POLITICAL ECONOMY GOOD PRACTICE NOTE 9 Assessing the Political Economy of Energy Subsidies to Support Policy Reform Operations Gabriela Inchauste David G. Victor Eva Schiffer i GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS CONTENTS Acknowledgments iv About the Authors iv Acronyms and Abbreviations v 1. Introduction 1 2. Information Required for Assessing Subsidies and Designing Energy Subsidy Policy Reforms 3 Information Type 1: Goals and Structure of Existing Subsidies 4 Information Type 2: Size of Subsidies, Who Pays for Them, and Who Gets Them 4 Information Type 3: Mechanisms Used to Deliver Subsidies and Their Alternatives 7 Information Type 4: The Decision-Making Structure Concerning Subsidies 10 Information Type 5: Stakeholder Interests and Dynamics 11 CASE 1: Large Benefits to Both Special Interests and Citizens. . . . . . . . . . . . . . . . . . . . 13 CASE 2: Large Benefits to Special Interests, Small Benefits to Citizens. . . . . . . . . . . . . 14 CASE 3: Small Benefits to Special Interests, Large Benefits to Citizens. . . . . . . . . . . . . 16 CASE 4: Few Benefits to Either Special Interests or Citizens. . . . . . . . . . . . . . . . . . . . . 18 Information Type 6: The Track Record with Reform 18 3. Information That Can Be Obtained from Desk Research 20 Macro Indicators of Subsidies: Goals, Costs, and Benefits 21 Political Actors and Interest Groups 21 Survey of Existing Literature 21 4. Information Usually Available only from Interviews 22 Filling in Fundamentals: Detail on Purpose, Cost, Benefits, and Instruments of Major Energy Subsidies 22 Information Concerning Political Interest Groups 22 Overall Political Economy Assessment 23 Forward-Looking Scenario Assessment and Iterative Learning 23 Annex A: Typical Interview and Background Research Questions 24 Critical Items Needed from Other ESRAF Good Practice Notes 26 Overview of the Political and Administrative System 26 ii TABLES Factual Overview of Industrial Structure of the Relevant Energy and Related Industries 27 History of Reforms 27 History of Non-Reforms 29 Broad Questions about Political Economy 29 Assessing Future Scenarios, Drivers, and Pathways for Reform 30 Annex B: Indicative Logistics 31 References 32 TABLES Table 1: Map of a Country’s Energy Subsidy Landscape 9 Table 2: Characterizing Subsidy Policy Benefits: Basic Framework 12 Table A1: Roles of Reform Actors 31 FIGURES Figure 1: Life Cycle of a Subsidy Regime 19 iii GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS ACKNOWLEDGMENTS This is the ninth in the series of 10 good practice notes under the Energy Sector Reform Assessment Framework (ESRAF), an initiative of the Energy Sector Management Assistance Program (ESMAP) of the World Bank. ESRAF proposes a guide to analyzing energy subsidies, the impacts of subsidies and their reforms, and the political context for reform in developing countries. The authors thank participants in the study “The Political Economy of Energy Subsidy Reform,” which has largely informed the analysis here, along with participants at a December 2016 workshop that reviewed a draft. Verena Fritz provided helpful comments and guidance for the team. ABOUT THE AUTHORS Gabriela Inchauste is a Global Lead on the distributional impact of fiscal and social policies for the Poverty and Equity Global Practice of the World Bank and a Lead Economist in the Europe and Central Asia region. Her recent work includes comprehensive assessments of the distributional impact of fiscal policies, ex-ante analysis of the distributional impacts of policy reforms, and diagnostics to better understand the channels through which economic growth, labor market opportunities and public policies can lead to poverty reduction. David G. Victor is a professor of international relations at the School of Global Policy and Strategy and director of the Laboratory on International Law and Regulation (ILAR). He is an internationally recognized leader in research on energy and climate change policy as well as energy markets. His research focuses on regulated industries and how regulation affects the operation of major energy markets. Victor authored "Global Warming Gridlock," which explains why the world hasn't made much diplomatic progress on the problem of climate change while also exploring new strategies that would be more effective. Victor is a leading contributor to the Intergovernmental Panel on Climate Change (IPCC), a United Nations-sanctioned international body with 195 country members. Eva Schiffer is a Leadership Expert in the Governance Global Practice of the World Bank. Her work focuses on assessing political economy constraints to reforms and on building the capacity of reform champions to implement difficult reforms. To analyze the political economy and stakeholder interactions concerning specific reforms, Eva developed the Net-Map tool, which is a participatory approach to mapping stakeholder networks, their formal and informal connections and the flows iv ACRONYMS A ND ABBREVIATIONS of influence and interest between actors. She works with governments and change agents across different sectors and regions in overcoming political economy and stakeholder obstacles to reform. ACRONYMS AND ABBREVIATIONS ESMAP Energy Sector Management Assistance Program ESRAF Energy Sector Reform Assessment Framework LPG liquefied petroleum gas SOE state-owned enterprise v 1 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS 1. INTRODUCTION For decades, policy makers have known that an important spotlight on incentives that it is important to reform energy subsidies. Yet, affect the behavior of political leaders and in practice, there has been huge variation in administrators. the outcomes from reform efforts. Failures are often rooted in the inability of reformers to Annex A provides a framework for interview understand and overcome political barriers. questions and a strategy for obtaining Successes have come where governments information through interviews. Much of and other important pro-reform policy actors the critical information about the political have addressed the political economy barriers economy is difficult to obtain through reports and opportunities for reform strategically. and data sets – while these can provide Further success of reforms will require tools critical information about the issues that that make it easier to understand and navigate pose problems and for which the underlying those barriers and opportunities. drivers need to be explored. Interviews will be essential, especially interviews on politically As part of a larger World Bank study on sensitive topics with seasoned senior officials the empirical record of subsidy reforms, the and observers. goal of this note is to create a framework to collect information that can help explain the While there has been extensive research history and possible future developments on the optimal design of subsidy policies, of the political economy of subsidy reform. systematic research on the political economy The purpose of this analysis is to improve of subsidy reform is much thinner, yet the design and implementation of reforms perhaps more essential to effective policy and to integrate political economy concerns design and implementation. Among the many from the outset and not in a reactive manner. insights from that research is that timing and organization are vitally important to the The analytical framework proposed in this practical success of reform efforts. Other note is rooted in basic theories of political insights concern the reality that much of economy—a framework that can guide the academic research on policy reform has empirical research while helping policy makers focused on first-best policy outcomes that draw lessons from previous reform efforts.1 are perhaps rarely observed in the real world. A political economy perspective pays close More realistic reforms often have “second-best” attention to such factors as the ability of (or “nth-best”) characteristics and are best interest groups to organize for or against understood in a dynamic framework. Often, the policy reforms and how institutions, prices, question is not “How can we achieve a result and technical opportunities shape policy that mirrors global best practice?” but rather decisions and their implementation. This “How can we make and maintain progress on political economy framework has also put the issue of energy subsidy reform?” 1 For more insight into the framework and in-depth application to four countries, see Inchauste and Victor (2017), notably chapter 1, which reviews the literature. For more about the foundations of the framework, see Olson (1965), Peltzman (1976), and Stigler (1971). For its application to recent studies of political systems, see Wilson (1973)).A discussion of the general experience of using a problem-driven political economy lens to inform WBG strategies and operations, see Fritz, Levy, and Ort (2014). 1. INTRODUCTION 2 Reform efforts begin and succeed where they of analysis. Significant attention is devoted engage effectively with the political economy here to the origins and operation of existing in a given context. In some cases, that means subsidies since that history conditions what that there is an existing favorable political is possible for the adoption and sustainability economy. In others, creating that dynamic will of future reforms. be one of the main tasks of the reform team— to engage with stakeholders and leadership The main interest and audience for this note to increase the space for reform and reduce is forward-looking—people and institutions resistance. By starting the work in areas of who need to understand what is politically favorable political economy, reforms teams possible and how to realign political forces can realize initial successes that help create around successful reform. The authors are and empower interest groups, institutions, and mindful that this role is perhaps different from political dynamics that can be used to beget other more technocratic roles of agencies additional reform progress. Political economy and institutions focused on technical analysis research has also emphasized the importance and thus they also devote some attention to of two distinct questions: (a) Has the reform the processes needed to obtain and manage been successfully implemented? and (b) Has sensitive information and political insights the result been maintained sustainably over since mismanagement in that realm can, itself, time or have changing circumstances and affect the political prospects for reform and stakeholder constellations led to a retraction harm the standing of reform agents in the of reforms? process. In contrast to desk research or analysis of existing datasets, field research on political This note comes in three sections. First, the economy will always be an intervention in the information required for political economy local system, which needs to be managed analysis of energy subsidy reforms is presented. well to increase and not decrease the space Second, a summary is given of the information for reform and coalition building. that can usually be obtained through desk research to provide the context for subsequent ESRAF defines an energy subsidy as a interviews and other field research. Third, deliberate policy action by the government information that probably requires interviews that specifically targets electricity, fossil fuels, and field data collection is provided. or district heating and that has one or more of the following effects: The ultimate audience of the proposed • Reducing the net cost of energy purchased types of analysis lies with policy reformers themselves and with external development • Reducing the cost of energy production and policy institutions that are seeking to or delivery help governments adopt more sustainable reforms. However, the direct audience for • Increasing revenues retained by energy this note are those commissioning political producers and suppliers economy analysis of energy subsidies, and Examples include government control of technocrats, researchers, and advisers to energy prices that are kept artificially low; policy makers carrying out the analysis. Often, budgetary transfers to state-owned energy a team made up of sector experts and political suppliers or tax expenditures granted to economy experts will provide a greater depth 3 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS energy suppliers to keep costs down to benefit The rest of the guidance outlined in this note consumers, producers, or both; underpricing is structured around three intended goals. of goods and services, such as fuels, land, and First is a political explanation for the country’s water used by energy producers; subsidized current array of energy subsidies. This first loans; and shifting of risk burdens, such as goal treats each major cluster of subsidies as the assumption of risks through limits on a unit of analysis (a subsidy with significant commercial liability. political and economic effects and organized administratively and politically in a distinct Many forms of subsidies have little effect on way). The second goal is to understand energy prices. For example, tax expenditures the history of reform—including whether may increase the profits retained by energy successes or failures in past reform efforts producers and result in large fiscal losses reveal or constrain what is possible for future but may have no impact on end-user prices reforms. To achieve this second goal, historical in a deregulated oil market. Because tax episodes of reform are used as the unit of expenditures are seldom reported or subject analysis. And a third goal is an assessment to scrutiny by legislators, they frequently of the prospects and viable strategies for attract little or no attention from the public reform in the future. This third goal uses the and policy makers, except in situations of sector and its actors as the unit of analysis increasing overall fiscal stress. By contrast, and, where appropriate, the overall political those subsidies that lower prices paid by economy of the country as the unit of analysis. consumers—and the reform of which is likely to Most reforms are sector-based, but at times raise prices—tend to be much more politicized, sectoral reforms are anchored in broader making political economy analysis essential. country-wide reforms and the rise to power As such, while this note is applicable to all of leaders who have an incentive to pursue forms of subsidies, it focuses particularly on country-wide reform. consumer energy price subsidies. 2. INFORMATION REQUIRED FOR ASSESSING SUBSIDIES AND DESIGNING ENERGY SUBSIDY POLICY REFORMS Before delving in depth on how information 3 | Mechanisms used to deliver subsidies and might be obtained, here the authors first their alternatives identify the six main types of information that 4 | The decision-making structure concerning will be needed for political economy analysis. subsidies Following are the six types of information that are drawn from Inchauste and Victor (2017) 5 | Stakeholder interests and dynamics and related research cited in that study: 6 | The track record with reform 1 | Goals and structure of existing subsidies The first three of these six types of information 2 | Size of subsidies, who pays for them and will lead to an understanding of the country’s who gets them existing subsidy schemes and the developments 2. INFORMATION REQUIRED FOR ASSESSING SUBSIDIES AND DESIGNING ENERGY SUBSIDY POLICY REFORMS 4 that led to these schemes. The analysis should from the rest of the energy system. In cold- seek to capture the initial developments climate countries, district heating plays a that led to the introduction of subsidies, and unique role, often managed at the level of the major policy changes made since then. municipal governments. Natural gas, like The last three kinds of information provide electricity, is managed by utilities at the level the guidance needed for a forward-looking of pipeline transportation and distribution. political economy analysis of those subsidies Because they all have elements of natural and their reform, to feed into effective design monopoly, economic regulation is required for and implementation of the reform. at least some segments of the supply chain for electricity, district heating, and natural gas. INFORMATION TYPE 1: GOALS By contrast, liquid fuels and coal are typically AND STRUCTURE OF EXISTING suited for sale in a competitive, deregulated SUBSIDIES market. Because petroleum fuels play such a visible and central role in industrial and The first category of information is aimed consumer activity—fuel prices affect the cost at understanding the scale of the subsidies of goods and passenger transport, with the and the scale of distortions they cause in the former affecting the prices of virtually all other economy and the political incentive structures. goods, for example—they are often highly Before assessing whether subsidies are politicized. reaching their intended targets, and whether alternative mechanisms could perform better, In most countries, the landscape of energy the scale and incidence of subsidies must be subsidies has developed over a significant known. period into a complex mix of producer and consumer subsidies that varies significantly Most countries do not create energy subsidies across fuels and energy carriers and that for their own sake. Instead, subsidies are often serves a mix of legitimate social and special initiated with the intention of advancing a interest goals. These different forms of subsidy potentially legitimate socioeconomic goal— differ with regards to their political and public such as keeping energy prices artificially low visibility and their perceived and actual impact for economic development, helping the poor on different interest groups and institutions— meet basic energy needs, or providing input which affects the political dynamics and subsidies in the form of cheap energy to certain stakeholder risks of reform efforts. industries—for which alternative instruments are not seriously considered, preferred, or INFORMATION TYPE 2: SIZE OF available. It is important to understand those SUBSIDIES, WHO PAYS FOR THEM, initial goals of a subsidy program, since they AND WHO GETS THEM inform how interest groups are organized, as well as the goals that must be achieved with At the outset of political economy analysis, it a reform program. is important to establish “what the problem is” and the detailed contours of the problem to The existence and design of a subsidy also the extent possible (see also Fritz, Kaiser, and depends on the way that the industries in the Levy 2009). Typically, it is expected that most country’s energy system are organized. The of the relevant information would be provided electric power system is organized distinctly by technical and fiscal analysis, either existing 5 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS or undertaken in parallel. Described here is the in clusters. For example, if a country has a extent of information considered as needed large subsidy for diesel fuel because that about the nature and incidence of subsidies benefits the trucking industry, then reforms to then meaningfully explore underlying might focus on this subsidy, as well as on political economy drivers, constraints, and other subsidies targeting substitute and opportunities. complementary products, such as kerosene and gasoline. Quite often it is not useful to Ideally, a table of all the main subsidies treat subsidies within a whole sector as a (or clusters of related subsidies) should single type of subsidy. Countries rarely just be prepared as detailed in table 2 in Good subsidize a whole sector (for example, all Practice Note 1, and information should be petroleum fuels) in identical ways. Instead, obtained on each one. For each, it is important they create complex and politically tailored to know the goals and sectoral focus of the subsidies that have differential effects on subsidy. Good Practice Note 1 discusses products. Further, subsidies evolve over time, how to quantify subsidies, how they are and a policy that started out as a unified and financed and intended, and who the actual streamlined subsidy can metastasize into beneficiaries are. For designing a subsidy a complex system of subsidies, exceptions, reform program, the focus varies by energy and administrative procedures. For example, type and country circumstances. Examples the Islamic Republic of Iran in 2007 began include the magnitude of budgetary transfers, rationing subsidized gasoline and allocated the scale of price adjustments needed, the gasoline according to the vehicle category and financial viability of energy supplies, and ownership. The quotas, as well as exemption fiscal losses inclusive of contingent liabilities. categories, increased over time because of This will make it possible to identify those political pressure, which transformed the reforms that may yield the greatest benefit. subsidies into a complex system consisting However, as shown below, in the analysis of of 45 consumer categories by early 2008 future opportunities and planning of reform (Iran Daily 2008). pathways, the identification of priority areas must be combined with an analysis of the Information about the total size of the subsidy political and administrative abilities of the helps to set priorities for reform. It can indicate system to implement this reform. This will help the total costs and benefits, as well as the scale avoid situations where the reforms look perfect of the effort that may be required for reform. on paper, but are not feasible to implement in the existing political economy environment. For each of the major subsidies, it is crucially How to estimate fiscal costs of subsidies is important to understand, next, who pays detailed in Good Practice Note 2. the cost. The costs of budgetary transfers, government contingent liabilities, and fiscal Some attention needs to be paid to the unit concessions are borne by different levels of of analysis. Here the unit of analysis is a major the government (central, regional, or local). subsidy—that is, a subsidy whose political and Frequently, energy suppliers—starting with economic effects are substantial within the state-owned ones, but in some circumstances country and which is organized in a distinct also private companies—incur financial losses way, both administratively and politically. Thus, as they provide energy at prices that are subsidies and their reform might operate below reference prices (prices that would have 2. INFORMATION REQUIRED FOR ASSESSING SUBSIDIES AND DESIGNING ENERGY SUBSIDY POLICY REFORMS 6 prevailed in a competitive market or, in the themselves. Instead, they favor policies absence of adequate competition, benchmark that externalize the cost to someone else. prices as detailed in Good Practice Note 1). Export restrictions, not adjusting a “market- This happens when they are not reimbursed based pricing formula” in a timely manner, for subsidies, either because there is no and reimbursing subsidies with a long delay mechanism for reimbursement or because and with no interest payments (if they are reimbursements are late or unpaid. reimbursed at all) are some examples. In all these cases, energy suppliers often bear the Two main sources of subsidy delivery cost. If export restrictions take the form of large mechanism merit attention. One is the general export taxes, the government raises revenue government budget—which includes central and lowers domestic prices at the same time government and regional authorities. These at the cost of investments in the energy sector. subsidies are often the simplest to understand Over the long term, some fuel exporters have and observe because their cost is easy to even turned into importers given the financial trace, as long as they are reported as separate losses. Prominent examples are major crude line items in government budgets. Thus, the oil exporters—such as Ecuador, the Islamic tradeoffs against other government policy Republic of Iran, Iraq, Mexico, Nigeria, and goals are immediately apparent. As Good the República Bolivariana de Venezuela—that Practice Note1 points out, state-owned have been forced to import large quantities of enterprises (SOEs) in the energy sector merit petroleum products because their refineries special attention due to several potential are not financially viable after decades of fuel factors—such as undue risk-taking, soft budget price subsidies. constraints leading to contingent liabilities, debt cancellations, and tax-exempt operating Finally, it is important to know who benefits status—combined with their being politically, from the subsidy. It is important to distinguish organizationally, and economically distinct. between eligible and ineligible beneficiaries, The use of SOEs to deliver subsidies poses a arguably the most egregious form of the latter different set of challenges and opportunities. being those who engage in criminal activities— On the one hand, they are often one step such as fuel smuggling and diversion to black removed from central government control markets—to gain financially from subsidies. and will fight to remain in existence and Where there is pan-territorial pricing and remain relevant. On the other hand, their fuel transporters are compensated through distinct governance structures often allow an elaborate cross-subsidy scheme, illegal for a larger flexibility in how to approach and profiteering by truckers can be common. The implement reforms. Governments, elected distributional impact of subsidies and their leaders, and political parties often use their reforms on households by income is covered disproportionate influence over SOEs to direct in Good Practice Notes 3 and 4. To the extent their activities toward politically useful missions possible, such information should also be while burying the cost of those missions in organized politically so that the size of the rent underinvestment or the larger operational flow can be linked to the organized interest budgets of the SOEs. groups (such as artisanal fishermen and private bus services) that seek the subsidy, as well as Governments often avoid policies that create to more shadowy interest groups profiteering direct on-budget fiscal consequences for illegally from subsidies. Understanding the 7 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS strength of those interest groups and whether 3 | Forgoing taxes and other government and how other groups can overcome political revenues blocks is often pivotal to successful adoption 4 | Underpricing of goods and services and implementation of subsidy reforms. The mechanisms are summarized with As a practical matter, the fiscal data (examined examples in tablet 2 of Good Practice Note in Good Practice Note 2) and distributional 1. As that note describes in detail, how each analysis (Good Practice Notes 3 and 4) are is delivered is an important determinant of not organized by political around which stakeholder groups, their benefits, and likely types of interest groups benefit and thus, an opposition to or support for subsidy reforms. analysis of the political economy of subsidies and their reform will need to examine these Consumer price subsidies are arguably the distributional impacts beyond the standard most visible form of subsidy, and one with analysis by income brackets. Understanding the most distorting effect on the economy. who gets the subsidy is important because it How they are delivered affects the extent can help reveal how beneficiaries are politically of subsidy effectiveness and leakage, as organized—and can point to opportunities and well as their unintended consequences. challenges to overcoming resistance against One question is whether energy suppliers the reform. And it is important because it is are compensated. If they are, how many crucial to understanding whether and how the energy suppliers receive compensation, how subsidy actually reaches a socially desirable that compensation is determined, whether target. One important dimension is that energy compensation is adequate and delivered on subsidies often benefit multiple social groups. time, and whether the compensation is self- For example, consumer price subsidies may administered (say by the national oil company) be critical for poorer groups, but they may all affect the political dynamics of subsidy also benefit elites, such as those who own reforms. Inadequate compensation can lead to bus companies or who generally consume contingent liabilities and, over the long term, more energy (for example to cool or heat their declining sector performance as the sector larger homes or to run industrial production), becomes increasingly unviable financially while the cost of the subsidies are generalized (see Good Practice Note 2 for these fiscal across all citizens (as taxpayers and as users dimensions). of public services). Other questions include whether the subsidized INFORMATION TYPE 3: energy is rationed and whether there is a MECHANISMS USED TO price stabilization fund. The price subsidy DELIVER SUBSIDIES AND THEIR may be helping to insulate politically well- ALTERNATIVES organized groups—for example, hauling or taxi unions—from the volatility and high cost There are four main mechanisms by which of an important input. When price controls subsidies are provided: lead to contingent liabilities that can be shifted 1 | Budgetary transfers to less visible parts of the state budget (or even to actors who are poorly organized 2 | Government-induced transfers between politically), the government obtains this producers and consumers 2. INFORMATION REQUIRED FOR ASSESSING SUBSIDIES AND DESIGNING ENERGY SUBSIDY POLICY REFORMS 8 political benefit while seemingly avoiding this loss will be felt by many and pose a political the cost. A similar logic applies with regard risk to the government. When subsidies have to the incidence of costs over time—where existed for a long time, they may be particularly the cost of subsidies can be hidden through invisible. A first step toward reforms often such mechanisms as price controls and then requires that the subsidies and the fiscal costs shifted into the future (for example, through become better known—transparency is a first rising debt loads of the enterprises that bear step toward a more complete reform. the costs of persistent under-investment in infrastructure that wears out only slowly) that Subsidies can be highly targeted so that only might be favored by political leaders who have the intended group obtains the benefit. The shorter time horizons. challenge in doing so is much higher for liquid fuels than for network energy (electricity, While political visibility is important to those natural gas, and district heating). A frequently designing and implementing subsidies, it is cited example is lifeline rates for network crucial to look closely at what the beneficiaries energy, where the challenge is resisting the of subsidies actually know and the conditions political pressure to expand the size of the under which visibility waxes and wanes (see lifeline block and the level of service that is Good Practice Note 4 for a review of qualitative “lifeline.” Smart cards that mete out low-cost methods that can be used for assessing electric power supplies represent a variation people’s perceptions). Not all subsidies are on lifeline rates. Quota cards for petroleum well known and visible to average citizens—in fuels—for which diversion is much easier—have the Arab Republic of Egypt, Jordan, Lebanon, met with varying success. When the cards are and Tunisia, for example, surveys revealed that for fishing boats, which can be used to smuggle many citizens were unaware of the extent to subsidized fuels out of the country, the problem which a number of fuels were subsidized.2 controlling diversion becomes especially acute. Even price controls may fall victim to opacity In some countries, the availability of targeted if prices have been frozen for a long time, income support—such as unconditional cash although they suddenly become visible when transfers—has allowed reduction or elimination efforts are made to lift controls precisely of some energy subsidies, since it is almost when they are most costly and reform is most always better to support a household’s income valuable (that is, when reference prices are directly than to offer indirect benefits through much higher than subsidized prices). subsidized energy. This can lead to the paradoxical situation Targeting has proved to be extremely where, as long as the subsidies are in place, important for reformers. Often it is politically and incur cost to the budget, energy suppliers, not feasible to remove an energy subsidy or both, ordinary citizens are not aware of completely. However, a scheme that allows the price subsidies and do not give the for better targeting makes it possible to tailor government credit for them. However, should the subsidy to the political environment and the government attempt to remove the price also to ensure that legitimate social goals subsidies and reform the system, the pain of (for example, poverty alleviation) are not 2 See the MENA SPEAKS surveys (Social Protection Evaluation of Attitudes, Knowledge, and Support [SPEAKS] in the Middle East and North Africa [MENA]) a set of nationally representative opinion surveys that collected cross-country data about citizens’ perceptions and aspirations concerning social safety nets (Silva, Levin, and Morgandi 2013). The surveys were conducted by the World Bank in part- nership with Gallup in Egypt, Jordan, Lebanon, and Tunisia. 9 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS undermined by subsidy reform. Better In summary, these first three categories of targeting might make first-best subsidy information make it possible to understand reforms possible. For example, Peru in 2012 the landscape of a country’s energy subsidy established a fund that provides conditional scheme: cash assistance to the poor to enable them • Goal and structure of existing subsidies. to purchase liquefied petroleum gas (LPG) for cooking (www.fise.gob.pe). The eligibility • Size of subsidies, who pays and who criteria are stringent to ensure that better-off benefits. households do not benefit from the program, and each beneficiary is personally visited to • Mechanisms to deliver subsidies and their ensure that the household is indeed cooking alternatives. with LPG. Selling a liquid fuel at market prices Table 1 maps out this landscape and is designed and helping the poor through cash transfers to organize information by fiscal, political, removes the financial incentives for illegal and administrative logic. An important point diversion, black marketing, and smuggling. to bear in mind is that there is frequently a Improved targeting might also make second- marked divergence between how the subsidy best subsidy reform strategies easier to is designed and how it works in practice. implement in ways that make dynamic This applies to who actually bears the cost, additional reforms possible. It can be the first who actually benefits, and how subsidies are step in an iterative reform process, building delivered on paper versus in practice. These in constituency support toward a broader and turn affect the costs of subsidies and benefits deeper reform in the future. Targeting can captured by the intended beneficiaries. In weaken politically powerful interest groups extreme cases, the benefits maybe close to while parallel efforts are made to blunt their zero or even negative, as with the case of influence or compensate them in other, less kerosene in box 6 in Good Practice Note 1. distortionary ways—allowing further reforms in time. TABLE 1: Map of a Country’s Energy Subsidy Landscape Major Goal Industrial Allocation of Total Cost Who Pays? Delivery Mechanism Subsidy (s) sector benefits Fiscal Other Intended Actual Intended Actual Intended Actual Product cluster 1 Product cluster 2 Etc. 2. INFORMATION REQUIRED FOR ASSESSING SUBSIDIES AND DESIGNING ENERGY SUBSIDY POLICY REFORMS 10 INFORMATION TYPE 4: THE government adopts—such as highly visible DECISION-MAKING STRUCTURE price controls enacted close to election time. CONCERNING SUBSIDIES Or, do interest groups affect the logic of political survival for policy makers in different The information required for the political ways—such as through lobbying, campaign e co n o my a n a l ys i s o f p o l i t i c a l a n d contributions, or direct roles in government? administrative decision making is discussed In some SOEs, for example, there are seats on next. The information gathering begins with a the governing board reserved for organized basic overview the organizational structures interests, such as labor. of the executive, legislative, and judicial branches. The goal is to identify which arms A prevalent problem that complicates policy of government have the authority to regulate making is opposition within a government. the energy market and make decisions about The opposition may be largely ideological the direct allocation of subsidies, regulation or political, but can also involve – typically of prices, and other decisions that create hidden – private interests. Such cases involve subsidies. Further, it is important to identify government officials (perhaps working with which specific units within these arms of executives of national oil companies) who government are involved in or drive the orchestrate diversion and smuggling of decision-making processes. subsidized fuels. These individuals will not be organized officially, but can have very The analysis focuses on two aspects. First is strong incentives to block subsidy reforms. the question of decision-making control. Are Also, government officials may be collecting subsidy-relevant policy decisions based on a informal payments in exchange for renewing decree, such as an executive order or in the tax expenditures, below-market land leases, direct control of SOEs, or do they emerge and other forms of producer subsidies. By from logrolling3 and political debate within their clandestine nature, information on such legislative bodies? And if they are instituted vested interests is difficult to gather. These and their structure is defined by decree, observations suggest, however, that it is can the executive decisions be reviewed or important to bear in mind that governments overturned—such as through legislative or are rarely monolithic and reformers within legal action? governments may be facing strong opposition from their own colleagues. Second is the question of how organized interest groups can make their influence felt In addition to a current picture of governing within government. Do they mobilize voters systems, it may be useful to include a brief who, in turn, can help determine the electoral outline of how the existing decision-making success of parties? Do they have the power structure arose—if that information helps to mobilize populations to protest and take to reveal major changes or lock-in effects. to the streets, possibly in violent protests, Big changes in governing structures—or in challenging the government? This has been ruling parties—can realign the logic of political the case in more than 30 countries in recent survival for leaders and reveal opportunities and years, often leading to a reversal of policies. If difficulties in subsidy reform. Those changes so, that may inform the kinds of subsidies that 3 ‘Logrolling’ refers to the practice of exchanging favors, especially in politics by reciprocal voting for each other's proposed legislation. 11 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS may also reveal—through past attempts, Throughout different reform episodes in successful and not, at reform—how reformers different countries, various interest groups can realign political forces. Information of this have organized themselves, formed coalitions type may be useful in interviews, for example, among groups, and influenced the reform to help elicit information about “what went outcomes. Understanding those important right” and “what went wrong” with earlier political phenomena requires looking inside reform efforts. each of the major organized political forces. How did the major interest groups arise INFORMATION TYPE 5: and what holds them together? How does STAKEHOLDER INTERESTS AND influencing government subsidy policy help DYNAMICS the group remain organized and deliver benefits to its members? How do they connect The 2017 World Development Report: to the political forces in the given context and Governance and the Law, which explores what fuels their influence? how unequal distribution of power in a society interferes with policies’ effectiveness, defines In addition to organized interest groups, better governance as the process through hidden interests ones can be just as powerful, which state and non-state groups interact if not more so (and often involve individuals in to design and implement policies, working influential positions in business and politics). within a set of formal and informal rules that Those engaged in making illegal financial are shaped by power. In this regard, political gains from subsidies are not visible and do economy analysis is about how groups their best to cover their tracks. In extreme organize effectively to get what they want— cases, as with kerosene in Nigeria mentioned and which groups fail to organize or to amass earlier, their illegal profits may even dominate sufficient influence and thus end up paying the virtually all potential intended benefits of the cost or not benefiting. Analysis of the political subsidies. economy of reform involves understanding the relative power of those groups. Thus, any It is axiomatic in the study of political economy political economy analysis requires analyzing that broad and diffused interests tend not to and mapping the goals and capabilities of be well organized politically, whereas more major organized, as well as unorganized, concentrated interest groups can mobilize interest groups. It also requires understanding more readily and effectively to advance their how the groups are organized internally to use narrower self-interested cause. This basic logic their capabilities to advance their goals and inspires a simple political economy framework, how they connect to each other. Further, it which could broadly characterize the political is important to understand how the different equilibrium of a country’s subsidy policy at groups connect to each other, which coalitions any point in time. Table 2 shows how the they form, how their interests overlap, and benefits of subsidies may be analyzed and how strong their connections are. categorized into four cases. 2. INFORMATION REQUIRED FOR ASSESSING SUBSIDIES AND DESIGNING ENERGY SUBSIDY POLICY REFORMS 12 TABLE 2: Characterizing Subsidy Policy Benefits: Basic Framework Citizen benefits are large Citizen benefits are small Special interest benefits are large Case 1 Case 2 Special interest benefits are small Case 3 Case 4 Source: Reprinted from Inchauste and Victor (2017), chapter 1. Ultimately, the goal is to understand the as meddling with national sovereign choices or interplay of these social groups with the interfering with the national political process. incentives of the government as it embarks on adopting policies that would move the To design feasible reforms and implementation country toward an equilibrium that is closer plans, it is crucial to figure out where the current to case 4, bearing in mind that this could political equilibrium lies at any particular point have large political costs.4 Those interactions in time in a country. Then, for each type of will depend on the level of organization and case, the proposed framework provides some political power of the groups, and it will also theoretical intuition about the circumstances hinge on the ability of the reformers in the that could lead to a change in that equilibrium, government to choose their political allies and thus the likelihood that an energy subsidy and to blunt the political influence of groups reform would be more (or less) successful. that could block adoption or reverse the Each of these cases is discussed below and implementation of energy subsidy reforms. accompanied by a set of hypotheses on the likelihood of reform. The aim is to provide a When governments are confident in their theoretical framework to assess the extent mandate and feel secure in power, they can to which these circumstances are in place at often get things done even over the opposition any given point for a country interested in of powerful groups. When political leaders reform and design interventions accordingly.. are more insecure in their tenure, the policy may need to be more directly responsive to In what follows, only those cases where costs the underlying political economy. Earlier work accrue largely to the government (taxpayers) on Indonesia, for example, has shown that and benefits to citizens and special interest politically powerful leaders have been able groups are considered. In practice, costs to take politically unpopular subsidy reforms, to citizens and special interest groups also but when electoral fate is less secure, leaders play an important role in political economy are less willing to adjust these politically analysis. For instance, when energy producers popular (yet fiscally costly) policies (Beaton, incur large financial losses, or when private Lontoh, and Wai-Poi 2017). In doing research businesses have to spend too much on on such factors, it is crucial to remember that backup generators. Inclusion of such costs matters of political succession and control may complement the characterization of are internal to a country, and it is problematic the political equilibrium described in table 2. for international institutions to be seen as It is also important to note that subsidy working on reforms that could be construed scenarios are seldom static. This is especially 4 Note that not all interest groups will be politically organized. Moreover, even within governments there may different positions with regards to subsidy policy. 13 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS true of fuel price subsidies, where costs are is deferred to the future or hidden in complex driven largely by world fuel price movements, institutional arrangements, citizens have no which exhibit high volatility. For the same fixed strong motivation to collectively pressure fuel price, the unit subsidy may be large or government to change policies because they small, depending on the world fuel price at do not feel a problem directly.5 Moreover, any given point in time. It would therefore be well-organized special interests fear that a useful to trace how a particular subsidy has change in policy will harm their interests. Each recently moved from one case to another, as depends on the support of the other for the described below, and how the case is likely benefits, and neither will support lowering to evolve in the future, for example based on benefits for the other. Governments tolerate future world price forecasts. this situation because leaders gain electoral and other benefits from the subsidy and are CASE 1: Large Benefits to Both Special not forced to deal with the cost. Interests and Citizens Reform in this case is more likely when some An example of case 1 is large price subsidies, or all of these conditions are present: such as in countries where retail prices are low for all users even when global prices are high. • Government is able to create a strong, simple, Large users benefit exponentially, but average and credible narrative that explains how the citizens also see a significant contribution to current situation is harming the country and their household budgets. Large benefits to so its citizens, breaking complex economic many typically lead to fiscal unsustainability. processes down to a simple relatable logic. This narrative is communicated consistently Special interest groups may also capture large and broadly. benefits where there are large tax expenditures • Citizens develop a better understanding of and other non-price subsidies detailed in how the existing system is harmful to their table 2 of Good Practice Note 1. These are interest, as it redistributes public funds much less visible than price subsidies, but mainly to the wealthy and special interest. the government’s revenue loss, contingent As a consequence, it is more likely that liabilities, or both could be considerable. citizens will mobilize in their own collective The theoretical intuition is that such cases interest. This process of mobilization can be of massive energy subsidies exist because supported by an inclusive and participatory citizens enjoy the benefits they reap without process of reform implementation. being too concerned about the cost of the • Government can make a credible support or the fact that a large portion commitment to citizens and interest groups of the benefit goes to special interest or that policy reforms will leave them better wealthier parts of society, as long as they off or at least not harm their interests. continue to benefit from the low prices. However, citizens and interest groups often Especially in cases where the cost of subsidy do not trust governments to deliver on 5 Note that some interest groups may not be receiving subsidies at all, but may be benefitting from the disruption and shortages that sub- sidies often create. For instance, low diesel prices combined with an unreliable electricity grid and acute power shortages may result in a flourishing market for backup diesel generator sets. Importers of such generator sets may fiercely resist diesel subsidy reforms, power sector reforms, or both. Although they are neither providers nor recipients of subsidized energy, they should not be left out of the polit- ical economy analysis. 2. INFORMATION REQUIRED FOR ASSESSING SUBSIDIES AND DESIGNING ENERGY SUBSIDY POLICY REFORMS 14 these commitments. Solving the credibility offsetting the benefits of subsidies received problem may require having alternative by consumers. programs in place that provide at least • External pressure changes the political medium-term benefits and that are timed equilibrium, such as when donors or lenders such that new benefits flow in tandem with have exceptional leverage. the loss of benefits from energy subsidies. • Special interests find it more difficult to By contrast, reform is less likely under the mobilize, in effect reducing the political following conditions: cost to government of reforming subsidies. • Governments fear mass mobilization and For example, special interest groups might protest by the public in response to removal become disorganized for some reason, or of subsidies. This is especially likely when the government might find different ways special interest groups are effective in to satisfy their core aims. The government developing compelling narratives of how may apply a “divide-and-conquer” approach the reform would harm ordinary people toward special interests, identifying which and are able to galvanize citizen protests. groups may be enticed to support the reform based on how the reform is structured, as • Powerful government officials' schemes in the example of Poland giving support to are making large illegal financial gains from the local miners in finding new jobs, which subsidies and stand to lose significantly enticed unions to support, or at least not from reform efforts. actively fight, the reform process. • Governments promise to replace energy • The costs of providing benefits rise sharply price subsidies with cash transfers to (for example, if world fuel prices skyrocket). average citizens, and fail to adopt a credible However, in some cases reforms have been sequencing, such that citizens do not believe successfully initiated during periods of low the promised transfers will materialize. world market prices, when the difference between the subsidized and non-subsidized CASE 2: Large Benefits to Special energy prices were less marked and the Interests, Small Benefits to Citizens initial implementation of the reform impacted citizens only minimally. Case 2 arises under several circumstances. Many forms of producer subsidies do not • Governments face any combination of a large benefit citizens noticeably, if at all. An revenue shortfall, general fiscal stringency, example is tax expenditures for fossil fuels or balance-of-payments stringency, with in a deregulated market that trades the fuels energy subsidies being a large part of the across the border. Tax expenditures benefit problem (Clements and others 2013). producers while consumers pay market prices at trade parity irrespective of the magnitude • The costs of subsidies (paid by the of tax expenditures. In such cases, large government or energy producers) are tax expenditures provide large benefits to not sustainable and the quality of energy producers at a large cost to the government, service delivery is beginning to decline and no benefits to consumers. In the case of or has declined noticeably, increasingly producer price support, producers may enjoy 15 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS large benefits while consumers pay higher impacts on the functioning of the economy prices than otherwise, accepting dis-benefits. and the public budget. In some cases, these situations will persist irrespective of the size Another example is one in which costs of of the cost because of the entrenched nature subsidies are large, but intended beneficiaries of the formal and informal influence of special do not capture them because of chronic interest and the lack of good governance in shortages of the subsidized energy. With the sector. The benefits to the citizenry as a subsidized liquid fuels, a substantial portion whole may be small or, more likely, citizens of the subsidies may be captured by those generally pay diffused costs while special engaged in diversion, black marketing, and interests gain concentrated benefits. From a smuggling, forcing consumers to pay much political economy perspective, these cases can higher prices on the black market and reducing develop and prevail because the concentrated their benefits. In the power sector, power special interest is well organized and close shortages are common in many countries, to the sources of power, while the general and low-cost electricity that is intended to citizenry is diffused and far from the sources benefit consumers is not available, forcing of power. businesses to pay much more for electricity by relying on diesel back-up generators. Where In these cases, a successful and sustainable underpricing is a cause of power shortages reform is more likely when some or all of these (see pages 35–36 of Good Practice Note 1 conditions are present: for more detail), benefits to citizens of such • Governments can credibly provide special energy price subsidies might also become interest groups with alternative benefits small. that meet their interests. Case 2 could also arise when prices are high • Dispersed interests that benefit from for all but a handful of consumers, such reform—for example, citizens who would as select industrial users. The theoretical gain from larger government revenue or intuition is that such a policy exists when subsidy allocation being redirected to citizens have little ability to advance their public goods spending—develop a better collective interests, while organized lobbies understanding of the price they pay and are powerful. In these cases, subsidies are the possible benefit of reform. Building on often organized in a way that is less obvious this understanding, they develop the desire to the general consumer. Subsidies would and the capacity to mobilize in their own then flow to special interests to the extent collective interests. Often this will require that the well-organized interest groups can strong and understandable communication exercise leverage over the government—such of the reform team and facilitation of as when there are family or party ties, or participatory processes. when the interest groups command a vital part of the economy (for example, transport). • The government changes, and special As a general rule, subsidies of this type may interests no longer have a large influence arise and persist because they benefit a within the successor government. powerful but particularly small fraction of • Benefits to citizens from existing fuel the population, or their costs are not large subsidies are small because black marketing enough to have substantial, broad-based 2. INFORMATION REQUIRED FOR ASSESSING SUBSIDIES AND DESIGNING ENERGY SUBSIDY POLICY REFORMS 16 is creating chronic and acute shortages • Chronic energy shortages driven in part of subsidized fuels, and consumers are by a history of price subsidies result in persuaded that eliminating subsidies will poor quality of service, and consumers eliminate fuel shortages. feel they are being asked to pay more for continuing poor service quality. The timing • Fuel prices skyrocket (making the total of service quality improvement and energy cost of the special interest subsidy more price increases is especially challenging for visible), or governments otherwise face the network energy (electricity, natural gas, general need for fiscal stringency. However, and district heating) because it is much during world market price hikes, benefits more costly and time-consuming to address to citizens will increase and may shift the shortages of network energy than those of scenario to case 1, while the willingness liquid fuels. Table 5 in Good Practice Note of special interest groups to fight reforms 1 discusses tangible benefits that may be will also be heightened—and they may use delivered to electricity consumers in the the general price increases to lobby with short run in exchange for higher prices. groups that are not even targeted by the reform, making them feel that they pay • Tax expenditures and other non-price more because of the reform. subsidies are not reported and continue to escape scrutiny. • External pressure changes the political equilibrium. CASE 3: Small Benefits to Special Interests, Large Benefits to Citizens By contrast, a successful and sustainable reform is less likely under the following Case 3 generally involves subsidies that conditions: are intended exclusively to benefit most • The total cost of the subsidy is small households. Examples include low electricity and thus neither attracts broader public tariffs for residential consumers and low prices attention nor drains the public budget. of LPG for household use. As with case 1, the On the one hand, in this case the political fact of providing large benefits to citizens and financial cost of reform may outweigh frequently means that the subsidy is not its benefits. On the other hand, if the cost fiscally sustainable for long. In these settings, of the subsidy has become small because citizens may be well organized enough to world fuel prices have collapsed, then this demand subsidies from the government— could provide a window of opportunity perhaps because governments, seeking for reform, as has been the case in several electoral advantage, brandish subsidies as a countries following the decline in oil prices way to curry broad-based political favor. Also, in 2009 and 2014. for some governments, offering subsidies targeted to households in general or the poor • Special interest groups remain well more specifically is part of a broader ideology organized and well connected relative to of redistribution. countervailing groups. Special interest groups develop strong narratives that The theoretical intuition behind case 3 is that convince the general public that they will subsidies can offer visible political advantages lose based on the reform. that political leaders might want to use 17 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS broadly. Leaders, for example, might need to Reductions in these subsidies are more likely appeal to large, lower-income segments of when some or all of the following conditions the electorate to retain power. They might are present: fear mass uprising from energy price shocks • The poor are no longer pivotal to the electoral or other events that the public might view as success of a government. For example, failures of government. The poor, for example, parties that oppose redistribution may may be organized into parties and be pivotal come to power in response to ideological voters—such as when social solidarity is high shifts or the perceived poor performance or when “social altruism” is inspired by specific, of redistribution policies. rather than general, consumption needs of the poor. Leaders in this setting might lack • The government can credibly offer alternative mechanisms that could target alternative policies to some or all of the subsidies more efficiently. For example, if citizenry, such as through direct cash benefiting the poor is electorally important, a transfers or other programs, that allow government may nonetheless use broad-based it to administer alternative systems for energy subsidies because it lacks the capacity transferring benefits to the poor. Political to implement targeted cash transfers or other leaders are able to craft and communicate better alternatives. Where government lacks a compelling narrative about the benefits capacity to implement more targeted transfers, of reform and follow through in realizing these broader subsidies may be the second alternative systems for social support for or (nth-) best feasible solution. the poor. A standard political economy framework • The costs of the subsidies rise, such as when would suggest that case 3 is rare. Normally, international fuel prices rise or subsidized political economy involves well-organized energy leads to substantial increases groups obtaining benefits for themselves in consumption. However, although the while the broader public interest is harmed government may be forced to increase (case 2). However, there are examples of prices in response to higher international case 3. A large price subsidy for LPG sold fuel prices, the unit subsidy may remain in small cylinders, as historically observed in the same or even increase, depending on Morocco and Senegal, is one such example. the relative magnitudes of the price shock Household use of LPG is nearly universal in on the world market and domestic price Morocco, benefitting citizens of all income increases. levels. Because LPG has limited applications • Politicians’ beliefs change about the “special” and the transaction cost of transferring LPG nature of energy, and redistributive policies sold in small cylinders to large cylinders or shift to more efficient transfers. containers for illegal diversion is not small, citizens may be capturing a majority of the • External pressure changes the political subsidy benefits. Put differently, these cases equilibrium, such as when donors with might be called “populist political economy” exceptional leverage become important to in logic. These cases are especially likely under a government’s political survival or other governments that have won elections as the exogenous shocks require a change in the result of campaigning with a populist agenda. public budget. 2. INFORMATION REQUIRED FOR ASSESSING SUBSIDIES AND DESIGNING ENERGY SUBSIDY POLICY REFORMS 18 • By contrast, reform is less likely under the While all cases face the possibility of moving following conditions: to another case, the government stands to lose the most if case 4 moves to any other • Governments fear mass mobilization case, and especially to case 1. For instance, and protest by the public in response to price subsidies dependent on petroleum removing the subsidies. products which could be characterized as • Special interests emerge that, along with case 4 began to move to other cases in a the broader public, lobby for continuation number of countries at the end of 2017 as of the subsidy (that is, moving the subsidy the world oil price rebounded by nearly two- to case 1). thirds from early 2016. • Governments continue to perceive that On the other hand, if the cost of the subsidy the benefits from the subsidy are crucial is small, the pressure to reform the subsidy to their political survival. may also be small. The compelling case for reforming a subsidy in such a case lies in • Governments are ideologically married to managing the risk of case 4 moving to other the concept of subsidies and not willing to cases, and especially to case 1. give them up. CASE 4: Few Benefits to Either Special INFORMATION TYPE 6: THE TRACK RECORD WITH REFORM Interests or Citizens Ultimately, the goal is to understand not just In case 4, no interest group, organized or the political forces that explain the origins and general, benefits exceptionally. Per-household persistence of energy subsidies, but also how or per-business subsidies may be small, but they might be reformed. Developing a robust that does not mean that the total cost of the mapping of existing subsidies, as well as the subsidy is also small. For example, a subsidy interest groups that favor and oppose these of US$0.01 per liter of diesel fuel may be so polices, is one foundation for this political small as to be unnoticeable, but if the total economy analysis and the resulting reform consumption is large, the subsidy could still strategies. amount to hundreds of millions of dollars a year. A complementary approach is to look at what Benefits captured by individual consumers has been tried (or avoided) in past reform may have been large in the past and fallen efforts, since this history can reveal what is recently. Examples include the collapse of the possible and how interest groups organize to world oil price in recent years in a country enhance their agenda. In developing a history with capped prices for petroleum products. of reform, the analysis shifts to a new unit of In such cases, the fact that subsidy benefits analysis: episodes of reform. Here the focus have become small to all parties may provide is on recounting the process, timing, and a good opportunity to reduce or eliminate sequencing of previous attempts to reform the subsidy, as many countries did with fuel subsidy policies. The purpose is to understand price subsidies following the collapse of the better how subsidy policy has arrived at the oil price in 2009 and again in 2014. current equilibrium and what paths could be open for reform. 19 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS For this purpose, it may be useful to create Instead, the subsidy is democratized as special an analytical table that shows the basic “life interests realize the benefits from a large history” of reform episodes as detailed in figure subsidy. Political leaders—often goaded by 1 below. For instance, subsidies may begin with the opposition or animated by fears of losing modest purposes at modest levels, as shown in power—also realize the benefits of providing a the lower-right corner. This, for example, could broad-based subsidy. The subsidy regime thus take the form of a risk mitigation strategy shifts west and becomes deeply entrenched. to soften the impacts of international fuel These are the most difficult cases for reformers price fluctuations in the absence of more because they lead to the highest costs and are sophisticated social protection mechanisms. animated by political forces—a combination of leaders who fear the loss of broad-based In such a case, well-organized interest groups public support and organized special interest may realize that a scaling up of those small groups that oppose any reduction of the subsidies would be to their advantage. As subsidies. a result, the subsidy regime moves north. Standard political economy models would Reformers might focus on re-concentrating predict that a north-moving subsidy would the subsidy regime—moving from a very be a stable outcome—an iconic example of costly broad-based subsidy to one designed special-interest politics. to be politically more efficient because it is catering to a smaller number of well-organized However, there are many examples of subsidies interest groups. Undertaking extensive reform, that do not remain in the northeastern corner. in contrast, may be much harder. Related FIGURE 1: Life Cycle of a Subsidy Regime BENEFITS TO THE BROADER PUBLIC Large Small Democratization of subsidy BENEFITS TO SPECIAL INTERESTS Entrenched subsidy Re-concentration Small Extpanding special Populist reforms Ex interests t en si ve re fo rm Large Initial subsidy Source: Inchauste and Victor (2017), chapter 1. 3. INFORMATION THAT CAN BE OBTAINED FROM DESK RESEARCH 20 to this are reform efforts that focus on the useful to understand the circumstances better parts of the subsidy regime for which reform that allowed reform to take place in the past, is possible. In the Dominican Republic, there and the likelihood that such circumstances have been extensive reforms of the fossil fuel might be put in place once again. Moreover, subsidy regime because the political interests to the extent that small reform efforts can be have proved feasible to manage. However, a used to build the capacity for more extensive reform of the power sector has stalled because reforms, a long-term strategy can be worked the political economy is much less supportive out. (Gallina and others 2017). While each country presents a specific Reformers have also done things that are situation, the factors that have supported quite unexpected within the standard political or hindered reforms in other countries can economy framework. They have shifted provide an interesting context for the analysis subsidies from the northwest corner (case 1) to of a specific country case. A cross-country the south (case 3)—removing special benefits comparison of 22 countries, covering 28 reform while preserving broad-based benefits. This episodes showed, successful and sustainable kind of “populist” reform is evident in several energy reforms often had the following in of the reform episodes in Ghana, for example. common: (a) a comprehensive reform plan; (b) Leaders, keen to retain public office and fearful a far reaching communications strategy; (c) of swings in the sentiment of the electorate, energy price increases that were appropriately found it difficult to reform broad-based phased and often sequenced differently for subsidies, yet were willing to allow the costs different products; (d) improved efficiency in of subsidies to flow against well-organized SOEs; (e) mitigation measures targeted at the interest groups, such as industry and even poor; and (e) a depoliticization of the reform the state-owned refinery (Addo, Bazilian, and to avoid a recurrence of subsidies following Oguah 2017). the change of political leadership (Clements and others 2013). Understanding the existing political equilibrium in the context of previous reform efforts is 3. INFORMATION THAT CAN BE OBTAINED FROM DESK RESEARCH The goal of this note is to guide readers on • Mechanisms used to deliver subsidies and how to obtain the information crucial for alternatives political economy analysis, as detailed above: • Decision making structures concerning • Goals and structures of existing subsidies subsidies • Size of subsidies—who benefits and who • Stakeholder interests and dynamics pays • The track record of reforms 21 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS Prior to field research, it should be possible expose them differently to the costs and to obtain a lot of information through benefits of subsidy regimes. In addition, existing reports and databases, field research foreign economic institutions—such as the databases, including those produced within International Monetary Fund and organized the World Bank Group's Governance Global bondholders—may play an important role in Practice. Because the accuracy of the available influencing national government policy. literature and databases depends on the resources devoted to their production, the SURVEY OF EXISTING LITERATURE information so obtained in desk research should be verified or assessed in field research Some countries have been the subjects of as much as possible. extensive research, which can provide useful information. In particular, the existing research MACRO INDICATORS OF may offer considerable value in providing SUBSIDIES: GOALS, COSTS, AND information, or first drafts of information, BENEFITS such as the following: First and foremost, it is important to populate • The size and basic structure of the the entries in tablet 1. This requires information subsidy policy, as a cross-check against on the major subsidies—their purpose, fiscal the information that will be obtained from cost, and allocation of benefits. Good Practice other ESRAF good practice notes Notes 2–4 are a place to start. • Regulations, decrees, decisions, and government announcements relevant to POLITICAL ACTORS AND the energy subsidies under discussion INTEREST GROUPS • Identification of the main interest groups Desk research should yield basic background that favor or oppose subsidies and why information on the decision-making processes and on the political organization of the major • A basic history of reform efforts and lessons groups that affect subsidy policy. The analysis from those reform episodes and attempts of relevant interest groups should focus on • An initial list of key observers of the scene their support base, ties to government (for and key actors in the process—inside example, through ideological or party links), and outside government—who could be and historical engagement with energy subsidy interviewed. Interview partners are often issues, as well as coalitions and conflicts they found in a “snowball” system, where initial are engaged in. More subtle and less well- contacts highlight other important actors documented information, such as on the to interview. internal organization of those groups, and their pathways for informal influence, may The goal of this prior research is to create a require interviews with relevant stakeholders. foundation of knowledge, so that subsequent, more detailed work can be more effective. In In focusing on political actors, some attention particular, this prior research will be essential should be given to the role (if any) of foreign to developing an interview strategy (see annex actors. Foreign firms may play important A) and to laying the foundation for an effective roles as investors and operators, which may interview program. 4. INFORMATION USUALLY AVAILABLE ONLY FROM INTERVIEWS 22 4. INFORMATION USUALLY AVAILABLE ONLY FROM INTERVIEWS The central purpose of interviews is to information obtained from external desk provide the information that desk research research is accurate. Often, it is difficult to and literature reviews cannot reveal. This understand from a literature review alone information will ultimately provide the content what the real political purpose and impact— that is schematically summarized in tablet 1, as past or present—of a subsidy is or how the well as the history and prospect for reforms. mechanisms for subsidy actually work in detail. Subsidies that involve transfer pricing As the research needed to implement this or contingent liabilities may also be hard to note moves from remote desk studies to detect from the outside. interviews, it is crucial to be aware of the political sensitivities surrounding think tanks, A particularly important aspect of interviews institutions, and organizations, including is to assess counterfactuals. For example, if a international development organizations. subsidy is delivered via a blunt mechanism— Forward-looking research on the political such as an across-the-board price control— economy of reform implicates national policy were alternative mechanisms unavailable? decisions in areas that are intrinsically politically Were there political or other reasons for sensitive. Thus, confidentiality and reasonable picking this mechanism? Such information care with the information gleaned—especially about the choice of subsidy instrument, in from high-level interviews—will be important. turn, affects the political benefits and costs Further, it is important to keep in mind that of a subsidy and may narrow the range of most interview partners will engage in the viable reform options. interview with a certain agenda or bias. INFORMATION CONCERNING Annex A offers much more detail on the POLITICAL INTEREST GROUPS development of an interview strategy and a checklist for questions. This section focuses To the extent possible, initial desk research on three broad aims for the interviews. will reveal the major interest groups that are relevant. However, it is unlikely that such FILLING IN FUNDAMENTALS: prior research will offer much insight into DETAIL ON PURPOSE, COST, why these groups favor or oppose subsidies BENEFITS, AND INSTRUMENTS OF or into how the groups are organized and MAJOR ENERGY SUBSIDIES what coalitions and conflicts they engage in to advance their policy goals. Obtaining such Building on the first draft of the information information usually requires talking with a prepared based on desk research, critical wide range of stakeholders and observers. gaps in this information must be filled in. In Observers of the political scene—even if they particular, interviews within country should are not specifically focused on energy policy check whether the current inventory of and fiscal matters—can be especially valuable major subsidies is complete and whether in this regard. 23 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS It is particularly important to focus on the “neutral” observer in most cases, it is crucial “glue” that holds the interest groups together. to triangulate among a variety of viewpoints Are they organized because they are small in this phase of the analysis. and concentrated—such that each member knows the benefit of being organized, and FORWARD-LOOKING SCENARIO large members will incur most of the cost of ASSESSMENT AND ITERATIVE organization? Or does something else hold LEARNING them together? Do they have a clear position with regard to the subsidy reform? How are The biggest challenge and most powerful the different interest groups connected to use of strategic political economy analysis other groups and to the government? comes with the need to take what has been learned from the past and develop reasonable OVERALL POLITICAL ECONOMY scenarios for predicting the future success ASSESSMENT of reforms. The political organizations and actors involved are complex living systems The introduction to this note identified that cannot as easily be predicted as machines three different goals for this political or static, well-bounded technical entities. economy analysis,, each with its own unit of Thus, any predictions derived from political analysis. Meeting all three of those goals— economy analysis will be only indicative, and an assessment of the political economy of will lead to developing reasonable and likely the current subsidy regime, an assessment pathways for future reform efforts, identifying of historical reforms, and an evaluation of supporting and hindering factors, and pointing plausible future reform strategies—requires out existing and potential change leaders, seasoned political judgment. Obtaining that coalitions, and windows of opportunity for judgment—informed by the particulars of change. the current subsidy regime and past efforts at reform—is difficult, yet is the most vital Because of the complexity of the system outcome from the interviews. and the long-term perspective that energy subsidy reform often requires, it is crucial Particular attention is needed in conducting to be prepared for iterative learning cycles, open-ended interviews using questions that where the initial political economy analysis assess plausible future reform strategies. (together with the information from other This requires thinking through who can share ESRAF good practice notes) provides a information on what, and what potential starting point for planning and implementing interests and biases and interviewee has. The reform activities. As implementation starts, task of those performing political economy the reform team observes the reactions of analysis is to cross-check those judgments the political economy system to these initial against areas where more detailed analysis reform activities and uses these reactions as is possible. Further, as these interviews are further sources of information about what being undertaken, it is important to remember is feasible, which drivers will be crucial, and that most interviewees will answer from their what the strengths and weaknesses of the own, often limited perspective, and they might opponents of the reform are. This then informs introduce their own biases, interests, and future reform efforts. Since a political reform prejudice to the picture. Since there will be no process is embedded in unpredictable and ANNEX A: TYPICAL INTERVIEW AND BACKGROUND RESEARCH QUESTIONS 24 dynamic political economy environments, Taking these insights into account when it cannot be fully planned out from start to designing and implementing interventions end. Rather, the plan should ensure clarity can lead to more iterative, adaptive project of direction, a focus on the problems and planning and implementation with a consistent aspirations that drive the reform, and the space eye on the process, the stakeholders, and the to react adaptively to changed opportunities incentives involved. and obstacles. ANNEX A: TYPICAL INTERVIEW AND BACKGROUND RESEARCH QUESTIONS Questions surrounding political economy are factors, often time and resources will not usually quite sensitive and complex. Thus, allow such in-depth work. In these cases, it is while government reports and data sets recommended to develop a general timeline provide important starting points, additional of reforms (attempted and successful), a few information is essential. It is imperative to ones, at least one and possibly identify a few develop an interview strategy that is based efforts for more in-depth analysis. on the information needed and the political and organizational sensitivities in obtaining it. The questions below can be transformed readily into a set of country-specific questions Below is a list of major categories of information and an interview strategy. The next step is to that will be required. The list is organized in identify a range of interviewees who offer layers—beginning with information that should diversity across three main dimensions: (a) be obtainable from desk research and prior people who are experts on energy topics studies, and then leading to a basic history versus generalists who are knowledgeable of reform efforts, further political economy about the political economy of the country; (b) interpretations for why those reforms have government officials with line responsibilities succeeded and failed, and finally to a future- within ministries (and thus knowledgeable looking assessment of the political economy about the details of policies and industries) as opportunities and constraints to different well as high-level officials who can speak more reform scenarios. It is important to be aware of broadly about the big picture; and (c) officials selection bias in focusing on known reforms— within the major branches of government as and remaining attentive to “non-reforms” well as outside observers (such as journalists, (reform attempts that did not happen), civil society non-governmental organizations since they often reveal just as much about (CSOs), think tanks, and private sector). On relevant political economy dynamics. The the basis of on this subject, a typical list of depth of analysis of past reforms and non- sources of good interview subjects includes reforms depends on the time and resources the following: available to the team. While it is optimal to • Established experts on energy subsidies develop a full storyline of reform episodes in the country. Those with publications on and a deep understanding of all influencing energy subsidies in that country would be 25 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS one choice, such as research and policy • Think tanks in the country that a focus on institutions, academics, and international energy, public finance, and reform efforts organizations working on energy subsidies more broadly (such as the International Energy Agency • Seasoned observers and participants in and International Institute for Sustainable the political process who can speak more Development), or in-country experts generally about political economy and how focused on energy issues. They could be it affects policy and reform an excellent source of basic information, and may also have some insights into political After developing a list of interview subjects, economy dynamics. those in the country who are familiar with • Ministry officials and legislative support political sensitivities can help to identify officials at relevant government agencies—. the questions that different subjects can be In addition to the ministry or agency asked and where answers will likely head. responsible for designing and implementing Government officials—especially lower-level the energy subsidy reform, it is helpful to civil servants—often cannot speak about involve other agencies that are related to policy, and thus the questions need to be the sectors, including ministries of finance, framed in the domain where the interviewee industry, and transportation, since they is both knowledgeable and willing to speak. would most likely be impacted by and It can be helpful to align the seniority of the influence the reform process. Subsidies interview team with the level of seniority for for district heating are often handled at the the subject. Often the most useful answers level of municipal governments. from senior officials and observers arise in the context of broader discussions about political • Leading experts on energy markets in the economy and broader interpretations of why country, including consultancies that advise some reforms have succeeded or failed. For investors and policy makers these officials, it would be important to pay close attention to the category (see Broad • Energy staff at major interest groups Questions about Political Economy, below). • Private sector actors in energy, both international and local, and their Often the best interview strategy unfolds in representations and associations layers—the first rounds of interviews focus on lower-level experts to ensure that there • Other stakeholders, such as sellers of diesel is a strong base of information about the generation sets or fuel truckers benefiting history and operation of subsidy regimes, from compensation for transportation complemented by desk research. Later rounds costs of liquid fuels, e.g. through a freight of interviews focus on higher-level officials equalization scheme and interpretations of what it all means. Sequencing interviews in this way also allows • Reporters who cover energy and public the team to be as efficient as possible when finance requiring the time of senior officials. ANNEX A: TYPICAL INTERVIEW AND BACKGROUND RESEARCH QUESTIONS 26 CRITICAL ITEMS NEEDED FROM 9 | Where possible, information on the goals OTHER ESRAF GOOD PRACTICE that each subsidy was originally designed NOTES to achieve and what goals it has achieved in practice. Provide a checklist of critical items needed from previous notes along the following lines: OVERVIEW OF THE POLITICAL 1 | The major energy subsidies and their sizes AND ADMINISTRATIVE SYSTEM as a share of gross domestic product and as a share of total government spending Provide a basic overview of the political and over time. administrative system along the following lines: 2 | Whether subsidized energy is officially or de facto rationed and, if so, how. 1 | How is the system of the government organized—for example, division of 3 | How unit subsidies are determined and authority among executive, legislative, how subsidies are delivered. and judicial powers? 4 | Discrepancies between the subsidy design 2 | How do key players in each arm of the and subsidy implementation, including government obtain and retain power? official prices versus actual prices paid. This This information is important, since it should also include analysis of the intended defines where and how policy actors are beneficiaries versus those who capture the amenable or vulnerable to influence by subsidies in practice, the volume allocated interest groups. to the intended beneficiaries versus the volume released, and who the ultimate 3 | How have these governance structures consumers of subsidized energy are. emerged, and are there any recent changes that are relevant? 5 | Spending on key social programs (health, education, and social protection) over 4 | What is the role of major political parties time to consider the opportunity cost of within the system of government, and subsidy spending by the government. what are the major party agendas related to energy subsidies? 6 | The distribution of benefits from subsidies among households by income and 5 | Who has power to regulate practices expenditure quantiles (such as quintiles and prices in the energy sector and what or deciles). instruments (for example, legislation, and administrative actions, such as executive 7 | Who pays those subsidies (for example, orders) do they use? Answers to these government, SOEs, private energy questions may vary with different parts suppliers, or consumers). of the energy system—for example, petroleum versus electricity. 8 | Where possible, information on how the benefits and costs of subsidies map onto 6 | For the policy instruments used, what known interest groups. are the major modes by which different interest groups can have influence? 27 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS 7 | What is the level of administrative capacity 5 | What are the major intersections between (over time if relevant) to design and market and non-market segments of the implement different types of subsidy energy business? For example, the price schemes? If government wanted to of fuel oil or coal could be set in global implement a scheme that would target markets, but power utilities may combust a subsidy to particular groups—notably these fuels to generate electricity and the poor—could it execute it effectively? sell it at regulated prices. Understanding these interactions is often crucial to 8 | What is the level of public confidence in uncovering who pays for subsidies since the government and how does that affect those payments often arise at the “seams” the incentives for the government to adopt between the different elements of the particular policies? energy system. 9 | How informed is the population at large 6 | Who are the main large and small about the costs and distributional impacts consumers of energy with regards to of existing energy subsidies? Are there different sectors? How well are they polling data or other indicators of public organized and connected and how strongly information? How informed is the broader could they influence the political decision public about the opportunity cost of public making process in the country? subsidy? HISTORY OF REFORMS FACTUAL OVERVIEW OF INDUSTRIAL STRUCTURE OF THE Over the relevant period, develop a list of RELEVANT ENERGY AND RELATED major “episodes” of reform. An episode is a INDUSTRIES cluster of related reforms that were adopted in response to broadly the same constellation Provide an overview of the structure of energy of political forces. For each cluster, what and related industries along the following lines: were the main changes in policy, what form 1 | What are the major categories of actors did they take (administrative, judicial action, (for example, collections of private firms legislative), and over what period did they versus SOEs) along the supply chain? occur? Depending on timing and resources, decide whether to perform deeper analysis 2 | Are there other actors affected by subsidies, on all clusters or on a purposeful sample of such as sellers of diesel generation sets? episodes that are deemed most instructive 3 | What are the main historical factors that for the future reform, because they highlight explain why the energy sector is organized reasons for success and failure and have played this way—for example, if SOEs dominate, out in a similar policy domain. For in-depth why were they created and why do they analysis, answer the following questions: persist? 1 | What was the process through which the 4 | What determines prices at different stages reforms were attempted? in the supply chain? a. If legislative, who proposed the legislation and who could have amended it? On formal legislative votes, how ANNEX A: TYPICAL INTERVIEW AND BACKGROUND RESEARCH QUESTIONS 28 large was the majority, and did voting organized and potent political forces, patterns align with other known political or did they emerge for the purpose of divisions? pushing or opposing the reform? b. If executive action, on what authority • What are the main interests that hold did the executive take this action and the group(s) together, and how do those is the use of that authority common? interests interact with other political What are the opportunities, if any, for interests and agendas? outside interest groups to shape the • How do these interest groups affect executive action—for example, through political leaders—for example, the proposal or comment on draft rules? ability to muster votes, alter campaign c. If judicial action, what cases or actions contributions, or threaten political gave rise to the judiciary exercising its survival through protest? authority, and is such authority seen • • If the reform has been initiated multiple as an intrusion or commonplace in the times, why did it not mobilize broader shaping of policy? If there is a critical support earlier? case that led to the action, who brought • Did the reform begin with a crisis (such the case and why? as a fiscal crisis) or some other kind 2 | Are the historical episodes of reform of galvanizing or organizing event? seen as relevant to potential current or If so, how did the event affect the future reforms? Or is the current or future constellation of interest groups? situation seen as quite different? If the • If the reform passed, were there major latter, then just an overview of the history difficulties or differences between of reform and not detailed work on it is intended actions and outcomes that probably needed. However, even after arose during the implementation radical changes (for example, regime process? changes from socialism to capitalism, • If the reform partially passed, which or major democratization) often many parts were successful, which were held old structures remain under the changed back, and why? surface, which should be explored in the in-country interviews. • Can the reforms be easily reversed or altered if the constellation of interest 3 | For each of the episodes of reform groups favoring or opposing were to analyzed, develop a basic history that change? includes elements such as these, and for • Was there public support for the reform each of these elements be attentive to efforts? How do those interest groups whether the answers and conditions are and the broader population perceive still relevant today: those efforts today? How would that • What are the main elements of the influence any future efforts? reform? Focus on how the reforms • How much internal opposition to the affected interest groups differently. reform is there within the government? • Who (or what group) initiated the reform In particular, are there officials benefiting and why? Were these groups already personally from subsidies who can be 29 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS expected to oppose the reform strongly • Developing a detailed political mapping for behind the scene? How powerful are non-events is difficult. However, for each these officials? of these “non-reforms,” explain the major • Is there a powerful national oil company interest groups that would have favored and that is a ‘state within a state’? What opposed them and why the opposition was is their position on the subsidy stronger or why no effective pro-reform reform? Are there executives who are support emerged. How are things similar personally making financial gains from or different today? the subsidies; and are these critical • To what degree were broad-based financial supporters for political parties interest groups (for example, the poor) or individual politicians? organized politically—if so, what was • To what degree is the mass public— their agenda and did that influence the such as the poor, the emerging middle policy outcome? How are things similar class, or other broad-based interests— or different today? organized politically? If so, what was • To what degree were powerful specific their agenda with regards to energy? interests (both private and public) • How is the electoral system organized organized against the reform? and what incentives and opportunities • To what degree were reform efforts does this create for or against reforms?6 defeated on account of internal opposition within the government? Was 4 | Among leading policy makers, are there there opposition from powerful SOEs standard lessons that are thought to have with close ties to certain government been learned about why these reforms officials? were successful or failed? • Among leading policy makers, are there HISTORY OF NON-REFORMS standard lessons that are thought to have been learned about why these non-reforms This section covers situations where subsidies have failed or not been attempted? have not been targeted by reform or where reform efforts have failed at early stages. BROAD QUESTIONS ABOUT Reforms that matured further but failed to be POLITICAL ECONOMY passed or implemented have been covered in the previous section. Answer the following broad questions about political economy: Develop a history of non-reforms along the following lines: • Looking at the past, what have the main barriers to subsidies reform been, and when • Over the relevant period, develop a major has it been possible for political leaders to list of failed efforts at reform. Also, develop avoid or overcome those barriers? a list of major subsidies for which there have been no serious reforms. Are these major • If there are major differences in the subsidy non-reforms still relevant today? regime—such as differences across fuels 6 E.g. see https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/7367.pdf. ANNEX A: TYPICAL INTERVIEW AND BACKGROUND RESEARCH QUESTIONS 30 or across energy systems (for example, • What aspects of the reform are most electricity versus petroleum products)— likely to spur strong resistance? what explains those broad differences? • Are there administrative and technical gaps in the administrative, technical ASSESSING FUTURE SCENARIOS, capacity or resource availability among DRIVERS, AND PATHWAYS FOR those who would support the reform REFORM and how can these gaps be reduced? To increase the usefulness of this analysis This scenario forecasting allows those actors for future planning, it is crucial to build a who are most familiar with the local situation bridge between reform experience, current to structure their strategic thinking and assessment of the stakeholder landscape, share their advice with regard to the present and what that means for future opportunities. opportunities and risk of the political economy Discussions with a broad range of stakeholders situation. on the ground can help the team develop a more solid forward looking analysis. The As the analysis develops toward strategic following questions can be used in discussions advice for those designing and implementing in individual interviews or in focus groups: reform efforts, it is crucial to identify the change agents that will initiate and move • In the eyes of the stakeholders interviewed: the reform forward. Since different change What would a successful reform look like? agents will play different roles, tablet A1 can • What would the resulting structure of the be a helpful tool for assessing which roles subsidy and social support system be? are filled or remain vacant and where the work of mobilizing change agents has to • What would be the foreseen results for the focus. Andrews (2013) distinguished between government budget, the general population substantive contributions, relating to those (specifically the poor), and the economy? providing ideas to make change happen, • Based on the answers to the above three procedural contributions, referring to those questions and the recommendations from navigating organizational rules and systems other ESRAF good practice notes, develop and maintenance contributions, which are a small number of different scenarios related the relational roles vital to mobilizing others to focus, sequencing, and size of reform, to participate in the change process and to which you describe to interview partners spread and scale it beyond the initial change in broad strokes. For each scenario, assess agents. These distributed agents can include the political feasibility: both front line and high-level staff of the diverse government agencies involved in • Who would win and lose, if it was the reform and may even involve private successful? sector and non-governmental actors, as part • How would different actors relate to of the diverse coalitions that are needed the reform (positive, negative, neutral)? for implementing reforms successfully and • What is the capacity of different interest overcoming political economy obstacles. groups to organize support or protest? 31 GOOD PRACTICE NOTE 9: ASSESSING THE POLITICAL ECONOMY OF ENERGY SUBSIDIES TO SUPPORT POLICY REFORM OPERATIONS TABLE A1: Roles of Reform Actors Function set Roles Who you think will play the role • Construct, communicate problems Substantive • Come up with ideas for reform contributions • Provide implementation view • Provide formal authority Procedural • Motivate and inspire reform contributions • Empower other agents • Provide financial support Maintenance • Convene small groups contributions • Connect distributed agents Source: Andrews (2013). However, as stated above, a good political will evolve over time, both because of macro- economy analysis in the planning process political developments (independent of the of a reform does not remove the need for reform) and because of the ways that the continually monitoring political economy reform interacts with the existing energy developments throughout the implementation sector political system, increasing or reducing of the reform. The political economy context the space for further changes. ANNEX B: INDICATIVE LOGISTICS The extent, scope, and depth of the political allow for updates and targeted analysis of economy analysis will be influenced by the political economy bottlenecks at a later stage. time, resources, and personnel available to undertake it. Under constraining circumstances, The team undertaking this analysis ideally it is crucial to focus the work on those aspects combines a political economy analyst, a that are most important to the team. This sector specialist, and an expert with deep may lead to trade-offs between focusing on knowledge of and connections to the actors experiences from the past versus the present in the country. Some of this expertise may and forward-looking analysis. Also, as noted overlap with the areas of expertise of the above, it may make sense to focus on a select teams working on various aspects of reforms number of past reform episodes (instead of covered in other ESRAF good practice notes. analyzing all in depth) and specific scenarios The work starts with a review of existing of future options. Finally, as the initial political materials and data, followed up by field work, economy analysis is a starting point that needs which consists of interviews and possibly to be updated as the intervention unfolds, focus group discussions. in some cases it may be recommended to Finally, the team will need adequate time start with a “good enough” analysis, which to analyze and write up the results. 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Qin. 2015. “Lessons Learned from China’s Residential Tiered Electricity Pricing Reform.” Research Report, Global Subsidies Initiative and International Institute for Sustainable Development, Geneva. 33 Energy Subsidy Reform Assessment Framework LIST OF GOOD PRACTICE NOTES NOTE 1 Identifying and Quantifying Energy Subsidies NOTE 2 Assessing the Fiscal Cost of Subsidies and Fiscal Impact of Reform NOTE 3 Analyzing the Incidence of Consumer Price Subsidies and the Impact of Reform on Households — Quantitative Analysis NOTE 4 Incidence of Price Subsidies on Households, and Distributional Impact of Reform — Qualitative Methods NOTE 5 Assessing the readiness of Social Safety Nets to Mitigate the Impact of Reform NOTE 6 Identifying the Impacts of Higher Energy Prices on Firms and Industrial Competitiveness NOTE 7 Modeling Macroeconomic Impacts and Global externalities NOTE 8 Local Environmental Externalities due to Energy Price Subsidies: A Focus on Air Pollution and Health NOTE 9 Assessing the Political Economy of Energy Subsidies to Support Policy Reform Operations NOTE 10 Designing Communications Campaigns for Energy Subsidy Reform