by Rob Maguire, project communis
In a country crippled by scarcity and want, a poverty alleviation group has been encouraging higher utility tariffs, despite the greater adversity this places on the poor. Ironic as this situation may be, it becomes clearly understandable and quite unsurprising once it is revealed that the organization in question is the World Bank, operating in Armenia, one of many developing countries suffering from the Bankís neoliberal policies.
As part of its bid to complete the privatization of publicly owned enterprises, the Government of Armenia, on recommendations by the World Bank, sought to make public utilities more attractive to private foreign takeover by restructuring the sector and increasing the cost of life’s basic necessities. The privatization of electricity generation and distribution began in 1998 with a new law (USDE 2004) designed to bring about the desired changes in ownership, as well as to satisfy World Bank loan and credit conditions that insisted on tariff increases and higher collection rates (Lampietti 2001).
A major government initiative taken to induce privatization in the energy sector was to increase electricity tariffs by nearly 50 percent in January of 1999. The existing block electricity tariff was promptly scrapped in favour of a flat rate tariff of 25 drams (ARD) per kilowatt hour (kWh). The government believed that this change would amount to an average consumer price increase of 30 percent (Lampietti:16).
The implications of such an increase in price alone could be quite severe, given that it is being done in a country where roughly half the population is living in poverty. Impact assessment, however, did not seem to be a government forte, for the reality of the price hike was far more severe than expected. The government had miscalculated the prior average cost of electricity, and having done so misjudged the increase the new tariffs represented. In actuality, the new price signified a 47 percent increase in electricity costs, driving the average cost up from 17 to 25 ARD/kWh (Lampietti: 16).
Such a steep and immediate price increase cannot be without dramatic consequences. Although detailed accounts of the effects of this increase are not readily available outside of Armenia, the World Bank has shed some light onto this issue with their conservative, yet highly revealing, look into the human costs of utility pricing. World Bank technical paper number 497, ìUtility Pricing and the Poor: Lessons from Armeniaî, was made available in May 2001, two years after the electricity tariff hikes. It details, in quantitative terms, the consequences of the utility increase on the poor in the country. The qualitative reality, however, is not difficult to imagine.
Naturally, as the price of electricity was drastically increased, people cut their consumption. Among the population sampled by the World Bank, electricity consumption dropped 17 percent on average, while collection rates fell nine percent and accumulated arrears multiplied by a factor of four. While the new electricity tariffs were difficult enough for the general population, those living in poverty found the higher prices much more demanding. According to the World Bank, ìrelative to the non-poor, the poor cut consumption more, the percentage of households with arrears was higher, and the average size of arrears increased more.î In other words, higher tariffs led to greater impoverishment of the most economically disadvantaged citizens of Armenia, as well as further complicating their lives by significantly reducing the amount of energy that is conveniently available to them (Lampietti: 17-18).
Granted, once the government realized that the tariff increases were far steeper than they supposedly had planned, they did initiate a subsidy program to help the poor cope with the increased cost of electricity. Monthly subsidies ranged from 370 to 2500 ARD per capita (US$0.70 to $4.75). The main subsidies, however, were designed to reach only 28 percent of those household that were below the poverty line, leaving most impoverished families behind. Furthermore, households receiving smaller subsidies were unable to depend upon them, as they arrived only six times per year on average, as opposed to the regular monthly payments that the government had planned (Lampietti: 22).
Aside from the direct impact on the poor and ìnon-poorî, the electricity price hike had indirect consequences that were perhaps equally as devastating. While the tariff increase was allegedly designed to increase the attractiveness of the utilities to the private sector, they certainly had the opposite effect on Armeniaís environment. As electricity became less affordable as a source of energy, many were forced to make up the difference through increased consumption of alternate fuel sources, the most frequently used material being wood. This increase in wood burning has led to increased deforestation as well as higher and more dangerous levels of indoor air pollution, increasing the risk of respiratory illnesses.
Considering the significant impact the tariff increase has had on poverty, health, and the environment, one would perhaps seek to find some justification in a substantial increase in energy sector revenues, thus fulfilling the governmentís goal of improving the utilityís attractiveness to private corporate interest. This, however, was simply not the case. Despite the extreme price jump, the net revenue increase for the utility was a mere 6 percent, a relatively small increase to justify the further impoverishment of Armenians (Lampietti: 17).
The World Bankís own research had made it clear that the price restructuring of the Armenian electricity utilities ñ undertaken in the name of privatization ñ did not work. The poor, the alleged beneficiaries of World Bank projects, were delivered greater adversity, meanwhile the price increase was a fiscal flop. In light of these conclusions, however, did the report have any lasting effect upon World Bank policy? According to the Wall Street Journal, the study ìlanded with a thud at the World Bank; it implied that free-market ideology had trumped clear thinking when the World Bank had prodded the Armenian government to commercialize the power company,î (Phillips, 2003).
Despite the self-criticism, however, we may be hard pressed to find significant change within the World Bank, as they continue their agenda of large-scale privatization. Commenting on tariff increases for clean water, the report suggests that ìutility revenue would be maximized at approximately 500 ARD per m3î, a change reflecting a ten-fold increase in the cost of water, a commodity far more fundamental to human life than electricity. The consequences that such a tariff increase would have on poverty, human health, and the environment are too painful to imagine (Lampietti: 38).
Demonstrating the World Bank approach to poverty alleviation, the report concludes, ìfuture electricity tariff increases should be closely coordinated with improved price response prediction and credible actions to mitigate the potential impact on the poor and the environment,î (Lampietti: 35). Although subtle, the language used is of utmost importance. Rather than aiming to improve the condition of the poor ñ the self-declared purpose of the World Bank ñ they talk about merely reducing the detrimental impact utility increases have on the poor. This damage-control approach is simply not acceptable
The bottom line is that the World Bank cannot make credible claims to be fighting world poverty while they simultaneously advocate policy that will further impoverish the poorest and most marginalized people. While this report on utility pricing in Armenia may have shocked the Bank, it certainly did not take their critics by surprise, but merely supports their claims that the World Bankís agenda of privatization simply does not reflect the true needs of the poor. Once the Bank begins to fight the conditions that beget poverty, rather than simply softening the sharp blows of capitalism, the institution may be seen as living up to its mandate of improving the lives of the poor.
References:
Lampietti, J. and al. (2001) ìUtility Pricing and the Poor: Lessons from Armeniaî, World Bank Technical Paper No.497, May 2001.
U.S. Department of Energy (USDE) (2004)
Armenia Energy Overview:
http://www.fossil.energy.gov/international/armnover.html
Phillips, M. (2003) ìThe World Bank Wonders About Utility Privatizationî, Wall Street Journal, July 21.