For the last decade the energy sector in the Dominican Republic has been failing its residents. A partially state-controlled system is characterised by frequent blackouts, electrical losses and high levels of electricity theft due to an inefficient structure in need of reform. The Dominican Republic is the largest economy in the Caribbean and has enjoyed economic growth in recent years averaging 5.5% between 1991-2013. Despite this, the level of poverty and inequality in still incredibly high with a poverty headcount still above 40%. By speeding up reforms in the energy market in particular the electricity subsector at a time of low oil prices the Dominican Republic could pave the way to becoming a more resilient and equal economy.
As a country without oil reserves, the Dominican Republic is part of a Caribbean oil agreement with Venezuela; Petrocaribe. Petrocaribe has been praised and criticised at the same time as a cheap benevolent provider of credit, but one which is potentially unsustainable and tends to skew investment decisions in favour of crude oil. Energy sector reform is a region-wide issue, but given the upcoming political elections; oil prices predicted to stay at $59 a barrel in 2016; and expiring purchasing contracts for private generators; it should be at the forefront of the political debate in the Dominican Republic. Pro-free market reforms should be high on manifestos for improving the economic efficiency and as a method of combating inequality in the next decade through lower prices.
As an oil importing nation, the Dominican Republic has a huge trade deficit, but has successfully started the transition to natural gas (which is cheaper) with 31% of the energy matrix made of natural gas. Whilst many of the energy generators are privately run, the transmission and distribution companies are state-run by the Dominican Corporation of State Electricity Companies (CDEEE). The distribution companies in 2003 were renationalised in the aftermath of the financial crisis where the second-largest private bank was bailed out decapitalising the central bank triggering soaring inflation levels, a contraction in output and a breakdown of public confidence. At the time the distribution companies were nationalised due to widespread discontent with energy prices in addition to energy price controls, but these temporary measures have led to structural problems and over a decade later these companies are still state-run and are economically inefficient. As they struggle to cope with technical and non-technical losses amounting to 33% of electricity (predominantly due to theft), the operational cost is pushed above the electrical price tariff set by the government on a weekly basis. These losses result in financial instability and ramifications along the supply chain and a need for state-subsidies to fill the gap between cost and sale prices. The lower oil prices will bring reduced operational costs to the distributors and offers a window of opportunity for gradually reducing the subsidies and the withdrawal of government intervention in the market.
By privatising the distribution companies, the right incentives will be in place to tackle the problem of electricity theft, low billing and collection rates and other non-technical losses. Despite a law criminalising electricity theft in 2007, it is still one of the greatest constraints on sector development, inhibiting investment in the distribution and generation sector resulting in capacity constraints which has led to unreliable supply and black-outs which can last for several hours. A reformed system should in time reduce the electricity losses thereby reducing the need for government subsidies. These savings could be earmarked for more progressive welfare benefits for poorer households to counter the rise in electricity bills.
A recent working-paper by the IMF also highlighted need for energy subsidy reduction across the Caribbean region. The Dominican Republic has larger than average subsidies which result in large fiscal deficits as the current energy subsidies aggregate to 2% of GDP of which 1.9% is on electrical subsidies. As the distribution companies which receive subsidies to cover losses are state-run, the consequence of the subsidies on the government’s fiscal deficit is somewhat unclear, but acknowledged to a hindrance to growth. Whilst reducing state control will seem controversial, especially as it may have a disproportionate effect on low income households where electricity makes up a large percentage of the household budget, a more progressive transfer system would be more efficient for improving inequality. As a method for reducing income inequality electricity subsidies are inefficient; the blanket subsidy benefits wealthier households who on average use a larger volume of electricity. In addition, they favour investment in capital intensive sectors (rather than labour-intensive) thereby benefitting capital owners to the detriment of the labour market.
During this period of transformation, regulatory reform and law enforcement should also be reflected upon, but first and foremost the structural issues prevalent in the energy market should gradually be resolved by reducing the role of the state. Removal of subsidies tend to have higher political and social costs the longer the subsidies are in place, so time is of the essence!
