Can We Keep the Poor Warm in Transitioning States? Problems of Social Protection in Eastern Europe
April 7, 2004
Staff-prepared summary of the EES noon discussion with Michael Cain, Associate Professor of Political Science, St. Mary's College of Maryland

In his study of energy sector reform in Bulgaria, Hungary and Romania, Michael Cain found these post-communist societies struggling with the legacies of the communist era, namely state monopolies, price subsidies, insufficient infrastructure investment, inadequate metering and low regulatory capacity. Reforming this sector is especially tricky in post-communist democracies: if reform is too slow, infrastructure will deteriorate, making reform even more costly and difficult; but if reform occurs to quickly, people cannot afford to pay for energy, leading to non-payment or protest, which governments seeking reelection especially fear.

Cain discussed three often-cited policy recommendations for addressing both the institutional and social aspects of energy sector reform. The first, tariff mechanisms, offer good coverage and are relatively inexpensive to administer. However, their ability to offer poverty protection depends on connections rates, targeting depends on poverty rates and they distort the market. Another policy mechanism is assistance payments and subsidies, provided either to everyone or specifically targeted for the poor. Assistance payments decrease the risk of non-payment and also cushion price shocks, but require strong institutions to administer properly. Third, governments can employ energy efficiency options, which decrease the amount of fuel assistance payments, but also require a greater capacity to administer.

Survey results of Cain's study revealed that the most common forms of assistance to poor and low-income households are low tariff rates for electricity or heating fuels. In Hungary and Romania, lifeline tariffs were introduced based on consumption. Thus, far energy efficiency programs have not been targeted to residential households and they are not part of any social welfare strategy for assisting the poor. All three countries have used energy assistance programs to assist low-income households with increasing utility costs, though effectiveness and design of these programs varied widely. Cain found that postcommunist governments have trouble targeting benefits to the poor, providing adequate levels and regular payments to the poor and making sure that all who require these benefits are covered.

Cain suggests that national programs are the best method to ensure coverage, as it decreases the risk of non-payment benefits. He also suggests making direct payments to utility companies to prevent leakage to non-energy related needs. Finally, he advises that utility or heat assistance payments should be unbundled from regular or housing assistance payments. In order to keep the poor warm in the region, East European governments need to begin focusing on more reliable energy assistance programs and invest in infrastructure development so that poor households can have more control over their energy usage.