A Reappraisal of Electricity Subsidies and Household Welfare in Brunei Darussalam.

• Author: Chian, Koh Wee
• Position: POLICY NOTE

This paper reassesses the impact of the residential electricity tariff reform implemented in 2012 on the distributional equity and fiscal cost of electricity subsidies in Brunei. Using data from the latest Household Expenditure Survey (HES) conducted in 2015/16, the study estimates that the poorest 20 per cent of households receive 18 per cent of total electricity subsidies, which is considerably larger than the previously estimated share of 11 per cent based on the 2010/11 HES data. This, in part, reflects behavioural changes induced by the reform to an increasing block tariff (IBT), as wealthier households reduce their electricity usage due to higher per-unit costs at higher levels of consumption while poorer households increase their usage as the tariff cost is cheaper in the first consumption block. Concomitantly, the fiscal cost of electricity subsidies has declined by more than 20 per cent following the tariff change. Yet, simulations of alternative reform scenarios show that there are substantial welfare gains and cost savings from refining the IBT structure, using a volume-differentiated tariff, or providing targeted cash transfers. The overarching message is that improving the design of subsidy schemes or introducing targeted transfers can achieve distributional equity and fiscal objectives more efficiently than existing electricity subsidies.

Keywords: electricity, tariff reform, subsidies, household welfare, Brunei Darussalam.

Note received: January 2021; revised: December 2021; accepted: February 2022

1. Introduction

   Electricity consumption in Brunei is heavily subsidized. Electricity subsidies amounted to approximately B$300-350 million between 2006 and 2011, equivalent to about 2 per cent of GDP (Koh 2014; Lawrey and

   Pillarisetti 2011). Subsidy spending has declined following the collapse in international crude oil prices in mid-2014, but the fiscal cost of energy subsidies remains high. Fiscal space has shrunk significantly amid steeply lower oil and gas revenues. In the context of tight fiscal constraints, energy subsidies represent a high opportunity cost as the foregone revenue could be spent on social assistance programmes or other growth-enhancing activities.

   Electricity subsidies have become firmly entrenched in Brunei for decades, as part of an elaborate and generous welfare system that includes free education and healthcare, low-cost housing, social welfare assistance, and subsidized staple foods and petroleum products. The wide coverage of these benefits makes it difficult to reduce or eliminate them as they enjoy popular support. The policy challenge is to implement politically viable reforms that reduce fiscal costs while protecting the poor and vulnerable groups.

   Prior to 1 January 2012, the residential electricity tariff in Brunei was based on a declining block tariff (DBT) structure, which had been in place since 1969. In 1998, a flat-rate tariff was introduced along with a prepaid metering system to address billing and payment collection problems. A new tariff based on an increasing block tariff (IBT) structure has been in effect since 2012--a significant reform in a country where subsidies are a highly sensitive policy issue.

   Although subsidies can make electricity more affordable for poor households, non-poor households receive a disproportionate share of the benefits (Komives et al. 2005). This can be attributed to the difficulty in targeting households according to income level, which makes electricity subsidies an inefficient tool for poverty reduction and distributional equity. Based on data from the 2010/11 Household Expenditure Survey (HES), the poorest 20 per cent of households in Brunei were estimated to have received only 8 per cent of total electricity subsidies under the DBT structure, while the share was 10 per cent under the flatrate tariff structure (Koh 2014). The IBT structure was projected to improve distributional equity, with an estimated share of 11 per cent for the bottom two household income deciles.

   The main objective of this paper is to reassess the welfare impact on households and the fiscal implications following the implementation of the IBT system. This is made possible with the release of the 2015/16 HES data. Several tariff reform scenarios are also simulated with the aim of improving the efficiency and design of the electricity subsidy regime.

   This paper makes several contributions to the growing literature on energy subsidy reform. First, it focuses on the experience of Brunei, which has not received much attention in academic and policy circles. The successful residential electricity tariff reform in Brunei, where welfare issues are highly sensitive, can serve as an important case study. Second, it expands on earlier studies by incorporating behavioural changes and introducing a more comprehensive framework for assessing the efficiency of Brunei's electricity subsidies. Third, it offers policy alternatives to improve the existing electricity subsidy system.

   The analysis in this paper shows that the improvement in distributional equity under the IBT structure is larger than anticipated, with the poorest 20 per cent of households receiving 18 per cent of total electricity subsidies. At the same time, the fiscal cost of the subsidy is considerably lower than the DBT and flat-rate tariff structures. Yet, simulation results show that alternative tariff designs and targeted cash transfers can achieve distributional equity and cost-saving objectives more efficiently than the current IBT system.

   The rest of the paper is organized as follows. The next section provides an overview of the key design features of the electricity tariff structure in Brunei and discusses trends in residential electricity expenditure. The third section evaluates the welfare impact on households across different tariff structures and estimates the fiscal costs. The subsequent section explores the factors explaining the distributional and equity effects. The fifth section presents the simulation results of three tariff reform scenarios aimed at improving the efficiency of electricity subsidies, and the final section concludes.

2. Electricity Tariff Structure and Household Expenditure in Brunei

   Electricity access in Brunei...