## _wp1530 ## Source details **Canonical URL:** [_wp1530](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1530.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1530.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1530.pdf.json) --- ### Executive summary — overview and aggregate magnitudes - High oil prices since the second half of the 2000s increased pressures to provide energy subsidies despite fiscal costs and efficiency/distribution concerns. - Energy subsidies in Latin America and the Caribbean (LAC) amounted to about 1.8 percent of GDP, on average, in 2011–13. - Composition (average 2011–13): - Regional average energy subsidies: 1.8 percent of GDP. - Fuel subsidies: about 1.0 percent of GDP. - Electricity subsidies: about 0.8 percent of GDP. - Broader fiscal cost if including forgone tax revenues and negative externalities (broad-brush estimates): about 3.8 percent of GDP. - Regional average decreases to 1.00 percent of GDP when excluding oil producer countries that ranked lower than the regional median in measures of institutional quality. ### Variation across countries, determinants, and country group statistics (average 2011–13) - Key cross-country patterns: - Subsidies larger in energy-rich countries and in countries ranking lower on institutional and policy quality measures. - Institutional quality appears more important than oil richness in determining subsidy size. - Electricity subsidies more prevalent in low-income countries and in Central America and the Caribbean. - Group-level averages (average 2011–13): - Total LAC: 1.8 percent of GDP (Fuel 1.0; Electricity 0.8). - Excluding Low-ranked & Producers (LR-OIL): Total 1.00 percent of GDP (Fuel 0.4; Electricity 0.6). - Low-ranked & Producers (LR-OIL): Total 5.1 (Fuel 3.7; Electricity 1.4). - Low-ranked & Importers (LR-NOIL): Total 1.5 (Fuel 0.3; Electricity 1.1). - High-ranked & Producers (HR-OIL): Total 1.2 (Fuel 0.9; Electricity 0.3). - High-ranked & Importers (HR-NOIL): Total 0.4 (Fuel 0.2; Electricity 0.2). - Caribbean Countries (CAR): Total 1.3 (Fuel 0.4; Electricity 0.8). - Central American Countries (CADR): Total 1.2 (Fuel 0.2; Electricity 1.1). - Low-income Countries (LICs): Total 2.2 (Fuel 0.5; Electricity 1.7). - Selected country examples (Percent of GDP, average 2011–13): - Venezuela: Total 8.9 (Fuel 7.1; Electricity 1.8). - Ecuador: Total 7.5 (Fuel 7.0; Electricity 0.4). - Bolivia: Total 6.2 (Fuel 6.1; Electricity 0.0). - Argentina: Total 3.9 (Fuel 2.1; Electricity 1.8). - Belize: Total 2.7 (Fuel 0.0; Electricity 2.7). - Trinidad and Tobago: Total 2.7 (Fuel 2.0; Electricity 0.6). - Mexico: Total 1.8 (Fuel 1.1; Electricity 0.7). - Brazil: Total 1.2 (Fuel 1.2; Electricity 0.1). - Colombia: Total 0.4 (Fuel 0.2; Electricity 0.2). - Uruguay, Chile, Costa Rica: Total 0.0 (Fuel 0.0; Electricity 0.0). ### Taxonomy and origins of subsidy mechanisms - Rules-based and permanent mechanisms: - Access to energy at below cost for targeted users (low income households, promoted industries, strategic regions). - Automatic price formulas with built-in buffers. - Pump prices below cost as blanket wealth transfer. - Discretionary and ad-hoc mechanisms: - Price stabilization funds. - Price freezes (after shocks, devaluations, or other reasons). - Transfers resulting from weak enforcement/capacity (e.g., electricity theft). - Ad-hoc suspension of market pricing or other rules-based mechanisms. - Fuel subsidies: - Tend to be larger and more entrenched in oil-rich countries; often originate from administered pump prices that do not cover opportunity costs or from price-stabilization mechanisms that impose fiscal costs during price volatility. - Electricity subsidies: - Originate from cross-tariff subsidization where average tariffs are lower than generation and distribution costs; exacerbated by fraud, non-payment, high technical and non-technical losses, weak enforcement, and capacity constraints. ### Fiscal, macroeconomic, and sectoral impacts - Fiscal effects: - Subsidies exacerbate budget deficits, add to public debt, give rise to payment arrears, and can exceed overall fiscal deficits in some groups (notably oil-producer countries ranking lower on institutional quality). - Energy subsidies represented about 7 percent of government revenues (on average) for the region. - Energy subsidies represented about 11 percent of tax revenues (on average) for the region during 2011–13. - In countries ranking lower on institutional quality, subsidies were equivalent to about 32 percent of tax revenues; in LICs just over 15 percent. - Country-specific shares of tax revenues consumed by subsidies (2011–13): Argentina 14 percent; Bolivia 20 percent; Haiti 23 percent; Ecuador 55 percent; Venezuela 85 percent. - Quasi-fiscal operations and contingent liabilities: - Subsidies often absorbed by SOE losses, off-budget financing, arrears, and contingent liabilities (e.g., guarantees to utilities). - Petrocaribe financing used to fund subsidies and off-budget spending in some countries, raising transparency and debt concerns. - Energy sector and competitiveness: - Subsidies weaken SOE balance sheets, constrain investment, distort incentives, and can result in nationalizations and sector inefficiencies. - Examples of firm-level consequences: PDVSA (Venezuela), PETROBRAS (Brazil), PETROTRIN (Trinidad and Tobago), PETROPAR (Paraguay). - External balance and macro vulnerabilities: - Long-lived subsidies encourage over-consumption, worsen oil-trade balances, and contribute to current account deficits and smuggling. - Petrocaribe sudden-stop risk concentrated in Antigua and Barbuda, Dominica, Dominican Republic, Grenada, Haiti, Jamaica, and Nicaragua. ### Distributional, welfare, and environmental effects - Distributional incidence: - Untargeted subsidies are regressive in practice: richer households capture larger shares. - Venezuela: richest 20 percent received six times more fuel subsidies per person than the poorest third. - Bolivia: poorest 40 percent received about 15 percent of total fuel subsidies. - Haiti: recent estimates suggest about 90 percent of fuel subsidies accrue to the richest 20 percent of households. - Fiscal trade-offs for social spending: - Average LAC country: energy subsidies equal about 45 percent of spending in education and health. - Average LIC country: energy subsidies equal about 80 percent of spending in education and health. - Oil producer countries ranking lower on institutional quality: energy subsidies equal about 110 percent of spending in education and health (or about 15 percent of total government spending). - Environmental externalities and corrective taxation: - Fuel taxes in the region were below levels that would correct for negative externalities (IMF, 2014a). - Corrective-tax shortfalls imply fiscal revenue losses for LAC of about 1 percent of GDP on average for gasoline and diesel alone (IMF illustrative calculations). - IEA (2011) estimate: phasing out world fossil-fuel subsidies by 2020 would cut CO2 emissions by about 6 percent. ### Measurement approaches and data sources - Price-gap approach (Box 1): - Pre-tax subsidies (S_PRE): S_PRE(t) = (BP_t - P_t) · UC_t. - Post-tax subsidies (S_POST): S_POST(t) = (BP_t - P_t)·UC_t ≡ S_PRE(t) + T*_t · UC_t, where T*_t includes prevailing tax and Pigouvian corrective tax. - For net fuel importers: reference price = import price + freight & insurance + distribution/marketing costs. - For net fuel exporters: reference price = export price + distribution/marketing costs (captures opportunity cost). - Electricity subsidy measurement: - Formal expression preserved: E_t S = [P_AV_t + D_t + O F_t - P_U_t · λ_t] · E_t UC_t, with variable definitions provided (P_AV_t, λ_t, P_E_t, D_t, OF_t, E_t UC_t). - Primary data: - Fuel: survey with authorities requesting retail prices, CIF price for importers, distribution costs, margins, consumption volumes; IEA database used in some instances. - Electricity: survey requesting production, losses, cost of generation/distribution, collection rate, and price; gap-fillers include OLADE, UN ECLAC, IDB, CARILEC, NREL, and national regulators/companies. ### Country price-setting practices — selected illustrations and fiscal implications - Examples of diverse practices and financing: - Haiti — Ad hoc: fixed domestic pump prices unchanged since 2011; uncovered costs financed through reduction in customs duties and elimination of excises, and through direct transfers to oil distributors. - Colombia — Formula: stabilization fund smooths difference between export parity price and a 60-day moving average; intended to be self-sustaining but imposed fiscal costs during price volatility. - Mexico — Ad hoc/formula: adjusts fuel excises to compensate for price volatility; negative excises historically produced net subsidies that peaked in 2008 at about 1.8 percent of GDP. - Panama — Formula: maximum prices based on import & transport costs; public transport subsidy via lower diesel prices through coupons; automatic formula achieves cost recovery with targeted subsidies paid through state budget. - Brazil, Ecuador, Venezuela, Bolivia, Trinidad and Tobago: examples of administered pump prices or state company losses contributing to large fuel subsidies. - Electricity sector snapshots: - Argentina: ad hoc formula; government transfers to generators (on-budget, 2% of GDP in recent years). - Belize: formula-based annual tariffs; 2012 rebate led to losses absorbed by stabilization account; no budget subsidies. - Dominican Republic: ad hoc monthly tariff-setting; total electricity subsidies estimated ~2 percent of GDP in 2013. - Haiti: ad hoc prices unchanged since 2008; technical/non-technical losses near 70%; electricity subsidies ~3 percent of GDP in 2013 (large part financed by Petrocaribe). - Colombia, Peru: market/formula-based regimes with targeted cross-subsidies often self-financing (e.g., FOSE in Peru). ### Reform experience, principles, and policy recommendations - Reform context and challenges: - Subsidy reform is politically difficult due to near-term social/economic costs, entrenched interests, and perception of subsidies as entitlements. - Electricity subsidy reform is particularly challenging because costs are less transparent. - Factors improving reform prospects: - Take country circumstances into account (business/oil price cycles, political calendar). - Depoliticize price setting: prefer automatic price formulas with built-in buffers to pure discretion. - Implement reforms gradually and in tandem with mitigating measures. - Strengthen SOE governance as a major focus. - Implement communication strategies emphasizing subsidy costs and reform benefits. - Use periods of falling international oil prices to ease reform. - Specific instrument lessons and cases: - Stabilization funds (Colombia FEPC): can smooth prices but are vulnerable to continuous price rises and political pressures; initial US$170 million funding; FEPC deficit reached about US$1.2 billion by end-2011 (0.4 percent of GDP). - Phasing out variable excises (Mexico): variable excises produced negative excises peaking in 2008 at about 1.8 percent of GDP; reforms in 2010 and later (carbon tax in 2014) aimed to eliminate subsidies by 2015. - Targeting via cash transfers and lifeline tariffs (Dominican Republic, El Salvador, Peru, Nicaragua): examples of converting blanket subsidies into targeted support. - Mitigating measures and sequencing: - Pre-reform assessment of social impacts using household data is essential. - Mitigating instruments include conditional cash transfers, subsidized school meals, targeted lifeline tariffs, special coupons, and temporary subsidies for vulnerable groups. - Gradualism helps households and authorities adjust and builds credibility; timing after elections and during favorable macro conditions can aid success. - Communication, stakeholder consultation, and credible reallocation of fiscal savings toward social/public investment help build support. ### Petrocaribe arrangement — financing and risks - Petrocaribe financing features: - Long repayment periods: 17 – 25 years. - Low interest rates: 1 – 2 percent. - Financed portion varies with oil market prices: 50 – 60 percent of the oil bill at current prices. - Uses and risks: - Member countries used flows for current and capital spending, financing energy subsidies, and building buffers. - Petrocaribe-linked external debt in selected countries (end-2013): Nicaragua 21 percent of GDP; Haiti 17 percent of GDP; Jamaica 17 percent of GDP; Guyana 7 percent of GDP; Dominican Republic 5 percent of GDP. - Sudden stop of Petrocaribe inflows would be a significant shock for beneficiaries, especially those with limited alternative financing. *Source: IMF staff analysis and country authorities; ANNEX II: DATA SOURCES; Box summaries; selected country snapshots and averages extracted from the provided IMF content unit._* ### Executive Summary ...................................................................................................... ### Executive Summary ### Overview - High oil prices since the second half of the 2000s increased pressures on countries to provide energy subsidies, despite their fiscal costs and non-transparent effects on efficiency and distribution. - Negative implications for macroeconomic management, fiscal sustainability, and the environment have heightened policymakers’ interest in the issue. - A new dataset compiled for this paper suggests energy subsidies in Latin America and the Caribbean (LAC) amounted to about 1.8 percent of GDP, on average, in 2011–13. ### Magnitude and composition of subsidies (Average 2011–13) - Regional average energy subsidies: 1.8 percent of GDP. - Fuel subsidies: about 1 percent of GDP. - Electricity subsidies: about 0.8 percent of GDP. - This measure is a lower bound because it does not include forgone tax revenues or the cost of negative externalities; inclusion of (broad brush) estimates of these costs would bring the LAC energy subsidy bill to about 3.8 percent of GDP. - The regional average decreases to 1 percent of GDP when excluding oil producer countries that ranked lower than the regional median in measures of institutional quality. ### Variation across countries and drivers - There is considerable variation in the size and types of energy subsidies across the LAC region. - Subsidies are larger in energy rich countries and in those that rank lower on measures of institutional and policy quality (budget transparency, rule of law, competitiveness, ease of doing business). - In some cases subsidies are permanent rules-based policy choices (for example, to provide below-cost energy to targeted users); in many others they arise as discretionary responses to events. ### Fuel subsidies: characteristics and origins - Fuel subsidies tend to be larger and more entrenched in oil-rich countries, where they are seen as a way of sharing resource wealth with the public, despite benefits accruing mostly to richer households. - In oil-rich countries, fuel subsidies often originate from administered pump prices that do not cover opportunity costs. - In other countries (particularly those that rank higher in institutional quality), fuel-related fiscal costs often result from price stabilization mechanisms that can impose fiscal costs during periods of price volatility. ### Electricity subsidies: characteristics and origins - Electricity subsidies are more common in low-income countries and particularly in Central America and in the Caribbean. - These subsidies typically originate from unbalanced cross-tariff subsidization (average tariffs lower than generation and distribution costs). - Electricity subsidies are often exacerbated by fraud and non-payment where enforcement is weak due to capacity and political constraints. - Capacity constraints and weak enforcement are important factors behind relatively large electricity subsidies in many low-income countries. ### Taxonomy of energy subsidy mechanisms (as presented in the paper) - Rules-based and permanent mechanisms: - Access to energy at below cost for targeted users (low income households, promoted industries, strategic regions). - Automatic price formulas with built-in buffers. - Pump prices below cost as a form of blanket wealth transfer. - Discretionary and ad-hoc mechanisms: - Price stabilization funds. - Price freezes (after shocks, devaluations, or other reasons). - Transfers resulting from weak enforcement/capacity (e.g., electricity theft). - Ad-hoc suspension of market pricing or other rules-based mechanisms. ### Policy implications highlighted - Energy subsidies pose challenges for macroeconomic management, fiscal sustainability, and the environment. - The paper’s dataset and analysis point to the importance of considering both direct consumer subsidies and broader fiscal effects (forgone tax revenue) and negative externalities when assessing the full fiscal and welfare costs. ### Data scope and limitations (as stated) - Data compiled for the paper focus largely on consumers, although data for some countries include subsidies provided to energy producers. - The subsidy estimates reported are a lower bound because they do not capture forgone tax revenues or negative externalities unless those are added in separately. *Source: Executive Summary, _wp1530 - Executive Summary (IMF).* ### 13. In oil-producer countries that rank lower on measures of institutional quality, energy ### _wp1530 - 13. In oil-producer countries that rank lower on measures of institutional quality, energy ### Key findings - Energy subsidies significantly constrained fiscal space in countries with lower measures of institutional quality, contributed to larger-than-average fiscal deficits, represented a high share of fiscal revenues, and their cost was comparable to that of education and health combined. - Energy subsidies are a drag on long-term growth and competitiveness by diverting resources from other spending priorities and by discouraging efficiency-enhancing investment in the energy sector. - Subsidies are often regressive, distort market signals, contribute to income inequality, encourage energy overconsumption (worsening the trade balance), and produce negative externalities including environmental harm. - Fuel taxes in the region were below levels that would correct for negative externalities (IMF, 2014a). ### Fiscal and economic impacts - Subsidies exacerbate budget deficits, add to public debt, give rise to payment arrears, and compromise fiscal and external sustainability. - When used to smooth volatile energy prices, subsidies can drive large swings in the fiscal balance, complicating efforts to meet fiscal targets. - Subsidies can be financed off-budget via losses at state-owned enterprises (SOEs), hampering transparency, increasing uncertainty, constraining energy sector investment, and reducing economic efficiency. - Electricity subsidy reform has proved particularly challenging because its cost is often less evident. ### Patterns and determinants across LAC countries - Energy subsidies for the average LAC country cost about 1.8 percent of GDP annually in 2011–13, about 1.0 percent of GDP for fuel and 0.8 percent of GDP for electricity. - Subsidies were largest in oil-producer countries that ranked lower in measures of institutional quality, and lowest in oil-importing countries that ranked higher in measures of institutional quality. - Institutional quality appears to be a more important determinant than oil richness in determining the size of subsidies. - Low-income countries (a subset of countries that ranked lower in measures of institutional quality) provided relatively high subsidies as a share of GDP, with capacity constraints and weak enforcement contributing to large electricity subsidies in countries such as Haiti, Honduras, and Nicaragua. - Energy subsidies in both Central America and the Caribbean were predominantly provided for electricity. - Energy subsidies in LAC were not related to economic size: larger economies tended to subsidize fuel while many smaller economies subsidized electricity. ### Selected country- and group-level statistics (average 2011–13) - Total Latin America and the Caribbean (LAC) energy subsidies: 1.8 percent of GDP (Fuel 1.0; Electricity 0.8). - Excluding Low-ranked & Producers (LR-OIL): Total 1.00 percent of GDP (Fuel 0.4; Electricity 0.6). - By institutional quality and oil-richness groups: - Low-ranked & Producers (LR-OIL): Total 5.1 (Fuel 3.7; Electricity 1.4). - Low-ranked & Importers (LR-NOIL): Total 1.5 (Fuel 0.3; Electricity 1.1). - High-ranked & Producers (HR-OIL): Total 1.2 (Fuel 0.9; Electricity 0.3). - High-ranked & Importers (HR-NOIL): Total 0.4 (Fuel 0.2; Electricity 0.2). - Geography and income: - Caribbean Countries (CAR): Total 1.3 (Fuel 0.4; Electricity 0.8). - Central American Countries (CADR): Total 1.2 (Fuel 0.2; Electricity 1.1). - Low-income Countries (LICs): Total 2.2 (Fuel 0.5; Electricity 1.7). - Selected country examples (Percent of GDP, average 2011-13): - Venezuela: Total 8.9 (Fuel 7.1; Electricity 1.8). - Ecuador: Total 7.5 (Fuel 7.0; Electricity 0.4). - Bolivia: Total 6.2 (Fuel 6.1; Electricity 0.0). - Argentina: Total 3.9 (Fuel 2.1; Electricity 1.8). - Belize: Total 2.7 (Fuel 0.0; Electricity 2.7). - Trinidad and Tobago: Total 2.7 (Fuel 2.0; Electricity 0.6). - Mexico: Total 1.8 (Fuel 1.1; Electricity 0.7). - Brazil: Total 1.2 (Fuel 1.2; Electricity 0.1). - Colombia: Total 0.4 (Fuel 0.2; Electricity 0.2). - Uruguay, Chile, Costa Rica: Total 0.0 (Fuel 0.0; Electricity 0.0). ### Sources and origins of subsidies - In energy-rich countries, domestic fuel prices often remain unchanged for long periods at significantly below world prices, creating large and growing fuel subsidies used as a lasting form of social policy (resource wealth transfer). - The gap between domestic and international prices was particularly large for oil-producer countries that ranked lower on measures of institutional quality (e.g., Bolivia, Ecuador, Venezuela). - The distribution and magnitude of fuel subsidies reflect how and why subsidies originate, including mechanisms of price setting and financing (examples: ad hoc price setting, state-fixed prices, losses at state companies, subsidized loans). ### Reform experience and policy recommendations - The context for reform in LAC has been broadly favorable in recent years, given generally solid growth and progress in poverty reduction; episodes such as the 2008 energy price shock highlighted the unsustainability of subsidy policies in several countries. - Energy subsidy reform is often difficult because it can have adverse near-term economic and social consequences; vested interests capture most benefits and long-standing subsidies can be perceived as de facto entitlements. - Experience suggests reforms are more likely to be successful if they: - Take country circumstances into account, including business and oil price cycles and the political calendar. - Aim to depoliticize price setting; adoption of automatic price formulas, including built-in buffer mechanisms, is preferable to pure discretion. - Are implemented gradually and in tandem with mitigating measures. - Strengthen SOE governance as a major focus of reforms. - Include a communication strategy emphasizing the costs of subsidies and the benefits of reform to boost support and reduce resistance. - Successful reform of subsidy policy is easier in periods of falling international oil prices. *Source: IMF staff analysis and country authorities (average 2011–13).* ### 2002. Government considering phase-out of blanket ### 2002. Government considering phase-out of blanket subsidy regime with quota-based debit card. ### Country price-setting practices and subsidy financing (selected LAC countries) - Haiti — Ad hoc: fixed domestic pump prices in nominal local currency terms unchanged since 2011. Gradual increase currently being considered. - Uncovered costs financed through reduction in customs duties and elimination of excises, and through direct transfers to oil distributors - Trinidad and Tobago — Ad hoc: State-set retail prices below cost; reduction in subsidies of premium gasoline increased use of other fuels; authorities considering plan to encourage compressed natural gase (CNG) vehicles. - A levy on cruder producers pays for a small part of the subsidy, which is mostly covered on budget and by government arrears to the state oil company. - Venezuela — Ad hoc: The government has fixed domestic pump prices in nominal local currency terms since 1997 (currently about $0.01/liter for gasoline) - State oil firm sells oil to domestic refineries at steep discounts and is heavily indebted. Some subsidy also recorded in budget. - Colombia — Formula: Stabilization fund smooths prices each month by financing difference between export parity price and a 60-day moving average; lower prices set in border regions. - Intended to be self-sustaining but imposes fiscal costs at times of price volatility. - Costa Rica — Ad hoc: Government-set prices. A price formula exists based on import prices, distribution costs, and tax exists but is subject to discretionary implementation. - Discretionary price-setting by government has reduced the tax applied to fuel products, leading to forgone revenue. - Dominican Republic — Ad hoc: Government fixes prices weekly, with a protection system for poor households - Uncovered costs financed by reducing VAT taxes; Cash transfer scheme to poor households financed through the budget - Mexico — Ad hoc: Government adjusts fuel excises to compensate for price volality. - Negative excises resulted in outright subsidization in the past, financed on budget. More recently the excise rate has been positive but resulted in forgone revenue. - Nicaragua — Market (mostly): The government does not regulate fuel prices except for LPG, but does heavily subsidize fuel purchases for public transport (buses and taxis) - LPG policies compress margins at firms and lead to forgone revenue; transport subsidies are financed through Petrocaribe off-budget. - Panama — Formula: Maximum prices based on import & transport costs, domestic value-added. Public transport subsidy through lower diesel prices via special coupons. - Automatic formula achieves cost recovery, targeted subsidies (to public transport, also to LPG) paid through state budget. - Peru — Formula: Government influences market prices (now only diesel, LPG) through stabilization fund transfers to refineries when reference prices exceed price bands. - Stabilization fund generated significant fiscal costs in past but fewer products now subject to bands, which are also more aligned with market. - Uruguay — Ad hoc: Committee members of regulator vote on fuel price adjustments on the basis of movements in international prices; no limit to number of adjustments - Taxes are a large part of the pump price; state oil firm runs losses that are financed in the budget; the government subsidizes diesel for public buses. ### Character of subsidy regimes and fiscal implications - Fuel subsidies are recorded in the state budget, but some are also absorbed by state companies. - Subsidy emergence mechanisms: - Price fixing to prevent pass-through of international price increases. - Cutting tax rates on petroleum products to offset higher import prices. - Direct subsidies to public transportation through lower fuel prices or company subsidies. - Fiscal costs of cushioning domestic prices: - Can be outright transfers when domestic prices are kept below international prices. - Can be forgone tax revenue when fuel taxes are reduced (examples cited: El Salvador, Haiti and Mexico). - Stabilization funds and price-smoothing mechanisms: - Intended to be permanent, self-correcting systems for avoiding sharp changes in domestic pump prices. - Examples: Chile, Colombia and Peru implemented stabilization mechanisms; these incurred larger subsidies after the 2008 oil price shock but provided very low fuel subsidies during 2011–13. - Risks: If oil prices consistently rise and pump prices are excessively smoothed out, stabilization funds can impose sizable subsidies and fiscal costs. - Political economy risk: Pressure to immediately pass through decreases in international prices can result in a net cost for the state, as in Peru. ### Classification snippet from Table 3 - Table 3 heading: Selected Fuel Price Practices and Financing Regimes in LAC - Categories indicated: High (pre-tax) Subsidy Countries; Low (pre-tax) Subsidy Countries - Sources listed: Fund staff estimates; World Bank; IDB; National Governmental and Regulatory Authorities. *Italic source attribution: IMF staff compilation from the PDF titled "_wp1530 - 2002. Government considering phase-out of blanket"* ### 2009. Moreover, to the extent that some of the oil price increase is structural, the ### _wp1530 - 2009. Moreover, to the extent that some of the oil price increase is structural, the ### Electricity subsidies in LAC — scale, distribution, and forms - Electricity subsidies in LAC were on average around 0.8 percent of GDP in 2011–13. - Forgone tax revenue estimates (using uniform tax rates equivalent to the LAC averages of 9.5 percent for gasoline, 9.3 percent for diesel and 7.9 percent for kerosene) imply estimated forgone tax revenues of about 0.7 percent of GDP for the average LAC country in 2011-13. - Electricity subsidies were less concentrated than fuel subsidies; countries subsidizing electricity the most were generally low-income countries (LICs) (examples: Haiti, Nicaragua, and to a lesser extent, Honduras). - Oil-importing countries ranked lower on measures of institutional quality subsidized more than the regional average; those better ranked subsidized the least. - Central American and Caribbean countries subsidized more than the regional average. - Among oil-producing countries, those that ranked better on measures of institutional quality subsidized less. ### How electricity subsidies are manifested and financed - Electricity subsidies appear as: - direct budgetary costs, - losses at electricity companies, - off-budget costs, including arrears. - “Gross” electricity subsidies may be greater than net figures reported, because tariff policies often provide below-cost electricity to poor households or small firms at the expense of large consumers or wealthier households. - Net subsidy only arises when average tariffs are not sufficient to compensate costs. ### Social and industrial policy motives and targeting examples - Subsidies targeted as social or industrial policy can be either net fiscal costs or fiscally neutral depending on cross-subsidization and financing: - Mexico: household and small agricultural tariffs set below-market not fully offset by cross-subsidization; state fills the gap. - Nicaragua: subsidized tariff for low-income consumers (below 150 kWh/month) and pensioners financed through a direct budgetary transfer. - Ecuador and Honduras: social tariffs are net subsidies. - Peru: cross-subsidy scheme (Fondo de Compensacion Social Electrica, FOSE) targets small users (less than 100 kWh/month) and off-grid rural power systems under 20MW; fully financed by a surcharge on large consumers and thus not a net fiscal cost. FOSE aims for social protection and to foster private investment in rural energy. - Colombia: similar targeted scheme with surcharges on the better off, with almost no net cost for the state. - Coverage examples: in Colombia almost 90 percent of households benefit from cross-subsidization, versus 60 percent in Peru. ### Electricity price-setting practices and financing (selected country snapshots) - Argentina: Ad hoc formula; government transfers to generators (on-budget, 2% of GDP in recent years); rationing and underinvestment. - Belize: Formula-based annual tariffs with a surcharge/rebate; 2012 rebate led to large losses absorbed by a stabilization account; no subsidies on budget. - Dominican Republic: Ad hoc monthly tariff-setting subject to political involvement; targeted subsidies in the budget, off-budget financing via Petrocaribe, and arrears to generators. - El Salvador: Ad hoc; headline tariffs would achieve cost recovery but up to 80% of households eligible for subsidized prices; subsidies absorbed by state-owned hydro generator included in the non-financial public sector budget. - Haiti: Ad hoc prices unchanged since 2008; low billing/collection, theft, technical and non-technical losses near 70%; on- and off-budget transfers and arrears to generators. - Honduras, Nicaragua, Suriname: ad hoc tariff-setting with large losses absorbed by state utilities; financing via on- and off-budget transfers, Petrocaribe, and arrears. - Brazil, Colombia, Peru: market/formula-based regimes with mechanisms to contain costs or cross-subsidize; varying small budget transfers or self-financing solidarity funds. ### Cushioning price shocks versus entrenchment - Electricity subsidies are often used temporarily to cushion tariff increases after shocks (exchange rate devaluations, bad weather, world energy price increases). - Example: Brazil’s government bore part of the cost of substituting thermal for hydroelectricity after below-average rainfall since 2013. - When shocks are persistent or when there is no expectation of reversal, temporary subsidies can become entrenched (example: some Argentine cities still lag generation costs more than a decade after the 2002 devaluation). ### Performance-related losses as drivers of subsidies - Subsidies sometimes arise because governments cannot raise tariffs sufficiently to cover losses caused by network inefficiency, low billing and collection rates, or theft. - Key empirical associations: - Countries with higher distribution losses (inefficient networks or theft) subsidize more; losses are largest in countries ranking lower on institutional quality. - Electricity losses were highest in LICs, partly due to very large theft rates in Haiti and to a lower extent in Nicaragua; some middle-income countries (e.g., Dominican Republic) also show high losses. - Higher generation costs are associated with larger electricity subsidies; high generation costs make per-unit subsidization more expensive and make cost-recovery tariffs socially/politically harder to set. - Several Central American and Caribbean countries (Belize, Guyana, Haiti, Nicaragua) had both relatively higher generation costs and higher levels of subsidization. - Electricity generation costs and subsidies were lower than regional average in oil exporters. ### Policy challenges for LAC arising from energy subsidies — fiscal costs - Energy subsidies pose aggregate-level challenges (fiscal and external stability, fiscal transparency, competitiveness) and microeconomic impacts for firms and households. - Fiscal impacts — deficit and debt: - For oil-producer countries that ranked lower on measures of institutional quality, the size of energy subsidies during 2011–13 exceeded overall fiscal deficits. - Subsidies contributed to fiscal deficits in LICs and in other groupings; for oil importers and Central America/Caribbean the size of subsidies was lower than fiscal deficits and represented a lower share of deficits than the LAC average. - Fuel subsidies contributed more to overall fiscal deficits in oil-producer countries that ranked lower on measures of institutional quality. Electricity subsidies contributed more to deficits in LICs, Central America and the Caribbean, and oil importers. - Some countries combined weaker-than-average fiscal positions with larger-than-average energy subsidies (examples: Argentina, Dominican Republic, Grenada, Guyana, Haiti, Venezuela). - Energy subsidies imposed serious fiscal costs even in some countries with stronger fiscal positions than the LAC average (examples: Bolivia, Ecuador, Nicaragua, Trinidad and Tobago). - Fiscal revenue pressure: - Energy subsidies represented about 7 percent of government revenues (on average) for the region. - Energy subsidies were twice as high (relative to fiscal revenues) in oil-producer countries that ranked lower on measures of institutional quality, and over 10 percent in LICs. - Energy subsidies represented about 11 percent of tax revenues (on average) for the region during 2011–13. - They were equivalent to about 32 percent of tax revenues for countries that ranked lower on measures of institutional quality, and just over 15 percent for LICs. - Country-specific shares of tax revenues consumed by subsidies (2011–13): Argentina 14 percent; Bolivia 20 percent; Haiti 23 percent; Ecuador 55 percent; Venezuela 85 percent. ### Fiscal transparency, quasi-fiscal operations, and contingent liabilities - Lack of transparent accounting: - Subsidies not fully recorded in government accounts allocate public resources without full debate on tradeoffs. - Foregone revenue sometimes not disclosed (example: Haiti fuel price freeze in early 2011 reduced excise and customs tax revenues without transparent budget disclosure). - Nicaragua presents social electricity tariffs financed from gross VAT receipts on a net basis in the budget. - Mexico disclosed cost of foregone revenues but did not detail subsidy distribution across population. - Stabilization funds: - Use of stabilization funds (Chile, Colombia, Peru) makes subsidy costs more apparent by tracking reference-price deviations. - Contingent liabilities: - Government commitments to cover utility losses create contingent liabilities often untransparent and poorly understood (example: Honduras guarantees large losses at ENEE; Haiti guarantees payment for electricity purchased but not paid by EDH). - Underfunded utilities create implicit contingent liabilities when government will likely be forced to cover essential public service costs later. - Quasi-fiscal operations and off-budget financing: - Squeezing margins of SOEs or private distributors conceals subsidy costs (e.g., PETROBRAS access to loans at below-market interest rates through BNDES to compensate domestic fuel prices below reference prices). - Petrocaribe operations have raised transparency issues when subsidized financing for energy imports is managed off-budget, including by private entities (examples of off-budget Petrocaribe resource management: Dominica, Grenada, Haiti, Nicaragua). ### Energy value chain, SOEs, and competitiveness - Subsidies financed by squeezing margins of energy SOEs and private firms can impair investment capacity, profitability, and increase indebtedness—raising long-run energy supply costs. - Compensation below opportunity cost: - In oil-producer countries that ranked lower on measures of institutional quality, and in LICs, gasoline and diesel pump prices excluding taxes were below opportunity costs (Figure 8 analysis). - When taxes are a large share of fuel prices paid by consumers, compensation to domestic oil companies can be below opportunity costs even if consumer pump prices reflect international prices. - Firm-level consequences and examples: - Venezuela (PDVSA): long-sustained forgone revenues on domestic operations; Petrocaribe export arrangements added to foregone revenues; PDVSA capital base deteriorated and debt levels increased. - Brazil (PETROBRAS): reported losses especially after the 2008 fuel price shocks as domestic gasoline and diesel prices were set below international levels. - Trinidad and Tobago (PETROTRIN): government arrears related to fuel subsidies peaked at nearly 5 percent of GDP in mid-2013. - Paraguay (PETROPAR): bears cost of blanket diesel subsidies as current prices carry a negative margin. - Bolivia and Ecuador: fuel subsidies financed through both the budget and revenue losses at state oil companies. - Policy actions and nationalizations: - High subsidy levels and distribution-intent have led to nationalization of energy firms in some countries (examples cited: Dominican Republic re-nationalized distribution companies in 2003; Bolivia re-nationalized oil and gas company in 2008; Argentina followed suit in subsequent years). *Italic line: Source: _wp1530 - 2009. Moreover, to the extent that some of the oil price increase is structural, the (selected excerpts).* ### 2012. Although it is difficult to establish a clear link between energy subsidies and ### _wp1530 - 2012. Although it is difficult to establish a clear link between energy subsidies and ### Ownership, SOEs, and sector incentives - Nationalizations and state ownership imply governments ultimately assume the true economic costs of energy supply. - Anecdotal evidence: SOEs are more frequently used to provide subsidies than private sector firms. - Resulting effects: - Reduced sector efficiency and distorted operator incentives. - State willingness to sustain financially unsound utilities for longer periods exacerbates underinvestment and uncertainty. ### Subsidies and the electricity sector value chain - When tariffs do not fully cover costs, distribution companies’ cash flow may be insufficient to pay generation and transmission. - Medium-to-long term consequences: - Weakened incentives to invest. - Dependence on government transfers. - Vicious cycle: poor service → high technical and non-technical losses → higher de facto subsidies. - SOE presence increases likelihood of prolonged financial support by the state and a less competitive, less reliable electricity sector, constraining economic growth and poverty reduction. - Country examples and outcomes: - Argentina: Below-cost electricity tariffs for more than a decade led to underinvestment in distribution in large urban areas, eroded capital of energy companies, and more frequent black-outs at peak demand with negative implications for production and investment incentives. - Honduras: Large losses at the state electricity utility slowed sector investment. - Suriname and the Dominican Republic: Below-cost electricity tariffs resulted in accumulation of arrears to electricity generation companies by state-owned distribution companies. - Nicaragua: Anecdotal evidence suggests a more predictable framework (including for subsidies) increased investment in (cheaper) electricity generation in recent years. - Haiti: A circle of high generation costs, low investment, poor service, and high levels of theft and de facto subsidy. ### Macroeconomic and external vulnerabilities - Energy subsidies cushion pass-through of higher international prices or exchange rate depreciations to domestic prices, mitigating shocks on domestic demand but distorting relative prices and investment decisions. - Long-lived subsidies: - Encourage over-consumption of energy products. - Worsen oil-trade balances when demand is met by imports; can be exacerbated by smuggling. - Regional examples and magnitudes: - Argentina: Energy subsidies as large as the fiscal deficit contributed to shifting the oil trade balance from a surplus in the early 2000s to a deficit in 2011. - Venezuela: Subsidies boosted domestic consumption while production stagnated; surplus in the oil trade balance shrank from about 30 percent of GDP in the mid 2000s to about 20 percent of GDP in 2013. - Oil trade deficits in Antigua and Barbuda, the Dominican Republic, Grenada, Haiti, and Nicaragua form the lion’s share of the current account deficit, in part due to over-consumption supported by energy subsidies. - Smuggling is widespread (fuel into Colombia from Venezuela and Ecuador; into the Dominican Republic from Haiti). - Petrocaribe participation: - Allowed recipient countries to finance external deficits and energy subsidies. - Outcomes vary: provided time for reforms in some cases (Nicaragua); facilitated postponing adjustment in others (Dominican Republic and Haiti), contributing to larger-than-warranted current account deficits and debt accumulation. - A sudden stop of Petrocaribe inflows would be a significant shock for beneficiaries, notably Antigua and Barbuda, Dominica, Dominican Republic, Grenada, Haiti, Jamaica, and Nicaragua. - Countries without international credit access (Haiti, Nicaragua) would need to compress domestic absorption; those with market access (Dominican Republic) could attempt borrowing but likely at less favorable terms. ### Household welfare and distributional effects - Untargeted price subsidies are blanket transfers that alleviate all households’ budgets but disproportionately benefit higher-income households who consume more energy. - Venezuela: The richest 20 percent received six times more fuel subsidies per person than the poorest third. - Bolivia: The poorest 40 percent received about 15 percent of total fuel subsidies. - Haiti: Recent estimates suggest about 90 percent of fuel subsidies accrue to the richest 20 percent of households. - Countervailing effect: Subsidies that smooth price volatility can disproportionately help credit-constrained consumers, who tend to be low-income. - Fiscal trade-offs: - Spending on subsidies reduces public resources available for social spending. - Average LAC country: energy subsidies equal about 45 percent of spending in education and health. - Average LIC country: energy subsidies equal about 80 percent of spending in education and health. - Oil producer countries that ranked lower in institutional quality: energy subsidies equal about 110 percent of spending in education and health (or about 15 percent of total government spending). - Other distributional impacts: - Subsidies favor capital- over labor-intensive investment, benefiting capital owners over labor. - Electricity shortages driven by subsidies disproportionately harm low-income households, who may resort to costly self-provision (batteries, small generators), raising average household electricity costs. ### Environmental and other negative externalities - Consumer prices often do not reflect negative externalities (air pollution, landscape destruction, water contamination, traffic congestion, health problems), leading to overconsumption relative to socially optimal levels. - Socially optimal (Pigouvian) corrective taxes are designed to address these externalities. - IMF (2014a) findings and fiscal implications for LAC: - Fuel product pricing is below optimal levels in most LAC countries. - Shortfalls between actual excise taxes and optimal (Pigouvian) taxes are significant for gasoline in pre-tax subsidizers and for the Dominican Republic, El Salvador, Panama, and to a lesser extent, Mexico. - For diesel, notable shortfalls include Chile, Colombia, and to a lesser extent, Peru and Brazil. - The corrective taxes estimated for gasoline and diesel imply fiscal revenue losses for LAC amounting to about 1 percent of GDP on average for these two products alone. - Environmental co-benefits noted: IEA (2011) estimated that if world fossil fuel subsidies were completely phased out by 2020, CO2 emissions would be cut by about 6 percent. ### How and when to reform subsidy policy — experience and lessons from LAC - 2008 oil shock (WTI reached $138/barrel) highlighted unsustainable subsidy policies and prompted many governments to develop strategies to reduce subsidies and better target support. - Reform challenges: - Near-term adverse economic and social consequences: impacts on competitiveness, growth, employment, and poor households’ energy access. - Electricity subsidy reform is particularly challenging because true costs are less transparent. - Political pressures favor subsidy retention; largest beneficiaries are often well-organized and resist change. - Lack of public information on subsidy size and costs and a history of failed reforms undermine credibility. - Time inconsistency: immediate fiscal/social costs vs. longer-term benefits. - Best-practice approach and pragmatic lessons: - Main goal: reinstate role of market prices so production and consumption reflect opportunity costs and the economy bears energy costs rather than the public finances. - Depoliticize price setting via: - Automatic adjustment mechanisms that pass through international price changes contemporaneously or with smoothing to cushion volatility. - Allow state intervention only under clearly defined circumstances. - Complement reforms with SOE management reform, gradual dismantling of subsidies, well-targeted mitigating measures for the vulnerable, and a communication strategy. - Examples and specific instrument lessons: - Automatic mechanisms and smoothing: - Colombia: automatic pricing mechanism and example of a smoothing rule (fuel price adjusted to a moving 60-day average, with limits). - Peru: state intervention allowed only under clearly defined circumstances. - Haiti: failure to implement existing automatic pricing mechanisms led to large subsidies. - Fuel price stabilization funds: - Colombia’s FEPC: intended to smooth price changes and phase out subsidies; initial funding US$170 million. - The fund ran out of resources in 2010 because continuous price rises and smoothing resulted in continuous subsidies and limited replenishment; discretionary price freezes (2009–10) exacerbated deficits. - Late 2011: introduced domestic price tied to a moving 60-day average of the export parity price and a 3 percent per month limit on price changes. - 2013: introduced a fixed fuel excise tax to replace a variable tax; government retained discretion on diesel prices and briefly froze prices in 2013, with the fund continuing to run deficits. - Lessons: stabilization funds can help rationalize pricing but cannot compensate for pricing formulas that fail to achieve timely savings or for political pressures that prolong subsidies. - Phasing out variable excises: - Mexico: IEPS variable excises offset differences between international prices and the Mexican pricing formula, producing negative excises (net subsidies) that peaked in 2008 at about 1.8 percent of GDP and remained large in 2009 when fuel prices were frozen. - 2010: adjusted formula to increase retail prices by about 1 percent a month to phase out subsidies. - 2014: imposed a carbon tax on fossil fuels and changed the formula so prices reflect inflation, placing Mexico on track to eliminate subsidies by 2015. - Caveat: if oil prices rise faster than inflation, the formula would not prevent subsidy reappearance. - Overall reform principles: - Depoliticize price setting through transparent, automatic mechanisms or well-defined intervention rules. - Use smoothing cautiously to buffer volatility but avoid permanent subsidies. - Pair price reform with targeted compensation for the most vulnerable and reforms to SOE management. - Communication and credible institutions are critical to sustain reforms. *Source: _wp1530 - 2012. Although it is difficult to establish a clear link between energy subsidies and (PDF chapter/section).* ### 2. Reforms need to take into consideration the socio-political context ### 2. Reforms need to take into consideration the socio-political context ### Mitigating measures should be implemented together with reforms - Assessing the social impact of proposed policy changes (including analysis of household expenditure data) is essential prior to reform. - Even if higher-income groups frequently bear the largest absolute burden of subsidy removal, removal can be regressive if low-income groups bear a larger burden relative to their share of total income. - Possible mitigating measures: - Conditional cash transfers. - When capacity is limited, alternative or interim measures while building capacity: subsidized school meals, subsidized public transportation, subsidized water, or electricity consumption below a specific threshold. - Subsidized electricity lifeline tariffs for small consumers (examples cited: Belize, Bolivia, Costa Rica, Ecuador, Guatemala, Mexico, Nicaragua, Panama, Paraguay, and Peru). - Credibly reallocating some budgetary savings to public investments (education, health, infrastructure) or tax reform could be more efficient. - Medium-term strategy: search, finance, and provide affordable alternative energy sources; price increases can be larger for products consumed by high-income groups. - Trade-off governing the size of mitigating measures: fiscal savings, administrative capacity, and the need to achieve public support for the reform. ### Examples: efforts to shift from blanket to targeted subsidies - El Salvador: - Until April 2011: fixed price of LPG at subsidized rates; subsidy large — only 35–40 percent of recovery prices were charged. - Since 2011: subsidy given directly to consumers (via electricity bill for small consumers or a special card for businesses and households with no electricity). - ECLAC reports LPG consumption fell by 15.4 percent in 2011–13. - In 2013–14, subsidy tightened by requiring advance registration and a special permit at time of sale. - LPG subsidies still accounted for about 0.6 percent of GDP in 2013. - Dominican Republic (2005–08): - Progressive elimination of subsidies on gasoline, diesel and LPG. - Part of savings used to target subsidies as cash transfers to poor households (covering the difference between market price and below-market price for targeted consumption) via a solidarity bank credit card. - Electricity-sector examples: - Ecuador raised most tariffs but left the “dignity tariff” for users consuming less than 100 kWh/month unchanged. - El Salvador: most consumers charged cost-recovery tariffs; targeted groups access a preferential tariff financed via fiscal transfer. - Nicaragua: blanket subsidies varied with energy prices via two tariff schedules (“notional” and “effective”); focused subsidies maintained for users consuming less than 150 kWh/month and for pensioners. - Administrative capacity and modern tools: - Existing social protection schemes provide a starting point for moving toward cost-recovery while protecting the most vulnerable. - Cross-subsidies can help achieve distributional goals while containing costs, despite inefficiency/transparency drawbacks. - Computerization and inclusive banking have improved mechanisms to channel subsidies to targeted groups, reducing administrative complexity concerns. - Capacity constraints remain important, especially in low-income countries. ### Subsidy reforms tend to be more successful when gradual - Phasing and sequencing: - Gradual approaches give households and enterprises time to adjust and help fiscal authorities build credibility. - Gradualism smoothes price effects and provides time to implement social safety nets. - Inappropriate sequencing across products can distort consumption patterns and encourage cross-border smuggling. - Timing trade-off: - Longer phase-down reduces social resistance but lowers short-term fiscal impact and increases vulnerability to fuel price shocks. - Chile, Colombia, and Peru used fuel stabilization funds to progressively reduce fuel subsidies. - Example — diversifying to cheaper energy sources (Nicaragua): - Progress in diversifying electricity matrix into renewable sources (wind, geothermal, hydro, biomass). - Petrocaribe resources partly used to continue financing energy subsidies, giving time to implement reforms. - High non-technical losses remain a source of de facto subsidies. - Electricity subsidies reduced from 3 percent of GDP in 2011 to just over 1 percent of GDP in 2013. - Example — Haiti: - Electricity tariffs unchanged since 2008 while production/distribution costs are high and technical/commercial losses were 67 percent in 2013. - Subsidies significant (around 3 percent of GDP in 2013, in excess of 20 percent of tax revenue), largely financed with Petrocaribe resources. - Subsidies pose concerns for fiscal and debt sustainability; reform attempts failed due to entrenched interests and lack of comprehensive strategy. - External financing or favorable macroeconomic conditions (economic expansion, low international prices) can provide a buffer to implement gradual reforms; failure to use these opportunities may entrench subsidies. ### Changes should be properly communicated - A communication strategy is essential to build support and should complement policy implementation. - Consultation with stakeholders and interest groups to develop strategies addressing their concerns has proven successful. - Example — Ecuador: - Authorities highlighted the need for change since 2013, emphasized that the largest benefits of blanket subsidies accrue to richer households, and are implementing mitigating measures. ### When to rationalize subsidies? — strategic timing, phasing, sequencing - General guidance: - Begin reform before subsidies become entrenched; populations accustomed to subsidies generate political pressure to reverse reforms. - Prefer timing after elections when governments may have greater mandate for reform, and avoid coinciding with other socially sensitive reforms. - Reforms should occur: 1. Prior to subsidies becoming a de facto entitlement. - The longer subsidies exist, the more they are perceived as entitlements, strengthening resistance to change. - Bolivia’s 2010 failure and violence after Venezuela’s 1989 reforms are cited as consequences of entrenched subsidy expectations. 2. Before subsidy levels threaten fiscal sustainability. - Allows gradual reduction with better chances of success; targeted phase-out preferable if subsidies are large and persistent. - Excessive delay may force abrupt, drastic changes with higher political/social costs. - Example — Haiti: - Stopped an automatic fuel pricing mechanism; fuel prices fixed in nominal local-currency terms from early 2011 until late 2014. - Authorities lowered customs and excise taxes, implying annual foregone revenue of almost 2 percent of GDP in 2013 (15 percent of total government revenue). - Domestic pump prices fell below international prices in 2014; Treasury accumulated arrears to oil distribution companies. - Government raised prices in late 2014 and used part of proceeds to finance poverty reduction programs, but subsidies had become entrenched. - Recommendation: maintain pricing mechanisms where possible because they constrain subsidy growth; amending a mechanism is less costly than reintroducing it once abandoned. 3. Considering the business cycle and taking advantage of decreases in international oil prices, while focusing on the medium-term. - Ideal to rationalize subsidies during economic expansion; reducing subsidies during a recession can worsen downturns. - Downturns in international oil prices present opportunities to reduce subsidies and converge to automatic price adjustment mechanisms. - Example — Argentina: - Energy subsidies grew over the last decade amid high export prices and increased aggregate consumption. - Worsening terms of trade and decelerating activity increased fiscal imbalances and prompted attempts to reduce subsidies. - Reductions during below-trend growth risk reinforcing the downturn. - Recommendation: dismantle blanket subsidies before fiscal constraints dominate. 4. Ahead of subsidies affecting the efficiency of the energy sector. - Prolonged large subsidies distort energy sector efficiency (including SOEs), leading to constrained supply and overconsumption. - Electricity-sector vicious cycle: non-payment and underinvestment (examples: Honduras, Haiti). - Strengthening SOE governance and fiscal positions helps improve efficiency and reduces misuse of SOEs to generate subsidies. - Example — Dominican Republic: - Electricity sector reform faces challenges; distribution companies re-nationalized in 2003. - Tariffs set below actual production and distribution costs to avoid riots, despite high fossil-fuel content, sizeable electricity theft (despite a 2007 law), and technical losses. - Subsidies to electricity sector estimated at about 2 percent of GDP in 2011–13. - Public distribution companies accumulated arrears to generation companies. - Recommendation: improve efficiency, strengthen regulatory frameworks and enforcement, and reduce generation costs to lower subsidy burdens and build social support for reform. *Source: _wp1530 - 2. Reforms need to take into consideration the socio-political context* ### ANNEX II: DATA SOURCES ### ANNEX II: DATA SOURCES ### Fuel — primary data and gap-fillers - Primary source: survey with the authorities covering gasoline, diesel, kerosene, LPG and any other relevant petroleum products or natural gas; survey requested retail prices, CIF price for importers, domestic transport and distribution costs, margin, and consumption volumes. For fuel exporters, international price and freight and insurance costs were asked in addition. - In some instances, the IEA database “Fossil-fuel consumption subsidy rates as a proportion of the full cost of supply” was used. - Data sources used to fill gaps: - Retail prices – World Development Indicators by World Bank, UN Economic Commission for Latin America and the Caribbean (ECLAC), and estimates based on data from state oil companies. - Reference prices and consumption volume – UN Comtrade database. Import volume was used as a proxy for the volume of consumption when national data is not available. ### Electricity — primary data and gap-fillers - Primary source: survey with the authorities requesting information on electricity production, technical and non-technical losses, cost of generation and distribution, collection rate and electricity price. - Data sources used to fill gaps: - Electricity prices: - (1) Latin American Energy Organization (OLADE), UN ECLAC, Inter-American Development Bank (IDB), and electricity company reports. - (2) Caribbean Electric Utility Services Corporation (CARILEC): http://www.carilec.com/ - Electricity production: - (1) UN ECLAC, World Development Indicators, and statistics from electricity regulators and companies. - (2) National Renewable Energy Laboratory (NREL), Energy Policy and Sector Analysis in the Caribbean, 2010–11 - Technical and non-technical losses – UN ECLAC, World Development Indicators, and statistics from electricity regulators and companies. - Cost of generation and distribution – UN ECLAC and statistics from electricity regulators and companies. - Collection rate – Statistics from national electricity companies. - Modes of Generation, background information on regulatory bodies – Renewable Energy and Energy Efficiency Partnership Database (www.reegle.info) ### Selected country-level findings and indicators (from annex text) - Antigua and Barbuda: - Net energy importer with no fossil resources. - Spends just over 12 percent of GDP on energy, or about 27 percent of imports of goods (on average) in 2004–13. - Since 2006, about 20 percent of the country’s oil demand has been met under the Petrocaribe arrangement; the country’s financing from Venezuela amounts to 1.6 percent of GDP per year. - The price of LPG or cooking gas continues to be directly subsidized by government. - Forgone taxes reduced from about 0.7 percent of GDP in 2008 to 0.4 percent of GDP at end-2013 (benchmarking described in footnote). - Implicit electricity subsidies were around 0.8 percent of GDP in 2011-13. - Argentina: - Significant producer of oil and natural gas, but a small net importer. - Export taxes used to manage domestic gasoline prices; minimum export tax was reduced from 45 to about 14 percent in 2013; updated again in 2014 to decrease rates in case oil price falls below US$80/barrel. - Electricity tariffs were frozen (in peso terms) in 2002; residential tariffs in Greater Buenos Aires were kept frozen until 2008. - Electricity subsidies amounted to almost 2 percent of GDP in recent years. - Transport subsidies represented about 1 percent of GDP in 2013. - Other subsidies (including for water consumption) were about 0.5 percent of GDP in 2013. - Bahamas: - Energy importer; oil-related imports comprising about 23 percent of total imports in (2013). - The Bahamas signed the first PetroCaribe agreement in 2005 but is not a signatory to the 2010 final agreement. - Implied fuel subsidies (price-gap approach) have remained around 0.4 percent of GDP in 2011–13. - National electricity utility Bahamas Electricity Company (BEC): total capacity of 438 MW (80 percent of electricity); BEC supplies 93,000 customers on all major islands except Grand Bahamas, where the Grand Bahamas Power Company supplies about 18,000 customers (20 percent of electricity production). - A post-tax subsidy related to preferential customs and stamp duty treatment for fuel imports by BEC is not included in the estimates due to lack of basis to fully estimate the size of such waivers/concessions. *Source: ANNEX II: DATA SOURCES (extracted from the supplied content).* ### 0.5 percent of GDP in 2011–13, which are partially financed by fiscal transfers to partially ### _wp1530 - 0.5 percent of GDP in 2011–13, which are partially financed by fiscal transfers to partially ### Barbados — Fuel and gas price policy and subsidies - Barbados is a net energy importer; imports of oil-related products were around 20 percent its import bill during 2009–13. - Locally-produced crude oil by the Barbados National Oil Company (BNOC) is shipped to Trinidad and Tobago for refining. - The Ministry of Finance, Economic Affairs and Energy defines broader strategies for natural resources, public utilities, the National Petroleum Corporation and the BNOC, and monitors and regulates energy supply, including advising on petroleum product prices and issuing licenses and leases for exploration and production. - Regulation of fuel and gas services and pricing involves some ad-hoc adjustment in consumption taxes to help smooth high retail prices. - Government and intermediaries have agreed that fuel prices are automatically set in relation to international prices. - Retail prices consist of the cost of imported fuel plus consumption, plus marginal profit of key intermediaries. - The price-gap approach indicates almost no pre-tax subsidy but implied forgone taxes (post-tax subsidies) are estimated at 0.6 percent of GDP in the last three years (2011–13). - Footnote: To the best of our knowledge, this pricing setting mechanism has been in place since the establishment of the Fair Trading Commission (FTC) in 2001. ### Barbados — Electricity tariff policy and subsidies - More than 95 percent of the country’s electricity produced is generated from fossil fuels. - Barbados Light & Power (BL&P) is the sole provider of electricity (generation, transmission, and distribution), which is 80 percent owned by the Canadian company Emera. - The Fair Trading Commission serves as regulator, including setting maximum rates, establishing principles for arriving at the rates to be charged, carrying out periodic reviews of the rates and principles for setting rates and standards of service. These involve ad-hoc tax adjustment to avoid high end-consumer prices. - Electricity subsidies estimated using the price-gap approach average 1.2 percent of GDP in 2011–13. - Energy distribution losses averaged 6 percent in 2011–13. - The authorities plan to split the BEC into two new entities (one in charge of electricity transmission and distribution and the other in charge of electricity generation) to lower electricity costs and improve the efficiency of the electricity companies. - The authorities introduced tax incentives for renewable energy (some are zero VAT on renewable energy and income tax holiday of 10 years for developers, etc.). - Footnote: This figure includes direct budgetary transfers to BLP through transfers under a subsidy program scheme (Fuel Clause Adjustment, FCA) which amounted about 0.9 percent of GDP in 2013. ### Belize — Fuel and gas price policy and subsidies - Belize is a net importer of fuel; domestic oil production has declined considerably. - Three private companies supply oil-related products to the domestic market. - The Ministry of Finance regulates retail pump prices, which include relatively high taxes. - To limit the impact of higher international prices on domestic prices, the authorities reduced import duties on fuel products in 2013, although forgone revenue was offset by an increase in the VAT. - All major load centers are connected to the country’s national electricity system, which is also interconnected to the Mexican electricity grid since 1998. ### Belize — Electricity tariff policy and subsidies - The Public Utilities Commission (PUC) regulates the electricity sector. - Belize Electricity Limited (BEL), a state-owned enterprise (the government took over 70 percent of BEL in June 2011), is the primary generator, transmitter, and distributor of electricity. - Several small independent generators exist; 43 percent of electricity consumed in 2012 was imported from Mexico’s Comisión Federal de Electricidad. - About 70 percent of electricity production is from hydropower and renewable sources. - Belize Cogeneration Energy Limited (Belcogen) contributed about 9 percent of total electricity supply in 2012 using bagasse. - Technical and non-technical losses are relatively low and the effective collection rate is high (around 12 and 90 percent in 2012, respectively). - The electricity tariff is set by the PUC and includes: - a fixed component (to cover overhead expenses and a reasonable rate of return); - a variable component (to reflect the electricity costs); - a deferred cost of power recovery or rebate to consumers related to the tariff stabilization program. - There are subsidized tariffs applied to consumers of less than 125 kWh per month. - Tariffs are adjusted annually, with a full review of tariff components every four years. - BEL created the “Cost of Power Rate Stabilization Account” (CPRSA) to stabilize tariffs. Between 2008 and 2011 there was a significant buildup in the CPRSA as actual generation costs were lower than projected. - Electricity tariffs were reduced in 2012 to rebate consumers for overcharge, but generation costs then increased above PUC’s regulated cost of power, resulting in losses for BEL of about BZ$16 million (0.5 percent of GDP). - PUC later compensated for this loss through increased tariffs during the first half of 2013. - Energy subsidies are not present in the government budget. ### Bolivia — Fuel and gas price policy and subsidies - Bolivia imports some petroleum products (mainly diesel) and exports natural gas to Brazil and Argentina. - Retail fuel prices in Bolivia are administered by Agencia Nacional de Hidrocarburos (ANH), covering gasoline, diesel, kerosene, LPG, jet fuel and fuel oil. - Prices have been kept unchanged since 2000; subsidies recorded in the budget rose to 3 percent of GDP in 2013 from just above 1 percent in 2006. - The cost of fuel subsidies estimated by staff reaches around 4 percent of GDP, suggesting some cost may be implicitly borne by the national oil company Yacimientos Petroliferos Fiscales Bolivianos (YPFB). - The authorities attempted to remove fuel subsidies in December 2010, but the policy was withdrawn after widespread protests. - The price of natural gas for domestic consumption is kept lower than export prices, resulting in estimated subsidies of about 3.5 percent of GDP in 2012. - The authorities have completed a plant to separate LPG from natural gas and are constructing another plant to help the country become self-sufficient in LPG; this may reduce fiscal cost of energy subsidies but may lead to larger implicit subsidies if domestic prices are kept below opportunity cost. ### Bolivia — Electricity tariff policy and subsidies - Two systems of electricity generation and distribution exist: - the national network (Sistema Interconectado Nacional, SIN) consisting of 12 generators and seven distributors, both private and public; - regional operators (Sistemas Aislados, SA). - The sector is regulated by the Autoridad de Fiscalización y Control Social de Electricidad (AE). - Lower tariffs are applied to low-income households consuming up to 70 kWh/month (tarifa dignidad); the cost is borne by generators and distributors and is relatively small (equivalent to less than 0.1 percent of GDP in 2012). - While no subsidies are reported in the budget, the price of natural gas for electricity generation is set below export prices, implying that part of the fuel subsidies benefits electricity users by lowering electricity generation cost. - Natural gas-fired electricity generation accounts for about 60 percent of total capacity; hydroelectricity accounts for about 40 percent of supply. ### Brazil — Fuel and gas price policy and subsidies - Brazil remains a net fuel importer despite increased domestic exploration and production. - Oil output has leveled off since 2010 (at just above 2 million barrels/day). - PETROBRAS is the dominant participant in Brazil's oil sector; the government provided it a monopoly until 1997. - Biofuels account for around 15 percent of demand in the transport sector; flex-fuel technologies account for around 90 percent of new passenger vehicle sales. - The Ministerio de Minas e Energía (MME) and the Secretary of Energy (Secretaria de Energía, SEN) formulate national energy policies; Agência Nacional do Petróleo (ANP) regulates the oil sector. - The government subsidizes fuel consumption through PETROBRAS and adjusts a tax (or subsidy) on gasoline and diesel to stabilize retail prices. - Domestic prices for gasoline and diesel remain lower than export prices, resulting in estimated subsidies of around 1 percent of GDP in recent years. - Fuel excises were reduced to zero in mid-2012; this is a temporary measure without a specified end-date. - The government indirectly subsidizes PETROBRAS through BNDES lending at below market rates; costs of these subsidies are difficult to estimate and are likely reflected in the budget below the line. - The authorities plan to introduce a new pricing mechanism, but it is unclear whether this will close the gap with international prices. ### Brazil — Electricity tariff policy and subsidies - Hydroelectricity accounts for around 80 percent of domestic electricity generation (and 70 percent of capacity). - Energy policy has aimed to increase alternative sources: wind power, biomass, small hydropower systems. - Continued expansion of hydropower is constrained by remoteness and environmental sensitivity, although 20 gW of hydropower capacity is under construction in the Amazon region. - The National Electric Energy Agency (ANEEL) regulates prices and electricity generation; long-term prices are set through contract auctions. - ELECTROBRAS is the dominant generator with a 40 percent share; the government owns almost the entire electricity transmission network. - According to IEA (2013), by 2012 the average price paid by industrial and residential clients reached US$178/mWh and US$237/MWh, respectively. - Concerns about higher prices led the government to reduce some taxes and renew large power generation concessions in exchange for reduced power costs; expected lower tariffs for industrial clients of up to 28 percent in 2013. - Direct subsidies take mostly the form of transfers to the public hydroelectric facility Itaipu, part of ELECTROBRAS, which operates at a loss. - The cost of this subsidy in 2013 was reflected in the budget as the Conta de Desenvolvimento Energético (CDE) and as revenue receivables from Itaipu, totaling about 0.2 percent of GDP. - As of early January 2015, the CDE had a negative balance of about U.S. $2 billion (0.1 percent of GDP) related to 2014 spending but for which transfers to the energy sector were delayed until 2015. ### Chile — Fuel and gas price policy and subsidies - Chile is a net importer of fuel and natural gas. - The National Petroleum Company (ENAP) has a monopoly over the production of refined products, while the private sector freely imports refined fuel products and gas; distribution in the domestic market is liberalized. - Chile had fuel price stabilization mechanisms since 1991: the Fondo de Estabilización de los Precios del Petróleo (FEPP). - FEPP was complemented by Fondo de Estabilización de Precio de Combustibles (FEPCO) in 2005, under which domestic fuel prices fluctuated within a 5 percent band (versus 12.5 percent under the FEPP) around a reference price determined by weekly import parity prices established by the Ministry of Mines and the National Energy Commission (CNE). - Under FEPCO: - when import parity price exceeded the upper limit of the band, there was a tax credit to fuel distribution companies and a subsidy to the consumer; - when import parity price was lower than the lower limit, the consumer paid an implicit tax. - The stabilization fund generated significant fiscal costs at times, especially in 2008 and 2010-2011. - In 2011 FEPCO was replaced with SIPCO, which relied on adjustments in fuel excise taxes to cushion prices, resulting in forgone revenue. - SIPCO was replaced by the Mecanismo Estabilización del Precio Combustibles (MEPCO) in July. *Source: IMF staff compilation from the pdf content.* ### 2014. Under the MEPCO, there are two bands: a 5 percent band around the reference price, ### _wp1530 - 2014. Under the MEPCO, there are two bands: a 5 percent band around the reference price, ### Chile — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Fuel and gas subsidies (including foregone revenue) were relatively low; in 2008 they reached 0.8 percent of GDP (OECD, 2013). - Electricity: - CNE (Ministry of Mines) sets policy; Superintendencia de Electricidad y Combustibles (SEC) regulates. - Electricity production/distribution by private firms; hydroelectricity is the main generation source. - Central interconnected grid provides electric power to 93 percent of customers. - Electricity subsidy established in 2005 for poor families when electricity tariffs increase 5percent during a six-month period (temporary discount on energy bill). - Monthly tariffs published by CNE with cross subsidies favoring users consuming up to 500kwh. - Subsidies used to private distributors to promote rural electrification (Vagliasindi, 2013). ### Colombia — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Colombia is a net energy exporter; ECOPETROL state-controlled but significant private participation. - Retail fuel prices set by Ministry of Mines and Energy; historically subsidized. - After 2008 market shock generating subsidies of about 1 percent of GDP, government created FEPC (Fondo de Estabilización de Precios de los Combustibles) at end-2008 with initial transfer of US$170 million to phase out subsidies. - FEPC smooths price changes by financing (or saving) the difference between export parity price and moving average price of previous 60 days. - FEPC reached a deficit of about US$1.2 billion by end-2011 (0.4 percent of GDP), requiring a Treasury loan. - Considering the FEPC deficit as measure of fuel subsidies: subsidies declined from 0.4 percent of GDP in 2011 to 0.1 percent of GDP in 2013 (Government of Colombia, 2014). - Electricity: - Hydropower 64 percent and thermal (mostly gas) 31 percent of capacity (Government of Colombia, 2013). - 48 producers; capacity concentrated at six large firms, three state-owned accounting for over half of total capacity; potential sale of Isagen under consideration. - 11 transmission firms; state-owned ISA controls most national network. - Wholesale market open to registered power companies and large consumers (above 0.55 MWh/month or peak use over 100 KW) and a regulated market supervised by CREG. - Tariffs set to achieve global cost recovery; cross-subsidization by socioeconomic strata via FSSRI: - Lowest three strata pay discounted prices; top two strata and commercial users pay a 20 percent surcharge. - FSSRI runs a small deficit financed by state budget; budgetary costs of electricity sector 0.1–0.2 percent of GDP in recent years. ### Costa Rica — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; RECOPE (state-owned) imports mainly from the U.S. - Domestic fuel prices regulated and set regularly by ARESEP; automatic price mechanism exists but discretionary in implementation. - Price formula includes distribution margin and a single tax (Impuesto único ó conglobado) from merger of excise tax and VAT (law 8114 of 2001). - Fuel taxes amounted to 1.6 percent of GDP in 2012. No subsidies recorded in government accounts. - Electricity: - Regulated by ARESEP; public sector controls all distribution and transmission and most generation. - Renewable sources: hydroelectricity >70 percent and geothermal 13 percent of total supply in 2012. - Distribution/transmission by state-owned ICE. - Technical and non-technical losses: 6.8 percent in 2000 and 10.8 percent in 2011. - Prices set quarterly by ARESEP; ARESEP estimates electricity price changes reflect: cost of fuel 49 percent, electricity company 27 percent, demand 12 percent, climatic conditions 11 percent. - Electricity tariffs among lowest in Central America: US$255/MWh in 2013. - No electricity subsidies reported in budget documents. - Residential VAT/GST reduced rate 5 percent; monthly residential consumption ≤250 kWh is tax exempt. - Tariff cross-subsidies favor consumers up to 200 kWh. ### Dominica — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; over 30 percent of diesel and petroleum derivatives in 2013 accessed under Petrocaribe. - Ministry of Housing, Lands, Telecommunications, Energy and Ports formulates energy policy. - Prices set on a market basis; no smoothing rules imposed. - Electricity: - Energy Unit sets policy and coordinates Renewable Energy Program. - Single private company DOMLEC handles generation and distribution. - Generation mix about two-thirds fossil fuels, one-third hydropower; geothermal exploration ongoing; first geothermal plant expected 2015/16. - Technical and non-technical losses low at 8 percent in 2012; billing efficiency 99 percent. - No subsidies; tariffs more than compensate operational, distribution, and generation costs. ### Dominican Republic — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Ministry of Energy and Mining and National Energy Commission responsible for energy policies. - Government plays important role in supply, including imports; MIC regulates sector and sets fuel prices weekly. - Government holds 51% of REFIDOMSA, supplying ~25% of domestic fuel market. - Subsidies progressively eliminated during 2005–08; mitigating cash transfers to poor households and public transport drivers via Bonogas cards. - Subsidies cover difference between market price and below-market price for consumption below MIC threshold. - Fuel subsidies modest at 0.1 percent of GDP in 2013. - Fuel taxes amounted to 2 percent of GDP in 2012. - Reform incomplete until automatic pricing ensures pass-through without foregone revenue; VAT reductions used to smooth prices have negatively affected budgetary revenue. - Electricity: - Regulator SIE sets monthly tariffs. Public sector controls all distribution and transmission; CDEEE includes transmission company ETED, three distribution companies (re-nationalized in 2003), and hydropower monopoly EGEHID. - Generation by private and mixed companies via long-term contracts. - Generation costs high: oil-derivatives 40 percent, natural gas 30 percent, coal 15 percent, hydroelectricity 15 percent. - 2009 reform targeted subsidies to poor households (replacing regional basis). - Sector politicized; blackouts despite large generation capacity. - Financial difficulties due to: - Technical and non-technical losses 33 percent in 2013. - High generation and distribution costs. - Capping of tariffs at levels that do not reflect actual costs. - Distribution companies accumulated arrears to generators, creating contingent liabilities. - Total electricity subsidies estimated ~2 percent of GDP in 2013. ### Ecuador — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - OPEC member and oil exporter; gasoline, diesel, and LPG prices fixed by ARCH. - Fuel prices unchanged since 2002 and at very low levels, generating large subsidies. - Smuggling to Peru and Colombia is a problem (Interpol, 2014). - Authorities considering fuel debit card quota system; ARCH developing a database as of mid-2014 to enable a quota system sometime in 2015. - Considering phasing out propane stoves in favor of electric stoves; stoves cost US$ 300–400 with special financing by government by late-2014. - Total fuel subsidies (government cash subsidy and indirect subsidies via state-owned fuel companies) ~7 percent of GDP in 2011-2013. - Electricity: - Production split between hydropower and oil-fired thermal plants. - CELEC (state-owned, created 2010) accounts for most production and national transmission. - CNEL and regional affiliates are large distributors. - Tariffs set by CONELEC; include subsidized “dignity tariff” of 4 cents per kWh for users consuming less than about 100 kilowatts per month (exact cut-off varies). - Heavier users (especially >500 kilowatts per month) face significantly higher tariffs. - In 2014 CONELEC raised tariffs by 1 to 2 cents/kWh on heavier residential and commercial users while preserving the dignity tariff. - System-wide losses generated a subsidy of about 0.4 percent of GDP in 2011-2013. ### El Salvador — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Fuel importer; Ministry of Economy (DRHM) responsible for regulation but does not regulate fuel prices which are market-set. - Authorities have suspended excise taxes to cushion volatility; six-month suspension in 2011 cost about 0.2 percent of 2011 GDP. - LPG subsidized via fixed monthly transfers to small consumers; until April 2011 price of LPG tank was fixed with government subsidizing difference. - Since 2011 subsidy targeted to consumers with monthly electricity consumption below 200 kWh via tarjeta solidaria after registration at CENADE. - Cost of LPG subsidy in 2013: US$ 134 million (0.6 percent of GDP). - Electricity: - Generation: thermal 40 percent, hydroelectric 32 percent, geothermal 24 percent (largest share in region) (ECLAC, 2012). - Hydroelectric production owned by state firm CEL; other generation mostly private. - Unregulated contractual market for larger consumers and regulated retail market. - Transmission by state company Etesal; distribution privately-owned. - Retail prices regulated by SIGET; retail market prices set according to costs and vary by provider. - FINET (created 1998) sets electricity subsidies: households <100 kWh/month (~60 percent of households) subsidized ~89.5 percent of difference between market price and FINET reference price. - New subsidy mid-2012 for households consuming 100–200 kWh/month (~20 percent of households); intended temporary but continued. - Government also subsidizes electricity to ANDA and other rural water pumping systems. - Electricity subsidies reported in budget ~0.8 percent of GDP in recent years; IEA finds somewhat higher level. - Subsidies delivered through preferential prices charged by state-owned CEL included in nonfinancial public sector budget. ### Grenada — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; oil imports about 25 percent of total exports in 2004–13, or 6.4 percent of GDP. - Purchases 30-40 percent of fuel from Venezuela via Petrocaribe. - Ministry of Finance, Planning, Economy, Energy & Cooperatives sets domestic fuel prices with monthly adjustments and benchmark rules. - Calculated level of subsidization about 0.4 percent of GDP compared with 1.2 percent of GDP during 2008 shock. - Note: forgone tax defined via gap between new monthly consumption tax set and benchmark consumption tax (previous three months average). - Electricity: - Mostly diesel-based; market dominated by GRENLEC (public-private company, private majority). - Reform target: raise renewable energy to 20 percent share by 2020. - Nearly complete electrification. - Electricity Supply Act provides for monthly tariff adjustments based on average fuel price during previous three months. - Tariff components: fuel charge, non-fuel charge, VAT, and environmental levy (residential). - Price-gap approach estimated subsidies ~2.3 percent of GDP in 2013 from 1.2 percent in 2011. - Distribution losses ~8 percent average for 2011–13. ### Guatemala — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer and small oil producer; no domestic refining capacity. - Retail fuel prices reflect import prices; Ministry of Energy and Mines monitors prices. - Staff calculations based on retail prices suggest no pre-tax subsidies. - Electricity: - Generation by public and private firms; three private distributors. - About 60 percent capacity thermal, but majority of generation renewable (hydro, biomass, geothermal). - Part of regional MER; net exporter of electricity. - Tariffs administered and published by CNEE. - Social tariff for households with monthly consumption <300Kwh. - Electricity subsidies in budget ~0.3 percent of GDP in 2013. - Anecdotal evidence of large electricity theft suggests implicit subsidies under price-gap ~0.5 percent of GDP. ### Guyana — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Fuel importer; some oil reserves in Takutu Basin but no commercial production. - Office of the Prime Minister and Guyana Energy Agency implement regulatory framework. - Authorities cushion fuel price impacts by allowing excise tax to vary and adjusting pump price with a lag. - Electricity: - State-owned GPL dominates transmission/distribution monopoly and 55 percent generation share. - Generation entirely fossil-fuel based (heavy fuel oil or diesel). - Planned 165 mW Amaila Falls hydropower plant; completion depends on private investment interest. - Government direct subsidies to support company operations: - 2014 budget envisaged US$18 million for transfers to GPL (0.6 percent of GDP). - US$15.5 million for electricity subsidy of other suppliers in Linden and Kwakwani (0.5 percent of GDP). - ~US$1.5 million (0.1 percent of GDP) to assist old age pensioners with electricity bills. - Total budgetary cost ~1.2 percent of GDP. - Technical losses ~14 percent and non-technical losses ~20 percent in 2011. - Tariffs determined by formula in GPL’s licensing agreement reviewed by the Public Utilities Commission; full formula-derived price not charged in recent years. - Implicit electricity subsidies estimated ~1.3 percent of GDP. ### Haiti — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Fuel importer; petroleum products mainly purchased from Venezuela under Petrocaribe. - Private companies distribute oil products. - Automatic price adjustment mechanism ceased late 2010; prices frozen in nominal local currency until end-2014. - Forgone fiscal revenues rose from 0.2 percent of GDP in 2010 to 1.6 percent of GDP in 2013. - Government collected 0.3 percent of GDP in fuel taxes in 2013. - Diesel and kerosene pump prices lower than import prices at estimated cost of 0.2 percent of GDP in 2013. - Government embarked on fuel subsidy reform to eliminate forgone revenue, implement targeted mitigation, and restore automatic price adjustment mechanism. - Electricity: - Generation by IPPs and state-owned Electricité d’Haïti (EDH); production about 85 percent oil-derivatives in 2013. - EDH owns only hydropower plant undergoing rehabilitation; EDH monopoly over transmission and distribution. - No independent regulator; supervised by Ministry of Public Works, Transport and Communication, Ministry of Finance, and Prime Minister’s office via Minister-delegate for energy security. - Tariff adjustments proposed by EDH and approved by council of ministers; no tariff adjustment since 2008. - Electricity subsidies ~3 percent of GDP in 2013 (large part financed by Petrocaribe), driven by: - High share of fossil-based generation, - High technical and commercial losses 67 percent in 2013, - Low recovery rate 30 percent, - High distribution costs. - Electricity price among highest in LAC despite large subsidies. ### Honduras — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Imports all fossil fuels; no domestic refining capacity. - Fuel prices regulated by CAP; uniform prices in two largest cities with weekly updates from CIF prices, taxes, and margins. - Fuel prices relatively high; price-gap suggests no subsidization. - Electricity: - Two-thirds generated from fossil fuels (mostly heavy fuel oil) and one-third hydropower. - State-owned ENEE responsible for transmission, distribution, and large share of production (including all hydropower). - Private investment limited to thermal production under PPAs with ENEE. - Tariffs set by Comisión Nacional de Energía; tariff schedule unchanged since 2009. - Very low prices assigned to residential users; much higher prices to commercial/industrial users. - High production costs and large non-technical losses have caused large losses for ENEE. - Overall subsidy ~1 percent of GDP in 2013. - Parliament approved breakup of ENEE to separate generation, transmission, and distribution and open to private investment expected in 2015. ### Jamaica — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; high petroleum consumption due to bauxite/alumina, power generation, transportation. - Ministry of Science, Technology, Energy and Mining formulates policy; Energy Division and PCJ implement/monitor. - Policies focus on diversification and renewable energies. - No implicit or explicit fuel subsidies detected; prices set by market. - Electricity: - Generation 88 percent fossil fuels, 12 percent renewables (hydro, wind) (IADB, 2012). - JPSC sole distributor, majority privately-owned with 19 percent government participation; also engages in generation and transmission. - Purchases from five IPPs amounting to a bit less of 40 percent of total electricity consumed in 2012. - Technical and non-technical losses ~24 percent; tariffs appear to cover costs; price-gap approach finds no pre-tax subsidy. ### Mexico — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net exporter of petroleum; oil production down by a quarter over past 10 years; about one-third of refined products imported. - PEMEX had monopoly on production, refining, distribution; constitutional amendment December 2013 allows private firms to produce oil. - Fuel prices (gasoline and diesel) determined monthly by SHCP with committee including SE, SENER, and CRE advisory. - Pricing formula exists but government can set prices ad hoc, resulting in tax or subsidy impacts. - Fuel subsidies peaked in 2008 at about 1.8 percent of GDP and remained large in 2009; declined thereafter but fuel subsidies in 2013 still ~0.7 percent of GDP. - In 2014 domestic gasoline price high enough to result in fiscal revenues while diesel continued to require budgetary subsidy. - Electricity: - Most generation thermal (natural gas, oil, coal); small shares hydro, nuclear, other renewables. - Most generation and all transmission/distribution controlled by state-owned CFE. - Tariffs proposed by CFE and approved by SHCP, SENER, SE, and CRE; 43 different electricity tariffs. - Commercial and industrial tariffs higher than marginal costs and track production costs and inflation; small agriculture and regular domestic consumers pay lower tariffs indexed only to inflation expectations. - Cross-subsidization exists; government and CFE cover part of the cost gap. - SENER and CFE calculate subsidies by comparing weighted-average tariff vs CFE costs (pesos/kWh). - More than 80 percent of electricity subsidies as of 2013 received by domestic consumers. - Electricity subsidies in budget averaged about 0.7 percent of GDP in 2011–13 (may be underestimated due to exclusions). ### Nicaragua — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Oil importer largely from Venezuela under Petrocaribe; private refinery but most refined products imported. - INE regulates energy market; prices of gasoline, diesel, kerosene freely set by private distributors and monitored weekly by INE. - INE sets official LPG prices; no outright subsidization per price-gap approach but compressed commercialization margins and some VAT exonerations for LPG distributors. - Government does not provide blanket fuel subsidies but subsidizes fuel purchases for public transportation financed off-budget through Petrocaribe. - Electricity: - Matrix mainly fossil fuels with diversification into wind, geothermal, hydro, biomass. - Producers include IPPs, state-owned ENEL, and ALBANISA (majority-owned by Venezuela). - Transmission by ENATREL (state); distribution privately-owned. - INE sets tariffs as weighted average across consumption blocks with ex post compensation if client composition differs. - In 2008–10 tariffs broadly matched costs; in 2011–13 INE established two schedules: “notional” (forecast) and “effective” (applied), difference financed with Petrocaribe resources, peaking at about 1.5 percent of GDP in 2011 then falling to about 1 percent and further in 2013. - Additional targeted subsidies for households <150 kWh/month and pensioners. - High non-technical losses and payment arrears in public sector institutions have caused distribution company arrears to generators. - Total price-gap estimated subsidies >1 percent of GDP in 2013, down from 3 percent of GDP in 2011. ### Panama — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; Secretary of Energy establishes maximum prices for oil products using formula based on U.S. prices, transport costs, and domestic value-added. - Maximum prices are above cost; no pre-tax blanket fuel subsidies. - Government subsidizes cooking gas and public transportation (preferential diesel prices via coupons). - Total cost of fuel subsidies averaged about 0.3 percent of GDP in 2011–13. - Electricity: - Capacity about evenly split hydropower and thermal depending on rainfall. - Most generation and distribution privatized; ETESA retains state monopoly on transmission. - Tariffs regulated by ASEP; government can set tariffs ad hoc (e.g., 2014 tariff freeze). - Tariff stabilization fund (FET, since 2004) smooths increases but imposes fiscal costs. - Compensation fund (FCE) created in 2011 to transfer forgone revenues to distributors when tariffs not adjusted with generation costs. - Two types of electricity subsidies: universal (bulk) and targeted to users below threshold. - Targeted subsidies benefited households with consumption ≤500 kWh/month until 2013; government reduced subsidies starting with 400–500 kWh in 2013. - Budgetary subsidies reduced from ~0.8 percent of GDP in 2011 to 0.3 percent of GDP in 2013. - Government plans further targeting to households with consumption <300 kWh/month by 2016. - Pensioners receive 25 percent bill subsidy regardless of income. ### Paraguay — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; Ministry of Industry and Commerce regulates fuel prices. - Price controls on gasoline eliminated early 2000s; slight diesel subsidy remains benefiting agriculture. - PETROPAR supplies diesel to distributors at negative margin; estimated annual cost ~0.1 percent of GDP (based on 2013 consumption and December 2013 price structure). - Budget does not report fuel subsidies separately; staff retail price calculations do not suggest pre-tax subsidies for other products. - Electricity: - Generation almost fully hydropower by two binational public companies (Yacyreta with Argentina; Itaipu with Brazil). - Surplus electricity exported to Argentina and Brazil. - No electricity regulator; ANDE administers sector. - Low generation costs; price-gap approach does not indicate subsidization despite high losses and low collection. - Authorities considering raising tariffs (fixed for over 10 years) to allow investment. - ANDE maintains social tariffs expanded in 2011 that subsidize up to 75 percent of consumption. - Fiscal cost of electricity subsidies reported in budget <0.1 percent of GDP. ### Peru — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; OSINERGMIN is national fuel regulator. - State oil company PETROPERU involved in refining and distribution; production by private sector. - Peru does not directly set fuel prices but has adjusted excise taxes to smooth prices and maintains FEPC stabilization fund to prevent full pass-through. - FEPC provides transfers to refineries when reference prices exceed price bands; FEPC fiscal costs peaked in 2008 at over 1.4 percent of GDP (including direct costs and lost revenue). - Authorities narrowed range of products subject to bands and since 2012 maintained bands only on diesel and LPG. - From August 2013 through June 2014 weighted-average reference price for diesel never exceeded price band in effect. - Electricity: - Capacity about evenly divided between hydropower and thermal sources; hydropower accounts for most generation. - 18 producers; ~70 percent of production private-owned; Electroperu state-owned with ~25 percent market share. - Transmission divided between nine private producers; ~70 percent distribution private. - Tariffs set by OSINERGMIN annually after public consultation, auctions and bidding designed to achieve global cost recovery. - Social tariffs through FOSE for users below 100 kWh/month financed by surcharge on larger users and not generating fiscal cost. ### St. Kitts and Nevis — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; petroleum products for public use under PetroCaribe at market prices. - Private sector consumers served by private importers at market prices. - Ministry of Public Works, Housing, Energy and Utilities and Ministry of Finance responsible for policy. - LPG price regulated; other fuel prices not regulated. - Total fuel subsidies in budget low; authorities reported subsidies 0.2 percent of GDP in 2012. - Electricity: - Mostly diesel generation; small wind farm (2.2MW) on Nevis since 2011. - Nevis pursuing geothermal power plant options. - Two state enterprises: SKELEC (St. Kitts) and NEVLEC (Nevis). - Technical and non-technical losses ~17 percent (among highest in Caribbean). - Despite 80 percent tariff hike in 2011, SKELEC and NEVLEC operate with subsidized tariffs not fully covering costs. - Subsidies extended off-budget by Sugar Industry Diversification Foundation (SIDF). - Authorities intend to create National Energy Commission as independent regulator. ### St. Lucia — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; refined products imported mainly from a single company. - Ministries responsible for policy: Physical Development, Environment and Housing; Public Service, Sustainable Development, Energy, Science and Technology. - 2000s mechanisms to smooth LPG and kerosene prices via negative excise taxes at pump; gasoline adjusted more frequently. - Impact on budget ~0.3 percent of GDP (average) for 2011–13. - Kerosene subsidies repealed beginning of 2013; LPG subsidy still in place. - Authorities considering shift to targeted subsidy regime and energy diversification toward renewables. - Electricity: - Generated exclusively from imported fossil fuel at high costs. - Sole electricity producer/transmitter/distributor LUCELEC partly government-controlled (15 percent). - LUCELEC enjoys monopoly rents with government guaranteeing consistent profit; tariffs cover fairly low technical and non-technical losses. - Billing efficiency very high. - Independent Regulatory Commission issues licenses, sets tariffs and approves investments, but LUCELEC largely self-regulating. - Electricity sector subsidies estimated zero. ### St. Vincent and the Grenadines — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net energy importer; Ministry of Finance regulates fuel prices. - Domestic fuel prices adjusted on three-month rolling average pricing rule enabling automatic pass-through with smoothing. - Staff calculations based on retail prices suggest no pre-tax subsidies. - Electricity: - VINLEC (fully state-owned) conducts generation and distribution. - Generation primarily diesel; ~20 percent hydroelectric. - Ministry of Energy regulates sector. - Electricity prices regulated with fixed rate determined by Cabinet and variable surcharge adjusted automatically by law. - Staff calculations indicate no electricity subsidies consistent with surcharges passing through input fuel price changes. ### Suriname — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Produces and exports crude oil but is a net importer with limited refining capacity. - Staatsolie state-owned oil company expanding refinery capacity planned to be completed by end-2014. - Ministry of Natural Resources regulates fuel and electricity production; Ministry of Trade and Industry regulates retail fuel prices and imports. - Retail fuel prices liberalized in 2005 and vary with international prices. - Fuel tax raised ~70 percent in January 2011 and 20 percent devaluation led to pump price increase ~40 percent. - Electricity: - Generation mainly hydropower. - SURALCO owns ~half of generation capacity and sells excess to EBS through the government. - EBS has not reimbursed government for electricity purchases resulting in arrears equivalent to 1 percent of GDP in 2011. - Cross subsidies and transfers among Staatsolie, EBS and government for thermal generation: EBS purchases oil from Staatsolie covered by netting with Staatsolie’s dividend payments to government; Staatsolie sells excess electricity to EBS for which EBS did not pay. - Below-cost electricity tariffs causing EBS loss-making and payment arrears. - Cross subsidies estimated at 1.5–2 percent of GDP on average in 2011–13. ### Trinidad and Tobago — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Exporter of crude, refined petroleum, natural gas, and petrochemical products. - Retail prices set by Ministry of Finance at subsidized levels for gasoline, diesel, kerosene, and LPG. - Special levy on large crude oil producers equivalent to 4 percent of value of crude produced covers <20 percent of total fuel subsidy costs. - Budget allocation for fuel subsidies ~2.7 percent of GDP in FY2012/13. - Payment arrears from fuel subsidies to PETROTRIN ~2.9 percent of GDP in FY2011/12. - Subsidy on premium gasoline lowered October 2012 but limited fiscal saving due to substitution to super gasoline more heavily subsidized. - Authorities intend national strategy to encourage conversion to CNG; CNG is subsidized. - Electricity: - Generation primarily based on natural gas. Two major generators: POWERGEN and Trinity Power. - T&TEC state-owned majority shareholder of POWERGEN and manages transmission/distribution. - RIC regulates the sector approving tariff rates. - Residential tariffs three-tiered with higher prices for monthly usages exceeding 400kwh and 1000kwh. - Utilities Assistance Program (UAP) introduced 2010 provides subsidies to low-income pensioners, disabled and households for consumption below 500kwh up to $870 per year. ### Uruguay — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Net fuel importer; MIEM is policy/regulatory authority. - ANCAP (state-owned) predominates in sector with monopoly in refining and wholesale marketing. - Wholesale fuel prices set by government on proposals by ANCAP; price adjustments frequent aligning with international trends. - ANCAP running losses covered by budget ~0.1 percent of GDP in 2013. - Government subsidizes diesel for public buses ~0.2 percent of GDP in 2014 (LaRed21, 2014). - Electricity: - UTE (state-owned utility) controls ~60 percent of generation capacity; remaining includes Salto Grande hydro (joint with Argentina) and small private companies. - Transmission and distribution fully under UTE by law. - Hydropower main source; shortfalls covered by imports or thermal generation, costly during droughts. - UTE finances itself through user tariffs set by MIEM designed to achieve cost recovery. - Between 2000 and 2011, 96 percent of UTE revenue from sales; government transfers marginal and halted in 2006. - Tariffs expected to cover operating costs, depreciation, and ensure reasonable profit; lags in adjustments create temporary inter-temporal subsidies impacting UTE surplus or deficit during droughts. ### Venezuela — Fuel and gas; Electricity tariff policy and subsidies - Fuel and gas: - Major exporter, OPEC member with very large oil and gas reserves; some recent problems at PDVSA led to imports of refined products. - Ministry of the Popular Power for Energy and Petroleum and Ministry of the Popular Power for the Environment regulate domestic fuel prices. - Consumption of oil-related products steeply subsidized; gasoline pump prices lowest in the world and unchanged since 1997. - Fuel subsidies ~7 percent of GDP in recent years, causing overconsumption, inefficiency, and smuggling. - Electricity: - More than 70 percent of electricity generation uses hydroelectricity. - CORPOELEC state-owned dominates sector controlling major companies including EDELCA supply ~three-quarters of total electricity. - Ministry for the Power of the People for the Electric Energy (created 2009) formulates and follows up energy policies; FUNDELEC became regulatory body in 2007. - Electricity tariffs adjusted ad hoc (latest referenced August 1th, 2014). - Electricity subsidized mostly through subsidized lower cost of fuel-based generation inputs. - Electricity subsidies appear to have increased to about 2 percent of GDP in recent years. - Cross-subsidies among statutory bodies: CORPOELEC purchases diesel and fuel from PDVSA at subsidized price to produce electricity. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1530.pdf* ### Box 1. Measuring Fuel Subsidies by the Price-Gap Approach ### Box 1. Measuring Fuel Subsidies by the Price-Gap Approach ### Price-gap approach: definition and variants - The price-gap approach measures fuel subsidies (per unit of consumption) as the difference between the (average) price of fuel paid by end or intermediate goods consumers, and a benchmark price. - Two variants: - Pre-tax subsidies (S_PRE): defined as the difference between the benchmark price (BP_t) and the end-user paid price (P_t) times total consumption (UC_t): S_PRE(t) = (BP_t - P_t) · UC_t. Pre-tax subsidies are positive when the price paid by consumers is below production and distribution costs. - Post-tax subsidies (S_POST): defined relative to a reference price that includes optimal taxes (T*_t). Post-tax subsidies reflect forgone revenue at the prevailing tax plus a correction for negative (fuel) consumption externalities (Pigou tax). Post-tax subsidies will be larger than pre-tax subsidies by an amount equivalent to the optimal tax per unit of consumption times total consumption: S_POST(t) = (BP_t - P_t)·UC_t ≡ S_PRE(t) + T*_t · UC_t, where BP_t = BP*_t + T_t*, and T*_t includes prevailing tax (τ_t) and Pigou corrective tax (Pigou). ### Calculating pre-tax subsidies: practical guidance - For net fuel importers: - Reference prices set at import prices (adjusted for quality if necessary) plus freight and insurance, and internal distribution and marketing costs. - For net fuel exporters: - Reference prices set at export prices (adjusted for quality if necessary) plus internal distribution and marketing costs. - The implicit subsidy can be captured as the opportunity cost of domestic consumption at domestic prices instead of exporting at international market levels. - Local prices are converted to U.S. dollars at market exchange rates. - Examples of energy exporters in the region mentioned: Bolivia (natural gas), Ecuador (crude oil), Trinidad and Tobago (crude and refined oil, natural gas), and Venezuela (crude oil). ### Calculating post-tax subsidies: challenges and proxies - Requires assessing optimal taxes, including non-distortionary taxes and Pigou corrective taxes for environmental damages; information often unavailable. - IMF (2013a) estimation approach (illustrative proxy): - Consider VAT as the prevailing tax for all countries. - Apply the same cost for damages from global warming: $25 per ton of CO2 emissions as a rough measure for Pigou taxes. - Alternative practical measure: - Calculate foregone revenues vis-à-vis a given reference tax rate (useful when governments decrease taxes on oil-related products to stabilize market value after a price shock). - Foregone tax revenues can also be calculated using tax rates (or excises) generally included in other products but not applied to oil-related products. ### Limitations of the price-gap approach - Better than government budget data for subsidy estimates because subsidies may be channeled off-budget (quasi-fiscal operations). - Does not capture subsidies on goods and services beyond those on which the government intervenes (e.g., research and development, subsidies on fuel production). - When τ is not directly estimated, T (the reference tax used) is used as a proxy for T* (generally an underestimation). ### Electricity subsidies: measurement complexities (Box 2 summary) - Electricity-sector subsidies (S_E) arise when tariffs do not fully cover costs and when they do not fully compensate for non-technical losses (including electricity theft). - Formal expression (symbols preserved from source): - E_t S = [P_AV_t + D_t + O F_t - P_U_t · λ_t] · E_t UC_t (expression structure preserved; variables defined below) - Variable definitions as given: - P_AV_t: average electricity price charged to electricity consumers (e.g., US$/MWh). - λ_t: loss factor denoting technical and non-technical losses of distribution (λ_t < 1 implies volume paid by consumers is a fraction λ_t of electricity purchased from generators). - P_E_t: average electricity price charged by generators; P_E_t depends on the electricity matrix M_t (the more dependent generation is on fossil fuels, the more vulnerable to oil price shocks). - D_t: electricity distribution costs (US$/MWh). - OF_t: other factors determined by the regulator (US$/MWh). - E_t UC_t: electricity produced (MWh). - Implication: subsidies are positive when tariffs do not fully reflect technical and non-technical losses, transmission and generation costs, or distribution costs. ### Empirical relationships: energy subsidies and country characteristics (Box 3 summary) - Institutional quality: - LAC countries ranked lower in measures of institutional quality generally provide larger energy subsidies (2011–13 average). - The positive coefficient remains statistically significant when considering fuel or electricity subsidies separately and after including control variables. - Energy richness: - Fuel subsidies are generally higher in LAC countries that are energy rich (proxied by oil trade balance); the coefficient of net exports of oil and derivatives (as percent of GDP) is positive and statistically significant after controlling for institutional quality. - Electricity subsidies: - Size related to efficiency and cost: larger electricity losses (technical and non-technical) and higher generation costs are associated with larger electricity subsidies, after controlling for institutional quality and the level of electricity tariffs. - Coefficient on electricity tariffs is negative: given losses and costs, countries with larger tariffs provided lower electricity subsidies. - Country groupings used in analysis: - Countries are grouped by energy richness (oil producers vs. importers) and institutional quality (higher vs. lower ranked), with additional focus on low income countries, Caribbean, and Central America. - Caution: - Significant intra-group variation may persist (e.g., Mexico and Brazil are oil producers and ranked relatively higher in institutional quality but may show different subsidy magnitudes across groupings). - Appendix I describes the country groupings used. ### Petrocaribe arrangement (Box 4 summary) - Petrocaribe: multilateral agreement providing concessional financing when member countries purchase oil from Venezuela. - Membership (in addition to Venezuela): Antigua and Barbuda, Bahamas, Belize, Cuba, Dominica, Dominican Republic, El Salvador, Grenada, Guyana, Haiti, Honduras, Jamaica, Nicaragua, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Suriname. (Guatemala left in late 2013.) - Financing terms (bilateral between Venezuela and member countries): - Long repayment periods: 17 – 25 years. - Low interest rates: 1 – 2 percent. - Financed portion varies with oil market prices: 50 – 60 percent of the oil bill at current prices; remaining portion paid in cash on commercial conditions. - Agreement does not require members to sell fuel domestically below market prices; financing depends on domestic prices reflecting import prices. - Uses of Petrocaribe financing: - Social purposes clause exists but not tied to specific projects; members have used flows for current and capital spending (sometimes off-budget), building financial buffers, and providing fuel and electricity subsidies (examples include Dominican Republic, Haiti, Nicaragua). - Transparency and fiscal impact: - Petrocaribe financing has sometimes funded off-budget spending, raising transparency concerns. - Petrocaribe-linked external debt increased in particular: - Nicaragua: 21 percent of GDP at end-2013. - Haiti: 17 percent of GDP. - Jamaica: 17 percent of GDP. - Guyana: 7 percent of GDP. - Dominican Republic: 5 percent of GDP. - Vulnerability to discontinuation: - Most affected countries are those with no alternative financing and limited progress in reducing structural vulnerabilities in the energy sector (example: Haiti). - Countries with alternative financing or improved electricity sectors (e.g., Dominican Republic, Nicaragua) would be affected but less so. *Source: Box 1 (and related Boxes 2–4) from the provided IMF content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1530.pdf_