Selected Issues

Abstract

Selected Issues

Energy Sector Reform1

A. Executive Summary

1. It is well known that the energy sector in Haiti generates large fiscal and economic efficiency losses. Only one third of the population has access to electricity, and of those with access, many are free riders who are not billed or do not pay. Technical losses, low administered tariffs, high costs, mismanagement and theft have resulted in chronic deficits at the state-owned electricity company, Electricité d’Haiti (EDH). Retail fuel prices are also administered since 2011 and have barely increased in local currency (gourde) terms despite large swings in international prices and a fast depreciating exchange rate.

2. Direct fiscal losses related to the electricity sector and fuel trade were estimated at 4.5 percent of GDP in FY2018, and at 6.5 percent of GDP in FY2019.2 These comprised foregone fiscal revenues, budget transfers to cover losses of EDH and fuel prices fixed below cost, fuel transfers (inputs in kind), and guarantees. These have contributed to large deficits, public debt and arrears build-up. Energy sector-related losses have risen over time. When the fixed retail price of fuel was not sufficient to cover the charges and fees due suppliers, excise taxes and custom duties were waived to cover the shortfall. Eventually by 2018 the retail price fell below world market prices, resulting in a direct budget expense (goods and services) which, in addition to foregone revenues, amounted to about 2.7 percent of GDP. At the same time, the estimated losses from the electricity sector amounted to about 1.8 and 1.9 percent of GDP in FY2018 and FY2019 respectively.

3. Broader economic and social losses would add up to a much higher bill. For fuel subsidies alone, losses related to resource misallocation, the opportunity costs of displaced productive spending, and other externalities are estimated by FAD at another 4.7 percent of GDP (“post tax”)3. The latter include estimated costs related to things like pollution and traffic congestion that raise health spending, including from traffic accidents. Energy subsidies and market rigidities distort resource allocation, encourage over-consumption, crowd out more productive government spending, and worsen the external balance, among other things. There are also the social costs of very regressive energy price subsidies as well as dead weight losses related to graft and corruption linked to the structure of the market.

4. Several key decisions since the mid-2000s put Haiti in its current predicament. In 2007, Haiti agreed to an arrangement with Venezuela under the PetroCaribe Agreement whereby fuel was supplied with concessional financing for a portion of the imports with the aim of financing “development projects” with the proceeds from fuel sales. Second, after the 2010 earthquake, the authorities fixed retail prices for humanitarian reasons, abandoning a 1995 law requiring adjustment in fuel prices to match supply cost variations. This resulted in lower tax revenues as excise taxes and customs duties on fuel products were compressed to compensate for import price increases and exchange rate depreciation. After committing in 2018 to gradually reducing fuel subsidies under a Fund Staff Monitored Program (SMP), the government decided to implement a one-time increase in prices of about 50 percent in July 2018. This sparked massive social protests and led to an immediate reversal in the hikes. Since then, intermittent social unrest and a protracted political crisis have led to fuel market disruptions and mounting fiscal losses, including build-up of arrears.

5. Ensuring fiscal sustainability and higher rates of growth in Haiti will not be possible without fundamental reform of the energy sector. This should be well prepared after broad consultation with stakeholders, well communicated, and implemented only after introducing mitigating measures for the most vulnerable groups in society. The eventual adoption of automatic fuel price mechanisms would be an important element of a sustainable solution, as would new regulation of the fuel import/ trade sector and the electricity sector, including with empowerment of an independent regulator. It would likely need new management at EDH, an overhaul of the utility’s administration, and an investment program to render it financially viable. Addressing these issues will require strengthening the grid system, reforming the tariff structure, improving metering, and implementing systems and controls to limit theft, among other things.

B. The Energy Sector in Haiti

Market Structure of the Petroleum Sector

6. There is no fuel production or refining in Haiti. The following petroleum products are imported: Gasoline 91, Gasoline 95, Gasoil (Diesel), Kerosene, a smaller quantity of JET-A1 for the air transportation industry, and crude oil for electricity production. Gasoil accounted for more than 50 percent of total imports over the last three years. The consumption of Kerosene, which is mainly used for lighting and cooking, is relatively low compared to total imports.

7. Until April 2018, the government controlled the import of petroleum products. The Autonomous Office of Monetization of Development Assistance Programs (BMPAD) under the MEF was responsible for implementing the Petrocaribe agreement from 2007–2018, playing an intermediary role between importers and suppliers. Under Petrocaribe, fuel products were imported from Venezuela and resold to private oil companies (Figure 1). The government paid only a portion of the imports in cash and the remainder was financed by a loan under concessional terms. Imports outside of Petrocaribe were also controlled by BMPAD through an opaque tendering process. After April 2018, Venezuela stopped delivery of oil under Petrocaribe, forcing Haiti to buy petroleum products on the Caribbean and U.S. spot markets. BMPAD managed the process from April 2018-March 2019 by issuing requests for bids.

Figure 1.
Figure 1.

Haiti: Electricity and Fuel Market Structures

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: Ministry of the Economy and Finance (MEF) and IMF staff calculations.

Evolution of Fuel Imports 1/

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: National Authorities and IMF staff calculations.1/ Data are in fiscal years.

8. The end of BMPAD’s intermediary role in March 2019 coincided with a political crisis and policy vacuum. With the end of Petrocaribe in 2018, BMPAD had become an unnecessary intermediary between foreign suppliers and local distributors. With the liberalization of imports in March 2019, independent power producers (IPPs) began to purchase directly from importers who then supplied petroleum products at CIF prices directly to private distributors and non-distributors. This also meant that distributors could no longer recoup losses related to price by underpaying BMPAD for fuel purchases.4 Consequently, the government started accumulating arrears to distributers. Arrears were reported at 4.8 billion gourdes in September 2019. Since FY2018, the government has made direct transfers to distributors to cover the margins specified in the price structure and fuel import costs. With BMPAD’s finances deteriorating rapidly and payment delays to foreign suppliers, fuel shortages emerged in August 2019.

9. The fuel importing and distribution process in Haiti is illustrated in Figure 1:

  • Fuel purchasers import about 300 million U.S. gallons per year. Under Petrocaribe, Haiti received roughly 14,000 barrels of oil per day (bpd). Haiti paid the market price, in cash, for a portion varying between 40 and 75 percent and the remainder was financed by Venezuela over 25 years at 1.0 percent interest.5 The proceeds from domestic sales combined with deferred import payments were to be used by the government for economic development.

  • Proceeds from the purchase of fuel were deposited in BMPAD accounts at the state-owned commercial bank (BNC) and the BRH.

  • Fuel was sold to distributors (235 million U.S. gallons in total) who in turn sold it to gas stations at the administered pump price. The rest was sold to IPPs and EDH for electricity production and distribution. Fuel distributors were compensated by the state about 27 U.S. cents, on average, for every gallon of gasoline sold to customers.

  • Due to its inability to meet electricity demand, EDH subcontracted some electricity generation to IPPs. The three IPPs, Haytrac, E-Power, and Sogener, generate about 11 percent of total electricity production in Haiti.

  • Subsidized fuel, including in-kind shipments, is also delivered to EDH and the IPPs Sogener and PBM (Petion-Bolivar-Mart). PBM, a Haiti-Venezuelan-Cuban joint state enterprise, generates about 6 percent of Haiti’s on-grid electricity.

  • The private sector also relies on self-generation. More than 70 percent of all electricity consumed in Haiti is produced by small scale diesel-powered generators owned by households and businesses.

10. Retail fuel prices at the pump are fixed by the government. With the humanitarian situation following the 2010 earthquake, the Government of Haiti (GoH) halted the automatic price adjustment mechanism for fuel products in place since 1995. Gasoline, diesel and kerosene prices were frozen in nominal local currency terms. Under the earlier mechanism, any change in international prices greater or equal to 5 percent triggered a price change at the pump.

11. Shortfalls in price below cost have been covered by the government. There are two different price structures, one for distributors and another for non-distributors: non-distributors do not pay the margins of distribution but are required to return 60 percent of this margin to the state (Figure 2). As a result, non-distributors pay more taxes but their price is lower than that paid by consumers. When the difference between the fixed pump price and the import price was not sufficient to cover charges and fees, excise taxes and custom duties were adjusted/waived to compensate distributors. As the difference widened further in recent years, the government started to provide direct budget transfers to distributors in addition to forgoing taxes and duties (Figures 2, 6).

Figure 2.
Figure 2.

Haiti: Fuel Price Comparison

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: Ministry of the Economy and Finance (MEF) and IMF staff calculations.
Figure 3.
Figure 3.

Haiti Electricity Grids and Power Generation

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: National Authorities and IMF staff calculations.
Figure 4.
Figure 4.

Haiti: Electricity Consumption in Haiti

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: National Authorities, World Bank, IEA Statistics and IMF staff calculations.1/ Data is based on EDH billing; it shows a fraction of total electricity delivered by EDH and, thus a fraction of electricity consumed.
Figure 5.
Figure 5.

Haiti: Estimated Cost of Retail Fuel Subsidies

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: National Authorities and IMF staff calculations.
Figure 6.
Figure 6.

Haiti: Fuel Subsidies by Product

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: National Authorities and IMF staff calculations.

12. As a consequence, administered fuel prices in Haiti are much lower compared to the region. With the exception of two ad-hoc price increases in March 2011 (30 percent) and 2017 (20 percent) and a temporary increase from July 2014 to February 2015, the price freeze means that all international price volatility has been absorbed by the government. Retail fuel prices in Haiti are now among the lowest in the Caribbean—about 50 percent lower than in neighboring Dominican Republic (Figure 2). The large difference in oil prices/subsidies between Haiti and the Dominican Republic (DR) had created a strong incentive to smuggle petroleum products to the higher-priced destination, increasing the budgetary burden for Haiti (see SIP on cross border trade with the DR).

Table 1.

Haiti: Price Structure for Distributors vs. Non-Distributors (2017)

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Source: Ministry of the Economy and Finance (MEF).

In July 4, 2018

In July 14, 2018

In January 5, 2018

Market Structure of the Electricity Sector

13. Per capita energy consumption in Haiti is the lowest in the Caribbean at less than 100 kWh annually. Most (75 percent) of total energy consumed in the country comes from wood burning and charcoal. Petroleum products provide about 20 percent of total consumption and electricity accounts for the remaining 5 percent. About 65 percent of the energy produced in Haiti is consumed by residences, 19 percent by industry, 12 percent in transportation, and 4 percent by services. Less than 35 percent of households are connected to the national electricity grid, of which only 12.5 are connected legally.

14. EDH is in charge of transmission, distribution, and some generation of electricity in Haiti. EDH runs ten separate unconnected distribution grids that are characterized by large average technical, commercial and collection losses (ATC&C). Daily blackouts have forced most businesses and many households to install private generators. While EDH provides most of the power in Haiti, most of that electricity is produced by IPPs that have signed power purchase agreements (PPAs) via indirect negotiations rather than through competitive bidding procedures. Three IPPs (Sogener, E-Power, and Haytrac) and a tri-national enterprise (PBM, Petion-Marti-Bolivar) produce most of the IPP power (Figure 3).

15. EDH generates around 10 percent of the country’s energy, with the rest coming from IPPs and PBM. About 90–95 percent of Haiti’s on-grid electricity production comes from thermal sources—evenly split between diesel and more efficient heavy fuel oil. The remainder is produced by EDH’s hydropower plants. The 2018 renovation of the large Péligre dam is expected to provide cheaper electricity and increase the share of hydropower in the energy mix, although volatile rainfall in 2019 prevented it from running at full capacity. By provider, EDH produced just 10 percent of Haiti’s electricity in 2017 (Figure 3). PBM produced 6 percent of Haiti’s on-grid electricity and IPPs produced the rest, led by Sogener, a Haitian private enterprise that is the base load power source for Port-au-Prince (meaning it satisfies minimum demand). E-power, the second most important IPP, is financed by the IFC and is active in both Port au Prince and the rest of the country.

16. To attenuate supply constraints and unreliable service, the private sector has resorted to self-generation. In the absence of a reliable on-grid supply, more costly self-generation via small generators has expanded significantly and now collectively produces more electricity than the official grid, both at the household and commercial level. Even so, only about one quarter of households have access to electricity, with charcoal providing the main energy source for the majority. While some businesses use self-generation as a hedge against blackouts, many have disconnected totally from the grid. This raises the country’s oil import bill, particularly since self-generation is relatively expensive and inefficient, has caused deforestation and environmental degradation, hurts competitiveness and aggravates the financial situation of EDH since it loses viable, paying clients.

17. Billing and collection performance at EDH is woeful. Less than half of the electricity supplied to the grid was billed in FY2017 and FY2018, and of the accounts billed, only about 82 percent of the total sold were collected in FY 2018. A combination of weak governance at EDH and flawed systems and controls have led to large losses, including from theft and secondary market middlemen who intervene in the provision of electricity. Not all consumers on the grid have a meter, including many that are illegally connected, making it impossible to measure consumption or collect payment. Where meters have been installed, EDH often lacks the capacity to read or send bills. There is also theft or skimming at collection points, non-payment by government entities, particularly municipalities with very limited revenue sources, or connections to the grid operated by middlemen and organized gangs, among other things. Fighting electricity theft is very challenging given high levels of insecurity and corruption.

18. Haiti has one of the lowest electricity consumption rates in the world. Haiti is the 88th most populous country in the world but ranks 184th in total electricity consumption (Figure 4). Per capita electricity consumption was 39 kWh in 2014, eighty times lower than the regional average according to Worldwatch Institute (2014) and the World Bank. As the majority of the grids are old and unreliable and its reach is limited, technical and non-technical electricity losses are very high. EDH estimates that 20 percent of households near the capital are paying customers, but the figure is under 10 percent everywhere else, including just 3 percent of households in the north-west.

C. Estimating Energy Sector-Related Losses

Fuel Subsidies

19. Retail fuel prices have been below the cost of supply since mid-2018 (Figure 6). The price should cover the import cost (CIF) plus charges for transport and distribution, and taxes. However, with prices rigidly administered since 2010, the gap between administered and cost recovery prices has been covered by foregone tax revenues or direct budget transfers. The newly-elected Moïse government implemented fuel price increases in 2017 following an agreement with transport unions: the gasoline price was increased by 19 percent (HTG35 per gallon), diesel by 20 percent (HTG30 per gallon), and kerosene by 17 percent (HTG25 per gallon). Although full pass-through parity was not achieved, the agreement provided for future adjustments to reach full parity in the medium term.

20. This contributed to a vicious circle of monetized fiscal losses and depreciation, now compounded by supply disruptions. Monetized fiscal shortfalls have contributed to exchange rate depreciation which has fueled further subsidy-related losses. With fuel prices fixed in local currency, these costs surged in 2018–2019. The gap between cost-recovery and administered prices increased from 55 percent (105 HTG per gallon) in September 2018 to 84 percent (160 HTG per gallon) in June 2019, mostly caused by gourde depreciation (33 percent)—equivalent to monthly subsidies of 0.3 percent of GDP. About 60 percent of this was forgone revenues and the remainder took the form of direct budget expenses financed in part—since the end of BMPAD—by arrears accumulation to distributors (Figure 5).

21. In theory, ‘efficient’ prices should cover supply costs, relevant taxes, and additional amounts reflecting negative externalities (IMF 2015). Information on the gap between the existing and ‘efficient’ levels of fossil fuel prices is a helpful benchmark for analyzing and reviewing policy trade-offs related to fuel price reform, including the welfare impacts of moving to efficient prices, the socio-political challenges, and differences across countries (Box 1). Options and alternative policies can then be evaluated to help policymakers assess tradeoffs, prioritize reforms, and communicate the case for reform.

Electricity Sector Losses

22. Chronic losses by EDH are covered by the budget. The state subsidizes the electricity sector in four different ways (Table 2, Panel C): (i) tax revenues collected by EDH but never transferred; (ii) the provision of free fuel to PBM and EDH thermal plants; (iii) payment guarantees in the form of electricity purchases from IPPs on behalf of EDH; and (iv) through the payment of fuel purchased by Sogener, supposedly in exchange for incomplete payments by EDH for electricity supplied. EDH routinely pays late charges on its billings from IPPs, continues to maintain unpaid debts to them, and in the past has borrowed from the state bank BNC to fund operations. The financing of EDH through transfers, arrears, and loans is neither clear nor transparent.

23. Electricity tariffs have been administered in nominal terms and rarely adjusted since 2009. The average price charged by IPPs to EDH in 2017/18 was in the range of 14 Gourde cents/KwH while the price charged by EDH was 11 cents (Table 2, Panel A). This means that EDH incurred a loss on every residential consumer, even before losses from failure to bill or collect. Commercial and industrial users paid about 20 cent per KwH more (plus fixed charges), but over time have opted for self-generation powered by diesel fuel since that produces electricity at comparable rates on a more reliable basis. EDH provides electricity for only about 14 hours per day.

24. Very low revenue collection, high generation costs and low rigid prices add up to chronic deficits at EDH. The cost to the nonfinancial public sector (NFPS) deficit of electricity-related losses has hovered around HTG 10 billion over the last 5 years, reaching HTG billion (1.9 percent of GDP) in FY2019 (Figure 7). EDH reports do not include information about financing. Fiscal data suggest that the EDH deficit is financed indirectly by government transfers, as detailed above.

Figure 7.
Figure 7.

Haiti: Electricity Subsidies

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: Ministry of the Economy and Finance (MEF) and IMF staff calculations.

25. The revenue collection and financial performance of EDH will be a critical issue to address in any reform. In 2018, only about 45 percent of the electricity generated was invoiced. The cash recovery index (CRI) increased to over 55 percent during the first half of FY2019 following reforms initiated under the SMP (Figure 7).6 Aside from collection, invoicing and overall revenues are constrained by management problems, serious governance issues, and excessive expenditures related to expensive and inefficient oil-based power generation, onerous IPP contracts, and a large wage bill, which has increased during the past few years.

26. Some collection gains were achieved through a combination of governance reform and suspension of electricity to nonpayers. Governance reforms included the installation of meters and the implementation of a phased action plan when bills were not paid. A simple counterfactual exercise assuming a CRI of 90 percent instead of 38 percent in FY2018 would translate into collection gains equivalent to 1.0 percent of GDP (Table 2, Panel B). Notwithstanding these gains, EDH would still fail to cover its costs and incur a deficit of 0.5 percent of GDP.

Estimating the Cost of Fuel Subsidies Economically ‘efficient’ fossil fuel prices have three basic components (IMF, 2018):

  • The economic cost. For traded products, such as gasoline and diesel, this can be measured by the international reference price as reflected in the cost faced by importers or the revenue foregone by domestically consuming rather than exporting the product. For non-traded energy, such as electricity, the supply cost is the domestic production cost or ‘cost-recovery’ price, with fuel inputs evaluated at international reference prices.

  • Environmental costs. For fossil fuel use, this includes the impact on global warming, local air pollution, and other costs associated with the impact of road vehicles like accidents.

  • Revenue-raising considerations. IMF guidelines apply consumption taxes to fuels similar to other goods, i.e., the VAT rate on final fuel consumption—based on prices reflecting supply and additional margins reflecting the public costs of related externalities (b. above)—but not on intermediate purchases.

  • Retail (pump) prices in Haiti are well below the efficient price and the gap is increasing. Drawing on the commonly accepted estimates of fossil fuel subsidy costs, the average cost of all post-tax externalities was estimated by the Fiscal Affairs Department at around HTG65 per gallon, about 40 percent of the supply cost.1

Post-Tax Subsidy by Energy Product, 2017

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: National Authorities and IMF staff calculations.

Haiti Efficient Price Composition, 2017

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

1 Pre-tax subsidies arise when energy consumers pay less than the supply cost of energy, including transportation and distribution costs. Post-tax subsidies are the sum of pre-tax and tax subsidies, where tax-subsidies arise if energy taxes are too low. Energy should be taxed in the same way as any other consumer product plus an adjustment for negative externalities such as the effect of energy consumption on congestion, climate change, etc.

D. Socio-Economic Implications

Economic and Environmental Aspects7

27. Energy subsidies, if large and persistent, can have serious costs. The literature is unequivocal on the perverse fiscal, economic and social consequences of energy subsidies, including higher deficits and public debt and crowding out of public spending on health, education, infrastructure, and social programs. Subsidies distort market signals, are regressive, and aggravate climate change and local pollution, congestion, and public health costs.

28. Losses of the state energy company together with energy subsides have compromised fiscal and external sustainability in Haiti. Since 2012, subsidies alone have raised public debt by 18 percent of GDP (including arrears). Energy subsidies also complicate budget management due to price volatility. In recent years, subsidies have become a drag on Haiti’s long-term growth and competitiveness by diverting resources away from other spending priorities, discouraging efficiency-enhancing investment in the energy sector and alternative energy, and diverting resources into non-viable or capital-intensive activities. A recent study (IMF, 2014) suggests that pricing of fuel products is below efficient levels in most LAC countries, including Haiti.

International Household Energy Expenditures

Internationally, maximum average expenditure on urban transport is estimated at about 25 percent of monthly household income. Monthly averages in Haiti are high when compared to other cities in Latin America and in Africa.

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Note: Households in Haiti spend on average US$30 /month on electricity and electricity substitutes (such as lighting, batteries). However, rural/urban and departmental averages vary greatly, and the poorest half of the population spends much less than this average. Sources: Ferro and Taillandier (2017), « Study on oil pricing reform and subsidy mechanism for urban transport”. World Bank. Scaling-up Renewable Energy Program (SREP) Investment Plan for Haiti, SREP/SC.13/5

Equity and Social Implications

29. Subsidized fuels are mainly consumed by the wealthiest households in Haiti. Poor households consume very little fuel, both in absolute terms and as a share of total consumption, consistent with the literature on the incidence of fuel subsidies (Arze del Granado, Coady, and Gillingham; Coady, Flamini, and Sears). On average, poor households spend only 112 Gourdes per year on fuels, or 0.1 percent of their annual budget. In comparison, average annual expenditure on petroleum products in the richest decile is 18,900 Gourdes, or 5.7 percent of total consumption (Figure 8). As a result, the poor receive only 1.6 percent of total subsidies accruing directly to households.

Figure 8.
Figure 8.

Haiti: Household Expenditure and Subsidies by Income Group

Citation: IMF Staff Country Reports 2020, 122; 10.5089/9781513541501.002.A003

Sources: ECVMAS (2012), World Bank, and Ministry of Finance (MEF).

30. An increase in fuel prices affects mostly the richest group of the population. Since fuels (gasoline and diesel) are a very small part of poor households’ consumption basket, the direct effect of a price increase is negligible (Figure 8). Considering a reduction in subsidies leading to a 30 percent rise in fuel prices, the price increase would reduce the real consumption of the average poor household by less than 0.05 percent, whereas households in the richest decile would experience a 1.65 percent decline in consumption. However, there would indirect, second-round effects on the price of food and transportation. Overall losses are estimated at 1.7 percent for the bottom quintile of the income distribution and above 2.8 percent for the top quintile. A World Bank (2016) report also estimated that 80 percent of rural households—among the poorest in Haiti—use kerosene as the main source of fuel and would be disproportionately affected by an increase in its price.

E. Evidence from International Experience

31. International experience with energy sector reform points to a number of challenges. Political constraints have often prevented or derailed reform, so understanding the political economy is critical for maximizing the probability of a successful reform strategy. Challenges arise from many aspects, including: (a) lack of information or understanding by the authorities and the public regarding the magnitude and shortcomings of subsidies (Ghana, Mexico, Nigeria, the Philippines, Uganda, and Yemen); (b) lack of government credibility and administrative capacity (Indonesia in 2003 and Nigeria in 2011); (c) concerns regarding the adverse impact on the poor (Iran and Nigeria); and (d) concerns regarding the adverse impact on inflation, international competitiveness, and volatility of domestic energy prices.

32. While the strategy has to be case-by-case, recent experience suggests the following ingredients can help to overcome barriers and increase the likelihood of implementation:

  • Develop a comprehensive and appropriately sequenced reform plan.

  • Develop a far-reaching communication strategy.

  • Include subsidy reform as part of broader reform of the energy sector, including regulation, governance, and transparency.

  • Implement mitigating measures in advance and to coincide with reforms.

  • Implement compensating social assistance before and during energy subsidy reform.

  • Move to an automatic pricing mechanism that is removed from the political process.

Table 2.

Haiti: EDH Budget and Electricity Price Overview

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F. A Proposal for Energy Sector Reform in Haiti

33. Any reform proposals for the fuel and electricity sectors should undergo a broad process of consultation and communication with all stakeholders. Broad consultations with relevant stakeholders should take place in advance to better inform the analysis and design of reforms. This should include parliament, civil society, labor, and key segments of the private sector. Public programs that mitigate the impact on key groups together with a strategic communications plan are needed to lay out in advance the rationale and end-goals, trade-offs, methods, mitigating measures, and timing of reform to the public. In this context, the following recommendations outline the key principles of reform without pre-judging the precise modalities, including sequencing and mitigating measures, which should be developed only after consultations.

Reform Priorities in the Fuel Sector

34. A gradual, sequenced, and differentiated approach would help alleviate the impact on the most vulnerable groups and ease the transition, thereby raising the probability of success. The experience of many countries has shown that the inflation response following the increase in petroleum prices tends to be short-lived and less than anticipated. Nonetheless, gradualism in eliminating subsidies would lower political economy risks by phasing and softening price transmission effects and their negative impact on the purchasing power of low-income households. Applying a different approach by product (differentiated) would help target the impact of reform.

  • a) Kerosene subsidies should not be touched until late in the reform process, if ever. As noted above, kerosene is consumed mostly by the lower income quartiles (Figure 8, ¶19): over 50 percent of households use kerosene as the main source of lighting and over 80 percent of rural households use kerosene as the main source of fuel (World Bank, 2016). In urban settings, reliance on kerosene is mostly amongst the bottom quartile of the income distribution. Since an increase in the price of kerosene would be felt by the most vulnerable segments of the population, and since kerosene subsidies account for less than 10 percent of total subsidy costs, they should be addressed much later in the process, if ever.

  • b) Gasoline subsidies could be changed gradually, only after introducing mechanisms to mitigate the impact on the transport sector (¶28). Gasoline is used more by middle-income groups directly in car use and indirectly through public and quasi-public transport—the tap-tap taxis.8 In 2014, it was estimated that two thirds of public transport services used gasoline and the remainder diesel. Price and subsidy reforms to gasoline should be gradual and be preceded by innovative ways to limit the impact on the cost to public transport providers and consumers.

  • c) Diesel prices could be first in line for reform since most of the subsidy benefits accrue to higher income groups. Diesel is mostly used for luxury cars and household/business power generation. Reducing subsidies on diesel should be first in line and would be the most progressive step since diesel is consumed more by the top income quartile and the price elasticity of demand is likely to be very low, if not zero. The impact could however be difficult for small and medium sized businesses who rely on self-generation to run their operations and consideration should be given about how to support these groups during the transition.

35. The plan should aim to eventually restore an automatic fuel price mechanism and move prices toward their ‘efficient’ level in the long term. The future price setting structure should be based on market prices and provide appropriate margins for transportation and distribution. The current level of taxation should be preserved such that foregone revenues are eliminated, followed by reduction in direct subsidies. (Arrears to domestic suppliers would need to be registered and restructured or unwound in a transparent manner.) In the long-run, the plan should move toward an automatic price adjustment mechanism to ensure appropriate pass-through of changes in import prices and depoliticize price adjustments. The adoption of a new price mechanism would present an opportunity to revise the 1995 pricing formula and taxation structure to account for externalities while achieving a desired level of smoothing of short-term price fluctuations (Coady et al).

36. Stakeholder consultation and consensus building is crucial to win support. International experience shows that outreach to parliament and influential beneficiaries directly affected by subsidy reform plays a positive role in reform. In Haiti, support from the transport sector and oil importer are two key stakeholders the government needs to engage to build support for reform.

37. A visible and scalable social protection program able to offset the impact on vulnerable groups is a pre-requisite. Even if a small fraction of existing subsidies goes the poorest, the reform could nonetheless have important consequences for those with little room for budget adjustment, especially because of pass-through increase in transport and food prices. Staff recommend measures to build a better social safety net—within the framework of the new national plan—with a few demographic-based unconditional cash transfer programs. These could help also mitigate the impact of energy reform on the poor.9 Staff recommend starting the reduction in the fuel subsidies only after identifying and launching a channel for the delivery of mitigating measures, including after a pilot program (see SIP).

38. Specific targeted measures for the transport sector and users should be included. While transport providers are directly affected, they may not be the most vulnerable group. Nevertheless, they are an important and vocal constituency in the country and their interests must be addressed as part of the package. Building on recent work by the World Bank, measures to lower costs in the transportation sector could be developed in exchange for a commitment to limit or stagger increases in tap-tap fares.10 Other structural measures to lower costs could include support to finance the replacement of old vehicles for newer more efficient ones, reduce administration costs, and eventually improve transportation infrastructure and roads that would lead to the optimization of tap-tap routes. 11.

39. A clear communication strategy should be prepared and launched prior to any reform. Development of a strategy and implementation of communications should precede any reform actions and include discussion of the rationale and end-goals, trade-offs, methods, timing, and most importantly, the mitigating benefits to be provided to lessen the impact. In particular, the rationale should stress that present losses (much dead-weight) caused by energy policies, equivalent to 6.5 percent of GDP in FY2019, would be freed up for spending on social assistance, education, health and infrastructure—a reallocation toward more productive, higher return activities that would drive private sector growth and employment. The plan should involve outreach that is inclusive and possibly interactive, such as a public forum or town hall, and include public service announcements that educate in plain language why reform is in the public’s best interests. Innovative methods tailored to Haiti’s situation should be explored, drawing on successful experiences elsewhere (e.g., rap songs about monetary policy deployed by the central Bank in Jamaica).

40. More generally, the overall regulatory framework would need to be reviewed and adapted to meet the needs of an evolving structure. It should cover regulation, accountability, and market power issues, among other things and pave the way for the promotion and development of renewable energies. Discussions should be carried out on how to reduce reliance on fossil fuels through greater efficiency in the generation and use of power and the development of renewable sources of energy, namely geo-thermal, solar and wind.

Reform Priorities in the Electricity Sector

41. Reform of the power generation sector should focus on three areas: performance of the public utility, reform of tariffs, and regulation of the sector. Weak governance, theft, inadequate regulation, and low investment have formed a destructive cycle in Haiti’s electricity sector. The overall legislative framework governing state-owned enterprises (SOEs) should be strengthened and regulation of the electricity sector overhauled. First, the dedicated unit within the Ministry of Economy and Finance (MEF) that oversaw the management of EDH and other SOEs should be reactivated and strengthened. Second, the authorities need to develop and implement a financial performance monitoring system for EDH (and other SOEs). Third, the government should prepare and publish annual consolidated financial performance reports for EDH (and SOEs).

  • d) Reform of the electricity utility EDH is the top priority. This would include revising legislation, strengthening the role and independence of the newly established regulator, and installing new management contracts until the governance legislation of SOEs is revised. It is not clear why 100 percent of EDH customers cannot be billed. Revenues should be increased by raising billing and collection rates significantly, including over time with the installation of remotely-controlled meters, remote payment systems—starting with large customers—and eventually renovation of the grids to reduce technical losses. Additionally, cost reductions could be achieved with the renegotiation in due course of supplier contracts awarded on the basis of transparent and competitive public tenders. Improved management and governance at EDH should lead to better cash flow for more investment to improve raise capacity and efficiency, capturing customers who currently depend on self-generation.

  • e) Reform of electricity tariffs should be considered and targeted first at those able to pay. The government should prepare a plan to increase tariffs following a rationale and sequence like the one proposed above for the fuel sector. Any increase in electricity tariff should be preceded by consultation with stakeholders, communication campaign, and implementation of mitigating measures, and should be phased progressively on higher income users and larger accounts.

  • f) Review and strengthening of regulation in the sector is needed to ensure a transparent and level playing field for a configuration involving a blend of public and private operators. While that might involve an end to the monopoly over the distribution and sale of electricity, regulation should put all operators on a level playing field, remove opportunities for rent-seeking and corruption, provide systems to control and reduce theft, ensure accountability and transparency, reduce universal subsidies, and include medium term objectives to expand the electricity grid in a way that strengthens productivity and efficiency, and lowers pollution. Reforms of EDH and the sector should be part of a long-run strategy aimed at crowding in private investment, transitioning to a cleaner production mix, and expansion of electrification to remote off-grid areas.

Annex I. Lessons from International Energy Price Reforms

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Annex II. Petrocaribe in Haiti

1. Petrocaribe was an agreement established in 2005 through which Venezuela exports oil and derivatives to Caribbean and Central American countries using concessional financing. Petrocaribe allowed countries to make up-front payments to Venezuela for a share of the total cost of imports. Up-front payments ranged from 30 percent to 95 percent of the cost, priced at market values. The higher the current oil price, the smaller the share the beneficiary paid up front. The remaining balance was loaned at 1–2 percent interest rates, with repayment periods ranging from 17 to 25 years.

2. For about 10 years, Haiti benefited from concessional financing under the Petrocaribe Agreement. Haiti joined the initiative in March 2007 and started benefiting from the agreement in October 2007. Haiti reliably supported Venezuela in regional forums such as the Organization of American States (OAS) and United Nations. Financing inflows were calculated as a proportion of Haitian purchases of oil products from PDVSA (Petroleos de Venezuela, the state-owned Venezuelan oil company.

3. The sale of oil products in the domestic market generated considerable financing resources for the government. As of end-FY 2018, the stock of Petrocaribe-related debt was US$1,825.5 million (20.2 percent of GDP). This entire debt stock was accumulated between 2010–18 since Venezuela cancelled all of Haiti’s pre-2010 Petrocaribe debt (US$395 million) after the 2010 earthquake.

4. Petrocaribe resources were used to finance investment projects and support the electricity sector. All related investment decisions were published in a resolution in the official gazette listing the projects and the amounts to be financed. Disbursements were reported in BMPAD’s webpage on a regular basis. The BMPAD website containing information on the projects financed with Petrocaribe resources is available at http://www.bureaudegestion.gouv.ht/index.php . Although the budget included information about capital spending financed with these flows, their use did not follow the same rules applied for treasury resources, including on procurement.

5. Petrocaribe flows served as a crucial source of financing in post-earthquake Haiti and their termination last year has led to substantial fiscal strain. The end of Petrocaribe flows has constrained investment spending and the financing of the electricity sector. The shock to growth has hit domestic tax revenues and international reserves.

Annex III. Experience from Recent Fuel Reform Attempts

1. In 2017, the newly elected President Jovenel Moïse was able to raise retail prices by 20 percent on average after extensive media outreach and discussions with civil society and transport unions. The government had negotiated with unions an increase in transportation fares to compensate drivers and promised the development of a health insurance for the sector and the construction of parking spaces. However, the government failed on delivering on the promises. With no subsequent price increase, the fiscal costs from subsidies started rising again.

2. To help pave the way for another ECF, staff and the authorities agreed in February 2018 on a Staff-Monitored Program (SMP) for the period March-August 2018. A key reform at the heart of the program was the full elimination of the sizable fuel tax subsidy by end-June 2018––a measure that was supported by the Fund and international donors. The authorities were advised by staff of the Fund and the World Bank to strengthen the social safety net and develop a communications strategy to help mitigate the social impact of this measure. EU and IDB provided additional technical assistance.

3. The government announced, on July 6th, an increase in prices for gasoline (38 percent), diesel (47 percent) and kerosene (51 percent). However, it suspended the price hikes the following day, before they could be implemented, amid widespread and occasionally violent protests. The move was met by strong opposition from public transportation drivers and also urban populations, even though other regions and segments of society were likely to have been more vulnerable.

4. While a package of measures had been developed to mitigate the social and political impact of the fuel price reform, these measures were neither communicated to the public nor implemented, because of the lack of implementation capacity and their likely ineffectiveness. The package included subsidized meals for students and workers, transport vouchers for workers, health insurance for transport providers, enhancement of an existing maternal support program, distribution of seeds and fertilizer in rural areas, and public works to support employment.

5. Some other ideas considered included: (i) Compensate taxi (Tap-tap) drivers with the aim of maintaining unchanged public transport fares after reform. This strategy was deemed impractical because of the absence of a register of participants in public transportation. (ii) Directly compensate workers who use public transport. However, the available register of workers comprised only workers in the formal sector, a minority of the labor force and not necessarily the most vulnerable. (iii) Compensate food producers. This was deemed inefficient since it would introduce distortions in the local food production market. There was also uncertainty about how to ensure that benefits would be passed on to consumers.

Annex IV. Experience from Electricity Sector Reform Attempts

1. Several reform attempts took place over the last decade by donors through a number of projects designed to improve the operations of EDH. Most of these projects have largely failed in strengthening EDH as a result of corruption and poor management controls. These projects have been somewhat timid in terms of the reforms or were weakened after approval because of political pressure.

2. For example, a USAID-funded project to strengthen EDH initially contemplated a quasi-management contract, with incentives for performance, where the consulting firm would have significant control of EDH, including hiring and firing of staff. But eventually, the Government of Haiti converted this contract to technical assistance contract, where the consulting firm was limited in its role to providing advice to management of EDH and supporting the procurement of some equipment. Improvements of efficiency under this contract were minor. Because of this poor performance, USAID reprogrammed more than $100 million originally intended for the power sector in Haiti, to other sectors in Haiti and to other countries. The USAID-funded program was one of a multitude of efforts by many donors, including also the World Bank and the IDB.

3. More recently, there have been a number of efforts undertaken as part of the World Bank and IDB investment operations aimed at improving the power system. These efforts have been largely unsuccessful. Lack of success is the result of a failure to reform EDH, which in turn is a result of lack of political will. Additionally, an important, and recent initiative by USAID provides support for the Caracol Power Plant. USAID initially provided funding for the construction of 10 MW diesel-fired plant and distribution network. Afterwards, USAID funded a management team under the National Rural Electric Cooperative Association (NRECA) and now ATC&C losses are under 10%, and all other efficiency indicators have also improved.

4. The government of Haiti has allowed private sector investment in electricity generation to compensate for EDH’s inability to supply sufficient power. Three private power producers generate electricity for EDH. The most recent entry, E-Power, opened a 32 megawatt, USD 56 million, IFC-financed heavy fuel-oil powered generation plant in Port-au-Prince in 2011. The National Regulatory Authority of the Energy Sector in Haiti (ANARSE), a state body created by decree in February 2016, concluded prequalification rounds for regional and mini electricity grids and power production, in October 2018 and March 2019 respectively. ANARSE is expected to start issuing tenders in 2019 for concessions for public private partnership for these regional and mini grids.

References

  • Coady, D., del Granado, M.J.A., Eyraud, L. and Tuladhar, M. A., (2013). Automatic fuel pricing mechanisms with price smoothing: Design, implementation, and fiscal implications. International Monetary Fund.

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  • Coady, D., Parry, I., Le, N. and Shang, B. (2019) Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates

  • Enquête sur les Conditions de Vie des Ménages après le Seisme (2012).

  • International Monetary Fund (IMF), 2014a, “Getting Energy Prices Right: From Principle to Practice”, Washington D.C.

  • Scaling-up Renewable Energy Program (SREP) Investment Plan for Haiti, SREP/SC.13/5

  • World Bank. 2016. Better Spending, better services – a review of public finances in Haiti (Vol. 2) (English). Public expenditure Review (PER). Washington, D.C.: World Bank Group (link).

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1

Prepared by Matthieu Bellon (FAD) and Rand Ghayad (WHD).

2

Fiscal year ends September 30th.

3

The recent IMF paper on energy subsidy reform (2018) used the national VAT rate to compute the benchmark fuel taxation level and added a corrective (Pigouvian) tax to charge for related externalities: CO2 emissions, local pollution, congestion, public health costs, etc..

4

Oil companies used to recoup losses by importing fuel at a market price lower than the Caribbean price specified in the administered price structure, thereby increasing margins. They also deferred payments, or accumulated arrears, towards BMPAD. When BMPAD folded, the option to defer payments ended but administrated prices are still based on the Caribbean posted price and thus still providing a source of additional margin.

5

The portion paid in cash represented a suppliers’ credit to be settled within 90 days. Shipping charges were prepaid and the cash and loan portions were determined based on FOB prices on a shipment-by-shipment basis.

6

The CRI measures the percentage of power purchases paid for by consumers. The CRI is equal to: [(Energy billed by EDHs) x (Consumer bills paid to EDHs)] / [(Energy purchased by EDHs) x (Total billing of consumers by the EDHs)].

7

All data discussed in this section, unless noted otherwise, is from the 2012 “Enquête sur les Conditions de Vie des Ménages après le Seisme” (ECVMAS 2012). (Survey of Household Living Conditions after the Earthquake).

8

“Tap-taps” are privately-owned small buses or pickup trucks providing collective transportation. They comprise almost 40 percent of the vehicle fleet in Haiti (World Bank, 2016).

9

Successful reforms, like in Iran in 2010, included quasi universal cash transfers (see Annex I).

10

The last successful fuel price increase in May 2017 followed a negotiated agreement between the government and tap-tap unions. Both parties agreed on a one-time increase in fares.

11

The average age of Port au Prince transport vehicles is substantially higher than in comparable cities like Abidjan, Bamako, and Kigali. Replacing the fleet with more energy-efficient vehicles would allow for savings in maintenance and fuel costs (World Bank, 2016).

Haiti: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.