Households in Central and Eastern Europe and the former Soviet Union receive several types of utility subsidies in order to receive utility services without having to sacrifice other essential needs. This report aims to provide a conceptual framework and methodology for the evaluation of utility subsidy mechanisms. The utilities covered are electricity, natural gas, district heat, water, and sewerage. It groups the subsidies into seven categories and each subsidy mechanism is evaluated against a set of criteria. The paper also reviews the financial impact of each subsidy mechanism on the budget, other consumers, and utilities. In principle, the cost of household subsidies can be covered by the utilities, non-household consumers, or the budget. The report finds that financing of the subsidy from the budget seems to be the best option in most utility sectors and countries. The paper is divided into three chapters. After the introduction, the second chapter describes the pros and cons of each subsidy mechanism at a conceptual level, and then illustrates these with real-life examples. The third chapter reviews the evolution of Bank advice and government responses in this area, and draws lessons for the future.
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