Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Figure E.2 Percentage of low income spent on gas services by low-income consumersSource: DG ECFIN (2007)When focusing on the bottom quintile, the shares can be much higher than in this study as long as average income inthat group is considerably lower.In fact, project implementation could be affected when the ‘losers’, because of the redistribution effects, are lowincomehouseholds, left without any compensation. Extremely poor households could have no other choice than tostop paying for the service or avoid using it, with consequences for the project’s financial sustainability and socialunrest. Project proposers should consider appropriate remedies (e.g. progressive tariffs, vouchers or subsidies foravoiding serious social tensions due to the project).Table E.4 shows some critical ratios from empirical observation: the share of persons who avoid using the service(replacing it when possible) or that do not pay for it, and the ratio of expenditure to total income they face.Table E.4 Share of expenditure and service exclusion, self-disconnection, or non-payment insome sectors and countries for the bottom quintileBOTTOMQUINTILEELECTRICITY SECTOR GAS SECTOR WATER SECTORShare of incomeon electricity%% of noexpenditure*Share of incomeon gas% of noexpenditure*Share of incomeon water% of noexpenditure*Bulgaria 10 1 3 0 5 14Hungary 7 3 11 8 5 22Poland 10 41 7 48 4 51Romania 6 34 7 32 6 42Turkey 10 50 29 56 5 59Source: Lampietti, Benerjee and Branczik (2007)* Households may report zero payment for a variety of reasons, including lack of connection, self-disconnection free riding, poor service quality, billingcycles and arrears.Table E.4 suggests as an empirical rule, that if the bottom quintile has to bear expenditure equal to or higher than acertain share of its revenues for utilities, then strong interventions are necessary because a substantial percentage ofusers will stop paying for the service or will disconnect.218