Energy, water, and communal services in Kyrgyzstan and Tajikistan
April 2011 -This document summarizes four poverty and social impact assessments of current trends in the energy and communal services sectors in the Kyrgyz Republic and Tajikistan.
Energy, Water, and Communal Services in Kyrgyzstan and Tajikistan: Poverty and Social Impact Assessments (Executive Executive ssummaries)1 UNDP Bureau for Europe and CIS Senior Economist’s Economist Office April 2011 Summary: The Framework for Action,, which was developed by UNDP in mid-2009 mid to implement the recommendations of the Central Asia Regional Risk Assessment, observed that: Programming under the Poverty and Environment Initiative could address the weak links between development and poverty reduction strategies on the one hand and concrete measures to address short- and medium-term term water, energy, and food insecurities on the other. Funding for research that would more clearly illustrate linkages between income poverty and water, energy, and food insecurities (e.g., by providing updated, accurate data on the numbers of households that do not have access to reliable year year-round round water and electricity supplies), is very much needed for evidence-based policy olicy development. During 2010-2011 2011 the senior economist’s office of UNDP’s Regional ional Bureau for Europe and CIS, working under the umbrella of the Poverty and Environment onment Initiative, commissioned four poverty and social impact assessments of current trends in the energy and communal services sectors in the Kyrgyz Republic and Tajikistan. This document summarizes these reports. Table of contents Page Executive summary—Poverty Poverty and social impact assessment of Kyrgyzstan’s energy sector Executive summary—Poverty Poverty and social impact assessment of Tajikistan’s energy sector Executive summary—Poverty Poverty and social impact assessment of Kyrgy Kyrgyzstan’s stan’s communal services sector (water, sanitation, solid waste management) Executive summary—Poverty Poverty and social impact assessment of Tajikistan’s communal services sector (water, sanitation, solid waste management) 2 6 9 12 1 Full versions of these assessments are available at http://europeandcis.undp.org/senioreconomist/show/DF091745http://europeandcis.undp.org/senioreconomist/show/DF091745 F203-1EE9-B8E083A9D6DBBC7D. 1 Executive summary—Poverty Poverty and social impact assessment of Kyrgyzstan’s energy sector • Kyrgyzstan since 2007 has experienced significant increases in energy prices and reductions in energy production and consumption. Electricity lectricity generation and consumption (generation less net exports and losses) dropped by some 25 and 13 percent, respectively, during 2007 2007-2010. Gas consumption fell by almostt two thirds, as prices of gas imported from Uzbekistan rose from $100 to $240 per 1000 cubic meters during 2007-2009. 2009. Faced with growing shortages of electricity and unaffordable gas, many households, businesses, and public institutions have switched to coal oal-fired boilers. Domestic coal production rose some 41 percent during 2007 2007-2010; 2010; apparent consumption (production less net exports) rose 57 percent. Meanwhile,, household energy prices during 2007-2010 2010 rose by 81 percent, compared to a 44 percent increase in the consumer price index during this time. This combination of sharply higher prices and declining consumption necessarily raises concerns about deterioration in household access to reliable, affordable energy services. • Despite these inflation rates, energy tariffs and prices in Kyrgyzstan generally seem low, relative to other transition economies and to cost cost-recovery recovery levels. This reflects strong socio-political political opposition to raising tariffs tariffs, which inter alia contributed to the April 2010 unrest that unseated President Kurmanbek Bakiyev.. Household energy consumption is currently being subsidized, from the state budget (which provides up to 75 percent of the revenues received by the Kyrgyzzhilkommunsoyuz national thermal power producer), ), from municipal budgets, via cross-subsidies subsidies from electricity exports, and from future generations, who will ultimately have to cover the differences between revenues and costs in the energy sector today today—in in the form of higher tariffs, higher taxes, or poorer services. Since ce most of these subsidi subsidies es increase with the quantities of energy consumed, which in turn are linked to income, they are not likely to help protect Kyrgyzstan’s most vulnerable households. • Kyrgyzstan’s energy sector seems likely to remain dominated by state-owned sta monopolies that generally report negative profitability, high technical and commercial losses, and (with the exception of the gas sector), high or growing depreciation rates (reaching 60 percent for fixed assets in the thermal power sector) for the th foreseeable future.. Many of these sectors report large accounts receivable, payable, or both. Outside of the coal sector, private capital and foreign investment are almost completely absent. Progress towards the creation of a regional electricity market, which could help attract foreign investment into Kyrgyzstan’s electricity generation and transmission sectors, remains halting at best. • Strategies based on tariff rebalancing, unbundling, and privatization via sales to strategic (often foreign) investors that have underpinned energy sector reforms in many transition economies have run aground in Kyrgyzstan. Privatization measures introduced or attempted during the Bakiyev period have been repealed, and electricity 2 tariff increases seem to be off the table for the foreseeable future. Emphasis mphasis instead is on reducing corruption within the energy sector by strengthening state control and civic engagement. Whether this approach can significantly reduce losses and attract the capital and expertise needed to reduce the on-going decapitalization of Kyrgyzstan’s energy sector, and improve national and household energy security, remains to be seen. • The deterioration in energy sector financial performance during a time of sharply shar rising prices can be explained in part by rapid growth in costs. While some of this cost growth reflects the need to build new and refurbish depreciated infrastructure, it may also stem from ineffective cost controls when it comes to the procurement of materials (especially fuels), particularly in the electric power sector. • Important mportant progress has been made since the onset of the winter energy crisis in 20072007 2008. Collection rates in the electricity sector have improved significantly as the quasiquasi fiscall deficit has dropped; fixed asset depreciation in the gas sector has fallen; and the basic legal framework for the development of decentralized renewable energy technologies has been introduced. New electricity generation capacity has been brought on line,, particularly in terms of the Kambarata Kambarata-2 2 hydropower plant. The Fuel and Energy Sector Transparency Initiative is beginning to improve regulatory governance and increase civic engagement. • While survey data indicate that energy consumption increased duri during ng 2006-2009, 2006 all this growth occurred during 2006 2006-2008; large declines in energy consumption were reported in 2009. Growth in energy consumption seems to have been particularly rapid in poor and extremely poor households, households in urban areas, and in households headed by a single parent. Growth in energy consumption was more moderate in households living in rural and mountainous areas. • While the shares of household expenditures devoted to energy increased during 20062006 2009, compared to many other cou countries, they do not seem to be particularly large (5.5(5.5 6.5 percent). And while energy expenditures absorb a larger share of household budgets in poor families than in high high-income income families, the share of household spending devoted to energy expenditures in low ow-income income households had converged towards national averages by the first half of 2010. • Low-income income households, and households in rural and mountainous areas, have very limited access to gas, central heating, and hot water supply. They tend to rely almost exclusively on coal and electricity for heating, as well as for light. This is particularly the case for Kyrgyzstan’s n’s poorest households, for whom spending on electricity absorbs about half of energy expenditures. It also means that such households are more mor likely to be affected by interruptions in electricity supplies. By contrast, urban and upper-income upper households are more likely to have access to gas, central heating, and hot water. 3 • Shortages have broken the link between connection to the grid and access acc to reliable electricity supplies.. Until 2008, quasi quasi-universal universal household connections to Kyrgyzstan’s electricity grid meant quasi quasi-universal universal access to electricity services. However, the winter energy crisis in that year led to a sharp increase in the fre frequency quency of service interruptions: nearly half of Kyrgyzstan’s households reported electricity outages on a daily basis; while 70 percent reported several such service interruptions per week. While the situation has improved since then, service outages conti continue. • Low-income income households, and especially households in rural and mountainous areas, are most likely to be affected by interruptions in electricity supplies. supplies As these households’ rely on electricity for heat as well as lighting, these data underscore the severity of the recent winter hardships experienced. • Kyrgyzstani households seem to pay more for electricity and gas than billing information suggests. While this discrepancy can be explained in various ways, corruptive collusion among households and bill collectors may be responsible. This apparent “corruption tax” seems to be a particularly heavy burden on low-income low households. • Only about half of Kyrgyzstan’s gyzstan’s social benefits are received by low-income income households. This share actually dropped slightly during 2009 2009-2010 (to 50 percent, down from 52 percent in 2008). By contrast, the share of social benefits accruing to upper-income upper households more than do doubled (from 6 to 13 percent) during 2008-2010. 2010. Much of the increased social spending in response to the crisis developments of 2009-2010— 2009 significant shares of which were financed by donors donors—seems seems to have leaked to relatively wealthy households. Kyrgyzstan’s social protection system seems to have become less able to direct benefits to the most needy households. This has implications for the system’s ability to protect vulnerable households from possible future increases in energy prices as well. • The simplification cation and monetization of categorical benefits introduced in 2010 seems to have deepened the regressive character of Kyrgyzstan’s social policy framework. The share of categorical benefits benefits—including including subsidies for energy and communal services— services received by low-income income households dropped from 46 percent in 2009 to only 20 percent during the first half of 2010. (This share had been at 65 percent in 2008.) By contrast, the share of categorical benefits accruing to upper upper-income income households rose from 11 to 38 percentt during this time. Likewise, the share of the monthly social benefits (accruing primarily to people with disabilities, to households that have lost a breadwinner, and to retirees not receiving old old-age pensions) going to low-income income households dropped from 57 percent in 2008 to only 12 percent during the first half of 2010. These trends question the rationale for considering the monthly social benefit to be an instrument for poverty reduction. 4 â€˘ Policy recommendations ecommendations made in this report include: o More closelyy linking the poor family monthly benefit to the guaranteed minimum income, which should itself be more closely linked to the minimum subsistence level; o Means-testing testing the monthly social benefit and categorical benefits, to reduce their regressive character; o Consideration of the reintroduction of lifeline electricity tariffs, tariffs to protect lowincome households from the possible impact of higher energy prices; o Devoting more resources to the ident identification ification and accelerated implementation of appropriate energy saving technologies, as well as decentralized renewable energy sources; o Strengthening the role of affordability analyses in regulating energy tariff increases; o Improving corporate governance in the energy sector; and o Improving the quality of household survey and production/sales data regarding the energy sector, in order to remove inconsistencies wit within hin and between these data sets. â€˘ Research recommendations made in this report include: o Developing oping possible scenarios for the future of Kyrgyzstanâ€™s energy sector; o Analysis of the costs of electric and thermal power production and tariff setting; o Further survey research concerning household energy consumption; and o Analysis of the results of the Fuel and Energy Sector Transparency Initiative. 5 Executive summary—Poverty Poverty and social impact assessment of Tajikistan’s energy sector • Tajikistan’s energy sector remains unable to provide many households with reliable supplies of electricity, gas, and heat, especially during the winter. Despite improvements in electricity generation and transmission capacity during 2009-2010, 2009 power cuts (up to 10-12 12 hours a day) continu continued ed during the winter of 2010-1011. 2010 An estimated one million people spend much of the winter (six weeks more) without access to reliable electricity supplies. Despite constituting three quarters of the total population, households in rural areas account for less than 10 percent of the country’s electricity consumption. • Electricity consumption dropped some 8 percent during 2007 2007-2009, 2009, before growing slightly last year. Annual nnual increases in household electricity tariffs during 2007-2010 2007 averaged 57 percent; household energy price inflation averaged 42 percent annually during that time. This combination of sharply higher prices and declining consumption raises concerns about household access to reliable, affordable energy services. • Due to these tariff hikes, energy expenditures can absorb up to 55 percent of the poorest households’ budget budgets. This is well above the 10-15 15 percent share of household expenditures generally regarded as an appropriate international benchmark for energy sector affordability. • Improving national and household energy security requires the investment investmen of billions of dollars in electricity generation (including in small small-scale scale hydropower plants), transmission, and distribution, in the gas supply network, and in the coal sector. Unless significant foreign capital inflows are attracted, Tajikistan’s energ energy y investment needs are unlikely to be met. • While some reforms have taken place in Tajikistan’s energy sector, overall progress has been slow. The main electricity company (Barqi Tojik) is a vertically integrated state owned monopoly, which suffers from hi high gh losses, low tariff collection rates, and large arrears.. While electricity tariffs have been increasing during the last few years (as per agreement with the international financial institutions), they remain below cost recovery levels. The dozens of communities that have developed their own small hydropower installations (often with donor assistance) are unable to sell surplus power back to Barqi Tojik’s grid; many do not have access to the grid. • The expansion of small hydropower plants (and, where appropriate, other decentralized renewable technologies) seems to offer the best short-term prospects for bringing reliable year-round round electricity services to the estimated 1 million people who do not currently have them. Experience from UNDP pilot pprojects suggests that the construction of 1000 small hydropower plants with average capacity of 100 kilowatts ilowatts could provide these households with one kilowatt of electricity—sufficient for year-round access to indoor lighting. As the average cost of constructing a hydropower facility with 100 6 kilowatts of installed capacity is around $100,000, this scenario generates an average cost of $1000/kilowatt per household. Satisfying the unmet basic electricity needs of 1 million vulnerable people (assuming ssuming 10 persons per household) therefore carries an a approximate price tag of $100 million. Moreover, if the addition of one megawatt of installed capacity in a small hydropower pl plant ant can generate employment for 40 workers, then the construction of 1000 small hydropower plants with 100 kilowatts of installed capacity would create 4000 “green jobs”. • The experience of Pamir Energy Energy—Central Asia’s first public-private private partnership in the energy sector, which manages Tajikistan’s electricity infrastructure in remote, sparsely populated Gorno Badakhshan on a 25 25-year concession—shows shows that improvements in Tajikistan’s regulatory framework can yield large benefits in terms of increased household energy security. The pursuit of similar improvements in the regulatory environment for small scale hydropower (and other decentralized renewables) could yield similar benefits. The accelerated implem implementation entation of the national small hydropower programme could be particularly important in improving access to affordable electricity, electricity as well as providing new income income- and employment generation opportunities, for much of the rural population. • A model contractt for small hydropower plants that wish to connect to the grid was approved in December 2010, along with a methodology for tariff calculation. While tariffs still have to be agreed between small hydropower generators and Barqi Tojik, this has brought Tajikistan istan a step closer to the introduction of feed feed-in in tariffs, as well as increased commercial financing of power generation using decentralized renewable energy technologies. The creation of a national renewable energy (and and energy efficiency) efficiency trust fund—to inter alia make Barqi Tojik’s purchase of electricity generated by independently operated small hydro plants more attractive attractive—is is particularly important in this respect. • All the evidence indicates that Tajikistan’s social protection system does not provide adequate protection against poverty in general, or energy poverty in particular. While the current social assistance scheme features compensation for electricity and gas use— use up to certain limits, for around 240,000 households (1.5 million people) who are identified dentified by the local authorities authorities—these these benefits are not well targeted. And at a $2 per month, they are not large enough to have a perceptible impact on vulnerable household incomes. • The government has introduced a pilot cash transfer scheme based on proxy means testing, with support from the World B Bank ank and the European Commission. Commission The results of the pilot are to be assessed after December 2012, hopefully to be followed by a national roll out. While experience from similar countries suggests that this is likely the best option for Tajikistan, the implementation of this reform seems likely to run at least 4-5 4 7 years. As tariff increases are set continue during this time, hardships for poor households seem likely to increase. • We suggest the possible tran transitional reintroduction of lifeline electricity tariff regime at Barqi Tojik (one was in place until 2007), as a temporary measure during this period. Simulations based on Tajikistan’s living standards survey database indicate that, if underwritten by relatively tively small subsidies (around $3.5 million annually, which could be grant financed by donors), lifeline tariffs could reduce the severity of income poverty by 5 percent, compared to current levels. The effectiveness of this transitional lifeline scheme could uld be further enhanced if it were coupled with additional categorical targeting—if if tariffs were further reduced for large households with children, since this is a good predictor of poverty in Tajikistan. • The experience of Pamir Energy supports the argument for lifeline tariffs. tariffs Pamir Energy operates a lifeline tariff regime, and has performed well in terms of generation, sales, losses and collections. Despite working in less attractive commercial conditions than Barqi Tojik, Pamir Energy meets electrici electricity ty demand with smaller per-customer per subsidies. • Other important strategic decisions facing policy makers in Tajikistan include the design and implementation of: o A national heating strategy strategy,, to guide investment decisions in the electricity, gas, coal, and district heating sectors. The design and implementation of such a strategy would also help develop more effective assistance programmes for energy poor households; and o An effective national energy efficiency/energy saving savings programme. Potential energy savings are estimated at 30 percent of current power consumption by the Ministry of Energy and Industry; other estimates place these savings at 60 percent for rural areas. While some bas basic ic laws are in place, these are not sufficient to induce the energy conservation investments that Tajikistan needs. The creation of a national renewable energy and energy efficiency trust fund is particularly important in this respect respect. 8 Executive summary—Poverty Poverty and social impact assessment of Kyrgyzstan’s communal services sector (water, sanitation, solid waste management) • While improved water supplies are available to 50-60 60 percent of the rural population, less than 25 percent have access to sewerage. For Kyrgyzstan’s 25 largest cities, drinking water coverage varies from 60 60-90 percent, depending on the city. It is less than 40 percent for improved sanitation and solid waste collection collection. • Household ousehold water tariffs rose 87 percent during 2007 2007-2010, with Bishkek hkek posting a 119 percent increase (i.e., more than doubling). • Official fficial survey data indicate that poor households devote only 0.35 percent of their expenditures to water and sanitation, and another 0.1 percent to solid waste. This is well below the suggested ested 44-5 5 percent international affordability benchmark. • The government has pledged to significantly increase tariffs during the next two decades, as part of the national policy dialogue on water issues. S Should hould tariffs continue to increase at the rates recorded during 2007 2007-2010, 2010, questions about the affordability of these services for poor households will become more important important. • The financial viability of many communal service providers is at risk, due to tariffs set below cost recovery level levels, coupled with high (35-45 percent) non-revenue revenue water levels and inadequate institutional capacity among service providers and the local government bodies that supervise them them. • The financing gap associated with maintaning existing water infrastructure was assessed $37.5 million in 2009. (The costs of extend this infrastructure to provide services to those who do not now have them is thought to be in the hundreds of millions.) m Prospects for meeting the investment needs for infrastructure rehabilitation, renewal and expansion xpansion from internal sources (e.g., by raising tariffs) are clouded by legal, regulatory, and political uncertainties, and by outdated commercial and managerial practices— practices particularly regarding billing and contracting. • Survey data concerning household willingness to pay more for better quality communal services are contradictory. Whereas research conducted by the Asian Development Bank and USAID indicate a strong household willingness to pay for improved services, UNDP research suggests that a m majority of poor customers (in both rural and urban households) are unwilling to pay more for communal services, services even if their quality improves. Likewise, some survey research indicates that much m of the population—including including poor households households—seems generally satisfied with the quality of communal services. 9 • Decentralization initiatives in Kyrgyzstan have transfered significant amounts of communal ommunal service infrastructure, along with responsibility for its maintenance m and service delivery, to local governments. However, theree is no national coordinating and regulatory body for communal service provision as a whole;; nor are there comprehensive, integrated national water supply supply, sanitation, and waste management policies. polic There is instead a lack of coordination between water sector policy and policies for related sectors (e.g., housing). Likewise, development policies for communal services sectors are not well integrated into the national annual and medium-term budgeting processes. Policy recommendations from this research include: • The use of affordability ffordability analyses for communal services, with an emphasis on low income households, during tariff revision and development planning for communal service providers. Such analyses should underpin efforts to protect consumer rights and promote appropriate public participation in communal service delivery. • It is not clear that social protection measures to improve household access to communal services are necessary necessary, particularly in light of the low shares of household (including poor household) expenditures devoted to communal services. Emphasis should instead be placed on mobilizing resources resources—from from donors, as well as from central and local governments—to to reverse the decapitalization of water and communal service infrastructure, and to extend access to these services for households that are not connected to this infrastructure. • A national policy framework for water and communal service provision should be health and environmental protection. It should be supported by the established, linked to heal creation of a national body for water, sanitation, and solid waste policy and investment planning, and for coordination with other relevant sectors—including including the private sector and non-governmental governmental organizations organizations. • The legal responsibilities and division of labour between local governments and service providers should be clarified clarified, along with the disposition of the debts inherited by local communal service providers from central government institutions. • International agencies can support these recommendations by: o Helping to accelerate the ttransfer of expertise and mentoring of Kyrgyzstan’s Kyrgyz experts on water sector management, on affordability assessments, s, and the like; o Supporting the implementation of the recommendations made by the national policy dialogue; and 10 o Supporting research esearch and analysis to develop disaggregated household survey data and qualitative survey results to capture the various dimensions of poverty, pover vulnerability and social exclusion exclusion,, pertaining to water and communal services. 11 Executive summary—Poverty Poverty and social impact assessment of Tajikistan’s stan’s communal services sector (water, sanitation, solid waste management) • Communal service tariff tariffs rose by an average annual rate of 50 percent during 20072007 2010, while service infrastructure continue continued to deteriorate. Tariffs rates are low, and survey data indicate that many households are unable or unwilling to pay more. Water meterage is operational only in some urban locations, and nearly impossible in rural areas given prevailing infrastructure conditions. However, the numbers of households benefitting from—and and paying tariffs for for—centrally centrally managed water, sanitation, and waste collection services are relatively small, and are concentrated in urban areas. • ommunal service tariffs do not fully cover costs of operations and upgrades, due to Communal affordability ffordability concerns, and the presence of viable household options to bypass at least some of the communal servic services es infrastructure (particularly for trash collection). collection) These constraints limit short- and medium-term term prospects for raising tariffs towards to cost recovery levels. • The 2006 Water Sector Development Strategy assessed Tajikistan’s investment needs in this sector ctor at nearly $1 billion billion.. Unfortunately, investment in water (and communal services) infrastructure remains well below what would be needed to meet this target. According to Finance Ministry data, sspending pending on the water sector from the state budget in 2009 was around $1.1 million; donors provided an additional $1.5 million. While some donor-financed financed water and communal service projects are underway in urban areas, similarly scaled projects are absent in rural areas, although some international organizations are implementing smaller projects. • Households in Tajikistan seem to view the quality and dependability of water and communal services as low, while tariffs are seen as high. Service ervice recipients may understand the abstract need to increase funding for communal services, but do not see themselves as the funding source. • As the vast majority of poor households are not paying tariffs for centrally supplied communal services, the case for linking social assistance to communal service tariffs is weak. Tajikistan’s stan’s social assistance policies have not been able to significantly reduce poverty, and are now undergoing reform. • While the management of communal services provision has traditionally been centralized, 2009-2010 legislation allows local governments to own water services and infrastructure, and to outsource service provision to private companies and nonnon governmental institutions. • Many local government officials and technical staff do not understand how the relevant legislation pertain pertains to their offices and responsibilities. Government overnment officials 12 and service personnel need training to upgrade their knowledge and technical skills, skills in order to maintain and operate infrastructure, effectively supervise service providers, attract private capital and know know-how, engage age with consumer organizations, and provide better customer service. â€˘ Communal ommunal services for urban households can be improved via local governance reform and partnerships with private private- and third-sector sector service providers. providers However, for many rural households,, improvement improvements in communal services depend primarily on progress with large infrastructure projects, funded by donors and the central government within the framework of the public investment programme. 13