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Subsidy Types, their impacts on tariff and ways of treating them. Presentation by: Joseph Loro German.

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Presentation on theme: "Subsidy Types, their impacts on tariff and ways of treating them. Presentation by: Joseph Loro German."— Presentation transcript:

1 Subsidy Types, their impacts on tariff and ways of treating them. Presentation by: Joseph Loro German

2 The Need for Electric Pricing in the Sudan Setting tariff rates takes to consideration all operational costs used in the production of electricity to the end users. Electricity price rates determine levels of revenue (high / low). Higher revenues reduce financial obligations while lower allows financial distress to continue.

3 3 Electric pricing in Sudan....Cont Raising sufficient revenues is a goal as well keeping affordable electricity prices to those who can’t afford its full cost. Maintaining balance on the goals will control increases in market prices as well allow efficient provision of electric services to consumers. Balancing maintains price stability of essential goods & services from year to year.

4 4 Electric Pricing in Sudan...Cont Balancing action is a social and an economic obligation to be adopted by governments. Approval of government subsidies on some selected consumer’s sectors is a noble requirement any government can do for its people. Purpose is to ease burden of paying higher costs of electricity charges.

5 5 1.2.Government Subsidies in the National Electricity Corporation & Prices Current electric prices in the Sudan reflect on five different customer sectors. Subsidies apply only on the domestic sector alone for the first 200 kwh consumed at 20 sud.dinars per each kwh sold. A different rate of 26 sud.dinars / kwh consumed is imposed on consumption beyond the 200 kwh.

6 6 Government Subsidies in NEC...Cont Sector rate’s prices are as follows: Domestic rate at 20 dinars / kwh for the first 200 kwh & 26 dinars / kwh for > than 200kwh Industrial rate at 21& 24 dinars / kwh Agricultural rate at 22 dinars / kwh Commercial rate at 34 dinars / kwh Governmental rate at 33 dinars / kwh

7 Types & Objectives of subsidies Type of subsidy used at the National Electricity Corporation is the social subsidy approved by the Central government. Main objective is to absorb burden of higher cost of fuel for Generation & ease burden on domestic sector prices. Final ultimate objective is to eliminate any variance that would arise in matching total costs against total sales.

8 8 Types & objectives of subsidies...cont The final ultimate objective of subsidies have not been fully achieved, because deficits still continue to arise after treatment. One possibility could be the methodology to measure the exact value of deficit with its corresponding cover rate always falls behind the timing of requesting monthly approvals by the government.

9 Data examined and tested Three years data are examined to reveal the outcome of the results. Source of data taken from published yearly reports for the National Electricity corporation for 2004, 2005, 2006 respectively show consistently a deficit occurrence.

10 Break-down of data and analysis Data breakdown and analysis cover the first 8 sheets contained in the Axel Power - Point which are arranged in the following manner:- a) Axel Sheet 1 – Has data for three years 2004, 2005, 2006 contained in one slide. Comparison between total costs to total sales reveal deficits shown with and without subsidies in the same slide.

11 11 Break-down of data...cont Total costs are divided between fixed & variable costs, while the total sales include electricity sales plus approved government subsidies. Details that reflect different customer sectors in both sud.dinars as well in kwh for the three consecutive years of 2004, 2005, 2006 are shown in the next second slide ( sheet 1 cont... )

12 12 Break-down of data...cont b) Axel Sheets 2,3, & 4 with a continuation of every sheet – contain Sales & Cost data for the years 2004,2005,2006 are all calculated using the contribution margin approach. Three different scenarios are shown for each of the years that determine deficit & rate shortfall, adjusting break – even value & rate, as well determining subsidy short - fall.

13 13 Break-down of data...cont 9 sheets are graph drawing sheets, numbering 1.1, 1.2, and 1.3, for year 2004 that show the scenarios for this year in slides. Sheets numbered 2.1, 2.2, and 2.3 for year 2005 show scenarios for this year in slides. Sheets numbered 3.1, 3.2, and 3.3 show scenarios for year 2006 in slides. All reflecting what were shown and analyzed in the previous 8 different Axel sheets in the Power – Point slides.

14 14 Brief & clear explanations given Every drawing for every year, with all their scenarios contain full accompanying notes that explain the results for each year. All drawings reflect clearly figures contained in sheet 1 as well sheet 1 cont. All sheets are in slides power – point presentation.

15 Contribution Margin Model used for analysis Model is used to calculate and determine the following: a) Deficit before and after adding approved subsidy. b) Deficit rate before and after adding subsidy c) Determination of the Break – even Point (Match point of total costs to total sales)

16 16 Contribution margin Model...Cont Model is a management accounting approach suited to analyze the relationship between total costs against total sales of an entity matching them to show deficit / surplus level, and locate a break – even point situation. Model allows management to produce clear evidence regarding any required increase in the amounts of subsidies from the concerned government authorities.

17 17 Contribution margin Model...Cont Model can support management decisions in case of a need to adjust tariff rate upwards in order to bridge the existing shortfall. Our analysis reveal that the passed approved subsidies applied by the Electricity sector of the Sudan are not sufficient enough to offset the persisting loss gaps as clearly seen in the calculations and drawings for all the years whose data are represented here.

18 Recommendations based on Model used Use model to determine deficit value & rate Test results after approved subsidies to determine shortfall. Allow break – even position as bottom line to reduce financial distress of your entity. Dialogue for more subsidies that oversteps the break – even position to allow margin for improvements of quality of services to your customers.

19 Conclusion Analysis reveal deficit situations despite government genuine social responsibility on subsidies towards its citizens. Positive response on the government side is possible as far as constructive and timely results are made available. NEC is finalizing a computerized reporting system that would be timely & accurate for decision making to deal with such issues. Sheet 1Sheet 2Sheet 3

20 Thank you 20

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