1. Measuring Financial Performance in Infrastructure Jane Ebinger Public Finance Course May 4, 2006

2. Objective To estimate the level of hidden costs or implicit subsidies in the power, natural gas and water sectors Various initiatives: – QFD assessment for Azerbaijan’s energy sector 1999/2000 – SAL 4 discussions in Russia 2000 – energy sector – IMF/ WB look at 6 CIS countries in 2003/2004 – energy sector

3. Simple Model WB/ IMF agreement on need for simple model of hidden costs in energy sector – Single measure of hidden costs in power and gas sectors – Indication of combined effect of losses, poor collections and tariffs below cost recovery – Provide insight to impact of reform policies and their implementation – Easily calculated, tracked and reported Recognize limitations in model – no attempt at in depth analysis

4. Simple Model Hidden Costs = Collection Failure + Unaccounted Losses + Tariffs Below Cost Recovery Where, Collection Failure = Q x Te x (1 – Rct) Unaccounted Losses = Q x Ce x (Lm – Ln) / (1 – Lm) Tariffs Below Cost Recovery = Q x (Ce – Te) And, QEnd user consumption CeAverage Cost Recovery Price TeWeighted average tariff RctCollection rate LmTotal losses LnNormative losses

5. Simple Model

6. Scope of Review Expand earlier efforts and estimate hidden costs in power and natural gas sectors across ECA – 22 countries with active programs included – 2000 – 2003 estimates Extend methodology to the water sector – 16 countries for same period Review financial performance in roads and railways – Roads – budgetary expenditure – Rail - budgetary support

7. Data Sources Use known sources or existing data collection instruments wherever possible: – Enerdata (power and gas supply and demand) – Erranet (power and gas tariffs) – OECD EAP Task Force (water sector) – Ib-net (water sector) – International Union of Railways – International Road Federation Statistics – EuroStat (transport) Data sources supplemented by: – Information from Ministries and agencies – Existing WB publications and reports – Data from sector specialists, consultants, WB and IMF staff Low cost exercise – no large scale field data collection efforts

8. Data Availability Information on the state of each sector generally available Data less available for: – Financial performance in general – all sectors, particularly rail and road sectors – Loss statistics in gas sector – Breakdown of residential/ industrial tariffs – power/ gas – Collection rates – Cost recovery tariffs

9. Data Quality Quality and consistency a major challenge – Average cost recovery prices – Transport – multi year statistics, and cross country comparisons – Trends – span 4 years period only Checks with sector specialists, review for consistency and outliers No field audit or major data collection Power sector data most robust

10. Energy Sector – Hidden Costs Twenty two countries reviewed over the period 2000 to 2003. Central and Eastern EuropeHungary, Poland South East EuropeAlbania, Bosnia, Bulgaria, Croatia, Macedonia, Romania, Serbia and Montenegro, Turkey FSU – Low IncomeArmenia, Azerbaijan, Georgia, Moldova, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan FSU – Middle IncomeBelarus, Kazakhstan, Russia, Ukraine

12. Power Sector Trends (2000 – 2003) – Hidden costs declined across all countries 8.6% of GDP to 4.4% of GDP US$ 30.1 billion to US$ 15.9 billion (2001 constant US$) Largest decline Russia (70% to US$ 4.2 billion) and Bosnia (62% to US$ 96 million) – Tajikistan and Uzbekistan have high hidden costs when compared with other countries, 16% and 12% respectively in 2003

13. Power Sector Trend improved across the region on all 3 aspects of hidden costs – Overall the WAET across the region rose by 26% to USc 4.15 per kWh on average (more than ½ in last year) – WAET declined in only 3 countries: Armenia, Georgia and Macedonia – Residential tariffs remained higher than non residential tariffs but gap decreased slightly (13%) – ACRP declined across sample by 5% to USc 5.1 per kWh; CEE group faced an increase (57%) – Average losses remained around 21% – Collection rates rose from average of 78.3% to 87.9%. Bosnia, Kyrgyz and Uzbekistan only showed declining trend

15. Natural Gas Sector Hidden costs lower than the power sector Hidden costs remained below 2.3% GDP all countries (Uzbekistan exception 8.5%) Trend (2000 – 2003) - (2001 constant US$) – US$ 6.8 billion (2000) to US$ 13.3 billion (2003) – Largest decline Ukraine (drop of US$ 690 million) – Largest increase Turkey (from US$ 0.2 billion to US$ 4.2 billion)

16. Natural Gas Sector Trends – Large variation in WAET – low in Uzbekistan 6.1 US$/km3 to high US$ 154.5 US$/ km3 (2000) – All countries increased WAET except Azerbaijan and Moldova – Contrasting trends in terms of ACRP – FSU countries ACRP much lower than other countries – Collection rates remained fairly stable over the period – also variation: Georgia ~ 25%, Croatia, Moldova, Poland, Turkey from 78 % – 90% – Data on losses sketchy – cannot comment on trends

17. Water Sector – Hidden Costs Sixteen countries reviewed over the period 2000 to 2003. Trends reflect 2000 to 2002 since the dataset for 2003 was not complete. Central and Eastern EuropeCzech Republic, Estonia, Latvia, Poland South East EuropeBulgaria, Romania FSU – Low IncomeArmenia, Azerbaijan, Georgia, Moldova, Kyrgyz Republic, Tajikistan FSU – Middle IncomeBelarus, Kazakhstan, Russia, Ukraine

19. Water Sector Trends (2000 – 2002) – Hidden costs significantly lower than the energy sector – Show improving trend over 2000 - 2002 – Hidden costs declined across all countries On average declined from 0.5% of GDP to 0.4% of GDP Below 1.6% of GDP in all countries except Moldova (2.9%) US$ 2.1 billion to US$ 1.9 billion (2001 constant US$) Russia, Poland and Ukraine have highest levels Largest decline Russia (70% to US$ 0.4 billion)

20. Water Sector Other indicators reviewed – Working ratio exceeded 1 in all countries except (Czech and Kyrgyz Republic) – Labor costs remained largely unchanged exceeding 15% of revenues in Russia and CIS, as high as 35% in Belarus and Tajikistan – Staffing remained high (> 3 x UK, employees per 1000 consumers) – Labor productivity rose on average 37% (water supplied per employee)

21. Rail Sector Statistics on the state of the sector span twenty two countries reviewed over the period 2000 to 2003. Data on financial performance is more limited. Central and Eastern EuropeCzech Republic, Estonia, Hungary, Latvia, Lithuania, Poland South East EuropeBosnia, Bulgaria, Croatia, Kosovo, Macedonia, Romania, Serbia, Slovakia, Slovenia, Turkey FSU – Low IncomeArmenia, Azerbaijan, Georgia FSU – Middle IncomeBelarus, Russia, Ukraine

23. Rail Sector State Budget Support (2000 – 2002) – May not be best measure, variations in state public budgeting and policy choices – State budget support (11 countries) On average increased 7.6% from US$ 775 million to US$ 834 million Remained unchanged at 0.4% of GDP or below Average state budget support per traffic unit rose to US$ 0.022 in 2003, operating costs and PSO support per TU also rose to US$ 0.012 in 2003

24. Rail Sector Other indicators reviewed – Working ratio was for CEE (0.74 average), FSU-LI (0.78 average) and FSU-MI (0.5 average), but in SEE (1.78 average) - 2002 – Operating costs (per TU) exceeded unit passenger and freight revenues – In FSU country groups unit operating costs and revenues were significantly below the regional average – Freight revenues exceeded passenger revenues in many countries – Labor costs as a % of total revenues rose on average from just under 60% to around 80% – Staffing reduced in all countries (average -11%) and staff productivity rose by 16% (TU per employee)

25. Road Sector Statistics on the state of the sector span fourteen countries reviewed over the period 2000 to 2003. Central and Eastern EuropeHungary, Latvia, Lithuania South East EuropeBosnia, Bulgaria, Croatia, Romania, Serbia, Turkey FSU – Low IncomeAzerbaijan, Kyrgyz Republic, Moldova FSU – Middle IncomeRussia, Ukraine

27. Road Sector Expenditure on the road sector (2000 – 2003) – US$ 8.9 billion spent for sample countries – Rose 9% to an average of US% 681 million; heavily influenced by Russia (64% of expenditure overall) – Average expenditure on FSU-LI significantly lower than other sub- regional groupings – Average expenditure represented 0.9% of GDP; FSU-MI (1.4% GDP) above average – Most attention paid to routine maintenance and repair (16% increase), followed by new construction and rehabilitation – Actual expenditure met or exceeded planned expenditure overall and rose from an average of 100% to165% of planned expenditure

28. Going Forward Updates proposed for: – Power and gas sectors – 2004 and 2005 – Water sector – 2004 and 2005, and additional countries as they become available through Ib-net

29. Access to Results of Review http://ecadata-worldbank.org Report “Measuring Financial Performance in Infrastructure”

30. Thank You Jane Ebinger Infrastructure Unit, Europe and Central Asia Region May4, 2006 jebinger@worldbank.org +1 202 473 0204