POLITICAL ECONOMY OF ENERGY SUBSIDY REFORM

SIMON COMMANDER ALTURA PARTNERS & IE BUSINESS SCHOOL

September  9,  2014  

MENA  Knowledge  Sharing  and  How-­‐To  in  Subsidy  Reform:  Regional  Workshop  

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Why is it so difficult to reform energy subsidies?

•  Generally accepted that subsidies are undesirable Ø Fiscally costly, often unsustainable & growth impeding Ø Distort the structure of the economy Ø Create large negative external effects Ø Regressive – mostly appropriated by non-poor Ø Inefficient as instruments of social policy & protection

•  Elements of best practice in reform well understood •  So why are energy subsidies so difficult to reform? •  Answer lies normally not just with technical or

institutional limitations but political factors

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Reasons for a status quo bias

Ø Governments often lack credibility when promising improvements contingent on reform Ø Unable to address the problem of uncertainty

Ø Inability to identify accurately winners & losers, vested interest & other interested parties

Ø Lack of consultation-based reform strategies that reflect citizens’ preferences Ø è inability to convince of merits of reform

Ø Inability to propose better systems of social assistance Ø Absence of alternative delivery mechanisms & weak

institutional capacity affecting scope & integrity

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Why citizens & interest groups often favour retention

Ø Self interest – they benefit directly from subsidies Ø Main barrier to reform mostly non-poor

Ø Reform options often perceived as creating only losers – other than government

Ø Perceptions of inequity – benefits of growth seen as accruing to only a minority of citizens - subsidies as offset

Ø Sense of entitlement + longevity of subsidy regime Ø Insufficient attention paid to designing transitional

compensation to non-poor groups Ø Inability to see how alternative systems of social

protection may work Ø Changes to subsidy regimes seen as driven by outsiders Ø Lack of legitimacy/trust between governments & citizens

Strategic  consideraIons  

Ø  IdenIfy  main  policy  objecIves  including  energy,  socio-­‐economic  &  climate  change  objecIves    

Ø  IdenIfy  principal  instruments  including;  Ø Price  adjustments;  fuel  switching;  technology  soluIons;  differenIated  tariffs;  compensaIon  mechanisms  &  incidence;  funding  for  renewables;  insItuIonal  channels    

Ø Timing  of  implementaIon  -­‐  ex  ante/ex  post  Ø  IdenIfy  main  constraints;  

Ø PoliIcal/civic/other  opposiIon  Ø Shocks  to  compeIIveness  (sectoral  dimensions)  Ø Macroeconomic,  including  impact  on  prices  &  earnings  Ø  Impact  on  poverty  

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Strategic  consideraIons  

Ø  IdenIfy  changes  to  market  structure,  ownership,  compeIIon  &  regulatory  agencies  Ø  ParIcularly  relevant  to  power  sector  including  extent  of  

integraIon  &/or  unbundling  Ø  Note:  such  changes  may  improve  performance  but  

operators  can  sIll  face  constraints  on  pricing  Ø  IdenIfy  which  stakeholders  to  consult    

Ø  but  vested  interests  can  oVen  block  Ø  IdenIfy  transparent  longer  term  price  seWng  

mechanisms/rules    

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Key steps in effective policy design

1.  Policy scenarios - fiscal & financial parameters, timing/phasing & institutional capacity

2.  Consultation with citizens, key constituencies & interested parties/stakeholders to answer: Ø What trade-offs are different interests prepared to make

in reforming existing subsidy regimes? Ø What complementary policies are required to bolster

acceptance of reform (e.g., energy saving technology)? Ø Are changes required to market structure & ownership? Ø Are changes required to existing system of social

protection on a transitional or permanent basis?

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Key steps in effective policy design

3.  Scenario testing with focus groups & other

sampled individuals, firms & other bodies 4.  Adaptation of policy scenarios consistent with

consultation-based feasibility analysis 5.  Implementation & communications strategy

Ø  Elements of a professional communications strategy include: Ø  Elaboration of series of messages tailored for

specific outlets & audiences Ø  Use of multiple channels – Broadcast/ TV/Radio/

Digital Communications/ Print….