24 April 2013

Africa: Energy Subsidies in Developing Countries - an Inefficient Policy?

Photo: Ed Mckenna/IPS
(File photo).


UNITED NATIONS, MediaGlobal News — Eliminating energy subsidies in developing countries could increase spending for health and education programs and ease budgetary pressures, a new report from the International Monetary Fund (IMF) concluded.

Released in February, the report found that the current global energy policy is inefficient and inhibits sustainable development, deters private investment, and does not adequately address the energy needs of the poor. The estimated $1.9 trillion that was spent globally on energy resources in 2011 could be better spent on bolstering often-fragmented education and healthcare infrastructures in developing states.

Least Developed Countries (LDCs), in particular, were mentioned as examples of how subsidies can create development-related problems, such as low growth and inequitable resource spending.

However, some experts are questioning the IMF's conclusions that all subsidies should be phased out, citing concerns over rising energy prices for consumers, and a potential reduction in renewable energy investments like solar and wind.

Roger Nord, the IMF's Deputy Director in the Africa Department, explains to MediaGlobal News that a poorly managed subsidy system in sub-Saharan Africa, an area containing the majority of LDCs, has resulted in less access to electricity and higher costs for the poor.

"Subsidies have discouraged investment and maintenance in the energy sector in sub-Saharan Africa, leading to costly and inadequate energy supply from the grid," Nord says. This policy "has adversely affected growth and competitiveness, resulted in very low access for the poor, and required consumers to incur large costs for self-generation alternatives."

Subsidy reforms encourage new investment and improved efficiency of state enterprises, Nord argues. "It offers the prospect of raising electricity supply, increasing access to the poor, and reducing the effective price currently paid by consumers for electricity," Nord says. Since 2005, he explains, Kenya and Uganda have raised energy production by 5 percent and 9 percent, respectively, through the use of such reforms.

Some LDCs are not so fortunate. Further south, the IMF reported that subsidies have contributed to national deficits in Mozambique and Zambia. These countries currently spend more than 4 percent of their GDP on energy subsidies - the highest in sub-Saharan Africa. This type of spending is expected to grow as both economies expand, leading to more debt.

Both Nord and the IMF are quick to recognize that a sudden removal of subsidies can have an adverse effect on the poor in developing countries.

The key is not removal, Nord tells MediaGlobal, but a reform of the energy sector. Any remedies, he says, must be accompanied by strong efforts to reduce costs for consumers. "We emphasize that mitigating measures to protect the poor must be an essential component to any successful energy reform strategy," Nord says. For example, conditional cash transfers targeted at aiding low-income groups in Gabon and Mozambique have been used to much effect.

Studies conducted by the United Nation's International Energy Agency (IEA) back up this claim. The annual World Energy Outlook has found that despite an increase in fossil-fuel subsidies by nearly 30 percent since 2010, these changes have not yet transpired to increased equitable access for the poor in developing economies.

Maria van der Hoeven, the Executive Director of the IEA, tells MediaGlobal News that, for the poor, access is still an issue.

"[Our] analysis in the World Energy Outlook indicates that only 8 percent [of subsidies] reaches the poorest income group," van der Hoeven explains. "A carefully designed social security system that targets the most disadvantaged groups of a population would be more effective in solving energy poverty problems than providing energy at subsidized prices from which the entire population can benefit."

A notable absence in the IMF's report is any discussion on how funds obtained through subsidy reform can be equitably distributed into a social welfare system. In several LDCs, where health and education policies are usually non-existent - and often administered inefficiently - it is unclear if subsidy reform will necessarily lead to improvements in living standards.

According to a World Bank report, while LDC energy access is understandably lower than in other developing countries, paradoxically these countries often pay double the price for electricity. The report attributes this to unreliable infrastructure, poorly-targeted subsidies, and geographical distance between energy investment projects and economic centers.

For example, the Democratic Republic of Congo and Ethiopia are cited as having hydroelectric power potential, but their distance from the main economic centers of Africa diminish opportunities for private investment. Thus, they must rely on development aid as a way to keep existing energy prices low through blanket subsidies of electricity.

Similarly, some development experts are not convinced that ending all energy subsidies is a good long-term policy.

Michael Keating, a professor at the American International University in London who has studied the role of the IMF in energy-sector reform throughout sub-Saharan Africa, suggests that the abolition of these subsidies "would potentially release funds for a range of purposes, including subsidies for low-carbon energy sources."

"The vast weight of energy subsidies in the developing world are for carbon-intensive energy sources - oil, gas, coal," he explains to MediaGlobal via email.

For example, the IEA has identified solar energy as the key resource for reducing greenhouse gas emissions while providing sustained electricity to poor regions of the world, particularly developing countries in arid parts of the Sahara and sub-Saharan Africa. Private and public investors are beginning to realize the potential of this region for its year-round concentrated sunlight, and already have apportioned over $4.4 billion to investment projects for solar technology in several North African countries.

As a growing African middle class is expected to use continuously more electricity over the coming decades, there is reason to believe that projects like solar technology investment may qualify as a more appropriate recipient of public funding to keep energy costs from accelerating. Despite little mention of such clean energy subsidies, the report's overall conclusion suggests that a reform of the current system would create net benefits for developing countries, including the possibility of additional private investment in renewables.

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