INDIA POWER SECTOR REFORM AND THE POOR South Asia Energy and Infrastructure October 27, 2002 Currency Equivalents (annual averages) Currency Unit = India Rupee (Rs.) 1998 US$1.00 Rs. 41.3 1999 US$1.00 Rs. 43.1 2000 US$1.00 Rs. 44.9 2001 US$1.00 Rs. 48.0 Fiscal Year April 1 - March 31 Abbreviations and Acronyms DESU Delhi Electricity Supply Undertaking (now DVE) ECA Europe and Central Asia EDC Electricity Distribution Company GOI Government of India GSDP Gross State Domestic Product Ha Hectare KJP Kutir Jyoti Program kWh Kilo Watt hour LPG Liquefied Petroleum Gas NSS National Sample Survey O&M Operation and Maintenance PBS Rural Electricity Cooperative (Bangladesh) PV Photovoltaic REC Rural Electrification Corporation SC Scheduled Caste SEB State Electricity Board SERC State Electricity Regulatory Commission ST Scheduled Tribe T&D Transmission and Distribution Vice President: Mieko Nishimizu Country Director: Edwin R. Lim Sector Director: Vincent Gouarne Task Leader: Lucio Monari INDIA- POWER SECTOR REFORM AND THE POOR Acknowledgments This report has been prepared by Lucio Monari (Task Leader), Kseniya Lvovsky, Mudassar Imran, Bhavna Bhatia and Pnti Kumar (consultant), with valuable contributions from Robert Bacon, Douglas French Barnes, IUB Reddy, Penelope J. Brook, and Roberto Zagha. Peer reviewers were John Besant-Jones, Vivien Foster, and Valerie Z. Kozel. Fowzia Hassan and Deepti Sharma provided administrative assistance. The study has benefited considerably from the discussions and guidance provided at a launching workshop held in New Delhi in May 2001, and at a final workshop held in New Delhi in May 2002. Each workshop was attended by more than 50 participants from vanous public and pnvate sector institutions, state and union government agencies, NGOs, and donors. -3 - INDIA- POWER SECTOR REFORM AND THE POOR Table of Contents ABBREVIATIONS AND ACRONYMS ................................................................ 2 ACKNOWLEDGMENTS ................................................................ 3 Executive Summary ............................................................... 6 INTRODUCTION ................................................................ 6 ELECTRICITY REFORM AND THE POOR .................................. .............................. 6 POWER SECTOR SUBSIDIES ARE LARGE AND HAVE A HIGH OPPORTUNITY COST ............. 7 POWER SECTOR SUBSIDIES TO HOUSEHOLDS ARE MISTARGETED .............. ...................... 7 POWER SECTOR SUBSIDIES TO FARMERS ARE MISTARGETED ................. ......................... 9 How CAN REFORM HELP THE POOR? ......................................... 9 IMPROVING OPERATIONAL EFFICIENCY AND QUALITY OF ELECTRICITY SERVICES .......... 9 IMPROVING GOVERNANCE ................................................................ 0 RURAL ACCESS ............................................................... 11 RETARGETING HOUSEHOLD SUBSIDIES AND PROVIDING SOCIAL SAFETY NETS TO THOSE IN REAL NEED ................................................................. 11 REDESIGNING SUBSIDIES TO AGRICULTURAL CUSTOMERS ................... ......................... 11 FACILITATING PARTICIPATION OF THE POOR ................................................................. 12 Chapter 1. Power Sector Reform and Poverty: Key issues ...................................... 13 BACKGROUND ................................................................. 13 OBJECTIVES ................................................................. 14 DOES ELECTRICITY BENEFIT THE POOR? ................................................................. 14 WHY ARE REFORMS NEEDED? ................................................................. 16 How DOES POWER SECTOR REFORM HELP THE POOR? ........................ ......................... 20 WHAT ARE THE MAIN AREAS OF CONCERN? ................................................................. 22 CONCLUSIONS ................................................................. 23 Chapter 2. How the Poor Can Benefit from Improved Electricity Services ............ 24 REASONS FOR Low ACCESS AMONG THE POOR ............................................................. 24 PRESENT CONDITION OF POWER SUPPLY AND UTILITY SERVICES, AND ITS IMPACT ON CONSUMERS ................................................................. 28 BENEFITS DERIVED FROM ACCESS TO ELECTRICITY AND IMPROVED SERVICE ............... 30 CONCLUSIONS ................................................................. 34 Chapter 3. Electricity Subsidies and the Poor ............................................................ 35 INCIDENCE ANALYSIS OF HOUSEHOLD ELECTRICITY EXPENDITURES, SUBSIDIES, AND CONNECTIONS ................................................................. 35 ELECTRICITY SUBSIDY ................................................................. 41 FARMERS, EQUITY, AND ELECTRICITY ................................................................. 47 CONCLUSIONS ................................................................. 49 Chapter 4. International Experience with Providing ........................ ........................ 51 Electricity to the Poor ............................................................... 51 -4- INDIA- POWER SECTOR REFORM AND THE POOR EXTENDING RURAL ACCESS ................................ 51 SERVING THE URBAN POOR ................................ 54 KEEPING UTELITY SERVICES AFFORDABLE ................................ 55 CONCLUSIONS ................................ 58 Annex ................................ 59 Annex 2 ................................ 68 Annex 3 ................................ 97 Annex 4 ................................ 102 Bibliography ................................ 114 -5- INDIA- POWER SECTOR REFORM AND THE POOR Executive Summary Introduction 1. Of all developing countries, India has the largest number of poor, as measured by income, health, opportunities, and access to basic amenities. Reducing poverty in its various manifestations, therefore, is the country's greatest challenge. The national and state governments have carried out a number of initiatives affecting the poor. Of those initiatives, this study focuses on power sector reform efforts carried out by some Indian states in the mid-1990s. The study aims to answer the following questions: What are the main challenges that power sector reform faces in reducing poverty in India? What are the main obstacles and main opportunities? Are the large subsidies to the power sector reaching the poor? How are the poor affected by the present conditions of power supply, and what changes would benefit them most? 2. In seeking answers to these questions, the report draws on relevant data and studies in India, as well as evidence from the literature and international experience with power sector reform. 3. The study also responds to the thematic direction set by the launching workshop held in New Delhi on May 30, 2001 and attended by more than 50 participants from various public and private institutions, government agencies, NGOs, and donors. Specifically, the workshop identified three areas for further research: (a) access of the poor to electricity; (b) impact of tariff and subsidies on the poor; and (c) social participation in the reform process. In view of an ongoing World Bank study on rural electrification that analyzes access issues, and the fact that tariff rebalancing is a major issue, the workshop decided that this report would focus on the impact of tariffs and subsidies on the poor. Electricity Reform and the Poor 4. There is a large body of evidence from India and other parts of the world that electricity improves living standards, supports development and job opportunities, fosters social activities, and improves health. Lighting alone facilitates the activities of women and children, from cooking to reading and studying. And, according to a village-level study (Ranghananthan and Ramanayya 1998), electrification accounts for a 2 percent growth in aggregate output of irrigated agriculture. These benefits are widely recognized by the households, which attach significant value to electricity access. 5. Studies also point out that electricity prices, quality of power supply, and access issues are closely interlinked. Poor quality of power supply negates the benefits of electricity for those who cannot afford alternative sources (e.g., back-up diesel generators), or cannot afford to repair damaged appliances. Failure to extend access to the rural population or to provide quality services prevents the benefits of electrification from reaching the poor, including benefits derived from indirect linkages such as economic growth. -6- INDIA- POWER SECTOR REFORM AND THE POOR 6. Power sector reform in India has been driven by the need to commercialize the sector. The operational inefficiency and poor governance of the utilities, along with a distorted and below-cost tariff structure, are the root causes of problems now affecting the sector, and have resulted in the financial insolvency of the power utilities. State Electricity Boards (SEBs), the vertically integrated state monopolies in charge of supplying electricity in India, are on the verge of bankruptcy, starving for investment to extend services and maintain and rehabilitate the network. This, combined with low collection rates and high distribution losses, results in poor quality of power supply, especially in rural areas. Official statistics (Planning Commission 2001) recognize that 15 percent of Indian villages still are not connected to the main electricity grid, and about 60 percent of rural households do not have access to electricity. In addition, large cross- subsidies and frequent outages hurt the competitiveness of industrial consumers. Power Sector Subsidies are Large and Have a High Opportunity Cost 7. Power sector subsidies in India are significant, reaching Rs. 280 billion, or 1.3 percent of GDP, in FY 2000, with financial losses by power utilities amounting to Rs. 202 billion. By comparison, India spends Rs. 150 billion on health, Rs. 580 billion on all levels of education, and about Rs. 100 billion on water supply and sanitation, although it is short of resources to meet basic needs of the poor in primary health and education and access to safe drinking water. If power sector losses were reduced by only one third, the savings for one year would be sufficient to fill every teacher vacancy in the country and provide schools with running water and toilet facilities. 8. More than 20 percent of the power subsidy to agriculture and residential consumers is financed through cross-subsidies from industrial and commercial users. The burden of cross-subsidies, along with the poor quality service offered by utilities, has forced the industrial sector to abandon the grid and switch to more affordable and reliable sources of supply, including captive generation, which has grown from 10,000 MW to an estimated 27,500 MW over the last decade. The switch away from the grid, particularly by large industrial customers, has multiple effects. It worsens the financial position of the power utilities, while increasing the cross-subsidy burden on those industrial customers who cannot afford alternative sources of power supply. Electricity tariffs for industrial consumers in several Indian states are now among the highest in the world, adversely affecting India's competitiveness and the interest of foreign investors. In addition, the utilities' weakening financial position results in shortages of power, which in turn cause a loss of production in the industrial and agriculture sectors. In the states of Haryana and Karnataka in FY2000, these losses amounted to an estimated 1 percent and 2 percent of the value added in manufacturing, respectively, and 3 and 13 percent of the value in agriculture. Power Sector Subsidies to Households are Mistargeted 9. The Government of India has traditionally justified price subsidies to households as a way to make electricity more affordable for the poor. The idea was that electricity provides the poor with opportunities for education and development, and that electric street lighting reduces crimes and fosters social activities, thus benefiting society at large. This is why India and many other countries consider universal access an important social - 7 - INDIA- POWER SECTOR REFORM AND THE POOR objective. However, an analysis includes in this study, conducted on the basis of the 1998 India National Sample Survey (NSS), indicates that only a small percentage of the power subsidy reaches the poor. The major findings of the analysis are summarized below. 10. Most poor households are not connected and receive no subsidy. The analysis reveals that 90 percent of households with an electricity connection are non-poor (defined as the richer 75 percent of households, with per capita monthly aggregate expenditures of more than Rs. 250). As income rises, the percentage of households with electricity increases. By contrast, 73 percent of poor households are not connected and therefore do not benefit from subsidies. The rural poor (77 percent not connected) are at a particular disadvantage compared to urban poor (31 percent). 11. Across all households-connected and unconnected-the subsidy is regressive, so a larger share goes to richer households. The subsidy is even more regressive in rural India, where a very large portion of households has no connection. In urban areas, despite a higher percentage of poor households connected, the subsidy is still regressive. 12. Subsidies are not targeted to connected poor households. For households that are connected, the share of electricity expenditures over total expenditures remains relatively flat across different levels of income. In other words, the proportion of expenditures for electricity remains similar for all households, regardless of their level of wealth. On average, the poor spend about 3 percent of their budget on electricity, about the same share as the non-poor. About 90 percent of the total household subsidy goes to the non- poor. 13. Cross-subsidies or increasing block tariffs within the residential sector are ineffective, particularly for rural areas. Electricity consumption by rural and urban households is generally low and relatively flat across income levels, particularly in rural India. According to the NSS survey (1998), the poorest rural households consume, on average, about 25kWh/month, while the richest consume about 60kWh/month. Given this relatively flat consumption pattern, there seems to be little scope for targeting the poorest through block or lifeline rates, as virtually all households, regardless of their income level, would benefit from the subsidy scheme. 14. The impact of tariff increases on the budget of connected poor households could be mitigated through targeted programs. An estimated 20 percent of the rural poor and almost 70 percent of the urban poor have access to electricity. As noted earlier, electricity expenditures make up only about 3 percent of household budgets; however, the tariff increase required to reach full cost recovery-twice the present level-would result in a doubling of the electricity bill as a percentage of the total budget for poor households. The poorest consumers, especially in the rural areas, could be affected more severely, as their electricity bill could increase to more than 8 percent of their household budget. 15. Based on preliminary estimates for India as a whole, it would be possible to save more than Rs. 6 billion per month by eliminating the present tariff subsidies to non-poor households. This is more than three times the total requirement of about Rs. 2 billion per - 8 - INDIA- POWER SECTOR REFORM AND THE POOR month to subsidize, at the present level of consumption and tariff (and excluding capital subsidies) all poor households, presently connected and non-connected. Power Sector Subsidies to Farmers Are Mistargeted 16. Electricity tariff subsidies to farmers are equivalent to three quarters of total electricity subsidies in India. These subsidies mainly benefit large farmers (those who own more than 2 hectares of land), because most small and marginal farmers (less than 2 hectares) do not have access to electricity, and because of the regressive effect of the present flat tariff structure. 17. Small and marginal farmers comprise 70 percent of the farmer population in Andhra Pradesh, and 60 percent in Haryana. Of these, 80 percent own rainfed land in Andhra Pradesh, and more than 70 percent of those have surface irrigated land, while only 50 percent use electric tubewells. Since the tariff in most of India is based on a flat rate levied on the size (horsepower) of the irrigation pumpset, the subsidized tariff regime benefits medium and large farmers, who consume more electricity as the subsidized rate. In Haryana, for example, the subsidy to medium and large farmers per unit of power consumed is twice the subsidy to small and marginal farmers. 18. As a large part of the power supply to agriculture is unmetered, utilities engage in the practice of disguising theft and other commercial losses as consumption of power by agriculture. A metering study conducted in Haryana (World Bank 2001c) showed that the state utility overestimated the electricity consumption by agriculture by one third. This implies that the level of distribution losses is much higher than reported, and that a significant portion of the cross-subsidy, in the name of supporting farmers, simply finances inefficiencies and poor governance in the utility's operations. How Can Reform Help the Poor? 19. In India, power sector reforms are expected to reduce the cost of power supply and improve the quality of electricity services by improving the operational efficiency and governance of the sector. Furthermore, better targeting of subsidies would make resources available for investment in grid rehabilitation and expansion, as well as for other development expenditures, including in rural development. Power sector reform would therefore have an overall positive impact on the poor, despite a short-term negative impact caused by an increase in tariffs for poor households connected to the grid. For those not connected, the expectation that reform would quickly result in universal access to electricity is unlikely to be met. However, at the present negligible rate of rural electrification in India, non-reforming utilities would take more than 100 years to electrify all villages. These impacts are reviewed in more detailed below. Improving Operational Efficiency and Quality of Electricity Services 20. Reducing technical losses and increasing the operating efficiency of the electricity industry would lead to better use of existing resources and to more reliable power supply for all consumers, especially the poor, who cannot afford expensive coping strategies. When combined with targeted investments to overcome bottlenecks in transmission and distrnbution, loss reduction and efficiency measures would improve the quality of service, -9- INDIA- POWER SECTOR REFORM AND THE POOR for which many customers are willing to pay a higher tariff. This, in turn, would allow utilities to recover the cost of service and further improve performance. 21. While certain improvements outlined above can be achieved by public utilities, privatization is often the most effective way to sustain improved performance, and to mobilize the necessary capital investment and managerial expertise. Experience from other countries and sectors (for review, see Gray (2001)) shows that private utilities typically outperform public utilities. Furthermore, there is increasing evidence that a power supply system with significant private ownership in distribution, if appropriately regulated, would be able to provide, over time, much better service delivery at lower cost. As is evident from international experience, better performing private utilities are able to provide for poor customers by undertaking special programs-in partnership with the state government, municipalities, and other sponsors-to extend connections to low- income areas (e.g., Argentina) or reduce the bill for the needy (e.g., Hungary). 22. Measures to improve efficiency and quality of service have been important elements of the state reform programs in India. Additional research is needed to collect more empirical evidence of the specific impacts of these measures on low-income groups, identify factors that enhance positive impacts for these groups, and effectively communicate the observed benefits. Improving Governance 23. Reducing theft, legalizing connections, combating corruption, and improving quality of electricity services would benefit the poor. As indicated in the socioeconomic assessments initially conducted in various Indian states as part of their power sector reform programs, the poor are penalized the most by corrupt practices and poor quality of service. The direct and indirect costs of these problems represent a large share of their income, and the need to make informal payments to utility staff is one of the main barriers to poor households even obtaining a connection. 24. In 2000, the Andhra Pradesh government and utilities undertook a massive state- wide campaign to regularize illegal electricity connections. In a short period of two months, about two million new consumers were officially connected. This campaign not only helped the utilities to raise revenues, but also helped those consumers who could not afford to make informal payments or could not obtain a legal connection. 25. In India, informal payments to utility employees are also required to obtain standard customer services, such as correcting inaccurate bills and replacing faulty equipment. Reforms would restore the financial viability of the utilities and enhance their operating performance, so the utilities could be more responsive to customer demands. However, much more needs to be done to stop the harassment of customers and the collusion between dishonest employees and some consumers. The participation of the poor in designing the reform program and the regulatory process could be a first step toward improving sector governance. Another improvement would be the monitoring of customer service standards by the regulatory commissions. - 10 - INDIA- POWER SECTOR REFORM AND THE POOR Rural Access 26. Increasing electricity access by the poor is one of the major challenges for power sector reform. During the initial phase of reform, utilities generally need to focus their investments on high-return projects to improve the quality of power supply-in order to raise revenues and create support for reform-before they can extend the power grid. During this transition period, special programs could be considered to facilitate access by the poor, such as the decade-old Kutir Jyoti program, which provides single-point connections to the rural poor, with special quotas for Harijan and Adivasi families. The program has had some success. According to the NSS survey (1998), half of the poorest rural households with access to electricity are from the targeted castes and tribes. However, as noted in a recent review of the scheme (ORG 2000), the program would benefit from better identification of the targeted population and beneficiaries served, before it considered a possible means to improve grid access by the poor. 27. For non-connected households in villages reached by the grid but with a low rate of connection, a review of connection charges would help assess the extent to which they are a barrier for the poor. This issue is being addressed by an ongoing World Bank study of rural electrification in India. Off-grid applications, including distributed generation, should also be considered in areas where there is no electricity or a lack of good-quality supply. Retargeting Household Subsidies and Providing Social Safety Nets to Those in Real Need 28. A number of measures can be employed, often in combination, to mitigate the adverse impacts on the poor of tariff increases. These measures range from improved tariff structures to the use of non-tariff instruments. In India, given the flat consumption levels across different income strata, it is unlikely that a restructuring of lifeline rates alone would reach or protect the poor. 29. Non-tariff subsidy schemes, such as welfare benefits to ease the overall budget constraints of a poor household, or cash support to help pay the electricity bill, have proven to be good instruments in countries where social safety net and welfare programs are performing relatively well. Several cash transfer schemes have been used in Eastern Europe to protect the poor during the period of reform and tariff adjustments in 1990s (World Bank 2000b). Well-designed non-tariff instruments are typically more transparent than subsidized tariffs, better target the subsidy, impose a smaller financial burden on the state, and do not interfere with the commercial operations of the utility. The performance, specific forms, and delivery mechanisms of these schemes differ substantially across countries, and there is a need to examine possible options for India and develop models tailored to the particular circumstances of each state. Redesigning Subsidies to Agricultural Customers 30. The electricity subsidy to agricultural consumers is one of several subsidies currently provided to the agriculture sector, and should be considered in that context. India has traditionally subsidized agriculture through various output and input price subsidies, including electricity, as an important factor in farm productivity and pro-poor - 11 - INDIA- POWER SECTOR REFORM AND THE POOR rural growth. Electricity subsidies for pumping water for irrigation were introduced in the 1970s to encourage farmers to produce more food during the famine. Because there were few electric pumps, cross-subsidization was not an issue. However, as agricultural production and electricity use have grown over time, this rationale has weakened, and the associated problems, including the environmental impact of depleting groundwater resources, have mounted. 31. Electricity brings private benefits to farmers (increased yields and income) that exceed the cost of service, and recent studies (World Bank 2000a, TERI 2001) indicate that most farmers are willing to pay for reliable and better quality supply. Small farmers, even more than large farmers, would benefit greatly from an improvement in the quality of power supply. The studies also find that electricity subsidies to farmers could be better targeted to more vulnerable groups by introducing a different tariff structure based on energy consumption (thus requiring meter installation), and perhaps including lifeline rates. 32. More work needs to be done to assess the feasibility of alternative electricity subsidies to farmers, and to better target farmers who really need them. For example, a study could explore whether revenue departments, along with the Agriculture Marketing Department and Food Department of the Government of India, could directly reimburse farmers for a portion of their electricity bills. This work needs to be integrated with efforts to explore alternative business models for rural electrification. At present, a study supported by DFID on alternative service and subsidy delivery mechanisms to agricultural consumers is being launched in Andhra Pradesh. Facilitating Participation of the Poor 33. Almost all Indian states have notified their regulatory commissions of the need to set electricity tariffs through a transparent and consultative process with the public. However, more efforts, including by the commissions, are needed to ensure that poor households, whether or not connected to the grid, are given the opportunity and means to participate in the process. It is also essential that the poor are involved in defining the financial incentives established to promote electricity access. International experience has shown that a consultative process is important to arrive at a subsidy program and a delivery mechanism that are broadly acceptable and work well in specific circumstances. - 12 - INDIA - POWER SECTOR REFORM AND THE POOR Chapter 1. Power Sector Reform and Poverty: Key issues Background 1.1 India is the country with the largest number of poor in the world-income-poor, health-poor, access-poor, and opportunity-poor-and reducing poverty in its various manifestations is a difficult challenge that requires concerted multi-sectoral actions (see Table 1.1). Of possible interventions that can affect the poor, this study focuses on reform of the power sector, based on the experience with reforms that India initiated in the mid- 1990s. This study examines possible impacts of reforming the electricity sector on the poor, drawing on relevant data and studies in India, and on international experience. Table 1.1 Selected poverty and development indicators: India and some comparators Country GNP per Population Under 5 Adult Primary Access to Access to capita. living under child illiteracy, school sanitation, electricity, US$ $1 a day (%) mortality % of people enrollment, % of % of (2000) per 1000 over 15 % of age population population (1999) (1999) group (1990-96) (2000 est.) (1997) Bangladesh 380 29.1 (1996) 89 59 75 35 25 India 460 44.2 (1997) 90 44 77 16 50 China 840 18.5 (1998) 37 17 100 21 97 Indonesia 570 7.7 (1997) 52 14 99 51 80 Thailand 2010 < 2 (1998) 33 5 89 96 90 Brazil 3570 9.0 (1997) 40 15 97 67 90 Columbia 2080 11.0 (1996) 28 9 89 83 90 Ukraine 700 2.9 (1999) 17 < 0.5 ... 49 100 Uzbekistan 610 3.3 (1993) 29 12 ... 18 100 Ghana 350 38.8 (1998) 109 30 ... 42 35 Kenya 360 26.5 (1994) 118 19 65 77 12 Sources World Development Report (vanous years) and Bank staff estimates 1.2 The study also responds to the thematic direction set by the launching workshop held in New Delhi on May 30, 2001 and attended by more than 50 participants from various public and private sector institutions, government agencies, NGOs, and donors. Specifically, the workshop identified three areas for further research: (a) access of the poor to electricity; (b) impact of tariff and subsidies on the poor; and (c) social participation in the reform process. In view of an ongoing study on rural electrification carried out by the World Bank that analyzes access issues, and the fact that tariff rebalancing is a major issue, the workshop decided that this study should focus on the impact of tariffs and subsidies on poor. - 13 - INDIA- POWER SECTOR REFORM AND THE POOR Objectives 1.3 The objectives of this report are to: * Improve understanding of the linkages between power sector reform and the poor in India; * Determine whether or not the large power subsidies currently provided to the power sector actually reach the poor; and * Review specific programs adopted in India and elsewhere to extend electricity connections to the poor, and mitigate the impact of tariff increases on connected households during the reform process. 1.4 The presentation of material in this report follows this framework. This chapter describes some basic linkages between power sector reform and impacts on the poor, based on international experience and evidence from India. Chapter 2 draws lessons from the socioeconomic assessments carried out in various Indian states as part of their reform program. Chapter 3 presents the results of an analysis on the incidence of power subsidies in India, and Chapter 4 summarizes international experience with programs undertaken by the public and private sectors to extend electrification and mitigate the impacts of power reform on the poor. Does Electricity Benefit the Poor? 1.5 Access to electricity brings significant benefits, such as income and development opportunities, and it contributes to improving living conditions, including through positive health impacts. Box 1.1 describes the public and private benefits of rural electrification, using examples from a variety of studies worldwide. For these benefits to materialize, however, it is necessary to have good-quality access, not just the nominal electrification of a village,1 or a household connection that is not served with electricity during the hours when it is needed. The Government of India's definition of an electrified village is somewhat misleading, since a village is considered electrified even if it has only one electricity connection Consequently, there is a striking difference between the percentage of villages "electrified" according to the Government (500,000 of a total of 600,000 villages in the country) and the percentage of the population with access to electricity (estimated at about 50 percent). - 14 - INDIA- POWER SECTOR REFORM AND THE POOR Box 1.1 Benefits of Rural Electrification-Examples from India and Around the World Benefits of lighting for households: > The main benefit of electricity for poor households is the substitution of electric for kerosene lamps. A 40-watt electric lamp gives about 40 times more light than a kerosene lamp, which makes possible additional activities in the evening > In India, the consumer surplus (value the consumer obtains from the lower cost of lighting) in the poorest rural households can be as high as Rs. 400 per household per month, or 50 percent of their net cash income (excluding any in-kind income). Opportunities for women and children in households (reading, easier cooking, etc.), and other social benefits: > In the Philippines, monthly time saved on household chores is equivalent to an estimated US$24.50 per household, or US$24.7 million for the country. > Public lighting facilities social activities and reduces crime and the vulnerability of women. More productive farming: > In India, a village-level study (citation) attributes 2 percent of growth in aggregate output to the impact of rural electrification on irrigated agriculture, and a recent study (Ranghananthan and Ramanayya 1998) reports an increase in agricultural productivity of 20-40 cents per kWh. Non-farm employment opportunities: self-employment for women in households; small business development: > In Costa Rica, a rural cooperative reported that the number of major businesses jumped from 15 to 86 in one year after gaining access to electricity. Improved health outcomes: > Recent evidence from an environmental health study in India, and from a cross-country analysis, points to a statistically significant association between electricity connection and lower child mortality; > In Bangladesh, rural electrification has contributed to reduced fertility rates. * Benefits are greatest when combined with other infrastructure investments (e.g., roads, irrigation networks) and holistic rural development: > A study in Peru found that bundling services such as water, electricity, sanitation, and education had a synergistic impact on the welfare of rural populations. Sources: Pouliquen (2000), ESMAP (2001b), Bamett (2000) 1.6 Rural electrification and improved power supply have positive impacts on agricultural productivity and non-farm business development. From enabling women to engage in income-generation activities at home (e.g. sewing), to new jobs creation in the non-farm rural sector (business cooperatives, one-person home businesses) and more efficient agriculture, these impacts are likely to trigger effective mechanisms to move the poor up the economic ladder. A positive impact on agricultural productivity is consistently reported by a number of studies, including those in India (World Development Report 1994, 2000); and evidence of the impact on non-farm employment is emerging (Pouliquen 2000). 1.7 These benefits are widely recognized, as demonstrated by the significant value consumers attach to the provision of quality electricity services (see Box 1.2). Several studies have confirmed that most people are willing to pay a significant portion of their income for services that improve the quality of their life or enable them to become more - 15 - INDIA- POWER SECTOR REFORM AND THE POOR productive. In Bangladesh, for example, where good service is available, even the poorest are connecting to the grid. In some parts of rural Bolivia, those without access to electricity use more expensive liquefied petroleum gas (LPG) lanterns as an alternative to candles. In Kenya, where the possibility of connecting to the grid in the near future is remote, higher-income rural households are buying solar photovoltaic (PV) systems (World Bank 1996). Ugandans spend an estimated US$100 million a year-as much as 1.5 percent of GDP--on dry cell batteries to power radios, flashlights, and other small items, to substitute for the lack of grid services (Townsend 2000). In India, where agricultural customers enjoy very large cross-subsidies, a recent study (World Bank 2001c) shows that farmers are willing to pay higher tariffs for improved availability and quality of power supply. Box 1.2 Quality of Power Supply An electric power system should supply electricity to consumers with reasonable reliability and at an acceptable quality. Reliability is generally measured in terms of the outage level (number and duration of supply failures for a given voltage level or supply area). Frequent power interruptions contribute to shortening the useful life of consumers' equipment, to lost or damaged production, and to an inability to complete activities. Unplanned outages or unannounced power cuts are normally more disruptive than planned outages, and in the absence of coping strategies such as alternative sources of electricity supply, can carry heavy economic consequences. The quality of supply is a function of the voltage, frequency, and harmonic levels, ranging within specified limits. Consumers' equipment is subject to damage from voltage fluctuations (both severity and frequency), variations from standard frequency, and the presence of harmonics. Damage varies according to the type of equipment and its sensitivity to the various parameters. In certain cases, these variations also result in sub- optimal utilization. To protect equipment from such damage, wealthy consumers resort to back-up power sources or power stabilizers, which limit variations in voltage and harmonics. For those with less income, back-up supply is either impractical or prohibitively expensive, and those consumers bear an implicit cost of reduced productivity or quality of life. Source: Bank staff. Why Are Reforms Needed? 1.8 In India, as in many low to middle-income countries (with the exception of Eastern European countries), access to electricity is low (see Table 1.1). As shown in subsequent chapters, the poor are disproportionately affected; only a very small percentage of the poor have an electricity connection, particularly in rural areas. Furthermore, utilities are unable to provide quality services to existing consumers, due to a combination of factors, including sector inefficiencies, governance problems, and the poor technical, economic, and financial conditions under which the utilities operate. For example, in many Indian states, transmission and distribution losses are estimated to be as high as 45 to 50 percent. Operational shortcomings, and problems associated with government interference in management of the sector, make it difficult to prevent theft and enforce bill collection. Tariffs are below cost, and the investments required to extend service to new customers and better serve existing customers are too large to be financed by the public sector. From the economic point of view, the inability to serve existing consumers has a large impact on industry and agriculture, as discussed in Box 1.3. - 16 - INDIA- POWER SECTOR REFORM AND THE POOR Box 1.3 The Impacts of Power Outages When infrastructure bottlenecks result in frequent power outages and blackouts, then the unserved power, even if prices reflect costs, means that (a) consumers cannot allocate budgets optimally and have to buy expensive alternatives (captive generation by industries, diesel water pumps in agriculture, back-up diesel or solar PV systems by richer households), with a loss of welfare; and (b) there is a steep rise in the short- run supply cost of energy-explicit or implicit-that ultimately affects productivity. An explicit rise in this cost was well illustrated by California during summer 2000-spring 2001. Countries with low cost recovery have suffered substantial productivity losses, due to the implicit high cost of poor quality supply. A review of the outage cost literature by Caves (1990) finds that while outage costs for customers with back-up generation are about 60 percent lower than for customers with no standby equipment, they are not reduced to zero. As the frequency of outages increases, the cost per interruption declines as customers adapt. Nevertheless, the unpredictability of outages increases the costs. Studies in various countries confirm these high costs. In the 1980s, the outage cost for the industrial sector was estimated at US$0.90/kWh in Pakistan, US$2.02 in Argentina, US$2.56 in Indonesia, and from US$1.86 to 3.39 in Colombia. In 1986, the total outage costs m Pakistan were estimated to be equivalent to 8.8 percent of the value added in the industrial sector. The cost of unserved energy is also high for the residential and commercial sectors-an estimated range of US$1.81 to 2.56 in Argentina, and US$1.39 in Tanzania, respectively. As found in a study on the cost of unserved energy for the Indian states of Haryana and Karnataka, (TERI 2001) industry and agriculture are significantly affected by outages. Using the production loss approach, the opportunity cost of unreliable power is estimated at more than 1 percent of value added in the manufacturing sector in Haryana, and 2.2 percent in Karnataka. The respective costs, measured by loss in crop production, approach 3.1 and 13.3 percent of agricultural value added. Sources: Caves (1990), TERI (2001), World Bank (1995). 1.9 The financial crisis in the power sector contributes significantly to the fiscal pressure on government budgets, which are already overwhelmed by the development agenda. Thus the sector crisis undermines macroeconomic stability and prospects for foreign investments and growth. From the financial point of view, the growing gap between tariffs and the cost of supply (see Figure 1.1) exacerbates the sector's operational problems and renders it incapable of meeting the needs of existing customers and extending services to a large number of unserved rural households. Gross subsidies in FY2000 were estimated at Rs. 366 billion, or almost US$8 billion. - 17 - INDIA- POWER SECTOR REFORM AND THE POOR Fig 1.1 Cost of Supply, Tariffs, and Cross-subsidies 4.0 3.0 - 2.5 -~-0 - 05Q]1.2 5 - -l no *\"U|~ '\>'fW- cca1:0 - " cC - * Long-run Average Incremental Cost for Rajasthan only (source: Rajasthan Power Restructunng Project PAD), 2000 Other indicators represent Indian averages. Source. Planmnng Cormmission (2001) 1.10 The largest subsidies in the power sector benefit agriculture (Rs. 246 billion) and residential consumers (Rs. 81 billion).2 These subsidies are financed partly through cross- subsidies from the industrial and commercial sectors (Rs. 82 billion), which pay tariffs higher than the average cost of power supply.3 Net subsidies4 (aggregate for all states) amounted to Rs. 283 billion.5 This level of subsidy can be compared to total FY2000 expenditures in the states of Rs. 152 billion for all health services and Rs. 581 for all levels of education. 1.11 As illustrated in Table 1.2, net subsidies to the power sector, and their relationship with expenditures in the social sectors, vary considerably across the states. In most of India, however, the level of subsidies to the power sector by far exceeds current expenditures on public health. For some states, such as Haryana, it even exceeds the 2 Planning Commission (2001). 3 The average cost of supply iS defined as the sum of fuel, power purchase, operation and maintenance (O&M), establishment and administration, miscellaneous, depreciation, and interest payments. Major deviations from an economic cost of supply include: (a) higher power purchase cost, due to the increasing dependence on thermal power generation; (b) sigmficantly higher investment requirements and replacement value to rehabilitate the system and meet demand; and (c) higher opportunity cost of capital compared to the subsidized terms obtained with a sovereign guarantee. On the other hand, the average cost of supply includes inefficiencies such as high transmission and distribution losses, low plant factor, and overstaffing. In the case of Rajasthan, this results in an economic cost of supply higher than the average cost of supply. 4 Net subsidy IS equivalent to the sum of subsidies to agricultural and residential consumers mius cross- subsidies from industrial and commercial users. Subsidies are calculated as the difference between average cost of supply (computed by the SEBs by dividng total costs by total consumption) and the revenues accruing to a particular consumer category. The average cost of supply is likely to be an underestimate of the true economic cost of supply because of the increasing marginal cost of generatlon and the massive mvestments required in transmission and distribution to reduce losses. In comparison, during the same year, state governments provided subsides to the SEBs of only Rs. 35 blllion. - 18 - INDIA- POWER SECTOR REFORM AND THE POOR current expenditures for education. In Andhra Pradesh, Gujarat, Haryana, Karnataka, Madhya Pradesh, and Maharasthra, the level of power subsidy to agriculture alone is equivalent to about 50 percent of the gross fiscal deficit. Table 1.2 Indian States: Revenue Expenditures on Health and Education, Power Sector Subsidies, and Gross Fiscal Deficit in FY1999-2000 MAJOR STATES Pevemne Revemne Subsidy for Sulbidy for Oss Net SuIidy Crnos Expenditures for Expenditures Agriculture Dmestic Sulidy Fiscal hEucation for Health Cons s Conmuns Deficit Andra Pradesh 343 124 312 7 1 5.8 37 6 59 9 Bihar 42.1 10.2 5 6 23 -2 8 8 2 611 Gujarat 33 6 9 7 38 9 2 8 10 0 29.4 60 3 Hayana 124 2 9 131 1 3 2 5 103 24.6 Karnataka 28 7 9 0 19.4 1.6 12.4 125 302 Kerala 25 3 72 0.8 6.9 1 9 7.7 35.1 NMdhya Padesh 25.3 8.4 30.7 6.6 9.7 34.2 39.7 Maharashtra 94.1 15 2 38 7 5.8 29 8 44.6 139.3 Onssa 17.6 4.3 0.0 0.0 0.0 0.0 32.6 Punjab 20 6 7.0 0 0 2 3 3 8 2 8 42.9 Rajasthan 306 9.2 18.0 5.2 4.5 23.7 57 7 Taral Nadu 42.0 11.1 20.4 4.4 12.0 226 49 8 Uttar Pradesh 59.4 13 5 24.0 142 8 4 23 6 122 6 West Bengal 49 6 12 5 3.2 3.9 -2.1 6.6 108.7 WILINIA TOTAL 581.5, 152.0 245.4, 81.0 82.5 282.8 947A4 Sources: RBI State Finances (2001); Planning Commission (2001b). 1.12 One of the big challenges for power sector reform in India is therefore to reduce these large subsidies, while improving the efficiency and effectiveness of public sector spending. Such subsidies bear a very high opportunity cost (see Box 1.4), and could be better utilized elsewhere in the economy. - 19 - INDIA- POWER SECTOR REFORM AND THE POOR Box 1.4 The Opportunity Cost of Failure to Reform The current situation in India's power sector is a significant barrier to the country's prospects for economic growth and poverty reduction. The opportunity costs of this situation are manifested in various ways: Opportunity cost of public sector bail-out. Government's attempts to bail out electric utilities have imposed a major burden on states resources and the public sector as a whole. At the beginning of 2001, cumulative arrears of the State Electricity Boards from various central sector undertakings amounted to almost US$10 billion. Furthermore, every year, SEBs lose some US$6 billion. If power sector financial losses were reduced by only one third, the savings for a single year would be sufficient to fill every teacher vacancy in the country and provide every school with running water and toilet facilities. Opportunity cost of unserved power. The deteriorating financial performance of the power utilities has led to inadequate investment and maintenance, affecting service quality and coverage. * Power shortages have a major impact on output and profitability in industry and agriculture. A study on the cost of unserved energy (TERI 2001), undertaken for the states of Haryana and Karnataka, shows that the average industrial production loss per unit of outage ranges from Rs. 5/kwh in Haryana to Rs. 22/kwh in Karnataka. Farmers lose an estimated Rs. 2 to Rs. 4 in profits for every unit of power not supplied. * Disruptions in power supply have an adverse impact on the quality of life of households, and especially affect women and children. In a survey conducted in Andhra Pradesh, for example (ESMAP 2000), women reported that, as a result of power outages, household activities were more difficult and children had less time to study. Comparable studies in other countries estimate the cost of unserved energy for residential consumers to be as high as for the industrial sector. * Furthermore, financial problems in the sector have slowed the pace of rural electrification-only 600 villages were electrified last year (using the Government's definition of one household connection meaning a village is electrified-with a detrimental impact on economic growth and quality of life in non-electrified areas. If the current trend continues, it will take 100 years to electrify all 80,000 unelectrified villages. At the same time, recent studies reveal significant economic and social benefits of rural electrification: the benefits of lighting to an average rural household in India are in the range of Rs.15-20/kWh, or 40 to 50 cents, while the cost of supply is 10 to 15 cents. Added value in agricultural productivity is estimated at 40 to 70 cents per kWh. Opportunity cost of cross-subsidies. Industry is penalized twice by India's power sector policies. It receives low-quality power, but is forced to pay tariffs above cost to cross-subsidize residential and agricultural consumers, who also receive low-quality power. Industrial tariffs in some states are about 9 to 10 cents per kWh, among the highest in the world, and affect the competitiveness of industry and the interest of foreign investors. Typical rates in Western Europe and the United States are in the range of 6 to 7 cents. Among other developing countries, industrial tariffs are also lower: 8 cents in Argentina, 7 cents in Bolivia, 6 cents in Brazil and Thailand. Sources: Montek Singh Ahluwalia Commission (2001); Planning Commission (2001); TERI (2001); Barnes et al (2000); Barnes (2002); World Bank (1995); TARU (2001). How Does Power Sector Reform Help the Poor? 1.13 Power sector reform (see Box 1.5) is expected to reduce the cost of grid supply, improve quality of service, promote the participation of consumers in utilities' service- related decisions, and ensure greater accountability and transparency in the sector. In particular, reform is expected to reduce the high level of losses and eliminate other operational inefficiencies, thereby reducing the cost of service and improving the quality of power supply. The introduction of governance reforms in the sector and in the - 20 - INDIA- POWER SECTOR REFORM AND THE POOR management of the utilities would bring more accountability and reduce corruption, leading to lower costs and improved quality of services. Power sector reform would also involve tariff rebalancing to target subsidies to those in need, therefore allowing governments and utilities to use resources to extend electrification and ameliorate quality of service needs (see Annex 1 for a review of electricity sector reform and poverty linkages). Box 1.5 What Is Power Sector Reform? Power sector reform involves creating the technical, financial, institutional, and economic conditions for maximizing efficiency and competition in the sector. Only a handful of developing countries have fully reformed the power sector, mostly in Latin America. Commercialization, legal reform, regulation, and restructuring are all crucial to power sector reform, but they are not sufficient to bring sustainable improvement. Sustainability is usually achieved through private participation, particularly in distribution. A World Bank survey of 115 developing countries shows that, on average, only 25 percent of those countries privatized existing assets (Bacon 1999). In India, power sector reform aims at commercialization of the sector, and consists of the following components: * Vertical disaggregation of utilities' activities, through the functional unbundling of generation, transmission, and distribution. Separate companies are created to facilitate the growth of power markets, and to promote transparency and more accountability at the managerial, operational, and financial levels. * The introduction of independent regulatory commissions to depoliticize tariff setting and promote transparency and accountability in the sector. * Tariff rebalancing and increased cost recovery, in order to better target subsidies, improve the competitiveness of the industrial and agriculture sectors, and restore the financial viability of the power sector. * Other governance reforms such as combating theft and corruption, to promote payment discipline. * Promotion of competition in power markets, and the introduction of regulation for those activities, which are natural monopolies. * Privatization, particularly of distribution, as the key to sustaining improvements in the utilities' commercial and financial performance, especially through incentives. Source: World Development Report (1994). 1.14 A number of Indian states have unbundled their SEBs and established independent regulatory commnissions, and one state has privatized distribution. Nevertheless, progress on decreasing losses and achieving cost recovery, especially by reducing cross-subsidies, has been slow. Addressing the issue of agricultural subsidies and cross-subsidies is a principal element of India's power sector reform process. This issue is linked to a variety of measures aimed at: (a) improving quality of supply; (b) reducing theft and unaccounted losses through metering; (c) restructuring tariffs and exploring alternative, less distorted, ways of providing a (reduced) subsidy; (d) permitting entry of new third-party providers; (e) exploring alternative institutional - 21 - INDIA- POWER SECTOR REFORM AND THE POOR arrangements (e.g., rural cooperatives); and (f) developing a supportive regulatory framework for decentralized energy solutions. What Are the Main Areas of Concern? 1.15 Power sector reform has different impacts on different groups of the poor (see 6 Box 1.6). In the short run, the pace at which tariffs will increase and quality of supply will improve is likely to be different. In particular, immediate tariff increases are likely to be required to maintain utilities' financially solvency, to prevent further negative effects on the economy. Improvements in the quality of supply and services will take more time to materialize because of several years of neglected investments. This dynamic could have short-term negative effects on electricity consumers. Box 1.6 Target Groups Reform policies can have different impacts on different disadvantaged groups, such as women, indigenous people, and scheduled castes and tribes. Furthermore, the impact on people involved in productive activities, such as small farms and non-farm enterprises, may have far-reaching implications for rural growth and poverty reduction. The proposed target groups for assessing the impacts of power sector reforms are listed below. Groups of concern may differ from state to state: * Households with incomes below the poverty line (BPL) * Other low-income households * Unserved/under-served populations - remote rural areas - grid-connected rural areas - urban slums * Disadvantaged groups - Scheduled castes and tribes -Women and children * Marginal and small farmers * Off-farm workers and small enterprises Source: Bank staff. 1.16 Various studies suggest that the poor with an electricity connection spend a larger share of their household budget on that service than any other group. Thus, they are particularly vulnerable to tariff increases (ESMAP 1999, Lovei et al 2000, Armar 2001, Lampietti 2001). However, international experience has shown that targeted subsidies are capable of mitigating the negative impact of tariff increases on the poor while reducing the fiscal burden on the state. 1.17 The financial crisis of the utilities also requires prudent management of investments and a careful review of their expansion programs, including rural 6 There are usually wide differences in income among the poor, with some people located just below the poverty line (BPL), and others having a much lower income. There are also vast variations in non-income measures of poverty. For example, a cross-country analysis (Hammer 1999) shows that disparities in child mortality between the poorest families and those in the next decile can be higher than between the next decile and the rest of the population. - 22 - INDIA - POWER SECTOR REFORM AND THE POOR electrification. This could negatively impact efforts to increase access by the poor in the short term. 1.18 Where the cost of service delivery is higher and cost recovery more difficult to achieve, the record of electricity reforms in extending services to rural areas is mixed (Brook and Besant-Jones 2000). Without dedicated government polices, the cost structure of grid provision limits commercial incentives for energy suppliers to electrify scattered rural populations (Powell and Starks 2000). However, when rural access objectives are incorporated in the reform agenda, they can be achieved through improved financial and technical performance of utilities, voluntary or mandatory service obligation agreements in sales/concession contracts, facilitation of third party access to the grid, and entry of new providers, including off-grid suppliers. Conclusions 1.19 The many benefits of electricity access to the poor range from creating income and job opportunities to improving living conditions. Most of the poor are, however, excluded from capturnng these benefits, due to the fact that electric utilities are unable to either extend services to more poor or offer quality power supply to existing customers. The poor are also penalized because of the sector's financial and economic crisis. The large subsidies that state governments in India need to provide to the sector crowd out potential investments in rural development and the social sectors. In addition, outages and unreliability of power supply affect the productivity of industry and agriculture, which in turn reduces the economy's potential to create jobs and increase welfare. 1.20 The efficiency and governance reforms that some India states have initiated are expected to directly benefit the poor by reducing the cost of supply and enhancing quality of service. Longer-term and indirect benefits are also expected from the elimination of outages, and the reallocation of scarce public resources to rural development and the social sectors. However, reforms would also increase tariffs and reduce cross-subsidies, thus imposing some hardship on the poor who are connected, unless special mitigation measures are implemented. Special incentives and programs are also needed as part of electricity sector reforms to increase access to rural areas. - 23 - INDIA - POWER SECTOR REFORM AND THE POOR Chapter 2. How the Poor Can Benefit from Improved Electricity Services 2.1 This chapter presents the findings of the socioeconomic impact assessments carried out in the last few years in the states of Kerala, Orissa, Haryana, and Andhra Pradesh, as part of their efforts to reform their power sectors.7 As the reform programs were starting, these studies helped the governments and utilities to identify key stakeholders, especially the poor, women, and vulnerable groups. Through primary surveys, case studies, and focus group discussions, baseline information was collected on access to electricity, quality, and services to different consumer categories. The studies then identified a range of potential impacts on the different categories of consumers and those unconnected. The main focus of this chapter is on three important stakeholders- the urban poor, the rural poor, and unconnected residential consumers.8 2.2 The studies identified two areas of major concern, which are summarized in this chapter: (a) the low access to electricity among the poor; and (b) the negative impact that poor quality of power supply and utility services imposes on consumers. The chapter also discusses the benefits the poor would derive from access to electricity and more reliable service. Reasons for Low Access Among the Poor 2.3 The socioeconomic impact assessments confirmed that unconnected households, in both urban and rural areas, are largely poor and belong to scheduled tribes and castes. Even in a rich state such as Haryana, more than 50 percent of unconnected households are those of landless laborers. In general, electricity connections are closely associated with better quality of housing and access to safe drinking water and sanitary facilities. 2.4 The main reasons for lack of connectivity are the high connection charges and the informal payments involved. In the sample surveyed in Kerala, half the households without electricity connections were in the lower income group (below Rs. 500/month). They explained their lack of connection in terms of cost (more than one fourth), the unsuitability of their houses for wiring, or distance from the grid (see Table 2.1). 7 XIM (1997), TARU (1999 and 2001), SNC (2000). 8 The classification of households in these studies is significantly different from that used for the incidence analysis in Chapter 3. While in the incidence analysis households were classified exclusively on the basis of monthly expenditures, the socioeconomic assessments included other characteristics, such as level of education, land ownership, and occupation. - 24 - INDIA- POWER SECTOR REFORM AND THE POOR Table 2.1 Kerala: Unconnected Households-Reasons for Lack of Electricity Connection Reasons for Lack of Electricity Family Income (Rs/month) ____r__ Connection Below 500-999 1000-1999 Over 2000 Total 500 Have not applied due to financial 34% 44% 11% 13% 27% reasons Applied and waiting 15% 22% 23% 40% 20% House not suitable for winng 23% - 3% - 13% No connections nearby / too far from 20% 3% 5% 20% 14% grd Living in rented house 2% 28% 58% 20% 23% Other reasons 5% 3% - 7% 3% Total 52% 12% 30% 6% 100% Source SNC-Lavalin International (2000). 2.5 Seventy-seven percent of those households too far away from the grid to be connected belong to the lowest socioeconomic group. Almost half the female-headed houses had not applied for an electnicity connection for financial reasons. The survey also showed that for rural domestic consumers, more time was required to obtain a connection than for urban consumers. In Orissa, complicated departmental procedures and the long distance between consumers' houses and the substation were reported as the main problems for obtaining a connection. A large proportion of unconnected households surveyed in Haryana were reluctant to get a power connection because of the time and expenses (both statutory and informal) involved (see Box 2.1). Several of these households resort to line tapping, especially in the evening and night hours, and pay rents to middlemen or utilities' staff for the illegal connections. Box 2.1 Collusion, Formal and Informal Payments To Obtain a Connection Bharat Rout (not his real name), a resident of Marthapur village in Dhenkanal district in Orissa, approached the local electricity office to inquire about the official procedure for getting an electricity connection in his newly constructed house. The utility staff in that office, who were known to Mr. Rout, advised him to pay them Rs. 5000 and they would do all necessary work to provide a connection. He paid them Rs. 5000 without obtaining a receipt and was connected within five days. Mr. Rout was grateful for the quick service, and invited them for dinner, spending about Rs. 5000 on food and entertainment. He asked them several times for the receipt and other official documents regarding the connection, but did not receive them. After five months, when a vigilance squad came from Bhubaneswar to that area, the same utility staff removed all wires and disconnected the power supply to Mr. Rout's house. The vigilance squad caught some consumers in the village, but not Mr. Rout. However, he had to apply again for an official connection. Village-level discussions indicate that informal payments for expeditious connections are common. Households that refuse to make such payments claim they are harassed by utility staff, and have to wait six months to a year to be connected. Further, applicants have to make at least six visits to the utility office, with associated costs of meals, commuting, and lost time, not to mention small informal payments (Rs. 200) to utility staff during each visit, as well as the cost of the official connection. The experience is particularly trying for wage-earners, who mniss a day's wages for every trip. Overall, the householder would save money by making the demanded informal payment in the first place. Several of these households have resorted to tapping, especially in the evenings. Sources XIM (1997), TARU (1999). - 25 - INDIA- POWER SECTOR REFORMAND THE POOR 2.6 In Andhra Pradesh, the results of the survey were similar: 70 percent of rural and 43 percent of urban households reported that high connection charges and high tariffs are the main reasons they are not connected (tables 2.2 and 2.3). Table 2.2 Rural Andhra Pradesh-Reasons for Not Getting a Connection Socio High High Behavior/Attitude No No Disconnected economic Connection Tariffs of Utility Staff Interest Infrastructure Group Charges R4 56% 59% 6% 3% 3% 15% R5 63% 88% 13% 0% 13% 0% R6 70% 72% 7% 4% 7% 0% R7 68% 62% 11% 3% 5% 0% All 70% 70% 8% 3% 6% 5% Note: RI consists of households with more than 4 ha of land and at least one member in the house who is a graduate and has a steady income; in addition to households that depend on labor (agriculture, construction, and other manual), artisan activities, and small households industry for their livelihoods. Source: TARU (2001). Table 2.3 Urban Andhra Pradesh-Reasons for Not Getting a Connection Socio economic High High No Others Group Connection Tariffs Infrastructure Charges U5 50% 67% 17% 0% U6 43% 64% 11% 7% U7 42% 53% 3% 16% All 43% 58% 7% 11% Note: Ul category consists of consumers who are graduates/postgraduates and officers/executives, and U7 consists of uneducated/pnmary/middle/skilled persons who are workers with no fixed income Source TARU (2001). 2.7 An analysis of the costs (both fornal and informal) incurred in obtaining a connection reveals that the burden on the poorest households is significant. Among the lowest socioeconomic classes in rural (R6 and R7)9 and urban areas (U6 and U7), 14-20 percent and 24-40 percent of the households, respectively, spend more than their monthly budget to obtain an electricity connection (tables 2.4 and 2.5). In Andhra Pradesh, rural and urban households were classified in seven socioeconormc categones, in decreasing order of wealth. - 26 - INDiA- POWER SECTOR REFORM AND THE POOR Table 2.4 Incidence of Expenditure in Obtaining Electricity Connection in Urban Area of Andhra Pradesh Socioeconomic Proportion of Households Paying M re Than Group 25% of Monthly 50% of Monthly Monthly Household Household Household Expenditure Expenditure Expenditure Ul n.r. n.r. n.r. U2 n.r. n.r. n.r. U3 78% 56% 0% U4 84% 56% 24% U5 85% 65% 35% U6 79% 61% 24% U7 78% 48% 40% All 80% 56% 29% Note: Sample base consisted of 119 villages. Source: TARU (2001). Table 2.5 Incidence of Expenditure in Obtaining Electricity Connection in Rural Area of Andhra Pradesh Socioeconomic Proportion of Households Paying More Than Group 25% of Monthly 50% of Monthly Monthly Household Household Expenditure Household Expenditure Expenditure RI 40 0 0 R2 47 12 6 R3 55 16 8 R4 76 38 13 R4A 70 37 16 R5 73 35 0 R6 67 42 21 R7 65 37 14 Grand Total 66 36 15 Note: Sample base consisted of 572 villages. Source: TARU (2001). 2.8 Erratic power supply was mentioned as another reason for not having a connection, as most low and middle-income households use electricity mainly for lighting purposes, and would have to pay the minimum charge even if electricity were not supplied. One of every three low and middle-income households, in both rural and urban areas, spends more than half of their monthly budget to obtain a connection. The survey also revealed that informal payments for electricity supply made by rural consumers range from Rs. 50 to Rs. 100 per month. To facilitate connectivity and regularize illegal consumers, Andhra Pradesh undertook an intensive campaign for regularizing illegal connections in October 2000, which increased the access rate from 50 to 68 percent in the span of a few months. - 27 - INDIA- POWER SECTOR REFORM AND THE POOR Present Condition of Power Supply and Utility Services, and Its Impact on Consumers 2.9 A common finding of the studies is that a significant number of power interruptions, particularly in rural areas, occur at the time when electricity is most needed. In Kerala, one fifth of the consumers interviewed-98 percent of them from rural areas- reported power cuts.10 In Haryana, about two thirds of rural households reported frequent power cuts between 1300 and 1:00 hours during summer, and half reported power cuts between 1900 and 2100 hours, when the electricity is most required for lighting and other appliances. The situation was better in urban areas, with only 15 to 30 percent of households reporting power cuts when electricity was most needed. In Andhra Pradesh, 40 percent of rural households reported dissatisfaction with the reliability of power supply. During the summer and monsoon period, none of the 191 villages surveyed reported having 24-hour supply. The highest availability, 22 hours, was reported by fewer than 1 percent of the villages; while 20 percent reported power supply for fewer than 12 hours, and 40 percent for fewer than 14 hours. Moreover, 85 percent of households do not receive prior notice of power outages. In urban areas, by contrast, the satisfaction with availability and reliability of power supply is higher than 98 percent. Quality and reliability of supply have become important for the urban population, with about 70 percent of households purchasing equipment such as voltage stabilizers, or becoming self-reliant by investing in back-up invertors and generators. 2.10 Poor and small consumers-households, small and marginal farmers, and small industries-are more severely affected by supply interruptions and poor quality of power due to their limited capacity to invest in invertors, generators, emergency lamps, voltage stabilizers, and other coping mechanisms. In Andhra Pradesh, the survey found that 88 percent of households have spent up to Rs. 2000 on equipment to cope with the poor quality and availability of supply, and that 3 percent have invested more than Rs. 10,000. 2.11 Another common finding of the studies is that the quality of power supply across the states is poor, with low voltage levels and frequent fluctuations. In Orissa, 60 percent of the consumers interviewed reported dissatisfaction with the voltage levels. About 51 percent of rural domestic and 42 percent of urban domestic consumers reported having suffered from unacceptably low voltage levels. The reasons cited for low voltage include overloading of transformers, illegal connections and unauthorized load, lack of proper maintenance of transformers, and long distribution lines. Box 2.2 discusses how people in one village suffering from acute low voltage decided not to pay their electricity bills. Industrial and agriculture consumers are even more adversely affected by the low quality of power-40 percent of industrial consumers and 60 percent of agricultural consumers reported that voltage problems damaged their electrical equipment. About 10 percent of consumers, mainly domestic, reported that voltage fluctuations cause their light bulbs to break. 10 Scheduled power cuts are reported to have been mostly eliminated in all major cities in Kerala in 1999. - 28 - INDIA- POWER SECTOR REFORM AND THE POOR Box 2.2 Low Voltage Doesn't Pay Banasingh, a multi-ethnic village in the Dhenkanal district of Orissa, was connected to the grid in 1969. Until 1987, it had no problems with electricity services and revenue collection. Villagers also actively participated in curbing power and material theft. When the number of consumers in the village increased from 10 to 90 without upgrade of the transformer capacity, however, voltage fluctuations became a problem. The utility staff did not take any action in spite of requests from consumers. As the quality of power supply continued to deteriorate, consumers collectively decided not to pay their electricity bills on the grounds that they were not being provided with proper service. The outstanding electricity bills reached Rs. 10,000 per consumer, well beyond their capacity to pay at one time, and villages now have no interest in helping the utility staff check for power theft. Source: Xavier Institute of Management (1997). 2.12 In Haryana, the proportion of respondents in rural areas reporting poor voltage ranges from 50 to 70 percent during the summer season and 30-45 percent during winter. The power voltage situation is particularly severe in the evening, when lighting is considered essential. About 40 percent of respondents who own a television and refrigerator use voltage stabilizers to cope with low and fluctuating voltages. In fact, rural households in Haryana have invested about Rs. 400 million in stabilizers. As expected, the stabilizers are used mostly by high-income consumers, and some low-income residents of urban areas, where voltage fluctuations range from 20-45 percent in summer and 10-20 percent in winter. Voltage fluctuations are reported by 35-45 percent of urban and 50-70 percent of rural consumers in summer, and 25-30 urban and 30-45 percent rural consumers in winter. 2.13 In Andhra Pradesh, almost three fourths the 191 surveyed villages reported being affected by the frequent voltage fluctuations, which damage appliances. Damage to appliances due to voltage fluctuations and surges was reported by a third of households in rural Andhra Pradesh. The significance of the damage and repair costs is highest among the lowest socioeconomic classes: 1 percent of the households in R7 incurred repair costs exceeding monthly household expenditure; while 3 percent of R6 households, 3 percent of R5 households, 2 percent of R4 households, and 8 percent of Rl households incurred repair costs in the range of 20-50 percent of their monthly expenditure. Damage to appliances was reported by one fourth of urban households. An estimated 2 percent of urban households use 10-30 percent of their monthly expenditure to repair damaged appliances. The relatively higher occurrence of these significant damage costs was found among the higher socioeconomic classes: U2 (5 percent households), U3 (4 percent), and U4 (3 percent). 2.14 Poor customer service. In rural Haryana, 60 percent of consumers expressed dissatisfaction with their service. Satisfaction levels are the lowest for availability, quality of supply, and new service connections. About half the respondents reported that transformer failures occur twice a year. They also reported a high level of delays in repairing transformers and line faults. Other reasons for dissatisfaction are long connection times (80 percent), a high incidence of inaccurate bills (40 percent), and delays in bill verification (80 percent). Consumers also reported having to pay for repair - 29 - INDIA- POWER SECTOR REFORM AND THE POOR material, and for maintenance and replacement of the utility's equipment. In Orissa, consumers cited billing as the main problem. About 40 percent reported irregular billing periods, 9 percent reported miscalculations, 3 percent reported billing without meter reading, and 6 percent reported that they could not get a receipt for payment. In Andhra Pradesh, one third of rural domestic consumers expressed dissatisfaction with services offered by the utility, mainly for inadequate responses to complaints, and for poor repair and maintenance. Of the 1,771 rural households surveyed, more than a quarter reported active rent-seeking behavior by utility staff, and said they had to resort to informal payments to resolve billing problems in their favor. Among the urban households, one fifth reported dissatisfaction with utility billing services. Beneflts Derived from Access to Electricity and Improved Service 2.15 While power consumption by rural households is very low, the benefits derived from its provision are significant. Households are satisfied with a few hours of supply at critical times. In Andhra Pradesh, rural households use electricity for lighting (all households), space cooling (50 percent), radio and television (35 percent), and appliances (10 percent). About half the respondents reported lighting to be the major benefit, one fifth cited space cooling and keeping mosquitoes away through fans, and 5 percent said the electricity benefited their work or primary livelihood (Table 2.6). Table 2.6 Benefits of electricity reported by rural households in Andhra Pradesh Socio- Livelihood Comfort Status Entertainment Household Utility Others economic Work Group Rl 4% 29% 0% 0% 0% 73% 0% R2 3% 34% 1% 1% 0% 59% 2% R3 3% 25% 1% 1% 1% 69% 1% R4 5% 25% 0% 1% 1% 66% 1% R4A 5% 38% 1% 1% 1% 54% 0% R5 7% 9% 0% 0% 0% 82% 1% R6 4% 17% 1% 2% 2% 78% 1% R7 3% 16% 0% 2% 5% 75% 1% All 4% 21% 1% 1% 2% 70% 1% Source: TARU (2001). 2.16 In urban areas, in addition to lighting, electricity is used by a large number of households for space cooling and entertainment (73 percent of respondents own a television, and 40 percent among the lowest socioeconomic class). In Orissa too, lighting is the most important use of electricity, followed by space cooling (three quarters of consumers). The use of electricity for entertainment was reported by 65 percent, and 12 percent use it for cooking (Table 2.7). - 30 - INDIA- POWER SECTOR REFORM AND THE POOR Table 2.7 Major Uses of Electricity for Different Categories of Consumers, Orissa Uses of Dom. Com Agr. Ind. Total Electricity N=288 N=197 N=65 N=114 N=664* Lighting 288 197 19 114 618 (100%) (100%) (29.2%) (100%) (93.%) Cooking 35 2 - - 37 (12.15%) (1.02%) (5.57%) Fan 219 183 4 68 474 (76.04%) (92.89%) (6.2%) (59.6%) (77.39%) Entertainment 186 29 2 3 220 (64.58%) (14.72%) (3.1%) (2.63%) (33.13%) Machines 132 22 - 114 268 (45.83%) (11.17%) (100%) (40.36%) Lift irrigation - - 65 - 65 points (100%) (9.79%) Others 12 22 30 64 (4.17%) (11.17%) (26.3%) (9.64%) Source: Centre for Development Research and Training (1997). 2.17 Electricity improves the lives of the poor in many ways, through the provision of lighting, cooling, safe drinking water, water for sanitation, and communications. The socioeconomic study in Andhra Pradesh reports that lighting makes it easier to carry out household activities such as cooking, cleaning, and studying. In the event of power failure, these activities are carried out by the light of a kerosene lamp or candles. Lighting from electricity also makes it safer for the elderly to move around the house, and enhances security for women. It also enables traditional artisans in villages-potters, carpenters, blacksmiths-who are facing competition from new materials (e.g., plastics) and technologies, to increase production by using mechanical devices. However, the lack of new connections to service this demand, attendant informal costs, and the sometimes incorrect categorization of these consumers, have imposed hardships and contributed to their exit from the market. Box 2.3 What Reform is Expected to Bring During surveys and group discussions, consumers said they expected reform to bring a number of important benefits: * Increased access to electricity * Improved availability of power supply * Improved quality of power supply * Improved service delivery and customer satisfaction * Increased public accountability * Reduced corruption * Improved financial viability of the power sector 2.18 The survey also found that once a household is connected, the loss of power has negative impacts. Urban householders in Andhra Pradesh said that the non-availability of power means they cannot use appliances for household work, or their television for entertainment. One third of respondents said that a disruption in supply has an adverse impact on children's education, with the highest proportion reporting this result coming - 31 - INDIA- POWER SECTOR REFORM AND THE POOR from the upper and middle socioeconomic classes. Adverse impacts on health, including loss of sleep, eye strain, and general unease, were reported by 30 percent of respondents. About 12 percent reported that disruption in electricity supply affects their livelihoods, especially for those who work from their homes, such as artisans and small shopkeepers (Table 2.8). Table 2.8 Impact of Power Interruptions Reported by Urban Households in Andhra Pradesh Socio- On On On On Health On All economic Education Livelihoods Household Information Respondents Group Work Access Ul 36% 20% 56% 48% 24% 25 U2 54% 13% 74% 32% 20% 97 U3 45% 9% 62% 37% 16% 172 U4 44% 12% 62% 34% 8% 178 U5 35% 16% 61% 31% 3% 168 U6 31% 12% 62% 25% 3% 181 U7 26% 9% 52% 19% 2% 171 All SECs 38% 12% 61% 30% 8% 992 Source: TARU (2001) 2.19 One of every two rural households surveyed in Andhra Pradesh indicated that power outages have the maximum adverse impact on household work (Table 2.9). About 28 percent reported a negative impact on education, including households in the lowest socioeconomic class. About 14 percent reported negative impacts on health. One tenth reported negative impacts on their livelihoods, as did more than one fifth of those in category 4A (households without land but with income from a salary or business). A relatively larger proportion of households in higher socioeconomic classes (1 to 3; mainly large and medium-size farmers) reported adverse impacts on their livelihoods. Table 2.9 Impact of Power Interruptions Reported by Rural Households in Andhra Pradesh Socio- On On On On On All economic Education Livelihoods Household Health Information Respondents Group Work Access Rl 25% 14% 54% 23% 21% 56 R2 28% 14% 65% 21% 14% 122 R3 32% 16% 60% 19% 5% 198 R4 30% 9% 56% 16% 3% 257 R4A 39% 22% 64% 17% 5% 180 R5 11% 3% 39% 10% 1% 95 R6 27% 6% 50% 12% 2% 485 R7 26% 7% 44% 10% 1 % 377 All 28% 10% 53% 14% 4% 1771 Source: TARU (2001). 2.20 Box 2.4 presents a case showing the benefits of electricity to farmers. Another benefit, reported by households from the higher socioeconomic classes, is access to information, mainly from radio and television. - 32 - INDIA- POWER SECTOR REFORM AND THE POOR Box 2.4 Electricity: A Boon for Poor Farmers The village of Bengapati in the Jaipur district, of the state of Orissa, is inhabited by 65 refugee families from Bangladesh who settled on a piece of wasteland during 1970-71. They originally worked as daily laborers. In 1982, they were allotted some plots of land by the district authority, and in 1983, electricity was supplied to them under the Special Programme for Agriculture. Fourteen families now use electricity for lift irrigation to cultivate their land. Over a period of about 13 years, all of those families have been able to earn, on average, Rs. 10,000 to Rs. 25,000 per year from agricultural production. They have also been able to provide employment, on a daily wage basis, to more than 100 people, each working 200 man- days per year. Using electricity for irrigation turned a piece of wasteland into cultivated land, and turned laborers into effective farmers, thus improving the qualify of life for all in the village. Source Centre for Development Research and Training (1997). 2.21 Table 2.10 shows that reforms leading to improved power supply are likely to have the largest favorable impact on poor households. Improved public services-street lighting, public water pumping, and health care-benefit lower and middle-income households most directly, since these households suffer more from inadequate public services. Power in rural areas also promotes irrigation and small commercial and business activities, which benefit the poor through increased employment and income generation opportunities. Table 2.10 Major Impacts of Improved Ele ctricity Supply Area Affected Services Affected Impacts Households * Food preparation, preservation, and * Improved health nutrition * Reduced drudgery and increased * Cleaning: water pumping and productivity of women heating, ironing * Improved education of children * Lighting and small appliances (radio, * Improved well being, quality of life TV) for studying, leisure, recreation * Reduced equipment damage and and rest costs * Space cooling: fans, air conditioning Public Services * Street lighting * Improved safety and security * Water pumping and delivery * Children's education * Public phones * Health and sanitation * Improved communication Health Centers, * Refrigeration, sterilization, water * Availability and quality of medical Hospitals supply, lighting, communications care * Improved health Schools * Lighting, small appliances, * Improved education communications Commercial * Lighting, refrigeration, appliances, * Increased productivity Services machines; communications for * Increased revenues stores, markets, hotels, and * Employment opportunities restaurants; office services, food processing Enterprise * Lighting, power tools, appliances, * Increased production and quality Development communications * Increased income generation * Employment opportunities - 33 - INDIA- POWER SECTOR REFORM AND THE POOR Conclusions 2.22 According to the socioeconomic assessments undertaken in India, the major problems faced by the poor households are lack of access to electricity services, poor quality of supply, and poor customer service. Most unconnected households are poor and most belong to scheduled castes and tribes. The reasons for lack of connectivity are mainly high connection charges, high tariffs, long waiting times, and the need to make informal payments to utility staff. The assessments also showed that improving the quality of electricity services would benefit the poor, who cannot afford expensive alternative sources of electricity when grid power is not available, or the repair of appliances damaged by voltage fluctuations. The assessments also showed that the poor are unable to make informal payments in exchange for standard customer services, such as bill rectification, replacement of faulty equipment, or even obtaining a connection. Major positive impacts are therefore expected from improved access, availability, and quality of supply. - 34 - INDIA- POWER SECTOR REFORM AND THE POOR Chapter 3. Electricity Subsidies and the Poor 3.1 In India, subsidies account for a significant share of government expenditures, but they generally are not well targeted or transparently defined. Electricity subsidies for households and agriculture are no exception. Although advocated on the grounds that they have social benefits, the incidence analysis presented in this chapter shows that power subsidies benefit mainly the non-poor and larger farmers. The electricity pricing regime in India fails to achieve its objective of reaching those most in need because the vast majority of poor and marginal farmers do not have access to electricity. In fact, the pricing regimes, including connection charges and flat-rate tariffs, benefit mainly richer households and larger farmers. Incidence Analysis of Household Electricity Expenditures, Subsidies, and Connections 3.2 Pricing of electricity services is one of the key variables affecting the distribution of welfare among different consumer categories. However, very little is known about the nature of electricity tariffs and subsidies in India, and how they affect poor households. This section analyzes that relationship, and attempts to answer the following questions: Are electricity subsidies to households reaching the poor? Does the block tariff structure, based on across-the board subsidies, effectively target subsidies to the poor? 3.3 The analysis is based largely on data from the Consumer Expenditure and Employment Survey of the National Sample Survey (NSS), 54th Round, related to the period January-June 1998 (Government of India 2000). The data allow us to estimate the access rate of the poor to the electncity grid, and therefore the distribution of subsidies among different income groups. Similarly, the data collected on electricity consumption and expenditures allow us to analyze the impact of tariff increases on households by income group, and the appropriateness of the increasing block tariffs in targeting subsidies. Approach 3.4 The NSS collects data at the household level by state, with a rural-urban breakdown for a stratified sample selected from all the Indian states and union territories. The electricity consumption and expenditure data reported in the 54th Round are for the last 30 days for each household, and are based on a household member's perception of the amount paid for electricity.. Investigators normally do not ask to see bills. Although the data do not indicate the type of electricity connections-legal or illegal-a Government official indicated that all types of connections are included." 3.5 As a proxy for the poverty level of the household, we use NSS data on household expenditure for a vast range of items, to calculate a total Monthly Per Capita Expenditure Letter from Mr. Arun Sexena, Director, Ministry of Planning and Programme Implementation, to the World Bank, September 4, 2001. - 35 - INDIA- POWER SECTOR REFORM AND THE POOR (MPCE) variable. Twenty expenditure categories (ventiles) were chosen for this analysis, with each category covering five percent of households.12 3.6 The National Planning Commission uses similar expenditure data to estimate poverty lines at the state and national level. In 1999-2000, all poverty lines, in Rs. per capita expenditure per month, were Rs. 328 for rural areas and Rs. 454 for urban areas. Below the Poverty Line (BPL) households were an estimated 27 percent of the population in rural areas and 23 percent in urban areas (using the 30-day recall period).13 Therefore, the first five expenditure ventiles, or 25 percent of rural and urban households, can be roughly defined as poor. However, given that expenditure is usually categorized by quintiles or deciles, we refer to the first quintile (first four expenditure ventiles) as the poor, and the first decile (first two expenditure ventiles) as the poorest in this analysis. 3.7 NSS data were used to compute household electricity consumption, expenditure, and connection rates for each of the expenditure categories. Data on consumption and expenditures were further combined with the statewide average cost of electricity supply, provided by the Planning Commission, to estimate, in a simplified manner, the incidence of electricity tariff subsidy. The methodology for subsidy calculation, data sources, and results are detailed in Annex 2. Electricity Connections 3.8 Electricity connection rates for the NSS sample of households are shown in Figure 3.1. There is a substantial gap between the average connection rates in urban and rural areas (82 versus 43 percent); and between rich and poor households in rural areas. Nineteen percent of rural households in the lowest expenditure decile and 66 percent in the richest decile have electricity connections. Even among the rural poorest, one fifth are connected, and there is no significant difference between the first and second ventiles. The connection rate in urban areas is quite high-60 to more than 70 percent, even for the poor. This may be due to the inclusion of illegal connections in the survey results (see Box 3.1). 12 The choice of 20 categories instead of 5 (quintiles) or 10 (deciles) was intended to provide greater insight into electricity consumption and expenditure patterns, particularly for the poorest of the poor. 3 Saxena (2000). - 36 - INDIA- POWER SECTOR REFORM AND THE POOR Figure 3.1. Electricity Connections by Expenditure Category 100 80 70~ CL X 50 _ % / .2 40 -- a 3~~~~~~~~~~~0- Rural -i- 2. Urban 10 -_ -*K- Combined 0 O I I I I I I 1 3 5 7 9 11 13 15 17 19 Expenditure category (ventile) Source National Sample Survey (1998). Box 3.1 Electricity and the Urban Poor: The Delhi Slum Study Roughly 1.8 million people live in the slums of New Delhi; and including unauthorized colonies and resettlement colonies, the number of people living in substandard areas has reached 4.7 million-about half the total population of Delhi. These areas have a poverty incidence of 75 percent and higher, although large income disparities are reported, with some slum dwellers earning more than Rs. 5,000 per month. How exactly do urban slum dwellers relate to electricity? Interesting insights are provided by an ERM study of energy use patterns in the slum areas of Delhi, with an emphasis on electrification. The study focused on notified jhuggi-jhopri (JJ) clusters that have access to basic amenities including street lighting, and on a sample of households from two unauthorized colonies with no legal electricity supply. Even though none of the surveyed households had a legal connection, all of them used electricity, and all possessed at least two electric gadgets, mainly for lighting (bulbs and tubelights) and cooling (fans and coolers). In unauthorized colonies with no access to public lighting connections, dwellers rely on neighbors with generator sets. The situation in the JJ clusters, where electricity supply is available, is different. Theft is prevalent, and the common practice is to hook into the nearest street lighting connection. Since there are no payments to the government for these illegal connections, and no meters, consumers bear costs of only Rs. 25-50 per month, for installing, maintaining, and repairing their wires. In other places, where wires can be maintained by local electricians, the cost is as low as Rs 5-10 per month. Many households, however, are willing to pay more for a legal and regular supply. Forty-one percent of respondents, including the majority of higher-income households and about one fourth of lower-income dwellers, have deposited Rs. 360 with Delhi Electricity Supply Undertaking (DESU, now DVB) to have a meter installed in their homes. But two years after accepting the deposits, DVB has yet to fulfill the orders. Source: Environmental Resource Management (1999). - 37 - INDIA- POWER SECTOR REFORMAND THE POOR 3.9 Tables 3.1 and 3.2 show electricity connection rates for the poorest (first decile) and the poor (first quintile). Of all connected households, only 4 percent can be characterized as poorest and 10 percent as poor. In rural areas, 81 percent of the poorest and 77 percent of the poor are not connected, while in urban areas, connection rates for the poorest and poor are 36 and 31 percent. In total, 73 percent of poor households are not connected, and therefore do not benefit from the electricity tariff subsidy. This 73 percent represents a huge error of exclusion from a public program aimed at helping the poor to afford electricity. Table 3.1 Electricity Connections (Coverage Rates) in the Poorest Category, First Expenditure Decile or First Two Ventiles Statistic Electricity Connections (Percentage) Rural Urban Combined Proportion of households connected that are poorest 4 8 4 (HH poorest, connected / HH connected) Proportion of poorest households that are connected 19 64 23 (HH poorest, connected / HIH poorest) Proportion of poorest households belonging to scheduled case or 10 15 10 tribe that are connected. (HH poorest, connected SC/ST / HH poorest) Proportion of poorest households that are not connected (error of 81 36 77 exclusion) (H-H poorest, not connected / HH poorest) Source. National Sample Survey (1998). 3.10 On the other hand, it should be recognized the 19 percent of the poorest households in rural areas were able to obtain a connection. More than 50 percent of these are from a scheduled caste or tribe (ratio between the third and second rows in Table 3.1) By comparison, in urban areas less than one fourth of the poorest households with connections are from a scheduled caste or tribe. For the poor group of households (Table 3.2), the overall connection rate is higher, but the proportion of connected scheduled caste or tribe households remains the same as for the poorest group. This pattern may be due to the impact of specialized schemes for the poor, such as the Kutir Jyoti Program, which provides single bulb connections to the rural poor, with emphasis on scheduled castes and tribes (see Box 3.2). - 38 - INDIA- POWER SECTOR REFORM AND THE POOR Table 3.2 - Electricity Connections (Coverage Rates) in the Poor Category, First Expenditure Quintile or First Four Ventiles Statistic Electricity Connections (Percentage) Rural Urban Combined Proportion of households connected that are poor 11 17 10 (HH poor, connected / HH connected) Proportion of poor households that are connected 23 69 27 (HH poor, connected / HH poor) Proportion of poor households belonging to SC/ST that are 10 14 10 connected (HH poor, connected SC/ST / HH poor) Proportion of poor households that are not connected (Error of 77 31 73 exclusion) (HH Ipoor,_not connected / HH Ipoor)___________ Source: National Sample Survey (1998) - 39 - INDIA- POWER SECTOR REFORM AND THE POOR Box 3.2 Electricity for the Rural Poor and Vulnerable: The Kutir Jyoti Program The Kutir Jyoti Program (KJP) is a Government-sponsored scheme implemented under the aegis of the Rural Electrification Corporation (a Government of India undertaking). The program was launched in October 1988 to provide single point light connections to rural poor households, with special quotas for Harijan and Adivasi families. The beneficiaries of the program are not charged the one-time cost of internal wiring or a connection fee. Monthly bills are usually nominal, mostly based on a flat rate. The program has been under implementation in all Indian states for about 10 years, with the major beneficiaries being the states of Andhra Pradesh, Bihar, Karnataka, Madhya Pradesh, Marahashtra, Tamil Nadu, Uttar Pradesh, and West Bengal. Under the program, the Government provides a fixed annual grant to REC, which in turn sets up connection targets for various states. State Electricity Boards are responsible for executing the target connections, against which they receive the grant through REC. Recently, REC commissioned a study (ORG 2000) to evaluate the performance of the program and its socioeconomic impact in rural areas. The study was based on a survey of 1,000 households with KJP connections and 200 households with no electricity connections across Bihar, Karnataka, MP, Mahrahsthra, and Uttar Pradesh. The main findings are as follows: Socioeconomic Impact of the Program. According to the study, the availability of electricity changed the activities of household members especially during the 1800 to 2200 hours period. In particular, study hours of children, rest periods for women, and the time spent by women in household work were significantly affected. While respondents were not forthcoming about changes in employment and income levels, investigators observed that small businesses were set up in residences, and women were engaged in productive activities during the extra hours of light in the evening. Other recorded social impacts are increased safety against wild animals, safety against theft, enhancement of social and cultural activities, and increased recreation at home. Beneficiary Identification. The study found that more than 60 percent of households with a KJP connection belong to the poorest of the poor. To avoid untargeted connections (i.e., for households above the poverty line), the study recommends that REC revise the KJP criteria for defining rural poor to be in line with those adopted by the Planning Commission. Beneficiary Misuse. The survey also found that about half the interviewed households with a KJP connection were using more than the one allotted electric bulb. Despite the fact that KJP is supposed to help consumers make the transition to a regular domestic connection, virtually no beneficiaries in the sample have switched to a regular connection. The recommendations are to introduce penalties for misuse of KJP connections, and inspections by utilities to ensure that households switch to a regular connection once their socioeconomic status improves. Potential Beneficiaries. Only one third of the potential beneficiaries were aware of the KJP program. The KJP differs from other social assistance programs in the following ways: (a) it envisages a cluster approach or least-cost option for release of connections; thus all eligible potential beneficiaries do not have an equal chance of being selected for a KJP connection; and (b) the program is not available for target beneficiaries residing in non-electrified villages. For these reasons, there is little scope for target beneficiaries to come forward and ask for a KJP connection. Instead, the Gram Panchayat, (a local body) prepares a list of potential beneficiaries, which is used by the SEBs for beneficiary selection. This could be one of the reasons for low awareness of the program. One recommendation, therefore, is to introduce as a new criterion the number of non-electrified rural households in a cluster (for instance, a hamlet). A separate cost-of-installation ceiling, depending on the distance from the nearest pole, could then be considered for consumers living in that cluster. Source: ORG (2000). - 40 - lNDIA- POWER SECTOR REFORM AND THE POOR Electricity Subsidy 3.11 Across all households-connected and unconnected-electricity subsidies are regressive (figures 3.2 and 3.3), due mainly due to the low level of connections among the poor. Subsidies are more regressive for rural than for urban households (except for the richest decile), due to the lower level of connections and income compared to urban areas. 3.12 While the subsidy (as a share of household budget) is not regressive for connected households, it is very poorly targeted: about 90 percent of the total subsidy goes to the non-poor (see Annex 2). The richest 20 percent receive twice as much subsidy as the poorest 20 percent in rural areas, and 3 times as much in the urban areas. Furthermore, the amount of the subsidy increases very significantly for the top 5 percent of urban households, which get 8 times the subsidy received by the poorest 5 percent. Overall, the top 20 percent of all connected households receive 48 percent of the total tariff subsidy, compared to only 6 percent received by the bottom 20 percent. Figure 3.2 Electricity Tariff Subsidy for Rural Connected and Non-connected Households 50.0 - 1.8 45.0 1.6 . 40.0 1.4 o 35.0 - 1.2 ° 30.0 i. a >. 25.0 - , - 20.0 -0.8 an 15.0 -U- Electricity subsidy, 0 U 6 u 10.0 - Rs/household/month - 0.4 D 5.0 ---"Subsidy as a share of total - 0.2 u0 O expenduture, %" 0.0 0.0 N t c r r L r S C a ) o 'It ( r- C cn o Expenditure category (ventile) Source: National Sample Survey (1998) -41 - INDIA - POWER SECTOR REFORM AND THE POOR Figure 3.3 Electricity Tariff Subsidy for Urban Connected and Non-connected Households 450.0 - - 4.5 - Electricity subsidy, 400.0 Rs/household/month - 4.0 . -4"Subsidy as a share of total 350.0 - expenduture, %" 3.5 o 300.0 3.0 ° 250.0 2.5 200.0 2.0 u 150.0 . ww 100.0 1.0*i 50.0 - a tffJ ' 0.5 tn 0.0 0.0 C CO St LO CD , 00 a) o x CO "t LO CD rN CO o)C , , . r r r - - N Expenditure categories (ventiles) Source National Sample Survey (1998) 3.13 A better targeting of tariff subsidies could save significant resources. A preliminary analysis based on NSS data (see Annex 2) shows that savings from withdrawing tariff subsidies to non-poor households would be equivalent to more than three times (Rs. 6.4 billion) the cost of providing tariff subsidies'4 to all poorest households (Rs. 2.0 billion), including those yet to be connected. Electricity Consumption 3.14 Electricity consumption is highly correlated with income-connections are higher at higher income levels, especially in urban areas, where the consumption level jumps for the richest 5 percent (see Figure 3.4). In rural areas, the level of consumption is lower and increases gradually at higher levels of income. Monthly consumption for poor rural and urban households average 30 kWh and 50 kWh per month, respectively. The richest quintile of rural households consumes about as much electricity as the poorest quintile of urban households. 3.15 Only 30 percent of urban households consume more than 100 kWh per month. If confirmed by additional studies,'5 this could indicate that a differential approach is required to better target subsidies to the rural and urban poor. For urban households, additional state-level studies could be conducted to assess the minimum consumption 14 At the current level of tariff and consumption but excluding capital subsidies. 15 More studies are needed to confirm this finding on the flat pattern of electricity consumption by different income groups. -42 - INDIA- POWER SECTOR REFORMAND THE POOR level and corresponding lifeline rate, in order to make the increasing block tariff structure more effective in targeting the poor (see Box 3.3). For rural households, however, the increasing block tariff does not seem to be an effective measure. In this case, indicators other than electricity consumption should be used to identify and target poor household consumers. Figure 3.4 - Household electricity consumption - NSS 1998 E> 250 - 0 Electricity Expendirul 0~ 00 c 50 __ _ _ 1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 Expenditure categories (ventiles) Source: National Sample Survey (1998). Electricity Expenditure 3.16 For households connected to the electricity grid, expenditures on electricity average 3 percent of the household budget. Despite differences in electricity consumption, this share of electricity expenditure is only slightly higher for urban households than for rural households-3.4 and 2.7 percent, respectively. This reflects the lower income of the rural population as well as the minimum charges that consumers have to pay regardless of the level of consumption. -43 - INDIA- POWER SECTOR REFORM AND THE POOR Box 3.3 Residential Tariffs in India In India, retail electricity tariffs are determuned by the states. In the last few years, the majority of states have set up State Electricity Regulatory Commissions (SERCs) which are responsible for determining retail electricity tariffs. Tariffs for the same category of consumers vary across states For residential consumers, states have historically opted for increasing block tariffs. The table below shows that even the first block of consumption, which is expected to be subsidized (i.e., lifeline rate), is different from state to state.() Ideally, the magnitude of the first block of consumption should be based on acceptable criteria for identifying low-income groups, and reasonable estimates of their consumption levels. Compari on of Residential Tariffs in Selected States State Units Consumpton Slabs and Tariffs(') Delhi kWh/Month 0-100 101-200 201-400 Above 400 Rs/Unit 1.00 1.75 2.50 3.00 Haryana kWh/Month 0-40 40-300 Above 300 Rs/Unit 2.60 3.60 4.25 Himachal kWh/Month 1-45 46-150 151-300 Above 300 Pradesh Rs/Unit 0.70 1.05 1.50 2.25 kWh/Month 0-30 31-100 - - Karnataka RstUnit(31 1.25 2.05 - KWh/Month 0-100 101-300 301-400 Above 400 Rs/Unit14T 2.50 3 25 4.00 4.50 Madhya Pradesh kWh/Month 0-100 101-200 Above 200 Rs/Unit 0.80 1.40 2.05 Maharashtra kWh/Month 0-30 3 1-100 101-300 Above 300 Rs/Unit 0.75 2.50 3.00 4.60 Onssa kWh/Month 0-100 101-200 Above 200 Rs/Unit 1.40 2.30 3.20 Rajasthan kWh/Month 0-50 51-100 101-300 Above 300 Rs/Unit 1.12 1.33 1.54 1.65 Tamil Nadu kWh/Month 0-25 26-50 51-100 101-300 Above 301 Rs/Unit(5) 0.65 0.75 - - - 0.75 0.85 1 50 2.20 3.05 Uttar Pradesh kWhtMonth 0-100 101-300 Above 300 Rs/Unit 1 80 2.25 2.80 Andhra Pradesh kWh/Month 0-50 51-200 201-400 Above 400 _ Rs/Unit (I) Virtually all SERCs that responded to our questionnaire explained that they simply continued to use the previously set consumption slab. (2) Energy charges are given for FY 2000-2001 except for Rajasthan. In that case, the latest available information is from FY 1999. (3) Tariffs are for consumption up to 100 kWh per month or 200 kWh for two months. (4) Two sets of tariffs are provided. Tariffs in the first row apply to monthly consumption up to 200 kWh. Tariffs in the second row are for monthly consumption above 200 kWh. (5) Energy charges are fixed at Rs 2.50 per unit for registered societies, for their residential colonies having not less than 20 houses in the colony, and for other residential colonies such as multi- storied residential complexes taking load in bulk at a single point. Lifeline tariffs should reflect the ability to pay of the poor, keeping in mind utility revenue constraints. This approach may be reinforced by appropriate connection policies, as well as by non-tariff instruments to assist the poor. It should be noted that electricity tariffs for higher-consumption slabs are also subsidized, and sometimes do not even cover the utility's operating costs. Source: State Electricity Regulatory Commissions. -44 - INDIA- POWER SECTOR REFORM AND THE POOR 3.17 Figures 3.5 and 3.6 show the distribution of electricity expenditures-in absolute terms and as a proportion of total household expenditures-across expenditure categories for rural and urban households connected to the grid. As a share of total expenditure, electricity expenditures have slightly different patterns for rural and urban households. Notwithstanding small variations, the share of electricity expenditure in total expenditures is essentially constant for urban households: 3.4 percent for the lowest quintile and 3.6 percent average for the top quintile. For rural households, this share decreases for higher expenditure levels, with the poorest households (lowest decile) paying the largest share of total expenditure-3.2 percent, and the richest (top decile) paying the smallest share-2.1 percent. Figure 3.5 Electricity Expenditures for Rural Households 80 4.0% 70 3.5% X 0 sO 60 - -XXx_X-x-x<-x-x-x - /)< /\ x-x-xt \ - -3.5% 2 : = 250 o ~ ~ lctiiy3.0% .3 v E ElectriciUtyexpenditure, 200 Rs/household/month 2.5% r X. xO~~~~~~~~~~~~~~~~ D (fl 150 -x- Electricityexpenditure - 2.0% 0 O as a share of total O .# 1.5% o > 100 - vexpenditure, % v5 1.0%o 50 0.5% X" o 0 0.0% 1 2 3 4 5 6 7 8 9 1011 121314151617181920 Expenditure category (ventile) Source National Samnple Survey (1998) 3.18 By comparison, non-connected households consume an average of 3.7 liter per month of kerosene as their primary source of energy for lighting,'6 at an average cost of about Rs. 18 per month. This is equivalent to 24 percent of the average electricity expenditure of connected households (Annex 2). In rural areas, the poorest 25 percent are reported to spend an average of about Rs. 14 per month on kerosene for lighting, equivalent to 45 percent of the expenditure on electricity in the corresponding connected households. 3.19 The tariff required for utilities to reach full cost recovery from households- estimated to be twice the present level-would result in an approximate doubling of the electricity bill as a percentage of total household budget. A preliminary analysis (see Annex 2) indicates that, for the poorest households, particularly in rural areas, the impact would be significant-their electricity bills more than double, from 3.2 to 8.8 percent. Therefore, some targeted support would be required. The regressive impact of tariff increases on the poorest customers revealed by this analysis is consistent with other studies of the incidence of electricity expenditures undertaken in India and elsewhere (see ESMAP 1999, Lovei et al 2000, Armar 2001, Lampietti et al 2001). In other countries, such evidence has been used by governments to design special programs to protect the poor during utility reforms. This experience is discussed in Chapter 4. In this context, Annex 3 reviews some targeted Public Distribution System schemes in India. 16 In the 1998 NSS survey, 90 percent of non-connected households reported using kerosene as their primary source of energy for lighting. In the analysis, we excluded fewer than 2 percent of these households, which reported also using kerosene for cooking. Overall, 5,385 non-connected households were used in the analysis. -46 - INDIA- POWER SECTOR REFORM AND THE POOR Farmers, Equity, and Electricity 3.20 The positive impact of electrification on agricultural productivity has been the basis of India's rural development program for the last several decades. However, the consequences and problems associated with subsidies extended to farmers using electric pumps are now well known. Given the negative impact of the subsidies on the financial health of the electric utilities, an important question is whether these subsidies are being distributed in an equitable manner in rural India. In this context, recent studies (ESMAP 2001a, World Bank 2001c) on the use of electricity by farmers found that subsidies benefit mainly large farmers, who receive 80 percent of the total. This is due to the limited access to electricity by small farmers, and to the regressive effect of the present tariff structure. 3.21 The number of farmers benefiting from electricity subsidies varies significantly among farmer classes and states. Because of their greater access to agricultural pumps, the richest states and the largest farmers are taking greater advantage of the subsidies. Marginal farmers constitute about 43 percent of the farm population in the states of Maharashtra, Andhra Pradesh, West Bengal, Punjab, Himachal Pradesh, and Rajasthan (ESMAP 2001a). However, in these states, marginal farmers have only 5 percent of the electricity pumpsets (Table 3.3). The use of electricity for agricultural pumping is highest in Punjab, a wealthy agricultural state. Subsidies for agricultural pumping do appear to be drawing farmers away from using diesel pumps, but there may be other reasons for this as well, such as greater convenience and the problems associated with using diesel engines with submersible pumps. Table 3.3 Extent of Electric and Diesel Pumping by Farmer Class in Rural India, 1996 % of All % with % with % with Farmers in Pumps Electric Diesel Category. Pumps Pumps Farmer Class Large (GT 3 Hectares) 23 34 27 13 Medium (2-3 9 27 21 8 Hectares) Small (1-2 Hectares) 25 21 16 9 Marginal (LT 1 43 8 5 4 Hectare) State Maharashtra Na 23 22 1 Andhra Pradesh Na 13 10 2 West Bengal Na 6 1 6 Punjab Na 83 60 52 Himachal Pradesh Na 1 0 1 Rajasthan Na 13 6 7 Average 100 14 14 8 Source: ORG (1996) (World Bank 2001) -47 - INDIA- POWER SECTOR REFORMAND THE POOR Box 3.4 Power Supply to Agriculture and Willingness to Pay A recent study found that power conditions in rural areas are characterized by poor reliability and quality of supply, with quality measured by the incidence of voltage fluctuations and transformer burnout, and phase imbalance. An econometric analysis, based on data from a metering study and recall surveys of farmers in Haryana over a one-year period, demonstrates that poor quality is responsible for significant direct and indirect costs to farmers. Willingness to pay for improved power supply is therefore quite high, especially among marginal and small farmers. The study provides estimates of their willingness to pay for different power supply indicators. Marginal and small farmers are willing to pay about four times their present level of tariffs for an additional hour per day of power in the short run, which is defined as the period during which the type of irrigation technology used remains constant. However, medium and large farmers seem to have a zero valuation for power availability at the margin, indicating that, given their technology choices, available power supply does not currently constrain them, and greater availability is not likely to have any short-run effects on their net farm incomes. This result has major implications for the efficiency of resource use, because it implies that important resources such as water and power have a zero marginal valuation in the short run for around 60 percent of the electric pump owners in Haryana. To improve conservation of these scarce resources, it is therefore imperative to shift to energy metering and per unit tariffs. While the willingness of medium and large farmers to pay for improved reliability (rather than availability) of power supply is quite high in the short run, marginal and small farmers attach no significance to improving reliability in the short run. In the medium run, however, given the time to adjust irrigation technology choices, the effect is quite large. Marginal and small farmers have over-invested in electric horsepower as a way to cope with the unreliability of supply. Should reliability improve, these farmers can be expected to shift, over time, to lower-horsepower pumps and thus lower their costs. The willingness to pay for reduction in days lost due to transformer burnouts is also quite high for medium and large farmers, suggesting that, in general, these farmers value improvements in reliability and quality much more than increases in availability. Source: World Bank (2001c). 3.22 The large farmers, who are presumably in a position to pay more for electricity, are getting the largest share of the subsidies directed toward pumping. As a corollary to owning more pumps, the large farmers use more electricity. Since electricity pricing in most areas is based on pump size and not on consumption, large farmers pay less per kilowatt hour than smaller farmers for the electricity they use. 3.23 The regressive nature of the flat tariff structure for irrigation pumpsets has also been illustrated in another recent study (World Bank 2001c). The study found that for electric pump owners in Haryana, electricity tariffs account for a small but regressive share of gross farm income. While, on average, electricity expenditures are equivalent to about 9 percent of gross income, the percentage decreases (Figure 3.7) from a high of 13 percent for marginal farmers (owning land of less than one hectare) to about 6 percent for large farmers (more than five hectares). The study also found that marginal and small farmers are willing to pay higher tariffs for improved availability of power in the short run, and that improved reliability in the medium run is of particular value to them (Box 3.3). -48 - INDIA- POWER SECTOR REFORM AND THE POOR Figure 3.7 Electric Pumps Only: Irrigation Cost as a Percent of Gross Farm Income in Haryana 40- 0 25 ci) 2, 20 2 0 Marginal Small Medium Large Overall C: Fixed Cost of Pump 12.1 11 9 8 6 6 9 7 and Well/yr,% O Purchase of Water,% 0 0.01 0 0 0 O Motor Burnout,% 10 15 4.56 2.39 1 64 4 52 O Pump Maintenance ,% 2 22 0.93 0 43 0.37 0.94 *Tariff,% 13.27 10.42 6.09 6.08 8.84 Source: World Bank (2000c). 3.24 The importance of metering farmers' electricity use, and of introducing a new tariff structure based on energy consumption, are increasingly recognized as a way to identify those farmers who need subsidies, and to target those subsidies more transparently. 17 Conclusions 3.25 The incidence analysis demonstrates that electricity subsidies in India are not well targeted and mainly benefit the non-poor. This is because of the low access to electricity by poor households and the low and relatively flat electricity consumption across income. On average, only 10 percent of households with an electricity connection are poor, and 73 percent of the poor are not connected. Rural poor are particularly disadvantaged, with 77 percent non-connected. For those connected poor and non-poor, the share of electricity expenditures is relatively flat, averaging 3 percent, with the poor spending about the same share of income as the non-poor. 3.26 Given this relatively flat consumption pattern, there seems to be little scope for targeting the poor(est) through block/lifeline rates, as virtually all poor and non-poor households would become part of the subsidy scheme. The analysis also demonstrates that for households connected to electricity, the impact of increasing tariffs to full cost recovery would be an approximate doubling of the percentage of the household budget spent on electricity, from an average of 3 to 6 percent. In that case, some targeted 17 India has experimented with other subsidy programs, such as the Public Distribution System, a food subsidy program that is more transparent than tariff subsidies and has done a better job of targeting the poor. -49 - INDIA- POWER SECTOR REFORMAND THE POOR support may still be required for poor rural households, which would see their electricity bills increase to more than 8 percent of their total budget. 3.27 Poor households can therefore be helped by increasing their access to electricity and by better targeting subsidies. How can reform help achieve these goals? Grid-based rural access by the poor could potentially be facilitated by special programs, such as the Kutir Jyoti scheme. However, the scheme needs significant improvements so that beneficiaries can be identified more accurately and subsidies are not misused. A review of connection charges at the state level is also needed, to assess whether they can be revised to facilitate access by the poor. Off-grid solutions, such as renewables and decentralized generation, should also be explored. 3.28 The present subsidy regime is too costly and ineffective, and needs to be revisited to facilitate access by the poor. According to the preliminary estimates from this study (see Annex 2), it would be possible for India to achieve a net savings of about Rs. 6 billion a month by eliminating electricity subsidies to the non-poor. This would be more than enough to cover the Rs. 2 billion per month needed to subsidize, at the present level of consumption and tariff (excluding capital subsidies), all poor households presently connected and non-connected. 3.29 Electricity subsidies to farmers are also heavily mistargeted. They benefit mainly medium and large farmers (owning more than 2 hectares of land) because most small and marginal farmers (owning fewer than 2 hectares) do not have access to electricity, and because of the regressive effect of the present tariff structure based on the horsepower level of the irrigation pumpset. Furthermore, recent studies have highlighted the importance of metering to target more vulnerable groups, since metering would make possible a tariff structure based on energy consumption, possibly including lifeline rates. Alternative subsidy mechanisms other than tariffs should also be explored. This conclusion also points to the need for metering farmers to reduce losses, which also hurt the poor.'8 18 Lack of metering penalizes the poor for several reasons. Tariffs not based on actual consumption benefit those who can use electricity the most. Camouflaging theft as losses also penalizes the poor because it results in low quality of services, financial difficulties of utilities, and therefore higher costs and tariffs. Since a large part of the power supplied to agriculture is unmetered, utilities have continuously disguised losses as consumption of power by agriculture consumers. - 50 - INDIA- POWER SECTOR REFORM AND THE POOR Chapter 4. International Experience with Providing Electricity to the Poor 4.1 Many countries around the world are reforming their power sectors, and looking at ways to motivate energy suppliers, through market and regulatory incentives, to extend services to the poor. The record in this respect comes mainly from reform and privatization experience in Latin America and the transition economies of Europe (see Annex 4 for a review). 4.2 Despite their differences with India in terms of poverty levels, electrification, and average income, experience in the Latin American and Eastern European countries is useful because it outlines a range of options to help poor consumers, and identifies the necessary conditions for these options to work. Other countries, including Bangladesh, have undertaken innovative schemes to promote rural electrification. This chapter briefly summarizes international experience in three areas: extending rural access, increasing connections to the urban poor, and helping poor consumers pay their utility bills. Extending Rural Access 4.3 In many low and middle-income countries, power sector reform programs face the challenge of expanding service coverage. Experience suggests that without a special government effort, the reform of electricity networks is unlikely to substantially increase rural access. The very cost structure of grid electricity services is unfavorable to extending access to low-density, scattered rural populations, where the cost of service provision is high and returns to investors are low (Powell and Starks 2000). With the exception of very small providers, there are not yet many instances of private investors spontaneously extending power services to remote areas. An incentive structure that promotes rural access and markets is required. In the Indian context, the removal of barriers to private entry into rural electrification projects, and creation of an enabling environment for private sector involvement, are perhaps even more important. 4.4 Most governments around the world subsidize rural electricity services. However, a common feature of all successful cases of rural electrification is that service providers are able to fully cover their operating costs, as well as part of their capital costs (with some capital cost subsidies), and operate on a commercial basis. Well-conceived subsidy mechanisms for rural electricity suppliers, such as subsidized loans for construction cost, lower bulk supply tariff, and transfer of existing rural electrification assets at low cost, allow operators to charge tariffs that ensure their business will be financially sustainable (Box 4.1). - 51 - INDIA- POWER SECTOR REFORMAND THE POOR Box 4.1 Designing Subsidies to Promote Access of the Poor In designing a subsidy scheme, the following important questions must be carefully considered: Whom to subsidize? If subsidies are meant to improve the welfare of the poor, they must be directed to the people who cannot afford access to high-quality energy services. These are typically the very poor, living in rural areas. What to subsidize? Evidence from other countries shows that providing a partial subsidy for the cost of connection is more effective than a subsidy for ongoing energy charges. Capital subsidies for access costs not only reduce the cost of service to the poor, but also encourage businesses to increase connections in rural areas. How to subsidize? Subsidy implementation mechanisms are broadly categorized as demand side and supply side. Although further study is needed to establish the right mechanism for India, demand-side subsidies that involve partial funding of connections generally work better. Demand-side subsidies have better targeting properties and provide greater incentives for expanding coverage and sustaining services. With the possible exception of lifeline rates, supply-side subsidies, although easier to implement, have the disadvantages of being difficult to target, undermining efficient service delivery, and raising costs above what they would otherwise be. While the proper design of the subsidy scheme would improve its effectiveness in reaching the poor, its ultimate success also depends on effective institutional structures; regulations that allow businesses to charge remunerative prices for energy services; mechanisms to offset the tendency of politicians to divert subsidies to political interest groups; and the active involvement of community groups in the scheme's design. Source: Barnes and Halpern (2000). 4.5 There is also a need to identify institutional models for delivering effective rural electricity services that may be different from the traditional utility model, especially for off-grid services. In many cases, the extension of distribution networks to supply electricity to scattered rural users is not the least-cost solution, and alternative systems of distributed power-photovoltaic, small hydro turbines, or diesel-run generators-have an advantage. In India, out of 80,000 remaining villages without electricity, 18,000 remote hamlets are classified by the Government as "non-electrifiable" through the grid and would therefore require off-grid solutions, including renewable sources of energy. Grid supply to rural areas may also warrant special models, and worldwide and regional experience points to a number of possible options, such as rural cooperatives, franchisees, and energy service companies.'9 Boxes 4.2 and 4.3 highlight lessons from a grid model of rural cooperatives in Bangladesh and a successful multi-model approach in Costa Rica. 19 An ongoing study on rural access to electricity services in India examines alternative service models in detail. - 52 - INDIA- POWER SECTOR REFORM AND THE POOR Box 4.2 Rural Electricity Cooperatives: Lessons from a Grid Model in Bangladesh Although there are other models, many of the rural electric cooperatives in developing countries are patterned after the rural electrification program in the United States. They can be characterized as grid electricity distributors, which in most cases purchase electricity from a national grid. Although some are involved in renewable energy as well, this business is relatively small compared to their main business of grid service to rural consumers. A case of particular interest is Bangladesh, a country with a very poor rural population and with a 15 to 20- year history of electricity service through rural electric cooperatives (Waddle 2000). In that country, all new cooperative service areas, prior to approval, must satisfy revenue requirement standards. Feasibility studies are performed to determine whether the revenue requirements are met, not only for the entire cooperative (PBS), but also for each service area within the PBS. Some communities may remain without electricity until the population and the associated potential for productive use loads grow to the point that they qualify to be included in the PBS electrification plan. The revenue requirement standards allow for financial losses, referred to as negative margins, during the first several years of PBS operation, reflecting the fact that load growth may be gradual as the system infrastructure is developed. The electrification program is designed to support the process of PBS development by providing cash flow support, as well as low-interest loans with long repayment periods. The program funds allow PBS operations to mature through the first five years of service. After this period of developing load and markets, the PBSs are expected to reach financial stability. The program support funding, while available to all PBSs, is quite limited and very closely monitored. Subsidies are in the form of below-market interest rate loans that are used mainly for new construction, and a cross-subsidy in the form of lower power purchase costs from the public utility. The goal of financial and operational viability is explicit in the development of the cooperatives. The subsidies are intended as incentives for them to develop a business to serve rural populations. Program administration costs are not very high, as the subsidies are in the form of subsidized interest rates on loans to the cooperatives. The cooperatives then are responsible for ensuring that rural people have access to energy services. As indicated, in the beginning phases of most rural electrification programs, the subsidies are not very well targeted, because the early adopters of electricity are usually non-poor households. However, over time the subsidy is likely to reach a greater number of poor people. Finally, the subsidy is targeted toward the grid distribution program and generally is unavailable for other energy service providers, so there is some limited distortion in energy markets. A better, and more difficult to administer, policy would be to provide all energy service companies with the same incentives as those received by the rural electric cooperatives. This would allow for a variety of service providers-many promoting off-grid technologies-to develop in areas that will not be reached by the cooperatives for a long period of time Source: Barnes and Halpern (2000). - 53 - INDIA- POWER SECTOR REFORM AND THE POOR Box 4. 3 Rural Electrifilcation Lessons from a Successful Program in Costa Rica Rural electrification is one of Costa Rica's success stories. In the 1960s, as few as 20 percent of the people in rural areas had access to electricity. At that time, despite growing demands from rural areas, rural electrification remained a low priority for the public electricity company. By the early 1970s, with assistance from USAID, four rural electrification cooperatives were set up around the country. All four of these cooperatives have prospered and now provide electricity supplies to about 20 percent of the country's rural population. In the meantime, most of the remaining rural areas were provided with electricity by the national utility. By the end of 1995, more than 90 percent of the rural population was connected to the national electricity supply system. Given the problems involving rural electrification in other countries in the region, what were the factors that led to such an impressive achievement? While some of the factors that led to success are unique to Costa Rica, others are more general and applicable to most rural electrification programs. * Economic conditions favored rural electrification, with high family incomes and a strong willingness to pay for electricity service. * The task of urban electrification was virtually completed by the start of the program, so there was a strong institutional base to support the rural electrification program. * The original cooperatives concentrated their efforts on distribution and were not distracted by power generation. * The cooperatives were financially viable and required to cover their costs through adequate electricity pricing, which enabled them to recruit and keep qualified and high-quality staff; * The cooperatives were very independent and were not subjected to much political pressure. * And finally, there was strong Government support for rural development, and effective collaboration between rural development efforts and the various power agencies. Rural electrification in Costa Rica was successful because it was based on principals of cost recovery, operational autonomy, a public service ethic, community involvement, proper timing of projects, and an effective regulatory framework.. Source: Foley (1996). Serving the Urban Poor 4.6 In many countries, including India, access is an issue not only for rural populations, but also for residents of poor urban neighborhoods and slums. As described in Chapter 3, almost 40 percent of the urban poorest (lowest decile) in India do not have an electricity connection. A similar situation existed in Argentina, where an innovative solution-a private-public partnership-was found. In 1994, the private utilities, municipal authorities, and the provincial government conceived and implemented the Acuerdo Marco to serve underprivileged customers in Buenos Aires (Box 4.4). - 54 - INDIA- POWER SECTOR REFORM AND THE POOR Box 4.4 The Acuerdo Marco: A Public-Private Initiative To Serve the Urban Poor The Acuerdo Marco, an initiative in Buenos Aires, is a public-private partnership that serves underprivileged electricity consumers. In 1994, two distribution companies-National Executive Power and Executive Power of the Province of Buenos Aires-signed a four-year agreement to extend or regularize services to the inhabitants of shantytowns and poor neighborhoods (while at the same time dimnnishing non-technical losses). Different categories of needy consumers were defined. The national Government contributed an amount equal to 18 percent of the net billing for users included in the agreement. This contribution was used to cover the unpaid balances of the shantytowns, and the remaining amount was allocated to payment of the US$20 million given to each distributor, apart from the contributions of the municipalities (6 percent) and the province (9.5 percent), for electricity infrastructure works. To provide their contributions, the province waived the 95 percent tax for distributors investing in electricity infrastructure works in shantytowns and poor neighborhoods, and the municipalities waived the 6 percent municipal tax on bills collected in those areas. Cooperation went far beyond financial contributions. The Province of Buenos Aires provided support to ensure that the distributors could enter the shantytowns to install meters to control consumption. The province was also in charge of disseminating the agreement among the municipalities and negotiating their participation in individual agreements. Municipalities collaborated to ensure that distributors had access to meter installation sites. They camned out a census of inhabitants and dwellings, opened up streets, and installed public lighting systems that prevented the theft of electricity, bearing the costs of installation and maintenance. The regularization process also included paving the way for participating inhabitants to obtain title to their property. The initiative achieved its initial target of reaching 650,000 users, out of a population of around 3 million inhabitants. Before the agreement was signed, many poor and marginalized households had been illegally connected. They also used electricity inefficiently (for high electricity-consuming devices, heating, and cooking). Their connections were unsafe, leading to accidents and damaging the electrical devices. As a result of the agreement, pre-assembled cables were laid, which prevented clandestine connections, and an average of 10,000 meters per month were installed. The companies improved their collection rates and quality of service. The initiative was regarded as a good method for channeling strong reactions to the prohibition against illegal connections, and, at the same time, as a successful tool for increasing access to electricity and constructing the necessary infrastructure. Source: Chisari and Estache (2000). 4.7 Argentina, which privatized its power industry in the 1990s, is also frequently cited as a model of power sector reform. Many features of Argentina's approach, including universal service obligations, and the transparency with which subsidies to rural users, pensioners, etc., are defined and paid directly by Government agencies, are of general relevance to India (see Annex 4 for more information). Keeping Utility Services Affordable 4.8 Evidence from India and other countries makes it clear that the poor usually pay a large share of their total budget for utility services, and that tariff increases may be a significant burden for them (Chapter 3). On the other hand, keeping the average tariff below the cost of supply, or imposing cross-subsidies across different categories of consumers, is not sustainable. Increasing block tariffs with a lifeline rate are used in a - 55 - INDIA- POWER SECTOR REFORM AND THE POOR number of countries, but have proven successful only when electricity consumption patterns easily allow for the association of lifeline consumption levels to poor households, and when the net fiscal impact of the subsidy is negligible. These conditions are not present in India and many other poor countries. 4.9 As a result, countries facing the need to commercialize the electricity sector increasingly opt for non-utility subsidies, such as various forms of income-tested cash transfers to eligible beneficiaries. Advantages of well-designed cash transfers over tariff subsidies typically include greater transparency and accountability in the delivery mechanism, better targeting, a smaller financial burden on the government budget, and efficiency gains and improved commercial performance of utilities. The specific delivery mechanisms differ substantially across countries, and are essentially influenced by the overall design and performance of social safety net programs. In Argentina, for example, the utility delivers a subsidy to eligible customers, but the Government identifies beneficiaries, pays the subsidy, and ensures full transparency and accountability of the process. In other instances, municipalities deliver assistance, which is either a benefit earmarked to compensate for the electricity bill or a cash payment to ease the poor household's total budget constraints. Boxes 4.5 and 4.6 describe experiences in Armenia and Hungary. 4.10 International experience also highlights the need to carefully evaluate several alternatives, using case-specific data and criteria, before making a choice, to avoid sub- optimal decisions. For example, when the countries of Eastern Europe faced sharp increases in utility tariffs (toward cost-recovery levels) during the last decade, their governments experimented with a number of schemes. Under political pressure and because of their lack of experience with designing smart subsidies, many governments initially opted for a specific cash transfer mechanism. However, that mechanism performed poorly in achieving its objective. Changing and improving the schemes over time was a common feature of the process (see Annex 4). - 56 - INDIA- POWER SECTOR REFORMAND THE POOR Box 4.5 Electricity Sector Reform and the Poor in Armenia Utility crisis. Considerable progress has been made since 1995 in reforming the energy sector in Armenia. During the utility crisis of early 1990s, caused by a combination of internal and external factors, most of the population received only 2 to 4 hours per day of electricity; central heating and natural gas were virtually terminated; and the supply of drinking water decreased in areas that required pumping. Partly in response to unreliable supply, consumer payments for both electricity and drinking water services fell in 1994 to only 10 percent of billing, thus further threatening the sustainability of these services. Government's response. The Government of Armenia responded with targeted investments and a series of economic reforms in the energy sector, including passage of a comprehensive Energy Law and creation of an independent Energy Commission to regulate prices. Tariffs have been raised, cross-subsidization reduced, and payment discipline has improved. Benefits of reform. The net result has been a dramatic improvement in the supply of electricity. Most households now receive service 24 hours a day, and outages are shorter and less frequent. Transparency of financial flows has increased, and accumulation of quasi-fiscal debt has diminished. Residential tariff increase and householders' response. To improve the financial sustainability of the utilities, household tariffs aim to reflect the high cost of supplying low-voltage electricity. As part of this effort, on January 1, 1999 the increasing block tariff was eliminated in favor of a single price of ARD 25 per kWh (equivalent to US$ 0.05), which was close to the cost of supply. This new price was supposed to represent a 30 percent increase. In fact, however, the household survey showed that it represented a 47 percent increase. The difference was due to the fact that calculation of the average price was based on aggregate utility data rather than household-level data. As a result, household electricity consumption dropped an average of 17 percent, and reported consumption of substitutes such as wood and liquefied natural gas increased. In addition, the collection rate fell by 9 percent, and arrears increased four-fold. Thus utility revenues increased only about 6 percent-much less than expected. This experience points to the need for designig tariff increases carefully, and for better predicting price responses. Impact on the poor. Relative to the non-poor, the poor cut consumption more (20 against 16 percent), the percentage of households with arrears was higher, and the average size of arrears increased more. The burden of electricity expenditures is particularly large for poor households-13 percent of total monthly expenditures in rural areas, and 16 percent in urban areas, as opposed to 7 and 9 percent for the non-poor. To mitigate this impact, the Government undertook two actions. First, it introduced, in 1999, a newly designed family benefit (with broader objectives) targeting 28 percent of households below the poverty line. Second, as a temporary transition measure, the Government targeted monthly cash payments to an additional 9 percent of households not eligible for the family benefit, but expected to have difficulty paying their bills. Source: Lampietti et al (2001). -57 - INDIA- POWER SECTOR REFORM AND THE POOR Box 4.6 Protecting the Poor During Reform and Privatization in Hungary As part of the reform process, authorities pursued both tariff and non-tariff instruments for re-targeting subsidies to benefit the most vulnerable groups during the transition period. The process involved rapidly phasing out cross-subsidies, using a three-pronged approach: * Initially applying a three-block lifeline tariff for households, and subsequently opting for one block tariff (at the cost-recovery level) for all households, while putting in place alternative mechanisms for protecting vulnerable customers (see below). * Re-targeting subsidies toward low-income households through means-tested earmarked cash supplements, to mitigate the impact of tariff increases. This scheme was consistent with the overall structure of the country's social safety net, which channeled dwelling maintenance support to the poor through the municipalities. * Minimizing the fiscal burden on the state by replacing the use of taxpayer's resources to fund subsidies with an alternative, public-private arrangement. Contributions from electricity consumers, utilities, and private sponsors were collected by a public-private partnership (the Hera Fund) and delivered to municipalities to match their resources. An extensive consultative process with various stakeholders was undertaken to develop this mechanism. Source: Armar (2001). Conclusions 4.11 International experience has shown that there are a variety of approaches to help the poor enjoy the benefits of electricity services. Experience has also shown that any approach, to be successful, must be adapted to the country's particular circumstances-its legal and regulatory frameworks, governance structure, traditions, geography, composition of electricity consumers, and patterns of energy consumption. 4.12 The majority of successful approaches have some common features, the most important of which are an emphasis on the commercial viability of service providers, cooperation from all levels of government, and the involvement of consumers and civil society in decision making, as shown in the cases of Bangaldesh and Costa Rica (boxes 4.2 and 4.3), especially in rural electrification projects. 4.13 Exploring and developing appropriate models to extend access and build social safety nets for non-connected and connected poor consumers, drawing on lessons and best practice examples from international experience, should be an integral element of state power sector reform programs in India. - 58 - INDIA- POWER SECTOR REFORM AND THE POOR Annex 1 ELECTRICITY REFORM AND IMPACTS ON THE POOR: OVERVIEW This annex presents a brief review of the literature on electricity reform and the poor. Typology of Impacts on the Poor The impact of any policy intervention on the poor can be defined as a measurable change in one or more dimensions of the well-being of poor individuals or households (see Box A1.1 on the dimensions of poverty and well-being) The impact can be measured at the household, group, or aggregate (state, country) levels. Practical interim welfare indicators to measure the impact of energy reforms are being developed (Foster 2001). In this report, however, we focus on evidence of how such reforms change the conventional indicators of poverty and inequality. Box A1.1 Dimensions of Poverty The concept of poverty encompasses multiple dimensions of well-being. Material deprivation, traditionally measured as monetary income or consumption, is the basic definition of poverty. A key instrument in developing income or consumption measures of poverty is the poverty line-the cutoff in income or consumption below which an individual or household is regarded as poor. Internationally comparable poverty lines are used for global measures of poverty and cross-country comparisons. Within a country, country-specific poverty lines, adjusted to the country's level of economic and social development, are used. The poverty line may need to be further adjusted for different areas, such as urban or rural, or different states or provinces, if prices or access to goods and services differ. If a special survey for poverty assessment is undertaken, the survey often uses a customized definition. The most commonly used indicator of poverty is the headcount measure-the number or percentage of people with incomes or expenditures below the poverty line. To enhance this static definition of poverty with its dynamic aspects, i.e., prospects for the non-poor to move out of poverty, other dimensions of poverty have been introduced. One important and long- recognized dimension includes achievements in health and education. These are critical not only because they improve quality of life, but also because better health and education provide important opportunities to overcome material deprivation. Measuring these dynamic aspects of poverty is more complicated, and available indicators do not provide the full picture. The most recent work extends the notion of poverty to vulnerability, exposure to risk, exclusion, and powerlessness, the conditions of life that increase the risk that the poor will be adversely affected by economic shocks, illness, natural disasters, or social violence. Source: World Development Report (1990, 2000). The literature on energy-poverty linkages demonstrates that the impacts of power sector reform on the poor are multiple and complex, and can be classified from different perspectives (see, for example, Albouy and Nadifi 1999, Stockholm Environment Institute 1999, ESMAP 2000, Lamech, O'Sullivan, and Lovei et al 2000). These impacts may be short term or long term; and they may reflect different dimensions of poverty- changes in welfare, opportunity, vulnerability, empowerment (see Box A1.2). In addition, the impacts of reform can occur through either direct or indirect mechanisms. Direct mechanisms operate at the micro level, and directly affect the living conditions, welfare, and opportunities (including local employment) of poor households or individuals, through changes in the price, quality, and availability of electricity services. These impacts can be short or longer term. Indirect mechanisms alleviate poverty at the micro - 59 - INDIA- POWER SECTOR REFORM AND THE POOR level through macro-level changes, such as the rate and composition of growth and public spending. These impacts are longer term. Though both direct and indirect impacts encompass various dimensions of poverty, only some of these impacts can be measured.20 Box A1.2 Power sector reform and poverty - examples of multiple linkages and impacts * Direct (micro) * Indirect (via macro) - quahty and pnce of electncity - hlgher growth, employment and service mcomes - local income and development - unproved balance of payment and opportunities composition of public spending * Short-term * Longer-term - tanff increases for some users - lower electncity pnces - disconnection of some users - better service for all * Opportunity * Empowerment - easier establishment and greater - public accountability of productivity of busmesses government institutions - better education and health - social mobilhzation prospects Direct Mechanisms and Impacts Some reforms can trigger both positive and negative effects, either simultaneously or with a time lag.. Positive impacts include improved availability and quality of electricity services to households, opportunities for local income-generating activities (farm and non-farm), and the creation of community infrastructure (schools, health facilities, street lighting). Negative impacts commonly include a loss of welfare for certain groups affected by tariff increases; required payment of bills, including arrears; disconnection of defaulters; and no more free electricity (prevention of theft). Positive effects can partially or fully offset negative impacts, and it is the net impact that is important. Evidence of both positive and negative impacts is reviewed below, with respect to price and quality of service, access, and local employment. Price and Quality of Service The best way to respond to consumer needs is to allow a range of providers to compete in price and quality (Brook and Smith 2000). In Chile, in the decade after privatization and the introduction of competition on the wholesale market, energy losses fell by half, reliability improved dramatically, and tariffs (which already covered the full cost of supply) were reduced. In addition, the percentage of connected households, including poor households, increased rapidly: in Greater Santiago, the percentage of households in 20 It is difficult to single out the impacts of a particular set of interventions, especially for indirect impacts. A linkage between an intervention and its impact should preferably be established on the basis of appropriate empirical models and quantitative evidence. However, when such evidence is not available because of methodological limitations or lack of research, some inferences can be made on the basis of broader evidence from literature on poverty, reform, infrastructure, and growth. - 60 - INDIA- POWER SECTOR REFORM AND THE POOR the poorest deciles with no connection dropped from 29 percent in 1988 to 7 percent in 1998. Retail electricity tariffs fell by 25 period during the same period. In Argentina, the retail price for residential consumers (net of taxes) was, on average, US19.1 cents/kWh between 1970 and 1991, but only US1 1.5 cents/kWh in the five years after privatization, 1992 to 1997 (in 1997 prices). Although some other factors impacted these changes (e.g., a new gas pipeline in Chile helped to lower wholesale electricity prices), these examples demonstrate the benefits of reform (Estasche, Gomez-Lobo, and Leipziger 2000). How quickly the price and quality benefits are realized depends on the starting conditions and the pace of reform. At the early stages of reform, when the aim is to improve cost recovery, both negative (higher prices) and positive (better service) effects occur. Thus, there is a need for a delicate balance between actions to commercialize and restructure utilities, on the one hand, and actions to protect the poor, on the other. Various studies have consistently shown that most people are willing to pay a significant portion of their income for services that would improve their quality of life or enable them to become more productive. In Bangladesh, for example, when good service is available, even the poorest are connecting to the grid. In some parts of rural Bolivia, those without access to electricity use more expensive LPG lanterns, which give more light, as an alternative to candles. In Kenya, where the possibility of a timely connection to the grid is remote, higher-income rural households are buying solar photovoltaic (PV) systems (World Bank 1996). In Uganda, consumers spend an estimated US$100 million a year-as much as 1.5 percent of GDP-on dry cell batteries to power radios, flashlights, and other small items to substitute for the lack of electricity network services (Townsend 2000). In India, where agricultural consumers enjoy the largest cross-subsidy, a recent study (World Bank 2001) shows that farmers are willing to pay higher costs for improved availability and quality of power supply. The poor, who cannot afford expensive coping strategies, bear a high cost, in lost productivity or lower quality of life, from not having regular, good-quality service. It is important to recognize that there are two types of affected customers-those non-poor willing and able to pay for better services (e.g., already using more expensive alternatives), and those poor who cannot fully afford tariff increases, so they are pushed to use cheaper and inferior substitutes, such kerosene or biomass (see Lampietti et al 2001). Social policies designed as part of the reform process should differentiate between these groups. While the majority of non-poor may accept higher prices in exchange for improved services, additional social protection measures may be needed to help the poor cope with the increased burden. - 61 - INDIA- POWER SECTOR REFORM AND THE POOR Access With respect to access, market-oriented reforms may slow the process of extending service coverage to rural areas, where the costs of service delivery are substantially higher and cost-recovery is more difficult, unless special incentives and institutional arrangements are implemented. The record of electricity reforms in extending rural services is mixed (Brook and Besant-Jones 2000), but when these objectives are incorporated in the reform agenda, reform provides good opportunities to achieve them- through improved financial and technical performance of utilities, voluntary or mandatory service obligation agreements in sales or concession contracts, allowing the entry of new providers and grid access to third parties, and other arrangements. Access to electricity gives the rural poor significant benefits, including jobs and development opportunities and positive health impacts. For these benefits to materialize, it is necessary to have good quality access, not just nominal electrification of a village, or household connections that do not supply electricity during the hours when it is most needed. Price, quality, and access issues are all closely interlinked, and should be considered together in the reform process. Since energy is a derived demand,21 the impact of rural electrification is likely to be a function of the complementary inputs associated with it (Fluitman 1983). Provision of electricity to the rural poor, therefore, needs to be combined and sequenced with other measures and services, such as water, sanitation, and education. This approach would enhance the benefits of rural electrification and make it integral part of an effective anti- poverty effort. Local Employment and Income Generation A number of studies highlight the positive impact of improved power supply on agricultural productivity and non-farm business development. From enabling women to engage in income-generation activities at home (e.g., sewing), to creating new jobs in the non-farm rural sector (business cooperatives, one person home businesses), to improving the efficiency of agriculture, these impacts are likely to move the poor up the economic ladder. While a positive impact on agricultural productivity is consistently reported by a number of studies including those in India, evidence of the impact on non-farm employment is just emerging. Indirect Impacts through Macro-Level Linkages Power Sector Reform and Growth Economic growth tends to raise per capita incomes, and poverty tends to fall as per capita income rises, although there is wide divergence among countries (World Development Report 2000). Evidence from a sample of 92 countries shows that the average income of 21 Consumers do not express explicitly a demand for electricity, but the demand for the appliances and engines using electricity as an input. - 62 - INDIA- POWER SECTOR REFORM AND THE POOR the bottom fifth of society benefits as much as the rest of society from economic growth (Dollar and Kraay 2000). An increase in average annual growth from 1.3 to 6 percent in Latin America and the Caribbean is estimated to have cut the poverty gap by half in a decade (Leipziger 2001). Therefore, to the extent that power sector reform has a positive impact on general economic growth, it will contribute-at least over the longer term-to anti-poverty goals. Reform typically fosters growth in two ways: * It reallocates resources to higher productivity goals activities, by improving allocative and technical efficiency in the sector, which eventually leads to a lower cost of power and contributes to economic adjustment. * It removing infrastructure bottlenecks, thus eliminating shortages and improving the availability and quality of electricity services. Electricity sector reforms in India are expected to result in a more efficient allocation of resources on the premise that a deregulated and competitive market will reduce: (a) over- consumption of power due to artificially low prices (below the economic cost); and (b) over-staffing due to the inefficiencies of public sector management (e.g., the SEBs). Obtaining indisputable empirical evidence of these linkages (e.g., a quantified impact of improved infrastructure on the rate of growth) is difficult, simply because growth is affected by a large variety of related factors. For example, an ongoing evaluation of the investment climate in Indian states, based on a survey of 1,000 firms, indicates that delivery of better power services is an important productivity factor. However, the evaluation also emphasizes a number of other factors, such a lower burden of regulation, a less rigid labor market, and good social infrastructure, as equally or even more important sources of productivity advantage for states with the best investment climate (Dollar et al, 2001). Cross-country data show a strong correlation between national energy consumption and income level, though the causality is not proven (see Box A1.3). Recent work that compares growth patterns in fast-growing East Asia with those in slower-growing Latin America has shown that the higher the growth, the stronger the relationship among electric power, telecommunications infrastructure, and income (Leipziger 2001). - 63 - INDIA- POWER SECTOR REFORM AND THE POOR Box A1.3 Infrastructure and Growth Aggregate studies of different design-time-series and cross-country-consistently show that infrastructure variables positively and signuficantly correlate with growth in developing countries. However, these studies do not satisfactorily explain causal relationships between infrastructure and growth, or mechanisms through which infrastructure may affect growth. What is evident is that a strong association exists between the availability of certain infrastructure - telecommumcations, energy, paved roads and water supply - and per capita GDP. It is further known that as countries get richer the composition of infrastructure services shifts in favor of power, telecommunication and roads at the expense of irrigation, water and sanitation. Sectoral studies of the effect of rural infrastructure on the local economy are more revealing about the nature of the apparent benefits. For example, a rural study in India (that analyzed data over time for 85 district across 13 states) found that 7 percent of growth in aggregate output can be attributed to road investments (lower transport costs increased farmer's access to markets and lead to considerable agricultural expansion) and 2 percent of growth in aggregate output can be attributed to electrification, through its impact on irrigation (modern irrigation methods brought higher yields). Sources: World Development Report (1994), Ingram and Fay (1994), Binswangwr, Khander, and Rozenzweig (1989). In India, power sector reform is a significant contributor to fiscal and structural adjustment at the state and national levels. For the country as a whole, the sector's financial losses are estimated at the level of 1.5 percent of GDP. Although fiscal and structural adjustment is necessary for macroeconomic stability and growth, the links between adjustment and growth are also too complex and influenced by too many factors to further pursue an argument about the impact of power sector reform on growth via adjustment policies (see Goldsbrough et al 1996, Offerdal 1996, McKenzie and Orsmond 1996). In sum, while the positive impact of power sector reform on economic growth is broadly acknowledged, it is very difficult to obtain empirical evidence that would separate the impact of power sector reform from the impact of other growth-oriented policies. Growth with Poverty Reduction While income growth is necessary for poverty reduction, all types of growth are not equally pro-poor.22 An investigation of the determinants of pro-poor growth in India (Ravallion 2000, Ravallion and Datt 2001, Datt and Ravallion 1997, Ravallion and Chen 1997) finds that the poverty impact of aggregate growth is linked with its sectoral and geographic composition. Higher agricultural productivity is a key factor in rural poverty reduction, and further, both the urban and rural poor appear to gain from growth in the rural economy. The extent to which non-farm growth is pro-poor in both rural and urban areas depends on the development of rural infrastructure and human capital. The findings 22 There are significant differences across countries and over time in how much poverty reduction occurs at a given rate of economic growth. For a given rate of growth, the extent of poverty reduction depends on (a) how the distribution of income changes with growth and (b) on initial inequalities in income, assets, and access to opportunities that allow poor people to participate in growth. Several studies in developing countries point to the particular importance of growth in rural areas for poverty reduction (World Development Report 2000). - 64 - INDIA- POWER SECTOR REFORM AND THE POOR are broadly consistent with a poverty assessment for the State of Uttar Pradesh that highlights the importance of rural growth and of the development of the social sectors (World Bank 2001 a). These findings suggest that a power sector reform that improves rural energy services has a good chance of contributing to pro-poor growth in India. Whether power sector reform contributes to the growth of industry in urban areas depends on achievements in other sectors, notably education and rural infrastructure, and how equitably the benefits of this growth are shared by the poor. Adjustment, Public Spending, and Reaching the Poor Power sector subsidies are a heavy burden on the national and state-level government budgets in India. Public resources released from reduced or eliminated subsidies and financial losses in the course of reforms (so-called fiscal space) can be used for high- priority expenditures in social sectors in a more pro-poor fashion than can electricity subsidies (World Bank 1999 a and b, Price 2000, Lamech, O'Sullivan, and Lovei 2000). While additional fiscal resources provide an opportunity for a more pro-poor allocation of public expenditures, there is no guarantee that resources released due to reform in a particular sector will be re-allocated to other needs and programs that effectively serve the poor.23 Such a shift in the composition of a public expenditure program would require realignment in spending priorities that can only emerge from a comprehensive macroeconomic and structural adjustment over time. This approach is currently being undertaken by a number of Indian states. The adjustment of energy prices, on the other hand, could exert short-term inflationary pressure on the cost of other goods and services, which may hurt the poor. This concern, however, is often exaggerated. While modeling exercises show that the welfare effect of removing subsidies may be slightly regressive compared to the status quo, the status quo is not a reasonable counterfactual. Governments will employ one set of measures or another to raise revenues and reduce the deficit caused by subsidies, and there is no evidence that the impact of energy prices is more inflationary or more regressive than that of alternative revenue-raising instruments used in most cases (ESMAP 2001, Newbery and Stern 1987, World Bank 2001d). 23 It should be noted that a mere increase in spending on primary health and education does not automatically translate into benefits for the poor, unless service delivery mechanisms are put in place to effectively reach the intended beneficiaries. - 65 - INDIA- POWER SECTOR REFORM AND THE POOR Observations Balancing Trade-offs During the Transition The multitude of linkages, often diverging in the timing and direction of impacts, indicates that it is not possible to obtain all the benefits for the poor at once. Impacts on the poor from power sector reform involve multiple trade-offs that need to be balanced and sequenced during the reform process, especially at transition stages (see Box A1.4). In addressing these trade-offs, it is useful to have a comprehensive understanding of the linkages, as this review attempts to provide, and of the kinds of measures that would make the impacts of reform more pro-poor. Some of these measures-programs and policies such as comprehensive macroeconomic adjustment and pro-poor allocation of public funds-lie outside the power sector, and have to be brought in and implemented in a coordinated manner to maximize the benefits of reform. But there are also measures, no less and maybe more important, that can be implemented, and should not be lost, within the power sector reform process. Box A1.4 Protecting the Poor as Part of Reform-Balancing the Trade-offs * Served versus un-served populations-different demands and impacts * Quality of service versus price of service * Social programs for the poor versus poorly targeted electricity subsidies * Expanding service coverage versus attracting private investment * Employment and development opportunities for disadvantaged versus status-quo for the better-off * Long-term benefits versus short-term handouts The transition period is most difficult and requires a delicate balance of various trade-offs and interests. Various elements of the reform package, such as restructuring and regulation of the industry, and private sector participation, help to moderate these trade-offs, through improved accountability, management, efficiency, and investment flows. Difficulty of Measuring Indirect Impacts Power sector reforms are not, and should not be anti-poverty programs in a narrow sense. The linkages between these reforms and the welfare of the poor are numerous and complex, with many positive impacts being indirect, long-term, and contingent on successful implementation of other policy reforms and government programs. Opportunity costs of no reform are clearly enormous, and point to large potential benefits of making reforms happen. However, empirical evidence that separates indirect macro- level impacts from the impacts of other programs is lacking and difficult to obtain. Need To Pay More Attention to Direct Impacts On the other hand, direct impacts of reforms are tangible and significant, and greatly influence the political economy of the reform process. These impacts need to be better understood and factored into the reform process. The design and implementation of a particular power sector restructuring program can vary by the degree of protection given to the poor and vulnerable. This depends on whether and how the issues of availability, - 66 - INDIA- POWER SECTOR REFORM AND THE POOR quality, and affordability of electricity for existing and new customers have been integrated in the program, and what specific mechanisms to assist low-income families and rural areas have been proposed. These issues fall under the ambit of power sector reform programs per se, and have clear operational implications for Bank advice and support to the power sector in client countries. A number of case studies and good practice examples from other countries are now available that help in drawing useful lessons and facilitating their application in the India context. Chapter 4 is devoted to these lessons. Differentiate Social Policies for the Poor and Non-Poor In designing policies to protect the poor during reform, it is important to distinguish, on the basis of adequate data and analysis, between two types of affected customers-those who are willing and able to pay for better services (e.g., those already using more expensive alternatives), and those poor who are not able to obtain or maintain access to the network at a higher cost, and may lack access to suitable alternatives. Substantial increases in tariffs may not be fully affordable by those poor, pushing them to use cheaper and inferior substitutes. However, since electricity services to households are associated with significant public benefits, in addition to private ones, there is a strong case for some targeted public assistance to poor households, at least during the transition period, and even more so to those poor rural households that are to obtain connections. - 67 - INDIA- POWER SECTOR REFORM AND THE POOR Annex 2 ANALYSIS OF NSS ESTIMATION OF ELECTRICITY COVERAGE RATES AND SUBSIDIES, 1998 Background The calculations below are based on an analysis of data from the Consumer Expenditure and Employment Survey of the National Sample Survey (NSS), 54th Round (January- June 1998). The survey data were collected at the household level by state, and disaggregated into rural and urban break-up for a sample of households selected from all the Indian states and union territories, based on a stratified sampling design. The electricity consumption and expenditure reported in the 54th Round is for the last 30 days for each household, and is based on a household member's perception of the amount payable as per previous bills. Investigators normally do not ask to see bills. Although the data do not indicate type of electricity connections-legal or illegal, an official Government source indicated that all types of connections are included.24 In the NSS 54th Round, two schedules were canvassed in two independently selected samples of households (sub-sample 1 and sub-sample2). The first schedule adopted a uniform reference period of 30 days for all the households' items (sub-sample 1). The second used different reference periods for different items of consumption (sub-sample 2). The analyses in this report are based on sub-sample 1 as there appears to be are substantive differences in household expenditure and consumption between the sub- samples, which could have affected the results. Thus, the analyses are carried out on 13,483 sample households-9986 rural and 3497 urban. Calculation of Expenditure Categories (Income Groups) NSS collects data on household expenditure for a vast range of items using which it is possible to calculate a total monthly per capita expenditure (MPCE) variable, which can be used as a proxy for income/poverty level. The variable allows computation of expenditure percentiles. We computed 20 expenditure categories (income groups), where each category covers five percent households. For example, five percent of the households with the lowest expenditure per capita form the first expenditure category and so on until 5 percent of the households with the highest expenditure per capita form the 20th category. Per capita expenditure was divided into 20 categories instead of a smaller number, say 5 or 10, as a greater number of categories provide information on electricity consumption and expenditure patterns in the poorest of the poor group of households. Table A2.1 presents the 20 expenditure categories computed on the basis of total monthly per capita expenditure, separately for rural, urban and all households. Household sample size, that is, total number of sample households in each of the 20 categories is given in Table A2.2. 24 Letter from Mr. Arun Sexena, Director, Ministry of Planning and Program Implementation, September 4, 2001. - 68 - INDIA- POWER SECTOR REFORM AND THE POOR Average household size and per household average monthly expenditure (total across all the household items) in each of the expenditure categories is given in Tables A2.3 and A2.4. Average annual consumption of electricity per household for each of the expenditure categories is given in Table A2.5. Tables A2.5A and A2.5B have household electricity expenditure per expenditure category and electricity expenditure as a function of total expenditure in connected households, respectively. Electricity connection rates in these households are calculated in Table A2.6. Coverage Rates We include an analysis similar to that done for the Water and Sanitation Sector 25 Specifically, we have answered the following questions: 1. What proportion of poor (and poorest) households benefit from an electricity connection? 2. What proportion of beneficiaries (households having electricity service) are poor households? Poor households have been categorized as those belonging to the first two expenditure categories, that is, the first 10 percent of the income population. Poorest households are those in the first four expenditure categories. The above two questions are answered using data from the NSS in which it is possible to examine how access to electricity varies for different households according to their economic resources. As mentioned earlier, NSS collects information on electricity consumption/expenditure, which are used as proxy variables to denote access to electricity. Further error of exclusion (proportion of poor households who do not benefit from the subsidy) has been estimated. Coverage rates in the poorest and poor categories are given in tables A2.7 and A2.8. As seen in Table A2.7, the connection rate among the poor households in rural areas is 19 percent. The reason for this high connection rate is not known. It may be that these households are covered by the Specialized Schemes for the Poor, such as the Kutir Jyoti Scheme, which provides single bulb connections, with emphasis on Scheduled Caste/Tribe Groups. We calculated what proportion of poor and poorest households belong to Scheduled Caste/Tribes (tables A2.9 and A2.10). Willingness to Pay Expenditure on kerosene used for lighting by a non-connected household has been used as a proxy estimate for willingness to pay for electricity. For each household, NSS provides information on the primary sources of energy for cooking and lighting. Out of 6068 households not connected to electricity (total sample size 13483), 90 percent or 5480 households use kerosene as a primary source for lighting. Of these, 95 households use kerosene for cooking also. Since on kerosene data in NSS are available only on overall kerosene consumption and expenditure it is not possible to estimate in households that use kerosene for both purposes the kerosene share that is used for lighting alone. 25 World Bank (2001d). - 69 - INDIA- POWER SECTOR REFORM AND THE POOR Therefore, these 95 households were neglected and 5385 non-connected households have been used in the analysis of willingness to pay. For each ventile, a proxy estimate based on the average household expenditure on kerosene for lighting was calculated as a weighted average, with weights being the coefficients that scale up the sample in the ventile to the corresponding population. ESTIMATION OF SUBSIDIES Data Sources In addition to NSS, the following national-level report was utilized to conduct a crude incidence analysis of electricity subsidies to households: National Sample Survey 199826: Annual Report on the Working of State Electricity Boards and Electricity Departments June 20012: The Power and Energy Division of the Planning Commission brings out this report out every year. It contains data on average per capita consumption, tariffs, subsidies and cost of electricity supply for each state and by year, based on analyses of the data of the State Electricity Boards and Electricity Departments. A description of datasets reviewed for the subsidy analysis but not used is given in Annexel. Assumptions A simple methodology for calculating electricity subsidies to households is given below based on the following assumptions: 1. The unit price of electricity paid by the NSS sample population represents the true electricity tariffs. This assumption was checked by comparing the average unit price for each state (calculated by NSS) with the corresponding average tariffs given in the Planning Commission Report; and for some states, the Regulators' information). 2. We utilize the state wise average unit cost of supply provided by the Planning Commission. This information was not available for five UTs - Andaman and Nicobar Islands; Chandigarh; Lakshwadeep; Daman and Diu; Dadra and Nagar Haveli. For each of these UTs, we assumed that average unit cost of supply is equal to the regional average, where the latter was estimated as a weighted average (weights were set equal to per capita electricity consumption) of unit cost of supply of states in that region. The unit cost of supply of electricity estimated by the Planning Commission represents the cost of supply to the ultimate consumers. The Planning Commission Report does not specify completely the procedure for estimating the cost of supply, however; it indicates that the major 26 Household Expenditure and Employment Situation in India, NSS 54h Round, January 1998-June 1998, National Sample Survey Organisation, Department of Statistics, Government of India 27Annual Report on the Working of State Electricity Boards and Electricity Departments, June 2001, Power and Energy Division, Planning Commission, Government of India. - 70 - INDIA- POWER SECTOR REFORM AND THE POOR components of cost of supply of electricity are: (a) revenue expenditure which includes expenditure on fuel, power purchase, O&M, establishment, administration and other miscellaneous expenditure; and (b) the fixed costs, mainly comprising depreciation and interest payable to institutional creditors and concerned State Governments. It is likely that the estimate is an underestimate because in the estimation it does not factor into the denominator (amount of electricity supplied) the unaccounted losses of electricity due to T&D losses and pilferage, which can be as high as 20-25 percent. Methodology Given the lack of electricity consumption data by income, household expenditure data was utilized as a proxy for income. As indicated earlier in the report, data on monthly per capita expenditure (total across household items) was used to categorize households into 20 groups, each representing five percentiles. For example, five percent of the households with the lowest expenditure per capita form the first expenditure category and so on until 5 percent of the households with the highest expenditure per capita form the 20th category. Subsidies per household are calculated according to expenditure categories for all of India and by rural-urban break-up. In addition, aggregate subsidies are calculated for eight selected states for which data are available on the number of domestic consumers for FY1998. These data were obtained from the state regulators and tariff reports. A simple method was adopted to calculate subsidies as given below. Let i = 1.. .20 denote the expenditure categories based on monthly per capita expenditure (MPCE) from NSS data. These categories correspond to 20 income classes. Then pi h be an estimate of average price of electricity for the ith expenditure category and household h calculated as a ratio of expenditure and consumption for each household in that category from the NSS data. Pi h = Et h/i h where, E , h and I, h are per capita electricity expenditure and consumption for household h in the ith expenditure category Let Q,, h denote the annual electricity consumption for household h in the ith expenditure category, calculated from the NSS data. Then the subsidy S i, h for household h in the ith expenditure category is estimated as S ih = (C - Pih) * Qih Where c is the state wise average cost of electricity supply given in the Planning Commission Report. The per household subsidy for the ith expenditure category, S, is S = Mean S, h for all h - 71- INDIA- POWER SECTOR REFORM AND THE POOR Note that in calculating average subsidy a weighted average method was used, where the weights are NSS multipliers that extend the sample to the corresponding population. Table A2.11 provides figures for average subsidy per household, and the ratio of subsidy to household expenditure in connected households is given in Table A2.12. Using the same method as described above, aggregate subsidies were calculated for eight states in Table A2.13, and have been compared with the subsidy estimates provided by the Planning Commission. NSS subsidy estimates tend to be higher than the national estimates. We see this in four out of six states in Table A2.13. While it is not possible to compare domestic consumption estimates of NSS and National as estimates for latter are not available, it is likely that the state electricity boards (based on which national estimates are drawn up) underestimate consumption. One big reason could be that the State Electricity Boards (SEBs) do not take into account illegal households (national consumption is based on legal sale of power) while NSS does. Comparison of Results with Other Datasets Two data sets allow comparisons with NSS results. Comparison with ESMAP 1994 Hyderabad Study 1. The Hyderabad Study gives an average per household electricity subsidy to be Rs 102 per month for an assumed cost of electricity production of Rs 2.25/kWh. NSS gives an urban average subsidy estimate of Rs 103.5 for average cost of supply of Rs 2.4/kWh. On an income group basis, subsidies between datasets are comparable for the low and high income groups. For the middle-income groups, NSS estimates seem to be slightly lower. 2. The Hyderabad gives an average monthly household expenditure on electricity to be Rs. 96.3 per household per month, whereas the corresponding NSS urban estimate is Rs 113.8. Comparison with ESMAP 1996 Rural Energy is Six States Study 1. Percent of income spent on electricity is 1.4 based on the Rural Energy Study covering six states, whereas the NSS estimate is 2.7 percent in rural areas. 2. Average connection rate is 42 percent for households having per capita expenditure less than Rs 575. The corresponding NSS estimate for rural areas is 40 percent. Similarly for incomes greater than Rs 575 per household per month - 72 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.1 Expenditure Categories (NSS 1998) Expenditure Cut-off Points for Per Capita Aggregate Expenditure Category (Rs. /person/month) Rural Urban Combined 1 < 169 < 245 < 177 2 169-196 245-295 177-206 3 196-216 295-328 206-229 4 216-233 328-361 229-251 5 233-251 361-403 251-272 6 251-269 403-435 272-292 7 269-286 435-470 292-311 8 286-301 470-503 311-330 9 301-319 503-542 330-351 10 319-335 542-582 351-378 11 335-355 582-629 378-405 12 355-379 629-685 405-435 13 379-404 685-745 435-471 14 404-433 745-810 471-511 15 433-469 810-900 511-566 16 469-512 900-1023 566-638 17 512-578 1023-1158 638-741 18 578-676 1158-1372 741-890 19 676-871 1372-1994 890-1211 20 >871 > 1994 > 1211 Note: Aggregate expenditure denotes expenditure across all household items. - 73 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.2 Sample Sizes (NSS 1998) Expenditure Sample Size (Number of Households) Category Rural Urban Combined 1 455 179 610 2 453 190 612 3 _ _469 172 631 4 446 186 646 5 476 205 663 6 481 154 608 7 480 173 654 8 434 173 597 9 494 188 682 10 436 271 707 11 503 168 687 12 507 186 643 13 498 166 698 14 483 174 709 15 535 175 748 16 530 186 734 17 582 161 751 18 568 156 720 19 589 184 715 20 567 145 668 Total 9986 3497 13483 - 74 - INDiA- POWER SECTOR REFORM AND THE POOR Table A2.3 Average Household Size by Expenditure Category (NSS 1998) Expenditure Average Size (Number of persons/household) Category Rural Urban Combined 1 5.9 6.6 5.8 2 5.8 6.0 5.9 3_ _ _ _5.8 5.5 5.8 4 5.5 5.6 5.5 5 5.6 5.4 5.6 6 5.5 5.7 5.3 7 5.2 5.1 5.4 8 5.4 5.3 5.3 9 5.3 4.4 5.3 10 5.4 4.6 5.0 11 5.0 4.4 5.0 12 5.0 4.6 4.7 13 4.9 4.3 4.7 14 4.4 4.4 4.7 15 4.6 4.1 4.4 16 4.5 3.7 4.3 17 4.4 3.6 4.4 18 4.2 3.4 4.3 19 4.4 3.5 3.8 20 3.9 3.3 3.4 Total 5.0 4.7 4.9 -75 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.4 Average Expenditure Aggregated Across Connected Household Items by Expenditure Category (NSS 1998) Expenditure Average Expenditure (RsIhousehold/month) Category Rural Urban Combined 1 921.1 1376.0 968.6 2 1105.2 1630.8 1181.9 3 1301.0 1779.1 1367.0 4 1292.9 2042.7 1415.7 5 1402.9 2316.8 1569.0 6 1491.0 2511.3 1584.8 7 1583.9 2407.2 1707.4 8 1665.5 2647.6 1826.4 9 1746.2 2341.1 1933.7 10 1928.1 2625.4 2033.8 11 1842.3 2705.5 2142.8 12 2034.5 3258.6 2110.6 13 2023.6 3167.2 2216.9 14 1941.7 3495.5 2446.2 15 2133.8 3631.1 2465.1 16 2241.7 3782.5 2674.6 17 2512.6 4221.2 3193.3 18 2734.1 4519.2 3525.5 19 3435.6 5998.7 4143.7 20 5881.7 10357.8 7497.8 Total 2324.1 3472.1 2778.8 - 76 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.5A Average Electricity Consumption by Expenditure Category (NSS 1998) Expenditure Average Electricity Consumption Category (kWh/household/month) Rural Urban Combined 1 25.1 37.9 27.2 2 30.5 51.2 32.7 3 32.8 50.8 33.0 4 31.7 55.4 36.9 5 35.4 55.6 41.9 6 38.5 65.0 41.8 7 39.8 62.4 43.6 8 40.9 62.7 45.8 9 44.7 58.9 46.0 10 43.7 64.6 45.7 11 41.8 57.4 50.7 12 43.5 90.4 48.4 13 44.7 77.5 50.8 14 43.6 88.8 56.9 15 45.7 103.4 54.7 16 51.1 110.4 56.9 17 49.9 114.0 70.7 18 55.9 116.5 81.6 19 58.4 124.2 97.9 20 60.6 232.4 137.2 Total 45.7 86.8 62.0 - 77 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.5B Average Electricity Expenditure-by-Expenditure Category for Connected Households (NSS 1998) Expenditure Average Electricity Expenditure Category (Rs/household/month) Rural Urban Combined 1 24.1 41.0 26.8 2 32.4 61.3 35.3 3 34.7 59.4 35.3 4 33.9 64.3 38.9 5 36.4 69.2 44.1 6 38.4 84.5 49.9 7 44.2 83.0 51.1 8 51.1 81.5 53.6 9 50.0 82.4 51.7 10 51.8 84.0 54.6 11 47.4 73.8 58.9 12 52.1 114.1 60.6 13 49.8 98.5 61.2 14 52.9 119.4 69.1 15 51.0 133.0 68.4 16 57.9 136.7 71.4 17 57.3 159.9 88.5 18 67.7 183.7 104.2 19 70.9 181.6 128.9 20 73.1 286.8 184.3 Total 52.8 113.8 77.0 -78 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.5C Electricity Expenditure as a Proportion of Household Expenditure, by Ex enditure Category for Connected Households Only (NSS 1998) Expenditure Electricity Expenditure as a Proportion of Overall Expenditure in Category Connected Households (percent) Rural Urban Combined 1 3.3 3.1 3.3 2 3.1 3.8 3.1 3 2.9 3.4 2.8 4 2.8 3.2 2.8 5 2.7 3.2 3.0 6 2.8 3.1 3.3 7 3.0 3.4 3.2 8 3.4 3.2 3.0 9 2.9 3.7 2.9 10 2.8 3.3 2.9 11 2.8 2.9 2.9 12 2.8 3.5 3.1 13 2.6 3.5 2.9 14 3.2 3.5 3.0 15 2.6 3.8 2.9 16 2.8 3.8 2.9 17 2.4 3.9 3.0 18 2.8 3.9 3.1 19 2.3 3.1 3.3 20 1.8 3.3 2.9 Total 2.7 3.4 3.0 - 79 - INDIA - POWER SECTOR REFORM AND THE POOR Table A2.6 Electricity Connections by Expenditure Category (NSS 1998) Connection Rate Expenditure (percent) Category Rural Urban Combined 1 19 62 22 2 19 66 24 3 27 72 31 4 29 76 30 5 29 72 37 6 32 77 43 7 36 79 40 8 41 86 53 9 39 86 49 10 50 87 48 11 42 91 49 12 44 84 58 13 45 86 63 14 51 90 65 15 58 89 69 16 55 85 69 17 59 83 74 18 57 87 78 19 68 87 76 20 64 97 84 Total 43 82 53 - 80 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.7 Electricity Connections (Coverage Rates) in the Poor Category (NSS 1998) Statistic Electricity Connections (percent) Rural Urban Combined Proportion of poorest households that are 4 8 4 connected (HH poorest, connected / HH connected) Proportion of poorest households that are 19 64 23 connected (HH poorest, connected / HH poorest) Proportion of poorest households that are not 81 36 77 connected (error of exclusion) (H poorest, not connected / HH poorest) Note: 1. Poorest households are defined as households in the first two expenditure categories. 2. It is not meaningful to compute the proportion of non-poor households that are connected Table A2.8 Electricity Connections (Coverage Rates) in the Poor Category (NSS 1998) Statistic Electricity Connections (percentage) Rural Urban Combined Proportion of households connected that are 11 17 10 poor (HH poor, connected / HH connected) Proportion of poor households that are 23 69 27 connected (HH poor, connected / HH poor) Proportion of poor households that are not 77 31 73 connected (error of exclusion) (HH poor, not connected / HH poor) Note: 1. Poor households are defined as households in the first four expenditure categories. 2. It is not meaningful to compute the proportion of non-poor households that are connected. - 81 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.9 Electricity Connections (Coverage Rates) among Scheduled Castes and Tribes in the Poorest Category (NSS 1998) Statistic Electricity Connections (percent) Rural Urban Combined Proportion of connected households that are 2 2 2 poor and SC/ST (HH poorest, connected; SC/ST HH connected) Proportion of poor households that are 10 15 10 connected and SC/ST (HH poorest, connected; SC/ST HH poorest) Proportion of SC/ST households that are 19 57 21 connected and poor (HIT poorest, connected; SC/ST HIH poorest) Note: 1. Poorest households are defined as households that belong to the first two expenditure categories. 2. It is not meaningful to compute the proportion of non-poor households that are connected. Table A2.10 Electricity Connections (Coverage Rates) among Scheduled Castes and Tribes in the Poor Category (NSS 1998) Statistic Electricity Connections (percent) Rural Urban Combined Proportion of households connected that are 5 3 4 poor and SC/ST (HH poor, connected; SC/ST HH connected) Proportion of poor households that are 10 14 10 connected and SC/ST (HH poor, connected; SC/ST HH poor) Proportion of SC/ST households that are 21 60 23 connected and poor (HH poor, connected; SC/ST HH poor) Note: 1. Poor households are defined as households that belong to the first four expenditure categories. 2. It is not meaningful to compute the proportion of non-poor households that are connected. - 82 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.11 Average Electricity Subsidies by Expenditure Category for Connected Households Only (NSS 1998) Expenditure Subsidy Category (Rs./household/month) Rural Urban Combined 1 32.3 48.2 34.8 2 36.5 60.8 39.3 3 40.4 59.7 41.0 4 39.2 66.9 46.9 5 44.8 67.0 54.9 6 51.0 70.6 50.3 7 51.9 64.0 53.6 8 47.3 72.5 55.3 9 57.8 54.1 56.3 10 51.2 74.6 55.4 11 50.9 67.2 62.6 12 52.9 110.8 55.6 13 56.5 95.1 58.5 14 53.2 95.5 66.9 15 56.4 121.1 61.5 16 62.8 126.9 66.2 17 61.1 105.9 83.2 18 64.2 100.7 94.0 19 66.8 124.0 103.4 20 67.5 403.6 185.3 Total 55.2 103.7 74.4 - 83 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.12 Electricity Subsidy as a Proportion of Household Expenditure, by Expenditure Category (NSS 1998), for Connected Households Only (NSS 1998) Expenditure Subsidy as Proportion of Overall Expenditure in Connected Households Category (percentage) Rural Urban Combined 1 4.9 3.9 4.6 2 3.6 3.8 3.6 3 3.3 3.5 3.4 4 3.2 3.4 3.5 5 3.5 3.1 3.9 6 3.7 2.7 3.4 7 3.7 2.9 3.5 8 3.2 2.9 3.2 9 3.5 3.0 3.2 10 3.0 3.0 3.0 11 3.1 2.5 3.1 12 2.9 3.4 3.7 13 3.1 3.2 2.9 14 3.2 3.0 3.1 15 2.9 3.6 2.9 16 3.2 3.8 2.7 17 2.8 2.5 2.8 18 2.8 2.3 3.0 19 2.3 2.1 2.8 20 1.7 4.1 2.5 Total 3.0 3.1 3.1 - 84 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.13 Average Electricity Subsidies by Expenditure Category for Connected and Non-connected Rural Households (NSS 1998) Ventile Subsidy per household Subsidy as percentage Per month of household expenditure 1 6.1 0.7 2 7.0 0.7 3 10.9 0.9 4 11.2 0.9 5 13.0 1.0 6 16.3 1.1 7 18.8 1.3 8 19.3 1.2 9 22.7 1.4 10 25.7 1.5 11 21.2 1.2 12 23.2 1.3 13 25.6 1.3 14 27.2 1.5 15 32.6 1.6 16 34.3 1.6 17 36.2 1.5 18 36.7 1.4 19 45.4 1.4 20 43.2 0.8 Total 23.8 1.2 - 85 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.14 Average Electricity Subsidies by Expenditure Category for Connected and Non-connected Urban Households (NSS 1998) Ventile Subsidy per household Subsidy as percentage per month of household expenditure 1 30.0 2.3 2 40.3 2.5 3 43.1 2.5 4 51.0 2.6 5 48.0 2.3 6 54.3 2.3 7 50.5 2.2 8 62.7 2.4 9 46.4 2.0 10 65.0 2.5 11 60.9 2.3 12 92.6 3.0 13 81.7 2.7 14 85.6 2.5 15 107.7 3.1 16 107.8 3.0 17 88.3 2.3 18 87.6 2.1 19 107.3 1.9 20 393.2 3.8 Total 85.1 2.7 - 86 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.15 Comparison of Aggregate Electricity Subsidies for Selected States (NSS 1998 and National Estimates) Per Household Electricity Consumption Aggregate (kWh per Tariff (Rs/KWh) Electricity Subsidies pear) Cost of (Rs. million) State NSS NSS Supply4) NSS(5) (NSS sample size) 1998(1) 1998(2) National(3) (Rs./KWh) 1998 National(6) Orissa n=97 832 1.22 1.32 3.5 2490 3417 Haryana n=174 517 1.99 2.04 2.9 1630 1629 Himachal Pradesh n=252 547 0.60 0.60 1.7 850 503 Rajasthan n=312 644 1.46 1.26 2.6 3550 3237 Uttar Pradesh n=399 470 1.54 1.05 2.5 3090 10790 Andhra Pradesh n=687 610 1.01 1.66 2.4 8250 3361 Kamataka n=419 350 1.28 1.66 1.8 1270 424 Maharashtra n=827 558 1.19 1.52 2.2 5160 3407 (1) NSS average consumption figures are weighted averages, where weights are NSS multipliers that extrapolate the sample of households having electricity connections to the corresponding state populations. Note that the Planning Commission report (Planning Commission 2001) does not give per capita electricity consumption figures for each category; therefore these have not been reported above. (2) These estimates are calculated from NSS as weighted averages, where weights are NSS multipliers that extrapolate the sample of households having electricity connections to the corresponding state populations. For each household in the NSS survey, tariff was estimated as the ratio of expenditure to consumption. (3) National estimates for tariff for 1997-98 are obtained from Annex 4.22 of the Planning Commission report (Planning Commission 2001). (4) National estimates for cost of supply for 1997-98 are obtained from Annex 4.1 of the Planning Commission report (Planning Commission 2001), Annual Reports on the workings for SEBs. (5) These estimates are obtained by multiplying the per capita subsidy estimated from NSS by the number of domestic consumers in the state. (6) These estimates for 1997-98 are taken from Annex 4.36 of the Planning Commission report (Planning Commission 2001) - 87 - INDIA- POWER SECTOR REFORM AND THE POOR Expenditures on Alternative Sources of Lighting The NSS provides information on the use of kerosene for households as their primary source of energy for lighting (when the primary source of energy for cooking is different from kerosene). It is useful to have these expenditure as an indicator of what people are already paying for lighting, since they would clearly be willing to pay that amount for superior service. Table A2.16 Rural Expenditures for Lightin Ratio of kerosene expenditure Ventile Average kerosene Average kerosene in non-connected household consumption per non- expenditure per non- to electricity expenditure in connected household connected household connected household (liters per household) (Rs. per household) (percent) 1 2.8 13.0 53.9 2 3.0 13.6 41.9 3 3.1 14.8 42.7 4 3.2 14.3 42.1 5 3.5 16.3 44.7 6 3.6 15.9 41.4 7 3.6 17.0 38.4 8 3.9 18.0 35.2 9 3.8 17.2 34.4 10 3.7 18.0 34.8 11 4.0 17.9 37.7 12 3.9 18.2 34.9 13 4.0 19.1 38.4 14 3.8 17.0 32.1 15 4.1 21.1 41.3 16 4.4 20.5 35.4 17 4.5 22.4 39.1 18 4.2 20.6 30.4 19 4.9 24.2 34.1 20 5.1 27.2 37.2 Total 3.7 17.4 32.9 - 88 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.17 Urban Expenditures for Lighting Ratio of kerosene expenditure Ventile Average kerosene Average kerosene in non-connected household consumption per non- expenditure per non- to electricity expenditure in connected household connected household connected household (liter per household) (Rs. per household) (percent) 1 3.6 17.4 42.4 2 6.0 25.3 41.3 3 6.0 28.8 48.5 4 5.2 24.1 37.5 5 4.9 24.2 35.0 6 7.9 51.5 60.9 7 5.3 30.4 36.6 8 5.7 24.7 30.3 9 5.9 38.1 46.2 10 5.7 29.2 34.8 11 12.6 85.7 116.2 12 6.4 52.6 46.1 13 10.2 56.0 56.9 14 7.7 48.0 40.2 15 7.4 57.9 43.5 16 6.0 41.3 30.2 17 4.7 20.8 13.0 18 3.8 27.8 15.1 19 8.0 59.1 32.5 20 5.0 15.0 5.2 Total 5.8 32.0 28.1 - 89 - INDIA- POWER SECTOR REFORM AND THE POOR Table A2.18 Combined Rural and Urban Expenditures for Lighting Ratio of kerosene expenditure Ventile Average kerosene Average kerosene in non-connected household consumption per non- expenditure per non- to electricity expenditure in connected household connected household connected household (liter per household) (Rs. per household) (percent) 1 2.8 13.1 48.8 2 3.1 14.0 39.7 3 3.3 15.3 43.4 4 3.4 15.6 40.1 5 3.7 16.3 36.9 6 3.8 17.3 34.7 7 4.0 18.5 36.2 8 4.1 19.5 36.4 9 4.0 18.5 35.8 10 io _ _ _ __4.0 _ _ _ 18._2 _ _ _ 33.4_ 11 4.1 19.1 32.4 12 4.3 21.5 35.5 13 4.3 22.2 36.3 14 4.5 20.9 30.2 15 4.7 24.5 35.8 16 4.8 24.6 34.5 17 4.9 25.5 28.8 18 5.6 31.8 30.5 19 4.9 26.9 20.9 20 5.7 31.7 17.2 Total 3.9 18.4 23.9 - 90 - INDIA- POWER SECTOR REFORM AND THE POOR Simplified Prediction of the Impact of Tariff Increase on Cost Recovery Level What would be the impact of tariff increases on full cost recovery for a poor household, assuming zero price elasticity? To find the answer, let us assume that the tariff for the particular ventile = full cost recovery, and calculate the electricity bill as a percentage of the total expenditure. The electricity bill for each household was calculated as electricity consumption * cost of supply. A2.19 Rural Cost of Supply Electricity expenditure bill Electricity bill under zero Ventile under present situation as a cost recovery as a percentage of total percentage of total expenditure expenditure Ratio 1 3.3 8.18 2.5 2 3.1 6.72 2.2 3 2.9 6.25 2.1 4 2.8 6.04 2.2 5 2.7 6.25 2.3 6 2.8 6.52 2.3 7 3.0 6.67 2.2 8 3.4 6.63 1.9 9 2.9 6.41 2.2 10 2.8 5.81 2.1 11 2.8 5.88 2.1 12 2.8 5.72 2.1 13 2.6 5.70 2.2 14 3.2 6.43 2.0 15 2.6 5.52 2.1 16 2.8 6.03 2.2 17 2.4 5.23 2.1 18 2.8 5.54 2.0 19 2.3 4.67 2.0 20 1.8 3.52 2.0 Total 2.7 5.76 2.1 - 91 - INDIA- POWER SECTOR REFORM AND THE POOR A2.20 Urban Cost of Supply Electricity expenditure bill Electricity bill under zero Ventile under present situation as a cost recovery as a percentage of total percentage of total expenditure expenditure Ratio 1 3.1 7.04 2.3 2 3.8 7.60 2.0 3 3.4 6.94 2.0 4 3.2 6.66 2.1 5 3.2 6.29 2.0 6 3.1 5.83 1.9 7 3.4 6.37 1.8 8 3.2 6.13 1.9 9 3.7 6.41 1.7 10 3.3 6.30 1.9 11 2.9 5.38 1.9 12 3.5 6.92 2.0 13 3.5 6.68 1.9 14 3.5 6.52 1.8 15 3.8 7.34 1.9 16 3.8 7.54 2.0 17 3.9 6.48 1.7 18 3.9 6.21 1.6 19 3.1 5.22 1.7 20 3.3 7.37 2.2 Total 3.4 6.55 1.9 - 92 - INDIA- POWER SECTOR REFORM AND THE POOR A2.21 Combined Rural and Urban Cost of Supply Ventile Electricity expenditure bill Electricity bill under zero under present situation as a cost recovery as a percentage of total percentage of total expenditure expenditure Ratio 1 3.3 7.83 2.39 2 3.1 6.69 2.14 3 2.8 6.19 2.19 4 2.8 6.34 2.25 5 3.0 6.87 2.28 6 3.3 6.71 2.05 7 3.2 6.67 2.10 8 3.0 6.21 2.07 9 2.9 6.08 2.11 10 2.9 5.81 2.04 11 2.9 6.01 2.09 12 3.1 6.12 1.97 13 2.9 5.76 2.01 14 3.0 6.10 2.03 15 2.9 5.83 1.98 16 2.9 5.53 1.93 17 3.0 5.79 1.95 18 3.1 6.17 1.96 19 3.3 6.13 1.86 20 2.9 5.33 1.86 Total 3.0 6.07 2.02 - 93 - INDIA- POWER SECTOR REFORM AND THE POOR If Electricity Subsidies in India Were Better Targeted Here we define the poor as the lowest five ventiles (both rural and urban)-the closest to the Planning Commission's 2000 data-and calculate the level of subsidy being provided to them (according to our method of cost of supply minus average tariff). Using the coefficient for the population, it is possible to calculate and compare: (i) how much it costs India to subsidize the connected population of only the lowest five ventiles; (ii) how much could saved by charging the full-cost tariff to the richer 75 percent of the population; and (iii) how much would it cost India to subsidize the entire population of the lowest five ventiles, including unconnected households if they became connected. Table A2.22 Cost of Subsidies to the Poor Entire Population of the Lowest Five Ventiles (Rs. million per month) Rural Urban Combined Connected households 327.0 498.37 587.5 All households 1313.6 709.37 1983.1 The calculation was done as follows: (Sl*NHC1 + S2*NHC2 + S3*NHC3 + S4*NHC4 + S5*NHC5) Si = AVERAGE MONTHLY SUBSIDY PER HOUSEHOLD FOR iTH VENTILE NHCi = NUMBER OF CONNECTED HOUSEHOLDS IN ith VENTILE (Sl*TNH1 + S2*TNH2 + S3*TNH3 + S4*TNH4 + S5*TNH5) Si = AVERAGE MONTHLY SUBSIDY PER HOUSEHOLD FOR iTH VENTILE TNHI = TOTAL NUMBER OF HOUSEHOLDS IN ith VENTILE Here we are assuming that the average monthly subsidy per connected household in i-th ventile is the same as that for all households in the i-th ventile. It is also possible to calculate how much in subsidies India would be able to save by charging the upper 15 ventiles the full-cost tariff (i.e., zero subsidies). The methodology is similar to the previous calculation. Table A2.23 savings from Charging Some Groups the Full-Cost Tariff Entire Population of the Highest 15 Ventiles (Rs. million per month) Rural Urban Combined Connected households 2910.8 3491.16 6393.1 All households 5794.3 3948.25 9616.6 - 94 - INDIA- POWER SECTOR REFORM AND THE POOR Attachment Data Inventory-Subsidy Analysis The following reports were used in the subsidy analysis. Name of Data Source Types of Data Available National Sample Survey (NSS) o Electricity consumption at household level o Electricity expenditure at the household level o Expenditure on electric bulbs and tube lights o Total per capita monthly expenditure These data are available for each state and by rural/urban breakdown for selected states. NCAER-Market Demographics o Number of households per 1,000 owning Study' various types of electric appliances o Number of households per 1,000 purchasing various types of electric appliances, including bulbs and tube lights o Number of households per 1,000 having electricity connections These data are available for each year between 1985- 1999 (except for three years), by income class, state, and rural/urban breakdown. Planning Commission-Annual o Average per capita consumption of electricity Report on the Working of the State o Average tariffs Electricity Boards and Electricity o Total subsidy for domestic consumers for Departments average unit cost of supply of o Total number of consumers of electricity These data are available for each state and by year. Centre for Monitoring the Indian o Total consumption of electricity for each state Economy (CMIE)2 and by year o Domestic tariffs for each state and by year The source of this data is thought to be the Planning Commission report. World Bank-Energy Strategies for This study has collected detailed data from six states. Rural India from Six States3 These data include: o Monthly electricity expenditure by income class and state o Monthly consumption of electricity by income class and state o Electric appliance ownership a Perceptions regarding electricity service and willingness to pay a Percentage of household income spent on electricity for various income classes - 95 - INDIA- POWER SECTOR REFORM AND THE POOR Andhra Pradesh Study-Household This report has descriptive tables by income deciles on: Energy Strategies for Urban India: o Monthly household expenditures on electricity The Case of Hyderabad4 o Prices paid by consumers for electricity o Monthly household subsidies for electricity o Electricity supply interruptions o Consumer costs for lighting associated with electricity failure o Extent of household lighting, including number of houses with bulbs and tubes In addition to the above, descriptive information is also available on: o Perceptions of electricity service o Household willingness to pay for fewer power failures o Consumer knowledge of electricity subsidies o Household attitudes and opinions toward energy conservation options Gujarat Study-Development of a This report has descriptive tables on monthly electricity Framework for Electricity Tariffs in consumption, expenditure, and average residential Gujarat5 tariffs according to: o Income classes for urban consumers o Size of land holdings for rural consumers Descriptive data are also available on the percentage of rural and urban households not willing to pay more for electricity. Delhi Slum Study - Energy The study is based on a small sample of slum Provisions for the Urban Poor: India households in Delhi. The report has very broad Study6 descriptive tables on end use of electricity by income classes, and on distribution of slum households according to amounts paid to middlemen for electricity. INatarajan (1998). 2Economic Intelligence Service (2001). 3 ESMAP (2001b). 4 ESMAP (1999). Tata Energy Research Institute (1998). 6 Energy Resource Management (1999). - 96 - INDIA- POWER SECTOR REFORM AND THE POOR Annex 3 TARGETED PUBLIC DISTRIBUTION SYSTEM SUBSIDIES IN INDIA: SOME SNAPSHOTS India's Public Distribution System (PDS) provides food subsidies to the poor, but recent studies have shown that leakage in the system is substantial and subsidies are not effectively targeted to the poor. Approximately 35-40 percent of rice and wheat meant for distribution through the Fair Price Shops does not reach the consumers, and the poor receive less than their fair share of the amounts distributed-though there are some exceptions, such as Kerala and Andhra Pradesh. On average, it costs the central Government Rs. 4.27 to transfer one rupee to the poor.28 The system appears to have failed to transfer grains from surplus to deficit states such as Bihar, Orissa, and Madhya Pradesh, which have a high incidence of hunger and poverty. This has resulted in a stagnant or declining trend in those states of cereal and calorie intake.29 In addition to ineffective targeting and extensive leakages, the cost of procurement, storage, and distribution, and transportation incurred by the Food Corporation of India have become prohibitive and more inefficient over time. Further, off-take by the states from their respective central allocations has been declining over time adding to the center's fiscal burden. Some attempts have been made to improve PDS targeting. At the state level, a distinction has been made among categories of PDS users. In Andhra Pradesh, recipients are issued pink and white cards, and only white cardholders are given rice at a subsidized price. In Karnataka, saffron and tricolor cards have been introduced, and tricolor cardholders are given wheat and rice at a lower price than other PDS users. In Kerala, no targeted approaches have been implemented; but reports indicate that PDS has fared well, due to large subsidies by the state government, and the involvement of private traders in moving food grains under supervision of the Food and Civil Supply Department.30 In 1997, the Government introduced that Targeted Public Distribution System (TPDS), based on recommendations of the Chief Ministers' Conference in July 1996, to specifically target families below the poverty line. Under this scheme, the states are required to identify these families and provide them 10 kg of food grains per family per month, at 50 percent of the universal PDS price (market price). The important question for both programs is the extent to which they have delivered subsidies to the poor? For example, calculations based on regional poverty indices estimated by Dreze and Srinivasan (1996) show that if a subsidy is distributed in proportion to the number of poor in each region, as opposed to the entire population in that region, the fraction of total subsidy reaching the poor increases only by 4 percent. 28 Radhakrishna et al (1997). 29 Radhakrishna and Rao (1994). 30 Radhakrishna et al (1997). - 97 - INDIA- POWER SECTOR REFORM AND THE POOR PDS Subsidies in Andhra Pradesh and Maharashtra Several researchers have studied the distributional pattern and magnitude of subsidies in the public distribution of rice in Andhra Pradesh-a state that has made notable efforts to target benefits. There are no efforts of similar magnitude in other states, and NSS data for 1986-87 show that access of the poor is higher in Andhra Pradesh, where the state subsidy has been increasing over the years, and is now substantially greater than the central Government subsidy. In other states, by contrast, state government subsidies are typically much smaller than central subsidies.31 And because access to the program is universal in all states, the non-poor tend to limit access of the poor to PDS.32 To quantify the impact of Andhra Pradesh's innovative PDS methods, including the white cards and recently introduced food coupons (see below), researchers from the Indian Statistical Institute, New Delhi, recently compared the PDS of Andhra Pradesh and Maharashtra, based on an analysis of the 50th Round of NSS household consumption survey data.33 Results are given in Table A3.1. Table A3.1 Average Per Capita Subsidy (Rs/month) by Expenditure Decile in Andhra Pradesh and Maharashtra Decile Rural AP Rural Maharashtra Urban AP Urban Maharashtra 1 6.59 0.95 7.13 1.33 2 7.02 1.27 6.26 2.04 3 7.05 1.64 6.05 1.79 4 6.88 1.34 4.92 1.82 5 6.82 0.62 4.38 0.59 6 6.74 1.57 3.47 1.60 7 7.12 1.23 2.14 1.37 8 5.44 1.33 2.24 1.07 9 5.75 1.69 0.76 0.90 10 3.76 0.82 0.03 0.29 All Deciles 6.43 1.32 4.14 1.51 Note: For Andhra Pradesh, the figures refer to the PDS subsidy on the purchase of rice. For Maharashtra, the figures refer to the sum of the subsidies for rice and wheat. Table A3.1 contains estimates of the average per capita levels of subsidies in the two states, where averages are based on the grain-buying population with access to PDS. The difference between the two states is striking. For the bottom half of the population (deciles 1-5), the per capita subsidy on rice in rural Andhra Pradesh is four to eleven times larger than the per capita subsidy on rice and wheat in rural Maharashtra. The subsidy in urban Andhra Pradesh is three to seven times larger than in urban Maharashtra. A part of this remarkable difference is explained by the fact that PDS consumption levels are lower in Maharashtra. More importantly, the level of the subsidy is substantially lower in Maharashtra. 31 Radhakrishna et al (1997). 32 Radhakrishna et al (1997). 33 Dutta and Ramaswami (2001). - 98 - INDIA- POWER SECTOR REFORM AND THE POOR In Andhra Pradesh's urban areas, the subsidy pattern across income groups is close to ideal. The bottom decile receives the highest per capita subsidy of Rs 7.13 per month. Except for a small jump between the 7th and 8th decile, the subsidies decline with per capita expenditure, and tail off to zero at the upper end of the income scale. This does not happen in the rural sector, where per capita subsidies are above Rs. 6 per month for up to the 7th decile. On the other hand, in Maharashtra, subsidies do not seem to be targeted in either the urban or rural sectors. Urban subsidies decline after the 6th decile, but even such mild targeting is not to be found in rural areas, where subsidies are substantially the same for all 10 deciles. Food Stamps in Andhra Pradesh Except for the food coupon program in Andhra Pradesh, introduced in 2000 to eliminate illegal cards and reduce the rice subsidy bill, the possibility of administering food subsidies through a food coupon system has never been examined in India. Though an evaluation of the program has not yet been carried out, the state's Office of Food and Civil Supplies reports that 1.5 million rice coupons have been issued, as against 1.13 million cardholders. As a result, the state has saved 13,817 metric tones of rice in the form of prain's per month and saved an amount of Rs. 77 crore per annum in the subsidy.3 Rice coupons are issued to eligible families, which they use, along with the white card, to buy rice at the subsidized price. Further steps to identify beneficiaries and improve targeting are ongoing by the PDS Commissioner's office. For instance, income declarations by families below the poverty line are being matched with data from the Multi-Purpose Household Survey (MPHS) and the Geographical Information Survey (GIS) to verify eligibility. Two criteria being used are income and landholding patterns; the latter tend to be more reliable. The PDS Commissioner expects to complete the verification process and prepare a list of eligible beneficiaries in 2001.35 While the food coupon program shows great potential for targeting rice subsidies to poor households. However, it can also have some drawbacks. For example: o There is scope for fraud and duplication of coupons; o Identification of beneficiaries below the poverty line is expensive and difficult; o The program is prone to urban bias, and feasible only for households that rely on the market for food purchases; o It is difficult to remove people from the program when they move up the income ladder. 34 Written communication from Mr. H S Brahma, Civil Supplies Commissioner, Government of Andhra Pradesh, September 11, 2001. 35 World Bank, Aide Memoire, Rural Development Unit, and personal communication with Rajni Khanna, Rural Development Unit, World Bank, New Delhi. - 99 - INDIA- POWER SECTOR REFORM AND THE POOR TPDS Subsidies in Uttar Pradesh The World Bank recently carried out an evaluation of targeting efforts in Uttar Pradesh since the introduction of the Targeted Public Distribution System (TPDS), based on data from the 1997-98 Uttar Pradesh-Bihar Survey of Living Conditions.36 The state governments, in collaboration with local government institutions (gram panchayat) are responsible for identifying beneficiaries and issuing special cards, following central Government guidelines. Vigilance committees have been set up to supervise the supply distribution of food grains and follow up on beneficiaries' complaints. Under the TPDS, which was introduced in June 1997, the central Government allocates a supply of food grains to each state in proportion to the state's incidence of poverty. Within each state, the food subsidy offered under the old PDS is now targeted to households below the poverty line, with each household entitled to 10 kg. of rice and 10 kg. of wheat per month, at half the market price, through the Fair Price Shops. The World Bank survey in Uttar Pradesh found that households below the poverty line were correctly classified to a large extent, and that only a small percentage should have been excluded under program guidelines. For instance, the survey found that only 2.2 percent of households in the sample had more than the stipulated land ownership ceiling; only 8.7 percent owned any consumer goods, and only 3.2 percent had any assets. With regard to how much of the subsidy actually reaches the intended beneficiaries, however, the survey findings are not very promising: there is a 40 percent discrepancy between the central Government's allocation of food grains to Uttar Pradesh and the amount actually received by poor households. The data therefore suggest that a large fraction of the theoretically possible transfer of subsidy is lost along the way (Table A3.2), and that further streamlining of the TPDS is required to bring about sizeable welfare gains. Table A3.2 Breakdown of Subsidy through TPDS in Uttar Pradesh Item Total Amount (Rs. million) Percentage Total theoretically possible subsidy total 3,781 100 subsidy provided Amount lifted lost 7,56 20 Subsidy received by households below 1,226 32.4 poverty line Leakage to households above poverty line 89 2.4 Higher prices - PDS shopkeepers not 185 4.9 clear Amount unaccounted for 1525 40.3 36 Kriesel and Zaidi (1999). - 100 - INDIA- POWER SECTOR REFORM AND THE POOR To be effective, the TPDS must overcome several problems.37 First, there are informational constraints that make it difficult to accurately determine household income levels. Second, the cost of identifying the poor can be high and recurring, since poverty is a transient phenomenon and has to be measured over time. In Sri Lanka, when the universal rice subsidy program was replaced by food stamps, those eligible for food stamps were identified only once. This meant that households whose incomes increased beyond the eligibility level continued to benefit from the program. In Brazil, a finely targeted food distribution program was changed back to a universal program-though within selected poverty areas-since it was found that the leakage of benefits to non-target groups was less expensive than the cumbersome targeted program. A third problem relates to the definition of who is poor. While TPDS tries to finely target subsidies, it does not cover people without proper residential addresses, including the homeless, street children, those under institutional care, and the destitute. Due to targeting errors, families that are not identified as below the poverty line, but are otherwise poor and left out of TPDS, would become worse-off than before if the untargeted PDS is phased out. Self-Targeted Approaches No particular targeting method has been perfect in India or other parts of the developing world. However, programs that are imperfectly targeted have proved better in reaching the poor and keeping costs down than no targeting at all. Countries where food coupon schemes have been launched have reported much better targeting, a reduction in leakages, and a substantial reduction in the magnitude of the food subsidy. In fact, international experience with food subsidies suggests that leakages are minimal in programs that self- select beneficiaries. In the case of food stamps, targeting was improved in Jamaica and Honduras by linking food stamp delivery to health clinics. In Bangladesh, leakages to the non-poor in the ration program were greatly reduced by tying distribution to primary school attendance. In Tunisia, the targeting efficiency of a universal price subsidy was greatly improved by subsidizing only those foods consumed by the poor. 37 Jha and Srinivasan (1996). - 101 - INDIA- POWER SECTOR REFORM AND THE POOR Annex 4 INTERNATIONAL EXPERIENCE WITH ELECTRIC UTILITY SERVICES AND SUBSIDIES FOR THE POOR This annex reviews some international experiences and lessons on how to reconcile the provision of electricity services to the poor with commercial viability of the utilities. It also reviews policies and measures that some countries have adopted to protect poor households against the burden of electricity expenditures and tariff increases during the early stages of reform. Codes of Practice in the Electricity Industry in the United Kingdom In the United Kingdom, electric utilities had largely achieved cost recovery and universal service before the industry was deregulated. During deregulation, the most important way the regulator could help the poor was to keep average prices down. Some addition protection was provided by codes of practice, which companies bidding for generation or distnbution contracts had to agree to follow. Such codes are designed to protect all consumers, but poorer consumers, who are more likely to have arrears and be less skilled in dealing with bureaucracy, may benefit more. License conditions in the United Kingdom allow an electric utility to disconnect consumers who fail to pay their bills. However, the company is required to agree with the regulator on a code of practice for bill payment, including procedures for the company to follow to first, distinguish consumers who have difficulty paying from other defaulters, and second, help those who are in difficulty. Help can include making arrangements for installment payments, or offering a prepayment meter (also calibrated to recover debt at an affordable rate). The utilities should also advise consumers on how to use electricity more efficiently to reduce excessive consumption, which may worsen their situation. Finally, the code requires the company to provide special services to elderly, sick, or disabled consumers to help them pay their bills, and prohibits the disconnection of such vulnerable groups during winter months. Complaints from consumers are normally resolved by the regulator's staff, but may also go to the Electricity Consumer's Consultative Committee. The use of the utility instrument to target welfare benefits from the Government budget is rather limited (Green 2000). This instrument is, however, part of a relatively effective system of targeted welfare benefits from the Government budget, which is the main instrument for protecting the poor. Universal Service Obligations in Utility Concession Contracts in Argentina In Argentina, electricity distributors are required to meet all electricity service demands, and must allow open access of third parties to transmission capacity. Distributors must also make all necessary investments to fulfill their public service commitments. Users have responsibilities as well, and may be disconnected if they put the safety of the - 102 - INDIA- POWER SECTOR REFORM AND THE POOR distributor's installations at risk, resell energy, or do not pay their bills. In all of these cases, the regulator must first demand that the consumer correct the problem. Under these arrangements, Government continues to have responsibilities to ensure universal access to electric services, and works in partnership with utilities to fulfill social objectives and protect the vulnerable. The law states that tariffs must recognize efficiency and economic cost, and prohibits any sort of implicit subsidy or cross-subsidy. If a subsidy is needed to achieve a social objective, it should be explicit, transparent, and borne by other, non-utility sources- usually the national, provincial, or municipal government. For example, the law envisages a reduced tariff for low-income pensioners, charities, non-profit organizations, and electricity-intensive industries. The cost of a subsidy is charged to the government area responsible for the subsidized social sector. Sixty percent of the National Electricity Fund is allocated to finance regional tariff compensations. The remaining 40 percent of the Fund's resources go to electricity development in the interior of the country. Users who live far from the distribution network are treated according to the specific characteristics of each region. Concession contracts for distributors at the national level include a special reimbursable contribution to be paid by users to non-electrified rural areas. In effect, the privatization process considered two different concession areas, with different socio-economic characteristics: o Concentrated markets connected to the national or provincial distribution system, and isolated markets (stand-alone generation systems) connected to local networks; o Scattered markets in unelectrified areas in the remaining provincial territories. Two different companies were set up to provide services in the two markets. The consumers in scattered markets are generally supplied with alternative systems of distributed power-photovoltaic, wind , small hydro turbines, or diesel-run generators. The scattered areas also have their own tariff systems, and the subsidy is paid by the provinces to the licensees (Chisari and Estache 2000). Performance of Different Subsidy Schemes in Central and Eastern Europe The experience of countries in Eastern and Central Europe (ECA) is particularly useful because they are facing the same fundamental challenges in the sector as India-the need to steeply increase tariffs to cost-recovery levels and improve bill collection. The Bank has also carried out innovative analytical work on utility reform in those countries that could be relevant to India. Until the early 1990s, utility prices were set artificially low for residential consumers in most countries in Central and Eastern Europe. When the cost of these across-the-board subsidies became unaffordable, one government after another decided to bring residential tariffs closer to supply costs. The resulting price adjustment process, however, turned out to be more painful than expected. The large tariff increases coincided with a decrease in - 103 - INDIA- POWER SECTOR REFORM AND THE POOR household income due to the contraction of economic activity. Furthermore, the decline in household income was coupled with increasing income polarization. As a result of these two trends, the share of the poor within the overall population reached alarming proportions in many ECA countries. Paying utility bills became a major challenge for the rapidly growing number of poor households. Some governments simply pressured utility managers to be lenient with households that did not pay their bills. By the middle of the 1990s, however, most governments recognized that this solution was unsustainable, and started to experiment with various subsidy schemes targeted to low-income households. These altemative subsidy schemes, and the methodology used to evaluate them (World Bank 2000b), are detailed in Box A4.1 and Table A4.1, below. BoxA4.1 Utility Subsidies in ECA Countries-Typology and Methodology Typology of subsidies. Households in ECA countries receive several types of utility subsidies, which fall into the following seven categories: - No disconnection of delinquent residential customers (a de facto subsidy) - Across-the-board household price subsidies - Lifeline tariffs (with two fixed or floating blocks, or with three blocks) - Price discounts provided to certain households based on occupation, medical history, age, etc. - Compensation for expenditures that exceed a notional burden limit, set as a given percentage of monthly household income (based on actual utility expenditures or expenditure norms) - Other earmarked cash transfers to help low-income households pay for utility services - Non-earmarked cash transfers to poor households Methodology. A variety of subsidy mechanisms were evaluated against a common set of criteria. The purpose of the evaluation was to establish which subsidy mechanisms can better enable the poor to receive utility services without having to sacrifice other essential needs; thus, the choice of criteria was determined by this objective. The main criteria used to judge the performance of each scheme included: - The extent to which the poor are being reached (coverage of the poor) - The share of the subsidy that goes to the poor (targeting of the poor) - Predictability of the benefit for the poor - Extent of pricing distortions and other umntended side effects of the subsidy - Administrative simplicity. Each mechanism was given a score for each criterion, with the scores weighted by the importance of each objective. In addition, fiscal impact and impact on the financial position of the utility were reviewed The study relied on household survey data, augmented with information provided by government ministries and statistical bureaus. Source: World Bank (2000b). - 104 - INDIA- POWER SECTOR REFORM AND THE POOR Table A4.1 Illustrative Evaluation of Subsidy Mechanisms Tagem 0 l -52 ~_ u I K Coverage i Ittor2 -to 22 - to2 1 to2 -2 1 1 1 1 Targeting 1 0 0 2 1 1 0 1 2 2 Predictability '0 2 2 1 2 2 1 1 1 1 Pricing distortion -2 -2 -1 -2 -1 -1 -2 0 -1 0 Administration 0 0 0 0 -1 -1 -2 -2 -2 -2 dost/difficulty Aggregate Score 2 2to4 3to5 5to7 4to6 4 -1 3 4 5 Note 1. Scoring: 0 - low, 1 - medium, 2 - high (see the last section of Chapter II for more information). 2. Aggregate score calculated using double weight for first two criteria. Source: World Bank (2000b). Findings and observations. The evaluation found that when subsidy mechanisms perform well according to some of the criteria, they tend to perform poorly according to others. For example, high coverage is usually associated with low targeting, and high targeting increases administrative costs. Furthermore, not all subsidy mechanisms are applicable or perform equally well across all countries and utility services. The lack of metering, for example, poses a problem for the introduction of lifeline tariffs. For utilities with high connection rates among the poor (electricity and water supply in most ECA countries), the three-block and floating block lifeline tariffs occupy first and second place, respectively. For utilities with lower connection rates among the poor (typically, district heat, gas, and sewerage in ECA countries), first place is shared between non- earmarked cash transfers and the three-block lifeline tariff. When no reliable estimate exists for actual consumption (or the billing system has major deficiencies), lifeline tariffs drop out, the criterion of pricing distortions becomes meaningless, and the top score goes to cash transfers/privileged consumer discounts, which can be matched by across-the-board price subsidies if the connection rate of the poor is high. The evaluation points to the importance of case-specific assessment and scoring. Still, some subsidy mechanisms seem unlikely to be top performers under any circumstances, at least according to the five criteria used in that study. The mechanisms include no- disconnection and burden limits, and across-the-board price subsidies in countries where the connection rate among the poor is low. In addition, the policies of across-the-board household subsidy and no-disconnection are so costly for utilities and, ultimately, government budget, that they could not be sustained in any country (see Box A1.2). - 105 - INDIA- POWER SECTOR REFORM AND THE POOR Earmarked cash transfers also rank quite poorly by these criteria, mostly on account of administrative complexity, although some other work suggests that this measure may have stronger merit when other considerations, such as utility revenues, are taken into account.38 One of the key conclusions from the evaluation is that policymakers should compare the performance of alternative schemes before deciding on the most appropriate subsidy mechanism. Otherwise, it is easy to make sub-optimal choices. For example, many governments in ECA countries opted for burden limits, but that mechanism appeared to perform poorly in achieving its objective. Political considerations and public perceptions may affect the ranking and acceptability of a particular subsidy scheme, or create pressure for innovative ways to deliver subsidies and reduce the burden on the budget-for example, public-private partnerships (see Box A1.2). 38 In Armenia, for example, households receiving cash transfers cut their consumption after prices increased, like all other poor households. But unlike other poor households, which did not increase their average payments to the utility despite a 13 percent average rise in their monthly bill-leading to further accumulation of arrears-households receiving cash transfers increased their average monthly payments to the utility by 4 percent. - 106 - INDIA- POWER SECTOR REFORM AND THE POOR Box A4.2 Who Should Pay the Cost of a Subsidy? The cost of household subsidies can be covered by the utilities themselves, non-household consumers, the budget, or a combination of these sources. The first option, however, rapidly leads to depletion of the utilities' working capital, which in turn reduces the reliability of the services they provide. The resulting and inevitable curtailments tend to have an anti-poor bias, and reverse the poverty alleviation impact of the subsidy. The second option may also become unsustainable if demand from industrial consumers is highly elastic with respect to price. Even when the short-term price elasticity of industrial demand is relatively low, the welfare cost of distorting the price of an essential input is likely to be larger in the long run than the deadweight loss associated with additional taxes in the context of a well-functioning tax regime. In summary, from the economics point of view, financing of the subsidy from the budget seems to be the best option in most utility sectors and countries. The latest experience with utility service provision in a number of countries also shows opportunities to use innovative public-private partnerships to assist the poor during the reform process. Concerning the financing burden placed on the budget, the higher the targeting efficiency of the subsidy mechanism, the lower this burden is going to be. Specifically, for a given amount of purchasing power to be transferred to the poor, the three-block lifeline tariff and income-tested cash transfer schemes require the least amount of funding. In fact, the three-block lifeline tariff can be designed in such a way that the penalty at the high consumption level (the third block) fully covers the subsidy at the low consumption level (the first block). At the other end of the scale, across-the-board subsidies place such a large burden on the budget that most ECA govemments have phased these out. While at first sight the no-disconnection mechanism appears to have no impact on the budget, in reality it tends to be so costly for utilities that the budget not only receives lower revenues from corporate taxes, but over time has to finance maintenance and rehabilitation costs and assume responsibility for the utility's accumulated debt to prevent the complete collapse of utility services. As a result, a number of govemrnents in the region that were lacking in fiscal resources decided to sell their electricity and gas utilities in order to avoid total system collapse (e.g., in Armenia, Georgia, Kazakhstan, and Moldova). The low proceeds from the privatization of these utilities, compared to the proceeds in countries where non-payers are regularly disconnected (e.g., Hungary), was another manifestation of the negative impact of the no-disconnection policy on the budget. Sources: World Bank 2000b, Armar 2001, Chisari and Estache 2000. Distribution Privatization and the Poor: The Case of Hungary Hungary has played a leading role among ECA countries in privatizing generation and distribution in its power sector. It is particularly useful to identify and assess the relative successes and failures of specific measures put in place to mitigate the impacts on the poor of the reform and privatization process (see Armar 2001 for a full description of the case study). The approach adopted in Hungary included three major elements that evolved over time (see Figure 1): o Phase out cross-subsidies between non-household and household electricity consumers, and initially replace them with three-block lifeline tariffs for household electricity consumers. Later, after development of the two mechanisms described below, the tariff was changed to a one-block tariff for all residential consumers). - 107 - INDIA- POWER SECTOR REFORM AND THE POOR o Re-target subsidies toward low-income households in a manner more consistent with the overall structure of the social safety net, allowing eventual phasing out of the lifeline tariff. o Minimize the fiscal burden on the state by replacing the use of taxpayer resources to fund subsidies with an alternative ratepayer-funded mechanism. Innovative funding arrangements and delivery mechanisms-two public-private partnerships to provide income-tested supplementary cash payments to poor households-were developed through a consultative process engaging a variety of stakeholders. Each of these elements is described in more detail below: Tariff adjustment. In January 1997, the Government of Hungary, assisted by the Electricity Tariff Committee, adopted a multi-year tariff adjustment program, which was applied uniformly to all electric distribution companies (EDCs). To phase out the cross- subsidization of household consumers by industrial and commercial consumers, a mechanism was put in place to: (i) determine a specified multi-year distribution margin for each consumer category; (ii) cap the annual electricity expenditure increase for households due to tariff rebalancing (at HUF 1,600 per household consumer); and (iii) ensure that the total revenue yield for the EDCs did not exceed the benchmarks set for the multi-year distribution margins. In addition, a three-block lifeline tariff was introduced to mitigate the impact of tariff increases on low-income household consumers. The lifeline tariff was designed to provide a subsidy of up to 50/kWh/month/household; recover costs for consumption in the second block of 601-3,600 kWh/month/household; and impose a penalty for consumption higher than 3,600 kWh/month/household. This resulted in a progressive phasing out of cross-subsidies between non-household and household consumers in a manner that would secure the specified distribution margins for the privatized EDCs. However, despite the relatively high frequency of tariff adjustments during the period, the Government was unable to achieve its objective of phasing out cross-subsidies within three years of the privatization. Ceilings on tariff increases had to be imposed as part of extraordinary measures taken under the Emergency Stabilization Program to curb skyrocketing inflation. Eventually, in March 1999, the Government approved the Tariff Committee's recommendations for a major revision of the regulations, procedures, and formulas for tariff setting. This included elimination of the three-block lifeline tariff because of its negative fiscal impact on the EDCs, and introduction of a one-block tariff for all households. Elimination of the lifeline tariff became possible due to the success of another mechanism-earmarked cash supplements-to help low-income households pay their utility bills. - 108 - 0 A~~~- - - - - - - -- - A- - - - - - - - - N,- - - - - - - - - l7 Cd I fr~~~~~X ----- ----- x C \lI~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I I~~Q 4.4~ 0~~~~~~~~~~~~~~~~~~~0 Iu *1 'Ii~~~~~~~~~~~ INDIA- POWER SECTOR REFORM AND THE POOR Non-tariff instruments. Earmarked cash supplements were introduced in January 1997 alongside the three-block lifeline tariff, to mitigate the impact on low-income households of post-privatization increases in electricity tariffs. Several trade-offs had to be made in deciding among options for governance of the subsidy delivery mechanism, including the sustainability of funding sources based on taxpayer funds (i.e., budget allocations) as opposed to ratepayer funds; and the degree of private sector involvement in mobilizing and disbursing funds for the cash supplements. The Electricity Tariff Committee recommended that the Government use the same eligibility criteria for the beneficiaries of earmarked cash supplements as were generally used by municipalities for dwelling maintenance support. For that support, the following guidelines typically applied: (i) monthly net income per capita should not be greater than twice the minimum pension; (ii) the quality and size of living space should be within approved specifications; (iii) general monthly expenditure on dwelling maintenance support is equal to or exceeds 35 percent of total monthly household income; and (iv) monthly expenditure on heating is at least equal to 20 percent of total monthly household income. The consistency of the eligibility criteria between the two support programs made it simple for the Government to channel the earmarked cash supplements to beneficiaries through the municipalities. Innovative delivery mechanisms. To supercede those arrangements, the Government later established a public-private partnership that became the Energy Fund for the Poor. Unfortunately, the Energy Fund's arrangements for distributing earmarked cash supplements faltered in were criticized during the run-up to the general elections of 1998. There was a political backlash against the specific way the Government had provided budgetary (taxpayer) resources to set up the Energy Fund. As a result, toward the end of 1998, the first full year of Energy Fund operations, the Government began to de-emphasize the role of the Fund and turned instead to the H6ra Alapftvany (Hera Fund), a private foundation that had secured more active cooperation and sponsorship from the electricity supply industry, municipalities, and other stakeholders, including electricity ratepayers. The public-private partnership among the Hera Fund, the municipalities, and ratepayers (through the mechanism of the Social Solidarity Levy) has therefore emerged as the principle source of cash supplements to low-income households to pay their electricity and gas bills (see Figure 2). From 1998 onward, the Hera Fund has been responsible for the administration of those supplements. It has provided, on a cost-sharing basis with the municipalities, cash supplements to some 300,000 families to help pay for electricity, gas, and district heating. Typically, each household receives an annual cash supplement of between HUF 1,000 and 5,000. On an exceptional basis, some households that rely exclusively on electricity for space heating have been provided with cash supplements up to the limit of 70 percent of their heating bills during the winter months (December, January, and February). - 110- INDIA- POWER SECTOR REFORM AND THE POOR In addition, the Hera Fund is credited with the launching an innovative cost-sharing program with municipalities that is helping to transform the low-income household market for energy-saving light bulbs. Through the program-organized in each municipality to attract the sponsorship of local individuals and enterprises-the Hera Fund has catalyzed the procurement and distribution, by the municipalities, of some 160,000 energy-saving light bulbs. The goal has been not only to structurally reduce the electricity consumption of low-income households, but also to promote energy conservation, reduce greenhouse gas emissions, and stimulate the market for local manufacturers of the energy-saving bulbs. Figure A4.2 Public-Private Partnership for Utility Subsidy Delivery in Hungary ELIGIBLE / Soc*al \ HOUSEHOLD Electricity Levy 1/3 CONSUMERS Ratepayers (Tariffs) 1/3 B _eca s s / Municipality Support to Poor Cash Supplements Beneficiary - Capital MVM, EDCs, etc. Municipality Subsidies Other Sponsors Saving FUND ~~~~~Beneficiary Lamps) GE-Tungsrain Municipality IOSRAM Lessons A number of good practice lessons can be drawn from the Hungary case, which may be useful in other countries. A. The first element of good practice emerging from Hungary is the need to adopt regulatory mechanisms that: o employ the most basic instruments o are relatively simple to implement o ensure predictability of outcomes to all stakeholders o are sensitive to the affordability concerns of poorer consumers o do not unduly restrict the operational flexibility of privatized utilities. B. The second element of good practice is innovation. In Hungary, authorities recognized that internal cross-subsidies in the distribution segment of the electricity supply chain could not be retained after privatization. In response, they developed, put in place, and, as necessary, adjusted components of a multi-year specified distribution margin, in order to re-balance consumer tariffs and simultaneously stabilize revenues within levels agreed upon with the privatized companies. - 111 - INDIA- POWER SECTOR REFORM AND THE POOR C. The third element of good practice is the use of both tariff and non-tariff instruments to re-target subsidies to the most vulnerable groups during the transition. In Hungary, two key instruments were simultaneously applied: o a three-block lifeline tariff as a transitional measure to cushion the impact on all household consumers of the inevitable rise in utility service charges; and o income-tested earmarked cash supplements to ensure that benefits would accrue to the most vulnerable consumers, in a manner consistent with the country's overall social safety net. D. The fourth element of good practice is the use of a highly consultative process to promote and nurture public-private partnerships. In Hungary, stakeholders were involved in re-engineering subsidy delivery mechanisms, in order to transfer the burden of funding the remaining subsidy (cash supplements) from taxpayers to ratepayers, municipalities, and private sponsors. General Principles of Electricity Consumption Subsidies Based on experiences with other countries, the following general principles are of relevance to India: o Across-the-board price subsidies and no-disconnection policies are both very costly and relatively ineffective in protecting the poor; o The absence of metering makes it impossible to use the best performing assistance schemes, such as lifeline tariffs. o While lifeline tariffs are commonly used to keep electricity affordable for the poor, a combination of tariff and non-tariff instruments (mainly cash transfers) is usually needed to protect the poor during the reform process, with the right balance depending on country conditions. o The feasibility and effectiveness of non-tariff instruments, however, will depend on their consistency with the country's existing social protection programs. Evaluation of as many alternative schemes as possible, adjusted to country circumstances, is needed to avoid costly sub-optimal choices. o A subsidy delivery mechanism must be transparent and accepted by the majority of stakeholders. o The Government budget is the least distorted source of subsidies to the poor, while cross-subsidies from industrial and commercial users have been deemed unsustainable and abandoned by an increasing number of governments; - 112- INDIA- POWER SECTOR REFORM AND THE POOR o Protecting the poor during the reform and privatization process requires a strong public-private partnership, including Government support in many areas-from financial to law enforcement to public awareness. o A consultative process among the various stakeholders (utilities, municipalities, consumers) can facilitate political consensus for reform and the creation of widely accepted arrangements for assisting the poor, including public-private partnerships. - 113 - INDIA - POWER SECTOR REFORM AND THE POOR Bibliography Amar, A. 2001. 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