Kyrgyzstan’s energy sector: Poverty and social impact assessment

1. Kyrgyzstan’s energy sector: Poverty and social impact assessment Rafkat HasanovKemal Izmailov Almaty, 13 April 2011

2. 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.

3. 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

4. Impact of the global financial crisis • 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%)

5. Poverty trends in Kyrgyzstan (2000-2009)

6. Energy inflation rates: well above consumer price inflation . . . Source: State Statistical Committee

7. . . . As electricity, gas consumption drop 2007 = 100

8. 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

9. 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?

10. Poverty and household access to energy: Data issues • 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

11. 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.

12. Share of energy expendituresin total household expenditures

13. 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

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

15. Shares of households reporting interruptions in electricity service Shortages have broken the link between connection to the grid and access to reliable electricity supplies.

16. Shares of households experiencing weekly (at least) interruptions in electricity service Low-income households, and households in rural and mountainous areas, are most likely to experience interruptions

17. Actual payment Billed amount Electricity: Bills versus payments (monthly per capita expenses, in som)

18. 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

19. Ratio of monthly pension, social assistance benefits to the national monthly subsistence minimum

20. Effectiveness of social protection

21. 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?

22. 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

23. Important future research topics • 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

24. Thank you for your attention!