Do Utility Subsidies Reach the Poor? Framework and Evidence for Cape Verde

This article provides a simple framework to analyze the determinants of targeting performance of utility tariffs and applies it to data on electricity in Cape Verde, Rwanda, and Sao Tome and Principe. While most indicators of benefit incidence are silent as of why subsidies are targeted the way they are (they only give an idea as to whether they reach the poor or not and to what extent), we develop a simple decomposition that allows analyzing both “access ” and “subsidy-design ” factors that influence the targeting performance of subsidies. Our findings suggest that consumption subsidies for electricity in Cape Verde, Rwanda, and Sao Tome and Principe are regressive in large part due to access factors that prevent the poor from using the services. We then conduct simulations to quantify how much targeting performance could be enhanced by changing tariff-structures as well as subsidizing connections instead of consumption. The authors are with the World Bank. This work was prepared as a contribution to the Poverty Assessments for Cape Verde, Rwanda, and Sao Tome and Principe. The authors acknowledge support from the Belgian Poverty Reduction Partnership for research on this issue. Results from the paper were presented in Cape Verde and Rwanda, as well as at World Bank seminars, and at the 2006 Annual Development Conference of the Agence Universitaire de la Francophonie. We are grateful to Kristin Komives, Vivien Foster, Jonathan Halpern and Roohi Abdullah for comments. The views expressed here are those of the authors and need not reflect those of the World Bank, its Executive Directors or the countries they represent