CONTENTS Acronyms iii Foreword iv Acknowledgements v Part One: Recent Economic Developments 1 A The Real Sector 2 B External Sector 6 C Monetary Policy 12 D Fiscal Sector 14 Part Two: Economic Outlook 17 Part Three: Managing Fuel Pricing in Madagascar 19 A Introduction 20 B Why the government has engaged in the reform of fuel prices 20 C Key considerations in pricing fuel 24 D Policy options available for fuel pricing 25 E Conclusion 30 References 31 FIGURES Figure 1 The services sector continues to be a strong driver of growth 2 Figure 2 Madagascar’s per capita growth rate compares favorably with other regions but still lags other high performing economies in Africa 2 Figure 3 International visitor numbers in 2018 have fallen 3 Figure 4 Prices of vanilla continue to trend upward 4 Figure 5 Since 2016, prices of nickel and cobalt have started to rebound (latest official data available) 4 Figure 6 Paddy production levels in 2018 are estimated to be on par with earlier years 4 Figure 7 Export receipts continue to perform well, particularly for vanilla, nickel and cobalt 6 Figure 8 Import receipts have increased largely due to a higher price of petroleum 6 Figure 9 The current account balance realized a moderate surplus in 2018 7 Figure 10 JIRAMA’s quasi-fiscal deficit is on an upward trend 8 i Figure 11 The operating costs of power generation in Madagascar are amongst the highest in Africa 9 Figure 12 Less than half of produced electricity is actually paid for 10 Figure 13 If JIRAMA’s reform momentum continues, financial equilibrium should be reached by 2022 11 Figure 14 Inflation in 2018 fell compared with the previous year 12 Figure 15 Inflation still remains relatively high in Madagascar compared with other countries 12 Figure 16 The ariary has been on a depreciating trend in nominal terms 13 Figure 17 The real effective exchange rate has been relatively constant in 2018 (2017 = 100) 13 Figure 18 Lending to the private sector has picked up... 13 Figure 19 … Which remains on a largely short-term basis 13 Figure 20 Low levels of financial intermediation are reflected by less than 20 percent of the population being banked 14 Figure 21 Customs revenues exceeded target starting in the second quarter of the year 14 Figure 22 VAT receipts started to fall below target in April 14 Figure 23 While tax revenues have been increasing over the last five years… 15 Figure 24 …Tax revenue performance remains weak compared to other countries 15 Figure 25 Current expenditures fell, largely due to a reduction in transfer to JIRAMA 16 Figure 26 Fiscal deficit (cash basis) was contained compared with other countries which held presidential election in 2018 16 Figure 27 The percentage of the population living below the poverty line is expected to decline over the medium term as growth continues to pick up 18 Figure 28 The gap between the retail price and the reference computed price is the subsidy (2014/15) or liabilities (2018). The gap is particularly high for diesel and kerosene 21 Figure 29 Gasoline and diesel are consumed by the richest, while the poorest 60 percent of the population largely consume kerosene 22 Figure 30 Consumption patterns of goods and services that utilize fuel show that the wealthiest are the largest consumers while the poor are excluded 22 Figure 31 Spending on a regressive fuel subsidy reduces resources available for pro-poor priorities 23 Figure 32 The poorest spend a higher share of their budget on fuel and goods and services that utilize fuel compared with the rich 24 Figure 33 Determinants of the reference computed price 26 Figure 34 The combined costs of transportation and storage and distribution and margins are the highest in Madagascar compared with benchmark countries 29 BOXES Box 1 Electricity Subsidies in Madagascar 8 Box 2 Mitigating Measures Accompanying Fuel Subsidy Removal - A Summary of Selected Experiences 26 TABLES Table 1 Madagascar: Selected economic and financial indicators: 2016-2022 5 Table 2 Balance of Payments financing requirements and sources (% GDP) 7 Table 3 Use of and spending on public transport, by quintile (urban) 27 ii ACRONYMS CBM Central Bank of Madagascar ENSOMD Enquête Nationale sur le Suivi des Objectifs du Millénaire pour le Développement FAO Food and Agriculture Organization GDP Gross Domestic Product HHI Herfindahl-Hirschman Index IMF International Monetary Fund INSTAT National Institute of Statistics (Institut National des Statistiques) JIRAMA State-owned utilities company (Jiro sy Rano Malagasy) MEF Ministry of Economy and Finance MGA Malagasy Ariary OMH Office malgache des hydrocarbures PIM Public Investment Management PPP Public Private Partnership RCF Rapid Credit Facility TPP Taxes on Petroleum Products USD Unites States Dollar VAT Value Added Taxes WB World Bank iii FOREWORD Welcome to the Spring 2019 edition of the World Bank’s Madagascar Economic Update, which presents recent economic developments and our medium-term outlook.1 The economy has continued to perform well, with growth in 2018 estimated at 5.2 percent, above regional and global averages. External demand for Malagasy goods and services remains strong, with exports such as cash crops, metals and business process outsourcing performing well. A small but dynamic private sector is responding to this increased economic activity with banking, logistics and services to support companies all under expansion. The central challenge remains of how this growth can benefit a wider population, so that Madagascar can make inroads in reducing poverty. Increasing access to reliable, sustainable and affordable energy supply is critical in this regard. Improving the reliability of energy supply would support firm’s competitiveness, which is crucial for helping industries to grow and creating job opportunities. At the household level, only an estimated 13 percent of the population has access to electricity, which limits opportunities to engage in non-agricultural activities and exacerbates the remoteness of the rural population. This context underscores the importance of having an effective public policy in place to support the growth of a sustainable energy sector. The national utilities agency, JIRAMA, is implementing reforms to improve its financial situation and operational performance. Although much needs to be done, certain reforms are starting to bear fruit, including improvements to revenue collection, a decline in system losses, and enhancing financial accountability and transparency. These measures are expected to help improve JIRAMA’s financial situation and should allow the company to invest in better electricity services on the interconnected network as well as isolated grids. Madagascar’s abundant potential for renewable energy presents an opportunity to increase access to reliable, affordable and sustainable energy, provided that projects are selected on a least-cost basis and are well-sequenced in line with demand and capacity to pay. As the transition to renewable energy is ongoing, implementing a fuel pricing strategy to promote access to reliable and affordable petroleum products, without the state having to bear the cost, will continue to remain critical for stimulating growth over the medium term. Implementing the automatic fuel price adjustment mechanism will mean that changes in global oil prices are passed through to consumers. Such a fuel pricing approach should be complemented by efforts to reduce the fixed cost drivers of fuel, mitigate the effects of price increases on the most vulnerables, and promote price competition supported by a strong and independent regulatory agency. Continuing to eliminate the fuel subsidy would mean that the government should have greater resources available to increase social and investment related expenditures that more concretely benefit the poor. And last but not least, the constitutional transition of power following the outcome of the Presidential elections marks an important milestone in Madagascar’s history. The government is on a solid foundation to implement its development program in pursuit of inclusive growth that benefits all Malagasy. Coralie Gevers Country Manager, Madagascar  1 The cut-off date for all data in this document is February 28th 2019 iv ACKNOWLEDGEMENTS This edition of the Madagascar Economic Update was prepared by a team led by Natasha Sharma (Senior Economist, GMTA4). The team included Faniry Razafimanantsoa (Economist, GMTA4), Jan Kappen (Senior Energy Specialist, GEE01), Joern Huenteler (Energy Specialist, GEE01) and Prisca Mamitiana (Consultant, GMTA4). The special focus on fuel pricing was prepared by a team consisting of Natasha Sharma, Faniry Razafimanantsoa, Rachel Ravelosoa (Senior Social Protection Economist, GSP08), Eneida Fernandes (Senior Private Sector Specialist / Tourism, GFCAS) and Cecile Giraud Kappen (GMTA4). Valuable peer review comments were received from Masami Kojima (Lead Energy Specialist, GEEXI), Alex Sienaert (Senior Economist, CROCR), and Tom Bundervoet (Senior Economist, GPV01). The report was prepared under the overall guidance and supervision of Mark Lundell (Country Director, AFCS2), Coralie Gevers (Country Manager, AFCS2), Mathew Verghis (Practice Manager, GMTA4), Carolin Geginat (Program Leader, AFCS2), and Sudeshna Ghosh Banerjee (Practice Manager, GEE01). The team would also like to express gratitude to our counterparts from the government for sharing the data used for the analysis and reviewing earlier drafts of the report, Litera for translation services, Cybil Maradza for design work, Dia Styvanley (Communications Officer, AFREC) for communications support, and Rondro Rajaobelison (Program Assistant, AFMMG) for logistics support. Generous financial support from the Energy Sector Management Assistance Program, a multi- donor Trust Fund, which was used to prepare this report and finance technical assistance on fuel subsidy reform is also gratefully acknowledged. v PART ONE RECENT ECONOMIC DEVELOPMENTS 1 A THE REAL SECTOR 1. The Malagasy economy remained strong in 2018, growth has outpaced the estimated population growth rate with growth estimated at 5.2 percent. A combination of of 2.7 percent (Figure 1: ).2 The performance of the Malagasy favorable macroeconomic conditions such as lower inflation, economy compares favorably with other economies in the a fiscal deficit under control, and an adequate level of region and also globally. GDP per capita growth in Madagascar international reserves have helped to sustain the growth in 2018 was at an estimated 2.4 percent, compared with 0.03 trend. For the fifth consecutive year, the pace of economic in sub-Saharan Africa and 1.9 in the world (Figure 2). Figure 1: The services sector continues to be a strong driver of growth Contribution to GDP growth (percentage point) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 2014 2015 2016 2017 2018 Primary Secondary Tertiary GDP growth Source: World Development Indicators and INSTAT Figure 2: Madagascar’s per capita growth rate compares favorably with other regions but still lags other high performing economies in Africa Annual percent change (data for 2018) 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 ca ca e s rld nia a al da ire AR ro iqu ny eg i i an vo Wo SC Afr Afr za mo Ke n mb d'I Rw n GA Se Co Ta th n za te ra DA u Mo Co So ha MA Sa b- Su Source: World Development Indicators and INSTAT 2 The population growth rate is estimated using the 1993 population and household census. The 2018 census is expected to provide an updated population growth rate. 2 2. The services sector continues to be the most 3. However, other services such as tourism have been important driver of growth. The tertiary sector grew by 5.2 affected by uncertainty related to the pre-election percent in 2018 as financial services, telecommunications, period and the outbreak of health epidemics, which transport and logistics continue to expand. Relatively new have deterred foreign visitors. The number of tourists industries such as Business Process Outsourcing have also been visiting Madagascar declined by 14 percent between performing well. However, performance of the services 2016 and 2018. These developments are likely to affect industry has been uneven. Services to support the growth popular tourist destinations including the coastal regions, of domestic industries have been flourishing, including with an unfavorable impact for hospitality services. The for those companies engaged in the export of goods and constitutional transition of power following the Presidential services. These developments are likely to bode well for elections should help to redeem this situation, which may enhancing employment opportunities in urban areas, be further supported by private sector development in including the capital, where private sector activity is most the tourism industry, including the establishment of concentrated. internationally recognized hotel brands in Madagascar. Figure 3: International visitor numbers in 2018 have fallen Number of tourist arrivals 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 2017 2018 Source: INSTAT 4. The performance of the manufacturing sector some extent compensated by an increase in the value was mixed, particularly for goods produced in export of garment exports to the United States by 25.5 percent. processing zones. Overall, the growth of the secondary Given global growth prospects, demand for Malagasy sector decelerated from 9 percent in 2017 to 5.4 percent garments is expected to pick up over the medium term, in 2018. Garments feature among Madagascar’s top which should be reinforced by plans to strengthen capacity three exports and realized mixed performance. The value of the Toamasina Port. Demand for other Malagasy goods of garment exports to France and Germany fell by 25 remained strong. The price of vanilla continues to remain percent, which is significant as an estimated 50 percent high, but is likely to fall over the medium term as more of garment production in Export Processing Zones is suppliers enter the market. The price of nickel has been destined to these two markets. However, this lackluster on a upward trend although was a slump in prices at the performance of exports to European markets was to end of quarter 1, 2019, whilst cobalt prices continue to rise. External demand for Malagasy goods and services remained strong, and prices of vanilla and cobalt continue to be high 3 Figure 4: Prices of vanilla continue to trend upward Figure 5: Since 2016, prices of nickel and cobalt have Price index for vanilla (2014=100) started to rebound (latest official data available) Price index for nickel (2014=100) 300 900 250 700 200 150 500 100 300 50 100 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Nickel Cobalt Source: Central Bank of Madagascar Source: World Bank 5. The agriculture sector received a boost in 2018 While the improvements to the rice harvesting season following a recovery in rice production. Favorable weather should bode well for farmers based in rural areas, this conditions have supported a productive rice harvesting development alone is unlikely to have a substantial impact season, where domestic production increased from 3.1 on reducing poverty levels in the short term. Farmers million tons in 2017 to an estimated 4.0 million tons in based in rural areas continue to face several challenges to 2018. Paddy production per capita in 2018 was on par with their livelihoods including a deterioration in the producer levels realized in 2016. The most recent available data price of key crops, such as rice, relative to input costs, from 2012 indicates that an estimated 77.9 percent of the distances to food markets which is exacerbated by the rural population live below the poverty line, and are largely poor condition of primary roads, low levels of human dependent on subsistence agriculture for their livelihoods. capital, and limited buffers to shocks.3 Figure 6: Paddy production levels in 2018 are estimated to be on par with earlier years Paddy production, kg per capita 250 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e Source: INSTAT, Central Bank, Ministry of Agriculture and FAO 3 World Bank, 2016, ‘Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings,’ World Bank, Washington DC 4 Table 1: Madagascar: Selected economic and financial indicators: 2016-2022 2016 2017 2018 2019 2020 2021 2022 Actuals Estimates Projections Real sector GDP (billions of ariary) 31,634 35,729 40,344 45,247 50,628 56,295 62,085 Real GDP (annual % change) 4.2 4.3 5.2 5.2 5.3 5.1 4.9 Primary sector (contri. to real GDP growth, pp) 0.4 -0.3 1.2 0.6 0.6 0.5 0.5 Secondary sector (contri. to real GDP growth, pp) 0.9 1.4 0.9 1.2 1.2 1.1 1.2 Tertiary sector (contri. to real GDP growth, pp) 2.1 2.4 2.3 2.6 2.7 2.8 2.5 GDP per capita (current USD) 400 448 461 496 521 544 563 Real GDP per capita (annual % change) 1.4 1.5 2.4 2.4 2.5 2.4 2.2 GDP deflator (annual % change) 6.7 8.3 7.3 6.6 6.3 5.8 5.2 Inflation, consumer prices (annual %, end of year) 7.0 9.0 6.1 6.0 6.0 5.4 5.0 Public Finance (%GDP) Total revenue and grants 14.8 14.8 14.6 15.5 15.0 14.7 14.7 o/w: Tax Revenues 11.0 11.5 11.8 12.2 12.5 12.7 12.8 Total spending (commitment basis) 16.1 17.2 16.6 17.4 17.9 18.0 18.4 o/w: Capital spending 5.2 5.5 5.8 6.6 7.8 8.1 8.3 Overall balance (commitment basis) -1.3 -2.4 -2.0 -1.9 -2.8 -3.2 -3.7 Total public debt 38.6 36.1 35.8 35.7 36.6 38.4 40.6 o/w: External 26.8 25.4 26.2 26.8 28.5 30.9 33.2 Monetary accounts (annual % change) Money Supply (M2) 21.3 19.3 13.7 17.1 13.3 14.7 15.0 Net Foreign Assets 37.4 23.1 13.1 10.9 15.2 16.3 13.8 Net Domestic Assets 10.8 14.2 14.2 20.6 8.6 10.9 13.5 of which: Credit to the Private Sector 8.2 18.4 16.4 17.8 11.5 11.0 14.2 External sector (%GDP) Exports of goods, f.o.b. 21.7 24.4 24.7 23.1 22.6 21.9 21.4 Imports of goods c.i.f 28.7 31.5 32.7 32.2 32.0 32.5 32.1 Current account balance 0.6 -0.5 0.8 -1.0 -2.6 -3.2 -3.7 Foreign Direct Investment 4.5 3.1 3.9 2.4 2.7 2.8 2.9 Foreign Reserves (months of imports) 3.9 4.0 4.0 … … … … Terms of Trade (percent change) 35.7 2.4 3.4 -4.6 -0.4 0.1 0.0 Exchange Rate LCU/USD(average) 3,176.5 3,116.1 3,333.6 … … … … Source: Malagasy authorities, IMF and WB staff calculations, February 2019 5 B EXTERNAL SECTOR 6. The current account recorded a surplus of 0.8 percent reducing by 8 percent in volume in 2018 compared to the of GDP, largely due to good export performance.4 previous year. Favorable rainfall conditions have enabled Madagascar’s traditional exports such as vanilla and nickel the state-owned utlity, JIRAMA, to increase hydropower have been peforming well but there have been in-year capacity, which is part of the company’s strategy to fluctuations of export receipts, in line with the seasonality of transition away from thermal energy and increasingly certain cash crops. In the third quarter of 2018, the current utilize renewable energy supported by least-cost and account recorded a deficit of 1.4 percent of GDP, coinciding competitively procured investments. However, the higher with the low-season of vanilla exports before reverting price of imported petroleum has offset the reduced to a positive balance in the last quarter of the year. Thus demand of petroleum (volume effect). the current account balance broadly continues the same trend maintained since 2013, where there is either a small 8. The performance of export receipts and higher external surplus or deficit. The performance of the current account financing have contributed to preserving the level of balance, combined with continued growth, indicates that the official reserves. The aim of holding foreign currency is Malagasy economy continues to perform well. for countries to protect themselves if there is an external crisis, preserve economic and financial stability against 7. The upward movement of international oil prices pressures on exchange rates, and create space for placed a strain on the economy. The Free on Board policy autonomy. Having an adequate level of reserves is price of diesel increased from an average of US$481 per particularly important for the central bank to be able to metric ton in 2017 to US$605 in 2018.5 As the economy manage large volatility in currency associated with the has been under expansion, demand for petroleum has seasonality of exports of cash crops. In 2018, a combination increased particularly by industry and the transport sector. of external financing and export receipts contributed to By contrast, reliance on diesel for thermal electricity preserving the level of official reserves at an equivalent of generation has tempered and contributed to imports four months of imports. Figure 7: Export receipts continue to perform Figure 8: Import bills have increased largely due well, particularly for vanilla, nickel to a higher price of petroleum, instead of and cobalt receipts US$ millions US$ millions 4000 4000 3500 3500 3000 3000 2500 2500 2000 2000 1500 1500 1000 1000 500 500 0 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Food industry Essential oils Seafood Rice Foods (Other than rice) Mineral products Cereals, fruits, vegetables, Petroleum products Equipment other spices Others Raw materials Others Garments Nickel, cobalt Vanilla Source: Malagasy authorities, IMF and WB staff calculations, February 2019 4 The current account records payments for the exports and imports of good and services, earnings on investments and transfers. Reference for U.S. Gulf Coast Ultra-Low Sulfur No 2 Diesel Spot Price downloaded from https://www.eia.gov/dnav/pet/hist/LeafHandler. ashx?n=pet&s=eer_epd2dxl0_pf4_rgc_dpg&f=m . Madagascar imports mainly from the Persian Gulf. Diesel is used for illustrative purposes as diesel represents almost 60 percent of the volume of petroleum imports. Free on Board is a trade term which means that the seller is relieved of responsibility once goods are shipped, in contrast to Cost, Insurance and Freight where the seller assumes additional costs. 6 Figure 9: The current account balance realized a moderate surplus in 2018 US$ millions 150 100 50 0 -50 -100 -150 -200 2014 2015 2016 2017 2018e Source: Central Bank of Madagascar Table 2: Balance of Payments financing requirements and sources (% GDP) 2016 2017 2018 2019 2020 2021 2022 Actuals Estimates Projections Total financing requirements 9.1 8.4 7.9 7.3 7.7 7.6 7.8 Current account deficit -0.6 0.5 -0.8 1.0 2.6 3.2 3.7 Net repayment of private sector debt 2.1 1.2 2.2 1.8 0.8 0.7 0.4 Repayment of government debt 0.7 0.7 0.6 0.5 0.6 0.6 0.7 Gross reserves accumulation (+=increase) 3.2 3.1 1.5 1.2 0.8 0.8 0.8 IMF repayments 0.1 0.1 0.1 0.0 0.1 0.1 0.2 Other (inc. unrepatriated export revenues) 35 2.9 4.3 2.8 2.8 2.1 2.1 Available financing 9.1 8.4 7.9 7.3 7.7 7.6 7.8 Foreign direct and portfolio investment 4.5 31 3.9 2.4 2.7 2.8 2.9 Budgetary support loans 0.2 0.7 0.4 0.0 0.4 0.0 0.0 Project support 4.0 3.5 3.2 3.9 4.7 4.8 4.9 IMF: RCF and ECF arrangement 0.4 1.1 0.4 1.0 0.0 0.0 0.0 Source: Central Bank of Madagascar, World Bank staff and IMF 7 Box 1: Electricity Subsidies in Madagascar JIRAMA, Madagascar’s national electric utility, is one of the JIRAMA’s financial woes became pronounced at the beginning main recipients of the country’s energy subsidies. Between of this decade – it was a profitable company during 2006- 2008 and the end of 2018 the Government provided over 09. Since then, however, undue delays in the preparation US$580m in direct budget transfers and—as JIRAMA’s only of hydropower and solar projects— which are cheaper but shareholder—absorbed another US$700m in losses6 that much more complex—led to overreliance on power generated have eroded the company’s equity. On an annual basis, from petroleum fuels. Consequently, Madagascar’s abundant the ‘quasi-fiscal deficit’ to the Government—the difference renewable energy resources remain untapped and more than between JIRAMA’s cost and the cash it collects, which is half of power generation is from expensive and polluting diesel closed by implicit and explicit subsidies— averaged just or heavy fuel. The procurement of privately-owned power over 1.1 percent of GDP. From 2010 to 2017 this quasi-fiscal supply contracts and the negotiation of power purchasing deficit has increased more than three-fold from 0.66 agreements have been opaque, often resulting in prices above percent of GDP to 2.12 percent of GDP (Figure 10). market benchmarks. Figure 10: JIRAMA’s quasi-fiscal deficit is on an upward trend Quasi-fiscal deficit of JIRAMA (% of GDP) 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Transmission & Distribution Losses % Bill collection % Underpricing % Source: World Bank staff calculations based on data provided by JIRAMA 6 This amount does not include unpaid government bills 8 On the cost side, fuel and power purchases is the largest electricity service at 230 percent of the weighted regional contributor, averaging 76 percent of the total cost of average.8 Generation cost could be cut by more than half JIRAMA over the period 2007 to 2017. The operational cost by switching from oil-based to competitively procured of power generation in Madagascar are among the highest renewable power (the average cost in countries with in the region, reaching almost US$0.30/kWh in 2017.7 A predominantly non-oil-based power was around US$0.13/ recent regional comparison put Madagascar’s cost of kWh in 2014).9 Figure 11: The operating costs of power generation in Madagascar are amongst the highest in Africa (US$/kWh) 0.60 0.50 0.40 0.30 0.20 0.10 - Liberia Comoros São Tomé and Principe Cape Verde Sierra Leone Gambia, The Rwanda Madagascar Senegal Togo Mali Mauritania Seychelles Burkina Faso Guinea Benin Gabon Mauritius Niger Botswana Côte d'Ivoire Nigeria Uganda Kenya Tanzania Swaziland Ghana Cameroon Burundi Central African Republic Zimbabwe Mozambique Congo, Rep. Malawi Sudan South Africa Zambia Ethiopia Lesotho Sources: Note: Data for 2014 or latest available, from Trimble et al. (2016). Madagascar data updated to 2017. On the revenue side, about a third of produced electricity gap is financed by government transfers, which jumped is unaccounted for (up from less than a quarter in 2008) to 1.54% of GDP in 2017, but JIRAMA still faces large cash and another 14 percent is billed but no cash is collected. shortages and often cannot pay its suppliers. As a result, This means that less than half of electricity produced is arrears to suppliers are accumulating with high levels of actually paid for. Since charging the full cost of supply interest, further increasing the fiscal burden that JIRAMA would make power unaffordable to many, the Government poses for the government and compromising the ability suppresses tariffs to a level that it deems acceptable, of the utility to serve as a conduit for realizing renewable currently an average of around US$0.13/kWh. Part of the energy investments on competitive terms. 7 A recent regional study found only seven countries in Africa with operating cost of power generation above US$0.30/kWh: Liberia, Sierra Leona, The Gambia, Rwanda, Cape Verde, Comoros and São Tomé and Príncipe. Trimble, Chris; Kojima, Masami; Perez Arroyo, Ines; Mohammadzadeh, Farah. 2016. Financial Viability of Electricity Sectors in Sub-Saharan Africa: Quasi-Fiscal Deficits and Hidden Costs. Policy Research Working Paper;No. 7788. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/ handle/10986/24869 License: CC BY 3.0 IGO 8 Source: Ibid. 9 Source: Ibid. 9 Figure 12: Less than half of produced electricity is actually paid for Utilization of produced electricity (total production in 2017: 1,701,612 kWh) Technical and non-technical losses kWh, 555,019 Electricity actually paid for kWh, 823,176 Bill collection losses kWh, 323,417 Sources: JIRAMA and World Bank staff calculations Government subsidies, if well targeted, can help make network maintenance and rehabilitation or invest in electricity accessible and affordable to the poor. Virtually modernizing its billing and collection systems. Second, all countries globally have provided budget transfers to those who are wealthier than the majority benefit bridge their utilities’ finances in periods of high investment from electricity subsidies. An estimated 83.5 percent of in electrification. Madagascar’s New Energy Policy, approved electricity subsidies in 2017 went to the richest quintile in 2015, has the target of increasing electrification rates of the population, compared to only about 1 percent from the current 13 percent to 70 percent by 2030, which for the bottom 40 percent. In a recent comparison of would require 260,000 new connections each year. And 22 countries in sub-Saharan Africa, only two countries going further, universal electricity access as envisaged (Rwanda and Mozambique) had a more skewed ratio of under the Sustainable Development Goals would require electricity access between the rich and poor.10 In fact, 400,000 new connections each year. Thus, if subsidies to total grid access, now estimated at below 13 percent of the Madagascar’s energy sector are well-utilized to enable population, has fallen over the past decade, as access has strategic investments, they could help improve access to failed to keep up with population growth. Third, JIRAMA’s affordable electricity, including for the poorest, which could financial situation means that it frequently does not pay open opportunities to engage in activities of higher value. its suppliers, resulting in arrears accumulating with high levels of interest. This situation increases the fiscal burden JIRAMA’s continuing cash shortage has multidimensional that JIRAMA poses for the government and compromises consequencies. First, JIRAMA has been able to connect the ability of the utility to serve as a conduit for realizing a mere 9,000 customers on average over the past renewable energy investments on competitive terms. 12 years, which falls far short of policy objectives to increase access. JIRAMA’s continuing cash shortage Madagascar clearly can and must do better. Seeking to also leaves it with insufficient resources to fund regular improve this situation, the Government is engaging in 10 Kojima, Masami; Zhou, Xin; Han, Jace Jeesun; de Wit, Joeri; Bacon, Robert; Trimble, Chris. 2016. Who Uses Electricity in Sub-Saharan Africa? Findings from Household Surveys. Policy Research Working Paper;No. 7789. World Bank, Washington, DC. © World Bank. https:// openknowledge.worldbank.org/handle/10986/25029 License: CC BY 3.0 IGO. 10 numerous reforms, which are being organized as part the first two months of 2018 were 46 percent above the of JIRAMA’s Financial Recovery Plan. Utility oversight is level of 2015 and 23 percent above the level of 2016. Steps being strengthened to improve transparency of JIRAMA’s have been taken to improve financial accountability and financial management, including the audit and review of transparency, including the publication of financial audits. new and ongoing projects. The overall tariff framework is An urgently needed least-cost generation expansion plan also under review, to ensure that low-income customers was completed and adopted in November 2018 and is are not unfairly facing the burden of high costs of currently being updated to reflect the priorities of the new service. To improve transparency and get better value- government. The expansion plan is the guiding framework for-money from privately supplied power, the Ministry of for the selection of renewable energy generation Energy, Hydrocarbons and Water has mandated that all projects. And as a result of network improvements and new projects have to undergo a rigorous assessment of better commercial management (including regular meter cost effectiveness and environmental and social impacts audits of large consumers), system losses have started and follow competitive procurement. In 2017, JIRAMA reversing a decade-long downward trend (falling from has also adopted a standard template for future power 34 percent in 2015 to an average of 32 percent in 2016- purchasing agreements to improve transparency and ease 17). However, more accountability and transparency of negotiations with private suppliers. investment and procurement decisions are needed to ensure that pipeline projects are strategically selected The reforms to improve JIRAMA’s financial situation have to accelerate progress towards universal access to started showing results. Seasonally adjusted revenues in sustainable electricity for all. Figure 13: If JIRAMA’s reform momentum continues, financial equilibrium should be reached by 2022 JIRAMA’s revenues and cost of service: historic and forecast 0.50 0.30 0.10 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 (0.10) Fuel and power purchases US$/kWh Salaries US$/kWh Depreciation US$/kWh Other operating charges Finance cost US$/kWh Taxes US$/kWh Reversals of loss provisions US$/kWh Operating revenues (US$/kWh) Source: JIRAMA and World Bank staff calculations In the short-term, subsidy needs can be reduced through contract management of all independent power producers a well-developed tariff policy under which higher-income can help reduce power purchasing costs. households and larger commercial consumers pay the full cost of service. A move towards greater cost-recovery In the medium-term, the most important consideration would undoubtedly lead consumers to pose questions towards rationalization and phasing out of subsidies regarding key cost drivers, which should also strengthen is through diligent planning and implementation of accountability for JIRAMA’s procurement decisions. investments in solar and especially hydro power in line Similarly, close management oversight of procurement and with the least cost sector development plan. And even 11 in the absence of direct subsidies, support from the hydropower plants often take five years or more from government will remain important in the form of sovereign contract award to commissioning—JIRAMA will depend on guarantees to facilitate private investment in public private Government support well into the next decade. partnerships. Since these take time to materialize—large Source: JIRAMA, MEF and WB staff analysis C MONETARY SECTOR 9. Inflation eased in 2018, averaging 7.3 percent consumption basket have followed an upward trend, compared with 8.3 percent in 2017, largely due to such as the cost of public services which has recorded improved agricultural performance. Favorable weather an average increase of 18 percent in 2018.11 In line with conditions have facilitated improved agricultural efforts to support the financial recovery of JIRAMA, production. Since food and beverages comprise nearly electricity tariffs for all consumers rose by an average half of the consumption basket, the increased supply of 10-14 percent over the period 2016 and 2018. Despite of domestic produce has supported a deceleration of the recent easing of inflation, the monetary policy inflationary trends. However, while the pressure on committee of the central bank has maintained the the price of domestically produced rice has abated, policy rate at 9.5 percent since end-2017. The monetary average market prices remain above the pre-peak policy committee is scheduled to meet in May 2019 to level in 2017. Furthermore, some components of the review the policy rate. Figure 14: Inflation in 2018 fell compared with the Figure 15: Inflation still remains relatively high previous year in Madagascar compared with other Percentage contribution to inflation, end of countries period (%) y-o-y inflation rate, end of 2018 (%) 10 10 9 8 8 7 6 6 5 4 4 2 3 2 0 1 2014 2015 2016 2017 2018 0 Others Fabrics & clothing Ma Ga a da on uth a ica za had uti Tan ue ov ia ua Ma r) Gu s a ar ial itiu an So eny ine be (N zan sc iq b Afr Gh Mo C em t or ur mb K ga Fuel & cost of transportation Housing, Water, Gas & other fuels Rice bo Eq Foods (excl. rice) Inflation Dji Source: INSTAT, National institute of statistics of benchmark countries 11 The cost of public services is estimated using a combination of different prices, the most important being salaries of domestic employees, registration fees at public primary and secondary schools, stamps, and fees at public hospitals. 12 10. Madagascar has a flexible exchange rate, where the beginning of 2018, the Ariary depreciated against the the real effective exchange rate has remained largely US dollar by 8.3 percent and the Euro by 1.9 percent in constant. A flexible exchange rate means that market nominal terms, with some fluctuations within the year. dynamics are used to guide the conversion rate of Depreciation of the Ariary was most notable in the low the Ariary into other currencies. The central bank export season, when demand for the local currency was only intervenes to smooth high volatility in currency low. Notwithstanding the fluctuations, the real effective fluctuations, which is applied on a limited scale. Since exchange rate remained relatively stable (Figure 17). Figure 16: The ariary has been on a depreciating Figure 17: The real effective exchange rate has been trend in nominal terms relatively constant in 2018 (2017 = 100) 20 110.0 15 10 105.0 5 0 100.0 -5 95.0 -10 -15 90.0 -20 85.0 01/02/17 03/02/17 05/02/17 07/02/17 01/02/18 03/02/18 05/02/18 07/02/18 09/02/18 11/02/18 2017m01 2017m03 2017m05 2017m07 2017m09 2017m11 2018m01 2018m03 2018m05 2018m07 2018m09 2018m11 11/02/2017 EUR US$ Source: Central Bank 11. Credit to the economy has been steadily increasing, of GDP in 2018, financial intermediation in Madagascar while central bank financing to the government slightly remains low compared to the regional average (Figure 20). reduced. Between December 2017 and December 2018, Conversely, central bank financing to the government has credit to the economy from private banks increased by been decreasing in line with the provisions of the central 14.1 percent, which is largely on a short term basis. While bank statutes updated in 2016. Notably, statutory advances this upward trend is a reflection of an economy under declined from 0.9 percent of GDP at end 2016 when the expansion, with credit to the economy at 13.6 percent law was enacted to 0.5 percent of GDP in December 2018. Figure 18: Lending to the private sector has Figure 19: … Which remains on a largely picked up… short-term basis % change y-o-y Annual variation (millions of MGA) 20 15 800,000 10 600,000 5 400,000 0 200,000 -5 0 -10 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 -200,000 Credit to the government Short term credit Medium term credit Credit to the economy Long term credit Source: Central bank, World Development Indicators, Global Findex Database 13 Figure 20: Low levels of financial intermediation are reflected by less than 20 percent of the population being banked Percentage of the population that is banked (age 15 and over) South Sudan Central African Republic Niger Madagascar Sierra Leone Chad Guinea Congo, Dem. Rep. Malawi Ethiopia Mali Liberia Benin Mozambique Senegal Burkina Faso Togo Tanzania Rwanda Zimbabwe Uganda 0 10 20 30 40 50 60 Source: Central bank, World Development Indicators, Global Findex Database D FISCAL SECTOR 12. Tax revenue collection showed a slight improvement in 2018 contrast, the performance of domestic tax collection fell short compared with the previous year. The most important change of expected targets by 9.4 percent mainly due to an under- to tax policy in 2018 was the increase in taxes on petroleum collection of VAT and excise duties (Figure 22). This performance products (TPP), which contributed to an increase in TPP underscores the need to continue strengthening domestic collection by 71 percent in 2018 compared to the previous year.12 tax administration. Overall, the performance of tax revenue Compared to other types of taxation, TPP can be considered as collection was at 97 percent of the annual target. While tax progressive: the wealthiest in society are the largest consumers collection rates have been increasing over the last five years of fuel products and bear the burden of taxation. The increase in (Figure 23), performance still falls short of other countries in TPP as well as continuous improvements in the administration sub-Saharan Africa, where average tax collection rates are of customs led to the government exceeding their annual target over 15 percent compared with over 10 percent in Madagascar for taxes on trade and transactions by 4.2 percent (Figure 21). By for the same period (Figure 24). Figure 21: Customs revenues exceeded target Figure 22: VAT receipts started to fall below targets starting in the second quarter of the year in April Customs revenue collection MGA billions Domestic VAT collection MGA billions 250 120 200 100 80 150 60 100 40 50 20 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Target Actual Target Actual Source: MEF, IMF 12 Taxes on petroleum products (per liter) increased from MGA 105 to MGA 213 for jet fuel, MGA 390 to MGA 503 for gasoline, MGA 120 to MGA 228 for diesel, and MGA 20 to MGA 128 for fuel oil. 14 Figure 23: While tax revenues have been increasing Figure 24: …Tax revenue performance remains weak over the last five years… compared to other countries Tax collected (gross), in percentage of GDP Percentage of GDP, 2013-2017 average 7 30 25 20 6 15 10 5 5 0 Mo frica e s a s ia ar itiu ro iqu ny an sc mo Ke ur nz mb A ga Ma Co Ta uth da za So Ma 4 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Domestic tax Customs tax Tax revenue collected Average SSA tax revenue to GDP ratio (latest year available) Source: MEF, IMF 13. Current expenditures, which refer to the cost of extension of the port in Toamasina, and the reconstruction running government and public services, were executed of infrastructures in Antananarivo. The slower than planned as planned in the Revised Finance Law. To increase the execution rate has affected the implementation of major level of resources available for financing social and roads projects which benefit from external financing.14 investment programs, the government has an objective of reducing current expenditures, which have fallen from 15. On balance, the government’s management of public 11.7 percent of GDP in 2017 to 10.8 percent of GDP in 2018 finances in the pre-electoral period has demonstrated (Figure 25). This reduction is largely due to a fall in the restraint, with the deficit contained at 2.6 percent of transfer to JIRAMA (from 1.2 percent of GDP in 2017 to 0.8 GDP (cash basis) (Figure 26). The deficit is mainly financed percent of GDP in 2018). Expenditures on social priority through external financing, which is largely on concessional sectors was at an estimated 1 percent of GDP, nearly in terms in line with the government’s medium-term debt line with the government’s target of 1.1 percent of GDP.13 strategy. The slower than expected execution of externally financed investment projects has contributed to containing 14. The execution rate of capital expenditures is the deficit. Domestic financing is through the issuance of improving, although the scale-up is progressing at a government bonds mainly subscribed to by commercial slower pace than expected. Capital expenditures were banks as well as limited central bank financing. The financing estimated at 5.8 percent of GDP. Close to 80 percent of of the fiscal deficit from domestic sources has fallen from capital expenditures programmed in the Revised Finance 50 percent in 2014 to 27 percent in 2018, reflecting increased Law 2018 were executed, comparing favorably with the access to external borrowing and adherence to the limit set 67 percent execution rate realized the previous year. by the updated central bank statutes on statutory advances. The most significant infrastructure projects (in terms of Over time, it is expected that the domestic debt portfolio will budget execution) in 2018 include the expressway that shift from largely short-term to increasingly medium-term connects the capital city with the international airport, the bonds, as foreseen in the debt strategy. 13 Social priority expenditures are defined as spending on health, education, water and population sectors excluding salaries and externally financed investments. 14 The roads projects subject to delays include the RN5 and the Rocade North-East. 15 Figure 25: Current expenditures fell, largely due to a Figure 26: Fiscal deficit (cash basis) was contained reduction in transfer to JIRAMA compared with other countries which held Percentage of GDP presidential election in 2018 Percentage of GDP 18 10 16 9 14 8 12 7 10 6 8 5 6 4 4 3 2 2 0 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 0 t uth e ica on ia li r yp Ma a w iop sc ro Current expenditure Capital expenditure b Afr Eg ba me ga Eth Zim da Ca Total expenditure Wages and salaries So Ma Source: MEF, IMF 16. Overall, the level of debt distress remains moderate. shocks that affect hydro power generation could result in Madagascar’s risk of external debt distress is moderate, increased utilization of thermal energy, which combined which means that while overall levels of debt are currently with poor procurement and planning decisions, may lead manageable if there is a shock to the economy, such as a the government to bear additional costs, as was the case reduction in growth, the capacity of the country to repay its in 2017. The transfer to the Pension Fund has been higher debt service is under moderate risk. The latest estimations than expected as the management of the government’s of Madagascar’s debt were undertaken in October 2018, civil service roster continues to progress. And finally, and show that the ratio of public debt to GDP fell from risks related to natural disasters are estimated to cost 38.6 percent of GDP in 2016 to an estimated 35.8 percent the economy on average 1.4 percent of GDP each year, of GDP in 2018. given Madagascar’s high level of exposure to cyclones and other climatic shocks. 17. The realization of unforeseen liabilities could pose additional costs that the government had not planned 18. The government is taking steps to improve the or budgeted for. The risk of unforeseen expenditures management of contingent liabilities. These efforts or liabilities arising is of concern to all countries; what include creating a consolidated contingent liabilities matters is how these risks are managed. In Madagascar, registry at the MEF to monitor guarantees, SOEs liabilities, the most pertinent sources of fiscal risks arise from fuel and commitments under PPP agreements. There has been pricing, JIRAMA, the Pension Fund and natural disaster increased transparency of debt, where the government related risks. The issue of fuel pricing is discussed in detail has undertaken its own analysis of debt sustainability and in section 3, and refers to the accumulation of liabilities to published the results. The government also publishes its petroleum companies if retail prices are not adjusted in medium-term debt management strategy and a quantified line with movements in global oil prices. Weather-related analysis of fiscal risks is included as an annex to the budget. Public debt to GDP is estimated at 35.8% in 2018 and the level of debt distress is moderate 16 PART TWO ECONOMIC OUTLOOK 17 19. The medium-term economic growth outlook is positive. fluctuations and meeting the target of foreign reserves. Growth is projected at 5.2 percent in 2019, a trend which is expected to continue over the medium-term. The peaceful 22. Over the medium-term, public expenditures are expected environment in which the Presidential elections and to moderately rise, but with a changing composition toward handover took place bodes well for investor confidence. lower current spending and higher capital expenditures. Growth of manufacturing-related activities is expected to Public spending is projected to increase from 16.6 percent remain strong. Developments in the energy sector should of GDP in 2018 to 17.4 percent of GDP in 2019, and then support this growth outlook, with average y-o-y growth average 18.1 percent of GDP over the period 2020 to 2022. projected at 10.8 percent over the period 2019 to 2021, Current expenditures are projected to continue following assuming that JIRAMA will continue to realize improvements. the same trend at around 10.7 percent of GDP in 2019, based The services sector is expected to continue realizing strong on the assumption that the transfer to JIRAMA will gradually performance. Construction-related activities are projected decline as the utility realizes improvements to its operational to intensify following the planned scale-up of public works. performance. Capital expenditures are projected to gradually The primary sector is expected to moderately expand, increase, as public investment projects are implemented, in including through the development of agribusinesses and line with external financing commitments. PPP agreements cash crops, such as vanilla. are also expected in key sectors such as energy and ports, following the approval of the PPP law in 2016. 20. The pressure on the current account deficit is expected to gradually heighten over the medium-term, reflecting 23. This positive growth forecast should bode well for the country’s external financing needs as plans to scale-up poverty reduction, provided that the sectors driving investments continue. The deficit is projected at 1 percent growth are accessible to the poor. Given that the majority of GDP in 2019, and then average 3.2 percent of GDP over the of the poor population live in rural areas, which is dominated period 2020 to 2022, as the scale-up in public and private by subsistence agriculture, it remains unlikely that the investments drives the demand for imports. The current positive growth forecast will incorporate the poorest account deficit will be offset by the related surpluses in over the short term. However, if over the medium to long the capital and financial accounts from public sector loans term, structural barriers can be lifted in the economy, for and foreign direct investment. The financing of the current example through the provision of electricity at affordable account is consistent with preserving the moderate risk prices, access to credit and to infrastructure, including of debt distress. greater connectivity of farmers to markets, there could be opportunities for the poor to be more meaningfully engaged 21. Monetary policy is expected to maintain its focus on in Madagascar’s growth trajectory. Such efforts would also controlling inflation. Total inflation is estimated to hover need to be complemented by investments in the human around 6 percent over the 2019 to 2022 period. Assumptions capital of the next generation of Malagasy by improving are based on food inflation being contained, and moderate education, health and social protection services. Based on increases in energy prices, in line with JIRAMA’s Business the current growth forecast, the World Bank projects that Plan. The central bank’s intervention in the exchange rate the percentage of people living on less than US$1.90 a day market is expected to remain limited to smoothing large could decline from 75 percent in 2018 to 71 percent by 2021. Figure 27: The percentage of the population living below the poverty line is expected to decline over the medium term as growth continues to pick up Poverty rate (percentage) 100 95 90 85 80 75 70 2012 2013 2014 2015 2016 2017 2018e 2019f 2020f 2021f International poverty rate ($1.9 in 2011 PPP) a,b Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b Source: INSTAT and World Bank staff projections 18 PART THREE MANAGING FUEL PRICING IN MADAGASCAR 19 A INTRODUCTION 1. The objective of this special focus section is to inform on pro-poor priorities. In the first quarter of 2018, the the public debate on fuel pricing in Madagascar. As the government also agreed with petroleum companies that transition to renewable energy is ongoing, demand for the formula for calculating fuel prices could be modified fuel will remain high. The government has been engaged to reduce the final retail price paid by consumers. While in reforms to fuel pricing with the objectives of ensuring these advances show that steps have been taken in the fuel supply at an affordable price, in a way that does right direction, there is still further scope for reforming not require the state having to pay. Notably, a universal fuel prices. This special focus section aims to inform the fuel price subsidy was eliminated, which was regressive public debate, by discussing: (i) why the reform to fuel because it disproportionately benefited the rich, and pricing and subsidies is important; (ii) considerations in reduced the level of resources available for spending pricing fuel; and (iii) policy options available to Madagascar. B WHY THE GOVERNMENT HAS ENGAGED IN THE REFORM OF FUEL PRICES 2. To contain the impact of high and volatile fuel rates plus other fixed cost drivers. When there is a prices, changes to global oil prices have not been gap between the reference calculated price and the passed through to consumers. The price of fuel paid retail pump price this means that changes in global by consumers at the pump has been lower than what oil prices are not being fully passed through to the would have prevailed if the reference calculated price was consumer. Instead, the government either subsidizes applied. The reference calculated price is a way of the price, as was the case in 2014 and 2015, or liabilities calculating the final retail price of fuel, in a way that accumulate to petroleum companies, which has been reflects changes in global oil prices and exchange the case in late 2018 and early 2019 (Figure 28). As the transition to renewable energy is ongoing, demand for fuel will remain high. 20 Figure 28: The gap between the retail price and the reference computed price is the subsidy (2014/15) or liabilities (2018). The gap is particularly high for diesel and kerosene (prices in MGA/liter) 5000 Subsidy for gasoline (2014/15) New liabilities accumulating 4500 4000 3500 3000 2500 2000 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Pump prices Reference computed price 4500 Subsidy for diesel (2014/15) New liabilities accumulating 4000 3500 3000 2500 2000 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Pump prices Reference computed price 3500 Subsidy for kerosene (2014/15) New liabilities accumulating 3000 2500 2000 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Pump prices Reference computed price Source: National Office of Hydrocarbons 21 3. Any fuel pricing policy that results in the government Madagascar is one of the poorest countries in the world,16 subsidizing the cost of fuel benefits the wealthy who it is only the richest 20 percent of the population who have consume the most fuel. A universal fuel price subsidy the purchasing power to consume diesel and gasoline benefits all consumers regardless of whether they are (Figure 29). By contrast, the poorest 60 percent of the rich or poor. The greatest beneficiaries of the universal population consume largely kerosene but no other fuels, price subsidy are those who consume the most fuel. As which explains why kerosene prices are lower. Figure 29: Gasoline and diesel are consumed by the richest, while the poorest 60 percent of the population largely consume kerosene Share of households consuming fuel products, by quintile (in percentage) 100% 83% 81% 81% 80% 70% 60% 39% 40% 20% 8% 0% 0% 0% 0% 1% 0% 1% 0% 2% 0% 1 2 3 4 5 Consumption quintile: 1 = poorest; 5 = richest Gasoline Diesel Kerosene Source: ENSOMD, 2012; World Bank staff calculations 4. Similarly, it is largely the wealthiest in society who by consumers are subsidized. consume goods and services that utilize fuel as an input, with the bottom 40 percent mostly excluded. • Public transportation: The poorest 40 percent utilize As fuel is used as an input for producing a range of goods only 5 percent of services. The prices of public and services, it is important to consider how the poor may transportation in urban areas have previously been be affected by price changes. Since the poor have limited subsidized by the government partly to mitigate the levels of consumption of electricity, public transportation effects of fuel price increases, a scheme which has and non-subsistence food, they are largely sheltered from had limited success. price changes of these goods and services. • Food: The richest 60 percent of the population are • Electricity: The richest 20 percent of the population the largest purchasers of food products, which may consume 85 percent of electricity compared with use fuel as an input to food processing, while the negligible levels of consumption by the poorest poorest 40 percent purchase just over 15 percent, 40 percent. The cost of service provision may not indicating high levels of consumption of home-grown reflect changes in global fuel prices, and tariffs paid food (auto-consumption). Figure 30: Consumption patterns of goods and services that utilize fuel show that the wealthiest are the largest consumers while the poor are excluded The richest 20% consume close to The richest 40% account for close to The richest 60% account for 85% of electricity generated 90% of public transportation usage over 80% of food consumption Q1 Q2 Q3 Q4 Q5 Source: ENSOMD, 2012; World Bank staff calculations 22 5. By using public resources to subsidize fuel prices which social priority expenditures.17 Therefore, policy makers are benefit the rich, the government has in the past had fewer confronted with a choice of either using valuable public resources available to spend on pro-poor programs. On resources to subsidize the price of diesel and gasoline which average in 2014 and 2015, 0.5 percent of GDP was spent on supports the lifestyles of those who are better off than the subsidizing fuel compared with only 0.8 percent of GDP for majority, or to spend on pro-poor programs. Figure 31: Spending on a regressive fuel subsidy reduces resources available for pro-poor priorities Expenditures on fuel subsidies / liabilities compared with priority social expenditures (% of GDP) 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2014 2015 2016 2017 2018 estimations Ministry of Public Health Ministry of National Education Ministry of Population Ministry of Water Fuel subsidy/liabilities Source: MEF and OMH 6. Furthermore, the policy of subsidizing fuel was not Arrears accumulated to petroleum companies were paid affordable, and arrears accumulated to petroleum through issuing treasury bills. The government committed companies. A universal fuel subsidy became unaffordable to passing through changes to global oil prices to the as a policy measure at a time when the fiscal space retail price of fuel to avoid a recourse to the fuel subsidy. available for spending on social priority sectors was already constrained. During the fuel subsidy period in 2014 and 2015, 8. However, as global oil prices continued to rise in 2018, the government was not able to compensate petroleum the pass-through of higher prices to the retail price companies on time for the lowered price of fuel. The lack has been moderated, resulting in liabilities once again of timely payments by the government created cash- accumulating to petroleum companies. In 2018, the retail flow problems for petroleum companies. For a business price of fuel was adjusted six times, marking a break with company, the lack of cash flow often perturb the ability to the period characterized by price regulation. However, manage operations and to implement the investment plan. since price changes were only ad hoc, a gap has once again emerged between the retail price of fuel and the 7. Following these challenges with the fuel subsidy reference calculated price, estimated at 0.3 percent of GDP. In scheme, the government embarked on a process to addition, the possibility of writing off part of the fees due reform fuel pricing. As global oil prices started to fall by petroleum companies to the Road Maintenance Fund at the beginning of 2016, the government eliminated fuel has been considered to compensate these operators for subsidies by decree,18 which supported the government’s losses related to fuel pricing.19 These recent developments objective of improving the composition of expenditures have once again opened the debate on how to optimize to have more resources available for pro-poor spending. policy-making related to fuel pricing. 17 Social Priority Spending is the sum of budget allocations to the Ministries of Health, Education, Population, and Water, excluding salaries and externally financed investment. 18 Décret n°2016-014 du 12 janvier 2016 portant fixation des prix maxima affichés à la pompe 19 OMH Petroleum Bulletin, first quarter 2019. The reference price structure for calculating the cost of fuel includes a fee that the petroleum companies are required to pay to the Road Fund. 23 C KEY CONSIDERATIONS IN PRICING FUEL 9. As Madagascar is a fuel importing country, ensuring the 10. A fuel pricing policy should aim to protect the poor security of fuel supply for this large island is essential. from price increases and promote affordability of this In the past, when petroleum companies have not been key commodity. While poorest 40 percent of the population compensated for the difference between the reference do not consume gasoline and diesel, they do consume calculated price and the retail price of fuel, there have kerosene. Furthermore, the poorest 40 percent of the been concerns that procurement will not be completed in population spend a higher share of their overall budget time to meet local demand. The government does have a compared with wealthier income groups, in both urban 21-day minimum stock requirement in place, as set in the and rural areas. In addition, the poor also spend a higher regulatory framework. A key factor in helping to secure fuel share of their overall budget on food, which uses fuel as supply is for liabilities to not accrue to petroleum companies, an input. Therefore, the pricing of kerosene is particularly which can compromise their ability to supply quality fuel to important for the poorer segments of the population for consumers and meet their investment obligations. lighting and other services. Figure 32: The poorest spend a higher share of their budget on fuel and goods and services that utilize fuel compared with the rich Share of total household expenditures spent directly and indirectly on fuels, by quintile (in percentage) Urban consumption Rural consumption 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 1 2 3 4 5 1 2 3 4 5 Consumption quintile; 1 = poorest; 5 = richest Consumption quintile; 1 = poorest; 5 = richest Autoconsumption Food Transport Autoconsumption Food Transport Housing Gasoline Diesel Housing Gasoline Diesel Kerosene Other Kerosene Other Source: ENSOMD, 2012; World Bank staff calculations 11. Furthermore, any fuel pricing policy should not result success, with the state having insufficient resources in the state having to subsidize the cost of fuel. A universal to pay. In addition, from an environmental perspective, fuel subsidy is a regressive policy, benefiting those who subsidizing fuel could reduce the incentives to transition are better off compared to the majority of the population. to renewable energy, a critical and complementary reform Previous episodes of subsidizing fuel have shown limited which is already underway (see Box 1). 24 D POLICY OPTIONS AVAILABLE FOR FUEL PRICING (i) Price smoothing 14. Given this global experience, many countries no longer use the concept of price smoothing to manage 12. The policy option the government is currently fuel pricing. Examples of countries that had used a implementing is price smoothing, which has intuitive price stabilization fund but found them developing very appeal, as the aim is to charge more when world fuel large deficits include Chile, Colombia, Ethiopia, Peru, and prices are low and use the savings to subsidize prices Thailand. Where these funds have been retained and used, when world fuel prices are high. The basic principle the degree of price smoothing is extremely limited, either underlying a self-financing scheme to smooth prices— in magnitude or coverage of fuels. In Thailand and Vietnam, which in theory requires no budgetary support—is to a fee is imposed on each fuel to finance the fund. keep domestic prices relatively high when world fuel prices are low and set aside the savings (over-recovery) 15. A further risk of implementing a price smoothing to subsidize domestic prices when world fuel prices approach in Madagascar, is that there is no formalized are high (under-recovery). This mechanism may be stabilization fund with clear and transparent governance managed virtually, whereby petroleum companies arrangements. In previous episodes of price smoothing, manage over- and under-recoveries on their own, or a for example between mid-2017 to mid-2018, petroleum fuel stabilization fund may be set up into which savings companies kept account of any ‘over-recovery.’ However, are deposited and amounts withdrawn for subsidies. The there is no established procedure for the use of the aim is for the government to moderate the transmission stabilization fund, which raises the risk of poor management. of world price volatility to the domestic market at little or no budgetary cost. (ii) Automatic adjustment mechanism with complementary policies 13. However, price smoothing has had limited success globally and in Madagascar in avoiding budgetary costs. 16. Another option for managing fuel pricing is to use the The premise of a price smoothing approach being self- automatic adjustment mechanism, so that changes in financing rests on petroleum product prices reverting to global oil prices are passed through to consumers. This a mean on a regular basis, so that under-recoveries are approach avoids the state having to pay for subsidizing followed by over-recoveries frequently. The movement of the cost of fuel. Countries that use the automatic price the oil price level over the past 15 years indicates that a adjustment mechanism implement a formula to calculate mean-reversion model has not held, and fuel stabilization the reference computed price, which has four major components: funds (or buffer mechanisms) have virtually universally the reference border price, transportation and storage failed to achieve their original objectives without costs, distribution and margins, and taxes and fees (Figure incurring large fiscal costs.20 In the most recent attempt 33). Changes to global petroleum product prices and the to implement price smoothing in Madagascar, liabilities exchange rate are variable factors that affect the final have accumulated to petroleum companies to the tune of retail price of fuel. The other components of the reference 0.3 percent of GDP and the possibility of waiving certain computed price are generally fixed costs that are agreed fees has been considered. between the government and petroleum companies. 20 An international study covering 65 countries showed that price stabilization funds have continuously required budgetary transfers. See Kojima, M. (2013). 'Petroleum Product Pricing and Complementary Policies: Experience of 65 Developing Countries Since 2009'. Washington DC : World Bank 25 Figure 33: Determinants of the reference computed price 54% of the final price is the reference border price The cost of procuring petroleum products in the international market and shipping them to the main port of Toamasina in Madagascar This includes the cost, insurance, and freight 9% of the final price is transportation and storage The cost of storing products at the main depot in Toamasina and transporting them to and storing them at the regional depots. 12% of the final price is the distribution of petroleum companies Cost of delivering products to gas stations, operating gas stations, and the margins of petroleum companies. 24% of the final price is taxes and fees Levies for road maintenance, the environment fund, the national regulatory body, taxes on petroleum products, and value added tax. 17. A concern related to applying the automatic price the automatic price adjustment mechanism have adjustment mechanism is that price increases and applied appropriate mitigating measures to cushion price volatility could adversely affect the poor, which the effects on the poor. Mitigating measures should be has contributed to prices for kerosene being lower well-targeted to the poorest who would be most affected, than other types of fuel. One way that fuel pricing has according to objective and transparent criteria. The cost been tailored to meet the needs of the poor is to have of implementing mitigating measures should be assessed kerosene prices lower than other types of fuel. While this early with financing secured, although such interventions policy can help to increase accessibility to fuel, a note of should be considered temporary. caution should be taken, as large price difference between kerosene and diesel bears the risk of illegal diversion of 19. Box 2 presents a selection of relevant country lower-priced kerosene to the higher-priced diesel fuel experiences where mitigating measures have been market. To reduce the risk, the government has imposed implemented, although it must be noted that these different coloring for each type of fuel. countries have a higher implementation capacity compared with Madagascar and that it takes time to 18. Other countries that have successfully implemented rollout the types of programs discussed below. Box 2: Mitigating Measures Accompanying Fuel Subsidy Removal - A Summary of Selected Experiences Experience in other countries highlights the important role that mitigating measures have played in contributing to the success of fuel pricing reforms by cushioning the effects of price increases and indicating public commitment to social welfare. Selected country experiences include the following: • In India, the delivery mechanism for delivering price subsidies for liquified petroleum gas (LPG) was modified, taking the form of a social protection program administered through the Direct Benefits Transfer Scheme. Under this mechanism, consumers pay market prices for LPG and receive a subsidy directly to their bank account. All 21 Kerosene and diesel may be considered nearly perfect substitutes for the purpose of commercial malpractice, where mixing of up to 30 percent may be undetected by vehicle users. 26 households except tax-payers with an annual income exceeding Rs 1 million per year (equivalent to (US$14,525), are entitled to this benefit up to twelve refills annually.22 While beneficiaries are required to self-enroll, the government also conducted a campaign to encourage the well-off to give-up to the subsidy. • In Egypt, the fuel subsidy reform in 2014 was accompanied by social safety net programs such as an increase in minimum wages for public servants and measures to limit food price increases, which helped to gain broader support.23 The reform was introduced right after the Presidential elections. • In Morocco, the energy subsidy reform was initiated in 2012 and fuel price subsidies were fully eliminated by the end of 2014 with the exception of the price subsidy for LPG. The successful implementation of the fuel subsidy reform was accompanied by an expanded government program to support school-aged children and medical assistance for the poor. In parallel, the government introduced new social protection programs for low-income widows and physically disabled and provided support for public transport.24 20. The mitigating measure which has been used to Third, global experience shows that public transport cushion the effects of higher and volatile fuel prices is subsidy schemes transferred as cash to bus companies the subsidy for urban transport companies to stabilize are inefficient with an estimated leakage rate of up to bus fares, but this is not targeted to alleviate the half.25 In Madagascar, there is no consolidated register of effects on the poor. First, 91 percent of Madagascar’s urban transport companies, and the management of the poor live in rural areas and are therefore excluded transport subsidy is not supported by effective control from this transport subsidy. Second, even within urban measures. One of the objectives of the subsidy was to areas the poor make limited use of public transport, incentivize improved services to consumers, which did not whereby less than four percent of urban households materialize. While this mitigating measure contributes in the poorest quintile and less than 10 percent in the to alleviating the concerns of the urban lower-middle second poorest quintile use public transport (Table 3). classes, the poor are still left behind. Table 3: Use of and spending on public transport, by quintile (urban) Quintiles Utilization of public transport Expenditures on public transport by urban households 5 - richest 25.2 91.4% 4 15.8 6.9% 3 10.5 1.2% 2 9.3 0.3% 1 - poorest 3.5 0.0% Source: ENSOMD, 2012; World Bank staff calculations 22 Jain, A., Agrawal, S., & Ganesan, K. (2018). 'Lessons from the World’s Largest Subsidy Benefit Transfer Scheme. In H. Van Asselt (Author) & J. Skovgaard (Ed.), The Politics of Fossil Fuel Subsidies and their Reform. Cambrige: Cambridge University Press. 23 Moerenhout, T. (2018). 'Reforming Egypt’s Fossil Fuel Subsidies in the Context of a Changing Social Contract'. In H. Van Asselt (Author) & J. Skovgaard (Ed.), The Politics of Fossil Fuel Subsidies and their Reform. Cambridge: Cambridge University Press. 24 Bousselmame, H. (2017) 'A Phased Approach to Energy Subsidy Reform: Morocco Experience'. Practitioner exchange series. Energy Sector Management Assistance Program. Available from: https://www.esmap.org/node/140726. 25 Gwilliam, K., Kojima, M. and Johnson, T. (2004) ‘Reducing Air Pollution from Urban Transport,’ World Bank, Washington DC : World Bank 27 21. In Madagascar, a strategy to cushion the effects with measures to improve the efficiency of the urban of price rises on the poor could consider expanding transit system. the social safety nets already in place. For instance, the Intervention Fund for Development (Vatsy Fiavota) 22. Another way to cushion the effects of higher program has been shown to significantly decrease the petroleum prices is to lower the fixed cost drivers food poverty ratio among beneficiaries by about 5 points of the reference calculated price. 27 In 2016 and 2017 an but only has limited coverage of 3 percent of the vulnerable independent industry analysis was conducted on the population. Rolling out this program further could help to reference calculated price using an approach of benchmarking meet the needs of the poorest. To more directly address costs in Madagascar with countries that share similar the impacts of kerosene and food price increases for characteristics.28 Information on actual operating costs poor urban households, a group that accounts for 10 were not available at the time, but could be used in the percent of extremely poor households in the country, a future to update the assessment. The industry analysis was cash transfer program targeted to poor urban households used as a basis for a first round of negotiations between could be considered for a limited time. However, the the government and petroleum companies, and resulted in implementation of a social safety net program in urban the reference calculated price being reduced by 4 percent, areas is associated with operational challenges, such an amount which could be further lowered. Thus, there is as effective targeting and monitoring the uptake of any the possibility for the consumers to pay a lower price for associated conditionalities. Furthermore, any temporary fuel without the state having to pay for a regressive fuel cash transfer programs should be accompanied by the subsidy. A summary of the recommendations is included gradual removal of the public transport subsidy, combined in Box 3. Box 3: How cost drivers in the calculated reference price can be reduced Based on the independent industry assessment, key cost drivers could be reduced as follows. These recommendations should not be considered exhaustive, but are rather a basis for further discussion. a. Reference border price. Currently, petroleum companies procure fuel to Madagascar as part of a group shipment where each company procures from a supplier which has links to a parent company. Recommendations for lowering the reference border price include the following: • Purchasing and freight costs could be optimized by grouping orders from a single supplier. • Freight costs could be based on actual cost components instead of a notional aggregate amount. • There could be a joint tender for fuel, whereby fuel exporters to Madagascar would have to compete to offer the best price, as is practiced in Kenya and Mozambique. b. Transportation and storage margins. The costs charged for unloading products in the Toamasina terminal (GRT) and the Petroleum Logistics (LPSA) are high in Madagascar compared with the benchmark countries. Costs are set by the 26 Ministère de la Population, de la Protection Sociale et de la Promotion de la Femme, Fonds d'Intervention pour le Développement, Office National de Nutrition, World Bank, UNICEF (2018). 'FIAVOTA program positive impact on beneficiary households: key results after 15 months of implementation'. 27 At the request of the government, the World Bank through the support of the Energy Sector Management Assistance Program financed an independent industry analysis. A firm specialized in the downstream petroleum sector was recruited on a competitive basis to undertake the study. The firm selected has substantial international experience in analyzing the reference price structure in numerous countries. 28 The comparator countries include: Reunion Island (island with a level of consumption similar to Madagascar), Kenya (challenging logistics since the main consumption zone, Nairobi, is located about 500km from the coast), Kenya, Tanzania, Senegal, Ivory Coast (refinery – in place or previously operating) and Mali, Guinea Conakry, Togo, Mauritania, Burkina Faso (similar levels of governance). 28 regulatory agency, based on the submission of information by petroleum companies. Recommendations for lowering the costs of transportation and storage include the following: • Reduce barriers to entry in the transportation of petroleum products, such as high costs of licenses. Consider alternative forms of more competitively priced transport, such as rail transport. • Undertake an audit of GRT and LPSA’s costs so that cost drivers can be disaggregated. Publishing the results of these audits could also aid monitoring by consumer groups. c. Distribution and margins. Petroleum companies in Madagascar have higher margins than all the other countries in the benchmarking study. Recommendations for lowering costs include: • Use actual costs, supported by financial audits. If information on audited costs is not forthcoming, establish a margin in line with the other benchmark countries. Figure 34: The combined costs of transportation and storage and distribution and margins are the highest in Madagascar compared with benchmark countries Costs in each country as a percentage of average costs for the sample countries 350% 300% 250% 200% 150% 100% 50% 0% li na ry t n al nia a o ia ar as Ma ny g nio an eg ak sc rki To za Co Ke rit n u on ga Bu n Se Re ry u Ta aC da Ma Ivo Ma ine Gu Transportation & storage Distribution and margins Source: Beicip-Franlab Industry Assessment d. Taxes and fees: Taxes on petroleum products in Madagascar are amongst the lowest in the benchmark countries. The recommendation for taxes is: • To closely monitor taxes and fees since this could be used as the variable parameter of a price smoothing plan. Any fiscal costs associated with taxes / fees and price smoothing should be availed to the public to facilitate an informed debate on fuel pricing. 23. The factors behind the cost drivers in Madagascar 24. Excessive market concentration is one of the allude to challenges related to market concentration constraints to price competition. Price ceilings enable an along the entire supply chain in the petroleum sector. assessment of the level of competition by monitoring the Such a situation lends itself to private operators being able degree of divergence from the ceiling for each fuel—the to exert their market dominance. Madagascar’s petroleum larger the divergence, the greater the level of competition sector has an Herfindahl-Hirschman index (HHI) of 0.27, in the market. In 2008 one company lowered prices indicating a high level of concentration. A market with compared to competitors but faced logistical challenges in an HHI above 0.18 is generally considered concentrated, re-stocking. Since the price administration period in 2010, while less than 0.1 is viewed as contestable. While the all petroleum companies have charged identical prices objectives of Law No. 2004-003 include facilitation of throughout the country, with no attempt to use pricing new market entry, in practice there has been limited to alter their respective market shares. The petroleum penetration by new actors. One of the barriers to entry in and logistics companies operating in Madagascar jointly the distribution chain is a requirement for any new firms control the supply chain, and their market dominance to have a minimum coverage in all eight petroleum zones, places them in a favorable position when negotiating any including in geographical areas where markets are small changes to the petroleum sector which may contravene and there is limited profitability. their interests. Therefore, petroleum companies behave 29 in an organized way to fix prices, indicating a significant 26. Granting the automatic legal right to the regulatory implementation gap between the market liberalization agency to access critical industry data would be an principles foreseen in Law No. 2004-003 of 24 June 2004 important aspect of strengthening the agency. As long and current practice. as the government remains involved in price regulation, which will be for the foreseeable future in the absence 25. Addressing issues surrounding excessive market of effective competition in the market, legal assurance concentration with a view to lowering prices would of the regulatory agency’s right to regular, timely, and require strengthening the role of the regulatory agency. automatic access to key industry financial and operational Madagascar currently lacks a strong and independent data is essential for performing one of the agency’s regulator who can work to improve market conditions, core functions. In this way, price ceilings can be set including full implementation of the law. The regulatory more appropriately, reflecting costs as well as providing and supervisory body of the petroleum sector, the incentives to improve efficiency and passing the efficiency National Office of Hydrocarbons (OMH) cannot fully gains on to consumers in the form of lower prices. exercise its mission of regulating the activities of the downstream petroleum sector. Today the OMH receives 27. The government has shareholdings in petroleum most of its technical and financial information from the companies which compromises the independence of Groupement Pétrolier de Madagascar (GPM), instead the regulatory body. It is unusual for a fuel-importing of establishing individual links with each operator. This country to maintain shareholdings in petroleum current information flow could put into question the quality companies, particularly since Madagascar has already and impartiality of the information received by the OMH. committed to a liberalized petroleum sector. While the To date, the law and regulations do not explicitly require government has argued that the shareholdings enable the operators to provide key data that would enable the state to develop the strategy for the petroleum sector and calculation of actual costs for the price structure (time to be present in the boards of petroleum companies, in charter contract, cost accounting for operators, storage practice it appears that the state has very little influence and transportation costs), limiting the effectiveness of the instead of making full use of its right of scrutiny over regulator’s decision-making capacity. As a shareholder in the companies. Rather, the impartiality of the regulatory petroleum companies, the government sits on the Board agency could be promoted by divesting its shareholdings and should have access to financial and other strategic to support the implementation of Law No. 2004-003 with information, which is not currently the case. the objective of improving market conditions. Conclusion 28. The government’s efforts to continue reforming fuel mechanism, would offer the possibility for the state pricing should be commended with a view to ensuring the not having to pay for subsidizing fuel, but should be affordability of fuel and reliability of supply, without the supported by complementary reforms. Specifically, state having to bear the cost. Reforming fuel pricing is a temporary measures could be considered for mitigating challenging task worldwide. Madagascar’s efforts to eliminate the effects of high and volatile fuel prices on the poor, the regressive universal fuel subsidy and undertake a first who spend a higher share of their budget on kerosene. round of negotiations of the reference calculated price of fuel The government could work with petroleum companies are laudable. However, the recent experience with the state to further reduce the fixed cost drivers of fuel, which accumulating liabilities to petroleum companies indicates would significantly lower the price for consumers. Over that there is scope for making further progress. the medium to long term, efforts could also be undertaken to promote competition in the petroleum sector with a 29. As the government considers policy options for fuel view to reducing prices, which must be supported by an pricing, the option of the automatic price adjustment effective regulatory agency. 30 REFERENCES • ALG Transportation, Infrastructures and Logistics (2014). 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