Présentation de Paolo Verme, Senior Poverty Specialist, World Bank, à la Conférence Internationale d'Experts sur la mesure et les approches politiques pour améliorer l'équité pour les nouvelles générations dans la région MENA à Rabat, Maroc du 22 au 23 mai 2012.

1. REFORMING SUBSIDIES IN MENA
Paolo Verme
World Bank and Department of Economics, University of Torino
“International Experts Conference on Measurement and Policy
Approaches to Enhance Equity for the New Generations in MENA”
Rabat 22-23 May, 2012

2. SUBSIDIES AS % OF GDP

3. WHAT IS WRONG WITH SUBSIDIES?
 Financially unsustainable
 Inequitable
 Pro-rich
 Distort market functioning
 Constraint supply
 More expensive that social transfers
 Increase fiscal risk for governments
 Encourage black market
=> If subsidies are bad why keeping them?

4. WHO IS INTERESTED IN KEEPING SUBSIDIES?
Government:
 Politically sensitive, Arab spring
 Perceived as a basic right in many countries
 Buy political consensus
Firms:
 Reduce production costs
 Benefit established monopolies/oligopolies
 They can make export-oriented firms more
competitive in the short-term
Households:
 Benefit the poor
 Benefit the middle-class
 Reduce financial risks for households

5. REFORMING SUBSIDIES – 3 PILLARS
Budgetary (Government benefit)
 Fiscal savings
 More investments
 From regressive to progressive expenditure
Economic (Firms’ benefit)
 Price liberalization
 Improved competition
 Incentives to domestic production
Social (Households benefit)
 Increase in social assistance program
 Establishment/improvements in targeting
mechanisms
 Conditional programs

6. THE CASE OF IRAN

7. BACKGROUND
 Extensive subsidy program, between US$90 billion
and US$100 billion per year, 29% of GDP
 Large number of products, from basic foods
(flour, bread, sugar, rice, cooking oil, milk) and
petroleum products to electricity, water, and postal
and transportation services
 70% of subsidies went to the richest 30%.
 Energy intensity 10 times higher than other
countries with a similar population

8. MOTIVATION
 The stated goal of the subsidy reform is to:
 Rejuvenate Iran's economy and bring it out of the slump it has
been in for so long;
 Increase productivity;
 More equitable distribution of income. Reduce the Gini index
from the historical 0.40-0.45 to 0.35;
 Reduce energy intensity in the economy;
 and…. International sanctions and the budget crisis.

9. PREPARATION
 State Owned Firm to manage the reform
 A massive and sophisticated public information program:
“The Petroleum Dividend”, improve energy
efficiency, people manage the dividend,
 Demonstrations strongly “discouraged”
 Little legislative details, government free to adjust
 Cash benefits deposited in banks prior to reform
(80$/person=2 months) with locked bank accounts
 Universal program, voluntary registration
 Stockpiling of essential food items in case of shortages
 Budget savings: 50% to households, 30% to firms, 20%
to the budget.

10. IMPLEMENTATION
 61 million Iranians (out of a total population of 74 million)
registered and the national banks opened 19 million
bank accounts for them to receive their cash transfers.
 Each person is entitled to US$40/month in
compensation for the fuel subsidy removal and
US$4/month for the removal of bread subsidy.
 The payments are made on a bimonthly basis to heads
of households. Originally, up to 6 members of the family
could be claimed
 All subsidies removed at once with a late night
announcement from the President (December 10, 2010)
 Unlock of bank accounts (December 11, 2010)

11. PRICE EFFECTS
 Gasoline from 10 US cents to 60-70 US cents/
liter, close to the world price.
 Gas for home heating and cooking gas usage, 5 folds
increase.
 Water and electricity, 3 folds increase with block tariffs
starting at no or low cost for low consumers.
 Wheat flour 44% increase. Consequently, the price of all
four types of commonly consumed breads is rising.
 CPI inflation rates have accelerated from an average of
10.5 percent in the first 9 months of 2010/11 to 15.8
percent in January 2011, 18 percent in February, and
19.9 percent in March, before slightly declining to 19.7
percent in April 2011.

12. OTHER EFFECTS
 Sharp reduction in energy consumption
 Sharp increase in use of public transport
 Short-term negative effects on production
 Poverty reduction (short-term), from 12% to 2%
at the $2 per day rate (Djavad Salehi-Isfahani)
 Drop in inequality from 0.40 to 0.37 (Djavad
Salehi-Isfahani).
 Development of the banking sector, millions of
new bank accounts
 Normalization of markets

13. CONCLUSIONS
 Motivation
 Budget crisis: Governments reform subsidies
when they have no other choice
 Energy efficiency/productivity/inequality
 Key ingredients:
 Strong public debate and public information
campaign
 Compensations for stakeholders:
Government, firms and households
 Credible and transparent implementation
mechanism
 Moderate legislation

14. THE CASE OF ELECTRICITY IN JORDAN

15. BACKGROUND
 Electricity system relatively new
 Production and distribution publicly managed
until 2005
 Privatization process 2005-2009
 Increase in the number of producers
 Increase in the number of suppliers
 Total cost = total revenues (2007-2010)

16. 2011-2012 BUDGET CRISIS
 Arab spring: disruption of gas supply from Egypt
 Electricity producers shift from gas to oil supply
 3-4 folds increase in the cost of production of
electricity
 Surge in current deficit and cumulated debt of
the public electricity company

17. ELECTRICITY SUBSIDIES CRISIS
Dec.
Jan. Jan. Dec. 2012
2010 2011 2011 (Est.)
Subsidies
(m. JD) 148.7 613.1 1,200 2,200
% govt. exp. 2.6 9.6 17.0 32
% of GDP 0.8 3.1 5.5 10

18. SOME FACTS
 Electricity prices have sharply increased with the
privatization process
 Electricity tariffs in Jordan are comparable to EU
prices
 Six tariffs blocks, but two blocks capture 88% of
consumers
 First block has very low tariffs but all consumers
benefit from these tariffs
 Rich benefit more from subsidies than the poor
 Relative expenditure on subsidized products is
larger for the poor

19. HOUSEHOLD CONSUMPTION OF ELECTRICITY BY
TARIFF BRACKET (KWH)
100
80
Household (%)
60
0-160 161-300 301-500 501-750 751-1000
40
20
0
0 200 400 600 800 1000
kWh

20. SIMULATIONS OF TARIFFS INCREASES
Poverty headcount
increase (%) Revenues Increase
Quintiles +30% tariffs +60% tariffs +30% tariffs +60% tariffs
e=-0.3 1 0.00 0.00 430,838 388,228
2 0.08 0.27 575,581 518,655
3 0.80 2.34 778,808 701,783
4 0.86 2.71 1,025,069 923,689
5 0.00 8.47 1,954,052 1,760,794
Total 0.32 1.45 4,764,348 4,293,149
e=-0.6 1 0.00 0.97 388,228 303,007
2 0.27 2.18 518,655 404,804
3 2.34 5.67 701,783 547,733
4 2.71 8.28 923,689 720,928
5 8.47 12.17 1,760,794 1,374,278
Total 1.45 4.02 4,293,149 3,350,751

21. SIMULATIONS OF TARIFFS RESTRUCTURING
Current
Tariff
kWh kWh Structure Reformed Tariff Structure
Brackets Tot. Elec. Tot. Elec. Tot. Elec. Revenues
Decile (kWh) Thresholds Cons. Exp. Exp. increase
1 200 17,600,000 651,389 580,950 -70,440
2 231 22,500,000 973,487 1,095,897 122,410
3 258 24,800,000 1,151,561 1,591,071 439,510
4 286 29,600,000 1,450,082 2,359,649 909,567
5 312 34,200,000 1,754,373 3,263,522 1,509,149
6 340 36,900,000 1,988,510 4,092,542 2,104,032
7 377 42,600,000 2,418,612 5,392,826 2,974,214
8 426 48,200,000 2,886,144 6,852,862 3,966,718
9 517 57,100,000 3,641,021 9,010,123 5,369,102
10 Max 80,000,000 6,230,652 13,900,000 7,669,348
Total 394,000,000 23,100,000 48,100,000 25,000,000

22. SIMULATION OF TARIFFS RESTRUCTURING
.2
New structure
.15
Current structure
.1
.05
0
0 500 1000 1500
kWh

23. CONSUMER’S SURPLUS AND DEADWEIGHT
LOSS

24. JORDAN FEBRUARY 2012 REFORM
 From 6 to 12 blocks
 Increase in tariffs for high consumers
 Consumers who use 600kWh or less of electricity per
month (89 per cent of households) continued to pay the
same tariffs
 Consumers above 600 kWh pay gradual increases up to
0.548 JD/kWh (>3,000 kWh/month).

25. CONCLUSIONS
 Motivation
 Budget crisis: Governments reform subsidies
when they have no other choice
 Key ingredients:
 Restructuring of tariffs
 Quickly implemented
 Implicit mean price increase
 Increase in tariffs only for top consumers