Kyrgyzstan’s energy sector: Poverty and social impact assessment

Rafkat HasanovKemal Izmailov

Almaty, 13 April 2011

Two winters of electricity rationing, years of rapid growth in household energy costs, and growing concerns about corruption and mismanagement in the energy sector, were key drivers of tensions in Kyrgyzstan.

Recent GDP growth trends

• Unstable GDP growth• Impact of internal, external shocks (economic and political)• Reliance on foreign trade, remittances • Difficulties in the business and investment climate, market distortions

2008: Food price inflation: 33% 2009: Slowdown of GDP growth: 2.9 % Remittances drop 15% Final consumption declined by 15% 2010: Political events of March-April,

ethnic conflict in June led to negative GDP growth (-1.4%)

Impact of the global financial crisis

Poverty trends in Kyrgyzstan (2000-2009)

Energy inflation rates: well above consumer price inflation . . .

Household energy prices Consumer prices

30%

25%

22%

7%

14%

8%

2008 2009 2010

Source: State Statistical Committee

. . . As electricity, gas consumption drop

2007 = 100

Energy sector: Key characteristics

All sectors (except coal) dominated by state-owned monopolies

Negative profitability, high technical and commercial losses

High or growing depreciation rates (except gas) Tariffs below cost recovery levels—despite

significant increases in recent years Household energy consumption subsidized by:

State, municipal budgets Cross-subsidies from exports, industrial users Future generations

Recent reform efforts: Some successes

Collection rates in electricity sector have improved The quasi-fiscal deficit has dropped Basic legal framework for decentralized renewable

energy technologies has been introduced Fuel and Energy Sector Transparency Initiative:

Focuses on: Better sectoral governance, regulation Increased civic engagement

Does not focus on: marketizing state-owned monopolies Attracting FDI, technology transfer, modernization

Modest step forward?

Survey data do not always correspond to production and sales data provided by energy companies

Survey data on household expenditures do not always agree with national income accounting data on consumption expenditure

Survey data not always internally consistent

Poverty and household access to energy: Data issues

Household energy expenditure trends (2006-2009)

• Household expenditures in general, and on energy in particular, increased in real terms.

• Energy consumption growth particularly rapid in:• poor and extremely poor households• households in urban areas• households headed by a single parent

• The share of household expenditures devoted to energy:• increased during 2006-2009, but • are not particularly large (5.5-6.5 percent)

• Energy expenditures absorb a larger share of household budgets in poor families than in high-income families.

Share of energy expenditures in total household expenditures

Shares of household energy expenditures devoted to various energy sources (by

household decile, 2009)

Low-income households, and households in rural and mountainous areas, have very limited access to: Gas Central heating Hot water

They tend to rely almost exclusively on coal and electricity for heating, as well as illumination.

This is particularly the case for first decile households Spending on electricity absorbs about half of energy

expenditures

Shares of household energy expenditures devoted to various energy sources (by household decile, 2009)

Shortages have broken the link between connection to the grid and access to reliable electricity supplies.

Shares of households reporting interruptions in electricity service

Low-income households, and households in rural and mountainous areas, are most likely to experience interruptions

Shares of households experiencing weekly (at least) interruptions in electricity service

Electricity: Bills versus payments (monthly per capita expenses, in som)

Actual payment Billed amount

0

10

20

30

40

50

60

70

80

90

100

I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q

2006 2007 2008 2009 2010

Bills versus payments

Households apparently pay more for electricity and gas than billing information suggests

Corruptive collusion among households and bill collectors may be responsible for this discrepancy

If so, this “corruption tax” seems to be a particularly heavy burden on low-income households

Ratio of monthly pension, social assistance benefits to the national monthly

subsistence minimum

Effectiveness of social protection

Categorical benefits PFMB

* The simplification and monetization of categorical benefits introduced in 2010 seems to have had a regressive character. * Social protection system has become less able to direct benefits to the most needy households. * Can social assistance protect vulnerable households from possible future increases in energy prices?

Social protection and the energy sector: Recommendations

More closely link: PFMB to the guaranteed minimum income; and Guaranteed minimum income to the minimum

subsistence level Means-test the MSB and categorical benefits, to

reduce their regressive character Reintroduce lifeline electricity tariffs?

Reductions in tariffs for small volumes of household electricity consumption could be offset by higher tariffs for consumption above this level, thereby leaving average tariff levels unchanged

Improvements in household survey and production/sales data regarding energy, to remove inconsistencies within and between these data sets

Energy sector: possible future scenarios Improving energy sector corporate governance Energy saving technologies, and policies and

programmes to accelerate their introduction Using affordability analyses in the energy sector Small hydro: prospects and obstacles Analysis of the costs of power production Fuel and Energy Sector Transparency Initiative

Important future research topics

Thank you for your attention!