel prices; source: Bank of Namibia, Quarterly Bulletin, March 2005.

### Key macroeconomic and energy statistics (Table 2: Namibia: Key Macroeconomic Indicators, 2000–2011)
- GDP per capita ($US): 2000: 2140; 2003: 2608; 2008: 4276; 2010: 5244; 2011: 5828
- 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)1: 2000: –0.9; 2003: –6.1; 2008: 2.4; 2010: –4.2; 2011: –11.3
- Public debt (percent of GDP)1: 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: 49.1; 2008: 59.6; 2010: 73.1; 2011: 81.9
- 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.
- Sources noted in table: International Energy Agency; World Development Indicators, World Bank; and World Economic Outlook, IMF.
- Footnote: 1 Figures are for the fiscal year, which begins April 1.

### Mitigating measures implemented
- Measures used to cushion fuel and food price increases and protect vulnerable groups:
  - Zero-rate value-added tax on selected food items.
  - Rebate facilities for food importers.
  - Food distribution program to feed the most vulnerable.
  - Rural pump prices subsidized via subsidized transportation costs to remote areas; oil companies submit claims on actual road deliveries to the MME for reimbursement from the NEF.

### Lessons and policy implications
- Comprehensive planning and broad consultation facilitated success:
  - Comprehensive reform plan retained targeted subsidy for remote areas and involved broad consultation with civil society.
- Gradual implementation aided consensus building:
  - Gradual reforms allowed time for consensus between government and stakeholders.
- Price smoothing and complementary measures helped prevent unrest:
  - Quarterly (later monthly) price adjustment mechanism with price-smoothing helped manage large price shocks in 2008 and 2011 without social unrest when combined with mitigating measures.
- Risks from legal obligations to state-owned enterprise:
  - Legally stipulated participation of Namcor in importation and supply hindered full depoliticization of price adjustments, enabling prolonged underrecoveries and large losses that required fiscal transfers.
  - Suggests careful design of price-smoothing mechanisms to avoid creating contingent fiscal liabilities through mandated state-enterprise participation.

*Prepared by Farayi Gwenhamo, African Department.*

### Bibliography

### _afr1302 - Bibliography

### Bibliography (selected items appearing in the document)
- Bank of Namibia, 2005, Quarterly Bulletin, Vol. 14, No 1. (March).
- Deutsche Gesellschaft für Internationale Zusammenarbeit, 2009, International Fuel Prices 2009, 6th ed. (Bonn and Berlin).
- Namibia, Ministry of Mines and Energy, 1998, “White Paper on Energy Policy.”
- Sherbourne R., 2010, A Guide to the Namibian Economy (Windhoek: Institute for Public Policy Research).
- International Monetary Fund, 2001, “Niger,” Country Report No. 02/35 (Washington: International Monetary Fund).
- International Monetary Fund, 2004, “Niger,” Country Report No. 04/275 (Washington: International Monetary Fund).
- International Monetary Fund, 2010a, “Adopting an Automatic Fuel Pricing Mechanism for Niger,” FAD Technical Assistance report prepared by David Coady, Anita Tuladhar, Javier Arze Del Granado, Luc Eyraud, and Lilla Nemeth (Washington: International Monetary Fund).
- International Monetary Fund, 2010b, Assessment Letter for the European Union and African Development Bank, August 20 (Washington: International Monetary Fund).
- International Monetary Fund, 2011a, “Niger,” Country Report No. 11/357 (Washington: International Monetary Fund).
- International Monetary Fund, 2011b, “Niger,” Country Report No. 11/358 (Washington: International Monetary Fund).
- International Monetary Fund, 2011c, Assessment Letter for the World Bank and the European Union, June 2 (Washington: International Monetary Fund).
- International Monetary Fund, 2012, “Niger,” Country Report No. 12/109 (Washington: International Monetary Fund).
- World Bank, 2012, “Proposed Credit in the Amount of SDR 32.3 million (US$50 million equivalent) to the Republic of Niger for a first Shared Growth Credit,” Report No. 69131-NE, May 31 (Washington: World Bank).

### Niger — Context
- Niger is land-locked and highly vulnerable to external shocks (climatic conditions and commodity prices).
- Medium-term growth potential linked to expansion in oil and mining (uranium) sectors.
- Recent developments:
  - Became a fuel exporter with the start of operations of a new oil refinery (SORAZ) in early 2012.
  - Annual domestic consumption about 7,000 barrels a day.
  - SORAZ expected maximum capacity of 20,000 barrels per day of fuel including gasoline, diesel, and LPG.
  - About one-third of SORAZ production feeds the domestic market; the rest is exported.
- Governance and social indicators:
  - Per capita GDP in PPP terms of US$720 in 2010.
  - Government highly centralized; current authorities in power since April 2011 after a one-year transition following a February 2010 coup d’état.
  - World Bank (2012) notes risk of political fragility where government failure to deliver tangible results could lead to loss of popular support and political stalemate.

### Niger — Experience with Fuel Price Adjustments (period until end-2011)
- IMF technical assistance in 2001: pricing formula to achieve automatic pass-through of international prices to domestic retail prices.
  - Formula adjusted retail price monthly whenever change in international prices was above CFAF 5; otherwise taxes absorbed changes.
  - Formula components: CIF import price at port; estimated costs and margins of importing and distributing fuel; net fuel taxes (ad valorem customs, value-added taxes, specific excise taxes).
  - A multisectoral body was envisaged to apply the formula but was never created.
- Developments:
  - As international prices rose from 2005, an explicit subsidy component was introduced to smooth domestic prices.
  - Subsidy component rose up to mid-2008 and further with the depreciation of the euro, contributing to significant subsidy increases in 2010.
  - Net fiscal contribution of fuel taxes declined:
    - From 1 percent of GDP in 2005
    - To 0.6 percent in 2009
    - To 0.3 percent in 2010
  - Cost of the subsidy on petroleum products amounted to more than 1 percent of GDP (2010).
  - Gasoline net tax decline: from a peak of 0.8 percent of GDP in 2005 to 0.3 percent of GDP in 2009.
  - Net taxes on diesel declined from 0.3 percent of GDP in 2005 to 0.2 percent of GDP in 2009.
  - Net tax on kerosene was continuously negative over the period; kerosene share of consumption is fairly low.
  - Fuel prices increased by 12 percent in mid-2010 (weighted average of gasoline, kerosene, diesel).
- Reform actions:
  - Authorities decided to phase out subsidies gradually due to unsustainable size and regressive distribution.
  - Agreed reform:
    - Step 1: pass through international oil price variations to domestic prices starting in June 2011.
    - Step 2: gradually unwind existing subsidy over following 12 to 18 months.
  - Fuel prices increased by about 8 percent in mid-2011.
  - Total amount devoted to fuel subsidies in 2011 kept below 2010 level (1.1 percent of GDP).
- Interaction with domestic production:
  - Once SORAZ started selling refined products, prices were set below international prices:
    - Gasoline at CFA franc 336 per liter.
    - Diesel at CFA franc 340 per liter.
  - Prices fixed for the first six months of operation; after that a formula linked to world market prices was to apply, but prices did not change.
  - Agreement between government and transportation trade unions led to decision to reduce the fuel tax (TIPP) from 15 percent to 12 percent starting in 2013.
- Fiscal pressure and smuggling:
  - Lower domestic prices relative to neighboring countries increased smuggling and a strong rise in fuel imports while Niger was still an importer.
- Political and timing considerations:
  - Imminent start of domestic production introduced urgency and complicated political economy—society expected lower prices with local production.
  - Initial reforms in late 2010/early 2011 implemented by a transitional government with perceived lower legitimacy.

### Niger — Fiscal and Price Outcomes (selected indicators from the text and Table 3)
- Table 3 selected indicators (years shown as in source):
  - GDP per capita ($US): 2000 = 155.0; 2003 = 223.8; 2008 = 361.0; 2010 = 363.6; 2011 = 420.7
  - Real GDP growth (percent): 2000 = –2.6; 2003 = 7.1; 2008 = 9.6; 2010 = 10.7; 2011 = 2.2
  - Inflation (percent): 2000 = 2.9; 2003 = –1.8; 2008 = 10.5; 2010 = 0.9; 2011 = 2.9
  - Overall fiscal balance (percent of GDP): 2000 = –3.8; 2003 = –2.8; 2008 = 1.5; 2010 = –2.4; 2011 = –3.0
  - Public debt (percent of GDP): 2000 = 118.8; 2003 = 90.1; 2008 = 21.0; 2010 = 23.7; 2011 = 29.2
  - Current account balance (percent of GDP): 2000 = –6.7; 2003 = –7.5; 2008 = –13.0; 2010 = –19.9; 2011 = –24.7
  - Oil imports (percent of GDP): 2000 = 4.0; 2003 = 2.4; 2008 = 3.8; 2010 = 4.7; 2011 = 4.7
  - 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): 2008 = 36.4; 2010 = 33.1; 2011 = 34.3
  - Poverty headcount ratio at $1.25 a day (PPP) (percent of population): 2008 = 43.6

### Niger — Mitigating Measures
- Direct subsidy to the transport sector (tickets modérateurs) introduced to protect poorest segments most affected by transport cost increases.
- Costs of mitigating measures were less than 0.1 percent of GDP.
- Fiscal reallocation after discontinuing fuel subsidies:
  - Allowed a 19 percent increase in social spending in the 2012 budget compared to 2011, with emphasis on investment in education.
  - Public wage bill was increased to accommodate recruitment of 4,000 teachers in early 2012.

### Niger — Lessons
- Understand the full extent and distributional incidence of fuel subsidies to build commitment for reform.
- Transparency is important: explicitly reflecting subsidy costs in the budget proved useful.
- Public information campaigns and media debates (TV and radio) aided societal understanding and support.
- Participative decision-making (e.g., ad hoc inclusive committee, “Commité du Differé”) fosters consensus.
- Allow sufficient time (about six months in Niger) to explain, negotiate, and implement reforms to build momentum and social support.
- Engage partners to provide information and encouragement while maintaining local ownership.
- Design mitigating measures to reach the most affected groups via targeted subsidies based on detailed analysis.
- Recognize that fuel subsidy reform becomes more complicated when a country becomes an oil exporter due to heightened expectations and pressure to lower pump prices.

### Nigeria — Context
- Nigeria is the world’s fifth leading oil-exporting country.
- Oil and gas sector accounts for:
  - around 25 percent of GDP,
  - 75 percent of general government fiscal revenue,
  - over 95 percent of total exports.
- Fiscal relations complex and driven by constitutionally mandated oil revenue-sharing among federal government, 36 states, and local governments.
- Price-setting framework:
  - Administratively set maximum prices for kerosene and gasoline and an indicative price for diesel established in 2003 by the Petroleum Products Pricing Regulatory Agency.
  - Agency applies import parity but is expected to stabilize prices using the Petroleum Support Fund (PSF).
  - Overrecoveries (when total costs are below maximum price) are paid into the PSF; underrecoveries are compensated from the PSF.
  - Agency posts product pricing templates showing maximum prices and estimated landing costs, trading margins and fees.
- Subsidy dynamics:
  - Nigeria subsidized kerosene and gasoline at substantial fiscal cost.
  - Subsidy costs rose from 1.3 percent of GDP in 2006 to 4.1 percent of GDP in 2011.
  - Budget appropriation for the PSF in 2011 was 0.6 percent of GDP; remaining funding came from the Excess Crude Account.
  - Price gap encouraged smuggling and abuses (e.g., overinvoicing of gasoline imports).
  - Subsidy regime discouraged investment in domestic refining; 20 refinery licenses issued since 2000 unused.
  - Domestic refineries often operated at about 20 percent of capacity, rarely above 40 percent, meeting only about 20 percent of domestic demand.

### Nigeria — Key Indicators (from Table 4 as presented)
- GDP per capita ($US): 2000 = 390.0; 2003 = 524.3; 2008 = 1401.2; 2010 = 1465.1; 2011 = 1521.7
- Real GDP growth (percent): 2000 = 5.3; 2003 = 10.3; 2008 = 6.0; 2010 = 8.0; 2011 = 7.4
- Inflation (percent): 2000 = 6.9; 2003 = 14.0; 2008 = 11.6; 2010 = 13.7; 2011 = 10.8
- Overall fiscal balance (percent of GDP): 2000 = 12.4; 2003 = –4.3; 2008 = 1.7; 2010 = –4.2; 2011 = 0.1
- Public debt (percent of GDP): 2000 = 84.2; 2003 = 63.9; 2008 = 11.6; 2010 = 15.5; 2011 = 17.2
- Current account balance (percent of GDP): 2000 = 12.5; 2003 = –5.9; 2008 = 14.1; 2010 = 5.9; 2011 = 3.6
- Oil imports (percent of GDP): 2000 = 5.1; 2003 = 2.5; 2008 = 5.2; 2010 = 4.9; 2011 = 7.9
- Oil exports (percent of GDP): 2000 = 49.8; 2003 = 39.8; 2008 = 40.6; 2010 = 32.7; 2011 = 36.9
- Fuel consumption per capita (liters): 2003 = 98.6; 2008 = 88.0; 2010 = 79.2; 2011 = 93.5
- Poverty headcount ratio at $1.25 a day (PPP) (percent of population): 2010 = 33.7

### Nigeria — Experience with Reform (mid-2011 to early 2012)
- Mid-2011: government attempted radical curtailment of gasoline subsidies and ran a public campaign.
- Political dynamics:
  - Initial support for subsidy removal from several state governors seeking resources to pay new minimum wage.
  - Debate in press, business, civil society, and National Assembly throughout late 2011.
- Price actions:
  - On January 1, 2012, price of gasoline raised to cost-recovery level — a 117 percent increase.
  - Price of kerosene was not changed.
  - In response to intense social unrest, the government scaled back the price increase to 49 percent by mid-January 2012.
- Outcome: despite six months of debate, measure did not enjoy sufficient public support and was substantially scaled back.

### Nigeria — The SURE Program (policy package proposed to accompany subsidy removal)
- Announced in November 2011 to channel savings from subsidy removal into infrastructure and safety nets.
- Objectives:
  - Stimulate economy and alleviate poverty through critical infrastructure and safety net projects.
  - Capital projects aligned with Vision 20:2020 (power, roads, transportation, water, downstream petroleum).
  - Mitigate impact on the poor through properly targeted safety net programs.
- Institutional arrangements:
  - Creation of a specific subsidy savings fund to finance SURE spending initiatives.
  - Fund and spending programs overseen by an 18-person board chaired by the president’s appointee.
  - Board composition: only four government representatives; other members from civil society.
  - Board to seek technical assistance from internationally reputed consulting firms; independent body to report directly on implementation.
- Public communication:
  - SURE brochure summarized case for removal, estimated gains for federal, state and local governments, and detailed proposed spending (including maternal and child health upgrades, specific road segments, etc.).

### Nigeria — Fiscal and Price Data (from Table 5)
- Fuel Subsidy (billion Naira):
  - 2006 = 1
  - 2007 = 251
  - 2008 = 290
  - 2009 = 637
  - 2010 = 399
  - 2011 Est. = 797
  - 2012 Proj. = 1,761 and 1,570 (table shows two figures in projection row; source lists both)
- Fuel Subsidy (percent of GDP):
  - 2006 = 1.3
  - 2007 = 1.4
  - 2008 = 2.6
  - 2009 = 1.3
  - 2010 = 2.3
  - 2011 Est. = 4.7
  - 2012 Proj. = 3.6
- Fuel prices (Naira per liter):
  - Diesel (deregulated): 2006 = 8; 2007 = 19; 2008 = 11; 2009 = 8; 2010 = 4; 2011 = 12; 2012 = 152144 (as presented in table — preserve exact sequence)
  - Kerosene (subsidized): 2006–2010 = 50 each year; 2011 = 50; 2012 = 50
  - Gasoline (subsidized): 2006 = 65; 2007 = 70; 2008 = 70; 2009 = 65; 2010 = 65; 2011 = 97
  - Note: table presents some values in sequences; numbers preserved exactly as shown in source.

### Nigeria — Implementation Challenges and Opposition
- Strong opposition from powerful sectors of society and the National Assembly.
- National Assembly came out against removal in early December 2011 claiming measure premature and not supported by firm data.
- Public unrest following January 1, 2012 price increase led to reversal of headline increase from 117 percent to 49 percent.

*Italic: Content unit: _afr1302 - Bibliography, extracted from the source PDF provided.*

### Box 1 . Nigeria: Rationale for Subsidy Removal

### Box 1 . Nigeria: Rationale for Subsidy Removal

### Government rationale (as summarized in the SURE brochure)
- Fixed prices have led to a huge unsustainable subsidy burden.
- Fuel subsidies do not reach intended benefi ciaries, and they benefi t mostly the rich.
- Subsidy administration has been beset with ineffi ciencies, leakages, and corruption.
- Subsidy costs have diverted resources away from investment in critical infrastructure.
- Subsidies have discouraged competition and stifl ed private investment in downstream petroleum.
- The huge price disparity has encouraged smuggling to neighboring countries.

### Timeline and political response
- President Jonathan officially inaugurated the program on February 13, 2012, and appointed Dr. Christopher Kolade as Chair of the SURE Board.
- The government had refrained from setting any date for planned removal, but the January 1, 2012, announcement came as a surprise and set off widespread protests.
- On January 9, the two large union federations launched a national strike.
- Certain parts of the country experienced a near breakdown of law and order and there were a number of deaths related to violence and acts of intimidation associated with the strike.
- On January 15, the president announced that the January 1 price increase would be partly reversed and the new maximum retail price for gasoline would be N97 (US$0.60) a liter, a 40 percent increase over its end-2011 level.
- The president emphasized continued pursuit of full deregulation of the downstream gasoline sector; the SURE program would go ahead but be scaled back in line with reduced subsidy savings.
- Unions called off their strike on January 15.

### Mitigating measures outlined in the SURE program
- Urban mass transit: Increasing mass transit availability by facilitating the procurement of diesel-run vehicles (subsidized loans, reduced import tariffs, etc.) to established operators. In the first step of this program, the government intended to import 1,600 buses within months.
- Maternal and child health services: Expanding the conditional cash transfer program for pregnant women in rural areas; and upgrading facilities at clinics.
- Public works: Providing temporary employment to youth and women from the poorest populations in environmental projects and maintaining education and health facilities.
- Vocational training: Establishing vocational training centers across the country to tackle youth unemployment.

### Lessons learned from the reform attempt
- Public information and consultation:
  - A well-thought-out public information and consultation campaign is crucial to success.
  - Although the government campaigned vigorously, the measure remained highly controversial when it went into effect.
  - The public communication campaign lasted only six months, and there was no broad popular consultation.
  - The ministry of finance produced several short briefs to support its proposal, but these were issued several months into the campaign, and there was no comprehensive report.
- Credibility and trust:
  - The government must establish credibility for its promise that the proceeds from removal of the subsidy will actually be used for the benefit of the broad population.
  - Despite laudable objectives of the SURE program and plans for oversight by a highly reputable board of directors, the new administration had yet to establish that it truly would live up to commitments and suffered from a very negative image of government held by the general public.
  - As such, the subsidy reform was viewed very suspiciously and the general public did not believe the government would live up to its commitments.
- Evidence base and transparency:
  - Thorough research on the costs and benefi ciaries of subsidies is important for bolstering the case for reform.
  - The absence of good quantitative information on the state of Nigeria’s refi ning industry and of the fuel subsidy mechanism allowed spurious arguments—often made by parties with vested interests—that government investment in the state-owned refi neries and/or measures to stop abuse by marketers were preferable to removing the subsidies.
  - The claim that subsidies mostly benefi ted the poor had been based on anecdotal evidence rather than on research based on household survey data.

*Source: Box 1 . Nigeria: Rationale for Subsidy Removal (excerpt from the provided IMF document).*

### References

### References

### Context
- Uganda suffered prolonged power shortages despite large hydropower potential; dependence on hydropower before 2006 made the country vulnerable to weather shocks.
- Rapid energy demand growth accompanied high economic growth rates during the 1990s and 2000s (see Table 8).
- Access to electricity was one of the lowest in sub-Saharan Africa, especially in rural areas.
- The public utility Uganda Electricity Board (UEB) had weak financial conditions and could not meet growing demand.

### Experience with Reform
- Comprehensive power sector reform program initiated in 1999:
  - New Electricity Act, establishment of Electricity Regulatory Authority (ERA) in 2000.
  - Unbundling of UEB in 2001 into UEGCL (generation), UETCL (transmission), and UEDCL (distribution).
  - Rural Electrification Agency (REA) established in 2003.
- Private concessions:
  - 2003: Eskom Uganda awarded a 20-year concession for management of UEGCL’s assets.
  - 2005: UMEME Ltd. awarded a 20-year concession for UEDCL (first electricity distribution network concession in sub-Saharan Africa).
- UETCL remained state-owned, operating high-voltage transmission and acting as bulk supplier; bulk supply tariffs were below cost-recovery levels, prompting direct and indirect government support.

### Shift in Generation Mix and Fiscal Impact
- The 2005–06 droughts increased dependency on thermal power:
  - Thermal share rose from about 7 percent in 2005 to about 39 percent in 2011 (Table 9).
- Explicit budgetary support mechanisms included direct budgetary support to UETCL and capacity payments to thermal units.
- In FY 2010/11 direct subsidy costs represented 1.1 percent of GDP (Table 9).
- The 2012 tariff increase, and Bujagali hydrogeneration becoming fully operational in late 2012, eliminated explicit subsidy costs according to the text.

### Key Tables and Indicators (preserved exactly as in source)
- Table 8. Uganda: Key Macroeconomic and Power Sector Indicators
  - Macroeconomic Indicators
    - 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
  - Power Sector Indicators
    - Input energy (million kWh): 2005 1846; 2007 1861; 2010 2456
    - Electricity consumed (million kWh): 2005 1139; 2007 1204; 2010 1731
    - 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
- Table 9. Uganda: Explicit Power Subsidies and Cost of Thermal Generation
  - Explicit power subsidy (US$ million): 2006 60.1; 2007 151.2; 2008 887.5; 2009 6112.8; 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 1022; 2011 1029
  - 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
  - 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
  - Notes: Subsidy figures are for fiscal years, which start in July. Data for 2011 are preliminary.
- Table 10. Uganda: Quasi-Fiscal Deficit of the Power Sector
  - 2005–08 (In percent of costs / In percent of GDP)
    - QFD due to underpricing: 32.8 / 1.0
    - QFD due to distribution losses (up to 10 percent): 6.7 / 0.2
    - QFD due to distribution losses (over 10 percent): 17.0 / 0.5
    - QFD due to undercollection: 4.6 / 0.1
    - Total quasi-fiscal costs: 61.1 / 1.9
  - 2009–11 (In percent of costs / In percent of GDP)
    - QFD due to underpricing: 40.1 / 1.4
    - QFD due to distribution losses (up to 10 percent): 6.0 / 0.2
    - QFD due to distribution losses (over 10 percent): 12.5 / 0.4
    - QFD due to undercollection: 1.9 / 0.1
    - Total quasi-fiscal costs: 60.5 / 2.1
  - Definition: The QFD of a power utility is defined as the difference between the actual revenue collected at regulated electricity prices and the revenue required to fully cover the operating costs of production and capital depreciation.

### Operational and Service Outcomes
- Distribution line losses fell from 38 percent in 2005 to 28 percent in 2011.
- Collection ratio increased from 80 percent of total power bills in 2005 to 96 percent in 2011.
- UMEME invested US$105 million by end-2010, exceeding contractual expectations.
- UMEME increased the number of customers by more than 30 percent by 2009–10.
- Despite improvements, about one-third of electricity supplied is still not paid for due to losses and noncollection.

### Tariff Policy and Reforms
- Past tariff increases:
  - June and November 2006: about 35 and 41 percent increases, raising average effective tariff to US$0.18 a kWh.
  - No retail adjustments in 2007–09 while generation costs rose.
  - January 2010: retail tariffs modified to give relief to household consumers; retail effective tariffs covered about two-thirds of power production costs in 2010.
  - January 2012: ERA approved an average effective tariff increase of about 41 percent (or US$0.05 a kWh); new industrial tariff set at US$0.128 a kWh (about 73 percent increase); lifeline tariff unchanged at USh 100 per kWh.
- Post-2012 tariff stance:
  - New tariffs were still below cost recovery at time of hike but expected to align with cost recovery once Bujagali became fully operational in late 2012.
  - Cross-subsidization from households to industrial consumers was reduced significantly.
  - After the hike, Uganda’s power tariffs were in line with other EAC members.

### Incidence, Public Reaction, and Political Economy
- Protests were limited; government ran a communication campaign explaining causes of tariff hikes (diesel prices, subsidies).
- Arguments emphasized that subsidies accrued disproportionately to the rich; lifeline tariff was preserved.
- Industrial stakeholders acknowledged tariffs would be bearable if power supply became reliable.
- Low access moderated protests: about 88 percent of people without access were not involved.

### Factors Enabling Tariff Increases (listed in text)
- The increasing and unsustainable fiscal costs of thermal power with rising fuel prices; explicit fiscal subsidy reached more than 1.1 percent of GDP in 2011.
- Poorly targeted electricity subsidies: before the hike, large industrial consumers paid less than a quarter of the cost of producing a kWh and accounted for 44 percent of total power consumption in 2010, meaning almost two-thirds of the power subsidy accrued to a small group of industrial consumers.
- Evidence of willingness to pay above prevailing tariffs: average coping cost for intermittent supply US$0.30 a kWh (or US$0.35 including fixed costs); residential willingness to pay US$0.498 kWh.
- Investments in hydropower infrastructure reducing medium- and long-term provision costs.
- Limited access to power: as of 2010 only 12 percent of the population (under 4 percent of rural population) had access.

### Mitigating Measures
- Lifeline tariff for low-income consumers: consumption up to 15 kWh a month charged at USh 100 per kWh; this lifeline tariff remained unchanged.

### Lessons and Policy Implications
- Investment is a key constraint: lack of investments impedes addressing inefficiencies; UMEME’s investments reduced distribution losses, improved collection, and increased access by about 50 percent in the last three years.
- Financial performance is affected not only by low tariffs but also by high distribution losses and undercollection. Therefore:
  - Tariff increases alone are insufficient.
  - Tariffs should be set at economic levels but allow for a reasonable level of line losses.
  - Financial sustainability requires measures to improve efficiency and regulatory incentives for utilities.
- Institutional reform is a long-term process: Uganda’s reforms began in 1999 and took more than 10 years to show clear progress in access rates, efficiency, and fiscal burden.
- Tariff increases require careful communication and implementation strategies to build public support.
- Expanding access is challenging: high upfront connection costs (about US$80) are a major impediment to new connections.

*Prepared by Mumtaz Hussain, African Department; bibliography and source references as listed in the original document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2013/_afr1302.pdf_