Utility Subsidies as Social Transfers: An Empirical Evaluation of Targeting Performance

Abstract

Subsidies to residential utility customers are important in‐kind transfer mechanisms in developing countries. Do these subsidies reach the poor? This article finds the average targeting performance of water and electricity subsidies to be similar to that of other social‐transfer mechanisms using the same targeting method. The most common form — a quantity‐based consumption subsidy aiming to subsidise low‐volume customers — is highly regressive. Many geographically‐targeted and most means‐tested utility subsidies are progressive, but still exclude many poor households. Connection subsidies are an attractive alternative in low coverage areas, but they will only reach the poor if utilities extend network access to poor households and if households choose to connect.