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Energy Reform Lessons and Implications

In the  2017  national budget, the government of Zambia announced plans to introduce ‘cost-reflective tariffs’ for electricity by the end of 2017. This means removing the subsidies, which currently allow ZESCO to charge consumers less than the cost of producing and distributing electricity. In view of the current economic context, with a large government budget deficit, this is a welcome decision. Some major considerations need to be pondered. The question is “how can cost reflective tariffs be introduced while adequately protecting the poorest Zambians and Small and Medium Sized Enterprises (SMEs)?” The other consideration is “How can the policy change be sustainable and not just end up being reversed in the future?”

This article is an excerpt from a PMRC interim report, which is exploring these questions. It assesses the international experiences, predominantly from other countries, in seeking to introduce cost-reflective tariffs. While no two countries are the same, lessons for Zambia can be learnt from the successes and failures of other countries.

In particular, the PMRC report highlights the relatively successful case studies of Kenya and Uganda. While reform has not been complete, there has been some success. But it also looks at examples of where reforms have not been successful and the example of Mexico is provided where there was a clear policy failure in energy reform. 

The key lessons drawn from these international experiences are:

  1. Tariff reform should be part of a comprehensive reform plan: for example, in Uganda tariff increases were accompanied by increases in generation capacity, with the opening of a large new hydroelectric plant.
  2. A communications strategy, with transparent access to information, is vital: the Ugandan government and local newspapers made clear the regressive nature of electricity subsidies, with the rich benefiting the most.
  3. Energy price increases need to be phased: in Kenya reform was only possible over 5-10 years. On average countries that successfully implement changes appear to need at least 5 years.
  4. Tariff reform needs to be accompanied by improvements in the efficiency of State Owned Enterprises (SOEs): Country experiences suggest the importance of strengthening SOE governance, improving demand management and revenue collection, and better exploiting scale of economies to offset costs associated with inefficiencies. The Zambian government plans to conduct a situational analysis of all SOEs under its portfolio with a view to recapitalize those that have a good business case and hiving off those that are not viable.
  5. Targeted mitigating measures to protect the poor are necessary: it is essential to provide support for the poorest consumers. This can take the form of life-line tariffs (the Zambian government plans to maintain life-line tariffs, but no details are yet available on this given that the tariff measure covers all households) or, for example, more generous Social Cash Transfers.
  6. Energy pricing should be depoliticised: responsibility for deciding on electricity prices can be given to an independent body to increase the chances of success and avoid political interference (as was the case in Kenya, the Philippines, and Turkey).

Zambia can learn from these experiences. For example, thinking carefully about how best to target life-line tariffs will be important. And how to combine increases in tariffs with improved reliability of supply will also be vital. With a good rainy season this year, Zambia might have a good opportunity of success with these planned reforms. 

Having gathered all this evidence to inform policy, PMRC intends to use the insights from international experience to inform the next steps in the ongoing Energy reform project. These next steps are to assess the impact of the current tariff structure in Zambia on the poorest households (through a distributional analysis) as well as on SMEs (through interviews and a stakeholder analysis). In a final report, due later this year, recommendations for government on how best to successfully implement the much needed tariff reforms in Zambia will be provided. 

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Electricity Subsidies help rich Zambians five times more than the Poor –but Removing Subsidies needs to be done with care

Electricity subsidies benefit the rich more than the poor. The richest Zambians currently receive nearly five times more in subsidies than the poor, according to a new research commissioned by Policy Monitoring and Research Centre (PMRC).  Given how unfair the current subsidy is, the government’s aim of reforming subsidies by the end of 2017 is the right move. But care also needs to be taken to protect the poorest when subsidies are cut.

These conclusions are based on rigorous distributional analysis that will form part of PMRC’s forthcoming report considering the impact of removing electricity subsidies on individuals and businesses. This analysis has revealed stark findings that demonstrate the regressive nature of energy subsidies and the consequences of removing them. The analysis shows:

The wealthiest 20% of the population receive approximately 70% of all subsidies, whilst the poorest 50% of the population receive less than 3% of the electricity subsidies;

Poorer households consume less electricity, average consumption for the bottom 50% of households is 226 kWh each month, compared to 312 kWh for all households;

Despite this, poorer households spent more of their income on electricity – so removing subsidies has a higher proportional impact on the poorest households (it could increase expenditure by up to 13% of income of poorer households, compared to 6% for the wealthiest households).

This evidence is illuminating and highlights the challenges of withdrawing subsidies without increasing poverty. PMRC’s research suggests that without alleviating measures subsidy withdrawal could increase poverty. However, this doesn’t mean subsidies should not be withdrawn- their withdrawal will make large savings for the Zambian treasury and reduce inequality in Zambia. Rather PMRC is calling on the Government and Zambia Electricity Supply Corporation (ZESCO) to consider some options to alleviate the impact on the poorest households.

Specifically, ZESCO and the Government should consider:

Improving the way the subsidy is targeted: Replacing the current universal lifeline policy with a targeted usage and hardship based lifeline tariff policy that is only available to the poorest households. The current lifeline policy extends subsidies to all electricity users regardless of their income status. Thus the majority of the benefits accrue to the wealthiest households.

Revising ZESCO’s proposed lifeline band setting: ZESCO has recently proposed to increase the current lifeline band from 100kWh to 300kWh following the tariff adjustments. This needs to be lowered as it is currently skewered toward benefitting the wealthiest households. ZESCO’s proposals imply over 50% of households will never exceed the lifeline rate, including many wealthy households. It could be better to align the rate to average use of the poorest households and set the upper limit at 225kWh.

Removing the “fixed monthly charge” rate: This is a fixed non-metered rate. Currently this only benefits wealthy households, PMRC’s research shows this rate leads to cross subsidisation of wealthy households and under usage by poorer households (effectively forgoing 100kWh of electricity).

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The National Policy on Climate Change

Climate change is widely recognized as one of the major challenges facing humanity and to address such a global issue, the United Nations Framework Convention on Climate Change was therefore adopted in 1992 to stabilize Green House Gases (GHG) concentration in the atmosphere. By definition, climate change is “a long-term change in the earth’s climate, especially a change due to an increase in the average atmospheric temperature.” It is widely recognized that climate change constitutes a significant and serious threat to sustainable development of any country. Evidence shows that Zambia has over the past years experienced a number of climate related hazards including droughts and dry spells, seasonal and flash floods, and extreme temperatures. Therefore, actions to minimize the potential future impacts of climate change are critical. The Climate Change Secretariat in Zambia recently indicated that over US$ 50 billion is required for both mitigation and adaptation to climate change effects. This is because the impact of climate change is long term and therefore long-term interventions are required.

International Agreements on Climate Change

The Paris COP 21

The 2015 United Nations Climate Change Conference was held in Paris, France, from 30 November to 12 December 2015. It was the 21st yearly session of the Conference of the Parties (COP 21) since the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the 11th session of the Conference of the Parties to the 1997 Kyoto Protocol. COP 21 negotiated the Paris Agreement, “a global agreement on the reduction of climate change”, which represented a consensus of the representatives of the 196 parties attending it. Zambia pledged to fight the effects of climate change by signing the Paris Agreement when President Lungu appended Zambia’s Signature to the historic Paris Agreement in September 2016 at the 71st Session of the United Nations General Assembly in New York, USA.

MarrakeCh COP 22

In November 2016, negotiators from more than 150 countries (including Zambia) convened in Marrakech; Morocco, for the 22nd Conference of Parties, (COP22) to discuss and showcase progress and begin the important process of turning the UN’s Paris Agreement into a detailed blueprint for action. The Marrakech Action Proclamation, issued by Heads of State and government gathered at the COP 22. It was widely seen as a reaffirmation of global commitment to the Paris Agreement. Further, a new fund to encourage transparency efforts was established and given a $50m injection of cash from countries including Australia, Canada and Germany. To this effect, Zambia needs to continuously seek out opportunities for international funding available for climate change adaptation and mitigation programmes.

The National Climate Change Policy (NPCC)

The Government of the Republic of Zambia recently launched the National Policy on Climate Change and PMRC welcomes this development, as it has been long overdue. PMRC notes that the formulation of the National Policy on Climate Change is based on mitigating the threats posed by climate change to the development process including attainment of the Vision 2030. Most importantly we note also that the policy provides guidance on how the Zambian economy can grow in a sustainable manner and compliment the implementation of the Seventh National Development Plan. We further believe that this Policy on Climate Change will promote coordination of all adaptation and mitigation measures towards combating climate change.

Insight into the National Policy on Climate Change

The Vision of the National Policy on Climate Change is “A prosperous and climate resilient economy by 2030”. We note also that the rationale for formulating the NPCC is to establish a coordinated national response to climate change; as previously, climate change issues have been addressed in a fragmented manner using various sectoral policies, strategies and plans and these have had limited overall effect.

The overall objective of the Policy is to provide a framework for coordinating climate change programmes in order to ensure climate resilient and low carbon development pathways for sustainable development towards the attainment of Zambia’s Vision 2030.

Specific objectives

  • To promote and strengthen the implementation of adaptation and disaster risk reduction measures to reduce vulnerability to climate variability and change;
  • To promote and implement sustainable land-use management practices in order to contribute to reducing Green House Gases (GHG) emissions from land use and land use change and forestry;
  • To promote mainstreaming of climate change into policies, plans and strategies at all levels in order to account for Climate Change risks and opportunities in decision making and implementation;
  • To strengthen the institutional and human resource capacity in order to effectively and efficiently address all aspects of climate change at international, national, provincial, district and local levels;
  • To promote communication and dissemination of climate change information to enhance awareness and understanding of its impacts;
  • To promote investments in climate resilient and low carbon development pathways in order to generate co-benefits and provide incentives for addressing climate change more effectively;
  • To foster research and development in order to improve understanding and decision making in responding to climate change;
  • To engender Climate Change programmes and activities in order to enhance gender equality and equity in the implementation of climate change programmes

Climate Change Department

As PMRC, we further applaud the establishment of the Climate Change Department. This department was established under the Ministry of Environment and Natural Resources in order to facilitate effective implementation of NPCC. Further, for purposes of coordination, overall oversight and mainstreaming of climate change in national development planning processes, this Department will closely collaborate with the Ministry responsible for National Development Planning.

Prospects

Moving forward, we note that having of this National Policy on Climate Change is an important development, which presents the country with a well-structured national strategy to respond more effectively to the adverse effects of climate change. We note that the structure and implementation arrangements will ensure effective delivery of efforts to mitigate climate change. The policy will also promote stronger collaboration between various ministries and institutions that have a critical role to play in climate change mitigation and adaptation. The mainstreaming further ensures coherence between the recently developed Seventh National Development Plan and all climate change programmes. We believe that this multi-sectoral collaborative approach is critical for success in implementing programmes because it requires coordination through a defined institutional framework. Further we note that the policy will support and facilitate a coordinated response to climate change by re-aligning its climate sensitive sectors of the economy and society. The policy provides stakeholders with a clearer framework on how to tackle climate change in Zambia. With a policy in place, duplication of efforts and time wasting would not arise because of the integrated approach.

Having launched the National Policy on Climate Change, the next steps for Government as custodians is to ensure that all players and stakeholders critical to the implementation are consistent in their delivery. Further, to ensure success, a monitoring and evaluation mechanism must be put in place with clearly defined key performance indicators that can serve as a guide to asses the state of implementation and success. What is next after having this policy is to ensure that cooperating partners and other stakeholders are consistent in implementing the policy. There is need to ensure that adequate provision of resources for climate change initiatives are available.

Conclusion

PMRC pledges to support all government efforts in evaluating and responding to Zambia’s needs to fight climate change based on evidence. PMRC remains supportive of highly feasible plans to reduce global emissions and build climate resilience for the immediate and future benefit of our generations. Government must further enhance efforts towards communication and dissemination of climate change information so as to increase awareness and understanding of interventions, programmes, opportunities and impacts. The fight against climate change concerns all citizens of the country and to this effect; there should be information available on the roles that citizens need to play in order to look after the environment. Furthermore, PMRC welcomes the launch of the National Policy on Climate Change as it is envisaged to provide a framework that will allow the implementation of existing, and future initiatives and opportunities in a more coordinated manner, while providing a long-term vision to achieve sustainable development.

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Tapping on Opportunities to Create Jobs Towards Resource Rich and Wealthy People

In Zambia, 3 out of 4 economically active people work in the informal sector because large-scale Foreign Direct Investments (FDI) have not created needed jobs. Domestic Small and Medium Enterprises (SMEs) and small-scale FDI, which have created relatively more jobs and are a seedbed for inclusive wealth creation are not adequately supported by policy measures. Education and vocational skills training is largely supply-driven, reinforcing a mismatch between job vacancies and skills of available candidates.

There is a lack of national HR policy to ensure demand-driven and effective job skills match analysis to meet the short, medium and long-term human resource needs of the country. This bolsters the case for Government to undertake conscious, aligned and reasonably sequenced policy and regulatory initiatives with realistic targets to create jobs.

A policy mix should create a right mix between FDI and SME incentives, tailor FDI incentives to direct quality jobs created, and combine business and poverty objectives. Training and skills needs to respond to current and future industry needs, Says Augustine Mkandawire – PMRC Head of Research.

Read the full article on this link http://www.scribd.com/doc/102773979/Policy-Brief-Tapping-on-Opportunities-to-Create-Jobs-Towards-Resource-Rich-and-Wealthy-People

How can Government through the Zambia Development Agency foster linkages between domestic SME’s and large business to create decent jobs?

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Learning From Government Indices-Towards a Government Delivery Measurement Tool

Zambia does not have one consolidated and widely accepted tool for measuring Government delivery of development commitments and targets. Instead there are a number of measurement frameworks, which sometimes lead to inconsistent measurements of progress and outcomes across several data sources. Within Government, there are several Key Performance Indicators which also provide an opportunity for harmonisation. There is an opportunity to develop a single, widely accepted composite index, the Government Delivery Index (GDI).

The GDI will create awareness and drive Government to align its various strategies, track and timely review its performance. Alignment of key strategic documents is an urgent requirement as it will enhance a harmonized way of monitoring Government delivery, says Salim Kaunda, PMRC – Researcher.

You can read the Detailed Policy Brief here: http://www.scribd.com/doc/102772253/Policy-Brief-Learning-From-Government-Indices-Towards-a-Government-Delivery-Measurement-Tool

Question?

Do you think the Government should develop and abide by a single, common Monitoring and Evaluation (M&E) tool, for measuring its performance and delivery?

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Learning From Renowned Governance Indices to Inform the GDI :Towards Methodological Options

Zambia does not have a single, consolidated M&E tool. The use of multiple unaligned M&E frameworks which focus clearly on input and output assessment, leads to information variations and unclear reporting of Government progress. Bearing that some sector’s KPIs take long to measure, the GDI tracks progress using 3 dimensions, of progress, output and outcome. Citizens want to know how money is being utilized and this is a case of transparency and accountability for Government and public office bearers. The major challenge is that framework documents are not aligned and this has led to information variances and inconsistencies in monitoring government performance. Better decision-making within government is enhanced as a result of monitoring public office bearers. It provides a forum for purposeful and concrete engagement between the executive, the legislature and civil society around critical choices and outcomes. The Government Delivery Index (GDI) will help track and contribute to consensus based comprehensive monitoring feedback on delivery and provide Government with the necessary feedback, Says Salim Kaunda-PMRC Researcher.

Read the full article here:www.scribd.com/pmrczambia-Learning from Renowned Governance Indices to Inform the GDI: Towards Methodological Options

Question

Should public office bearers be held accountable for their actions?

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Guiding Zambia’s Policy Direction: Putting Zambia in its Own Driving Seat

Zambia aspires for greater economic growth and sustainable development; this requires well-articulated policy and regulatory coherence. The Paris Declaration proclaims a harmonized development agenda between cooperating partners (CP‟s) and Government. There is need for a focused comprehensive developmental plan, mapping strategies, projects, programmes and policies. The government has various frameworks employed to guide and sequence the developmental process. These frameworks contain guiding policies, strategies and implementation plans that outline sequential execution of the development policies. They also contain core areas of interest and general priorities, highlighted by either Government or CP‟s.

Analysis shows, the purpose of all these guiding documents is sustainable development. Many of the targeted sectors are similar but there are lapses, differences of priorities, as well as varying key performance indicators (KPIs). Implementation plans and M&E mechanisms are also notable absentees. This builds the case for serious consideration of harmonising all documents guiding Zambia’s delivery and development agenda. Says Salim Kaunda and Chileshe Chaunga, PMRC Researchers.

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Exploring the Zambian Diaspora: Tapping into the Potential of the Zambian Diaspora

The world today is interconnected and interdependent in social, economic and developmental ways, thus acclaiming the name “One Global Village”. In order to fully increase the potential of this Global village, it is essential that countries design and implement comprehensive diaspora strategies for engaging with their global citizens. The size of the countries population can no longer be calculated within the contours of its borders, rather it must be perceived through the global lens of migration and encompass those who are defined as the ‘diaspora’.

The emigration of a specific labour sector can lead to shortages in the country of origin. In Zambia, this has primarily affected the health care and education sectors. The International Monetary Fund (IMF, 2007) has reported that levels of attrition (degree of loss) of highly skilled workers in the health sector range from 15 to 40 people per annum in Zambia. This loss hinders the ability of Government to achieve its national development plans.  There is an opportunity to engage the diaspora and leverage from their intellectual capital, Says Susan Chima and Salim Kaunda – PMRC Researchers.

Read the full Background Note: http://www.scribd.com/Background-Note-No-1-Exploring-the-Zambian-Diaspora-Tapping-Into-the-Potential-of-the-Zambian-Diaspora

Question

Do you think that Zambians living in the diaspora can contribute to this country’s social and economic development?

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