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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.