Free utilities in Turkmenistan: Ending the bluff
Introduction
When governments consider economic solutions to various problems, a possible remedy may be worse than the disease. For example, due to problems in regulating natural monopolies, some Kazakhstani people ask, “Our country is rich in natural resources, but why are utilities so expensive here?” However, there is a counterexample in Central Asia, where utility services used to be free - Turkmenistan. This article shows how free utilities made Turkmenistanis worse off than they could have been, if they paid for their usage.
The benefits and their elimination
Turkmenistan has been transitioning to a market economy very gradually and used to provide generous welfare. According to a decree of the passed-away President Saparmurad Niyazov, since September 1992 and until 2014, Turkmenistanis were receiving 600 cubic meters of free natural gas and 25 kilowatts of free electricity per person.
Gurbanguly Berdymukhamedov, the current President of Turkmenistan, cut the benefits. In 2014, he ordered installing gas meters in homes. All natural gas, consumed beyond the 50 cubic meter allowance per person, was charged at 7 U.S. dollars per individual. Most urban residents still use free natural gas, but villagers, who heat their homes and barns with it, now have to pay. The President also restricted electricity provision. A 1-2 person household is provided 90 kilowatt hours of free power each month. For larger households, each resident receives a monthly allowance of 35 kilowatt hours, reports EurasiaNet.org.
The costs of free utilities
Turkmenistan’s welfare system is inefficient. For individuals, consuming just the free amount or more, in-kind benefits (provision of free goods, rather than cash) have the same effect, as a cash benefit for the market price the utilities have, i.e. they only increase quantity demanded of normal goods and services, as more money is available for spending. Economists call this increase the income effect. Individuals, who use less utilities than the norms require, substitute more expensive goods and services. Economists call this change in preferences the substitution effect. This increase in purchasing power would be cheaper for the government, if it provided cash, instead of in-kind benefits.
Some argue that consumers may spend cash unwisely. This paternalistic view is common in the CIS countries. Most economists, however, believe that the government should generally permit consumers to choose what to buy, if the purchase does not violate the rights of or impose costs on third parties, including the children of recipients. The government cannot determine, what’s best to consume. Groups with vested interests may dominate over other people.
A free utility is charged at a zero price floor, below the market price, since the cost of an additional unit is above zero. Without subsidies, the price control creates shortages, as demand exceeds supply. The subsidy must be sufficient to cover the shortage. In practice, shutoffs in Turkmenistan were frequent. According to Farid Tukhbatullin, Chair of the “Turkmen Initiative on Human Rights”, a Turkmenistani independent human rights organization, utilities lack funds to conduct repairs of pipelines and power lines, so they malfunction, reports the Chronicles of Turkmenistan, the organization's website.
Nevertheless, Turkmenistan’s subsidies were burdensome. According to Bairam Annameredov, former Representative of the regional department of the Ministry of Economic Development and current Minister of Railroad Transportation, they amounted to over 22% of Turkmenistan’s GDP in 2015, reports Jumaguly Annayev, of CA-portal, a political and economic website, focusing on Central Asia.
Combining market power of natural monopolies and subsidies of utility services enable gaining at the expense of the rest of the population. In a perfectly competitive market without externalities, profit-maximizing firms generate the maximum net social benefit. Subsidies induce producing more than that amount, at lower prices, with a portion of government expenditures that nobody claims. With no competitors to undercut its price, an unregulated or inadequately regulated monopoly produces more expensive goods, and in lower qunatities, than the efficient amount. Combining monopoly power and subsidies yields higher profits for monopolists, at the expense of consumers and taxpayers, than would exist under a properly regulated natural monopoly.
One may argue that access to utilities should not depend on income. However, universally distributed in-kind benefits help the rich, as well as the poor. For example, since the rich can afford to buy larger housing and more appliances, they consume more electricity.
Charging fees
A botched transition to market-based utility pricing still burdens Turkmenistani people. In early 2015, the total annual cost of utility services, included in the rent for a typical 2-room apartment (an equivalent of a 1-room apartment in the U.S., since in the CIS region, a living room is counted as a room) in a new district of Ashgabat rose 15 times over 2014, reports the Alternative News of Turkmenistan, an online project, founded in February 2010 “to promote openness in Turkmenistan and develop a strong civil society that believes in freedom of speech and values justice.” The increase could have been smoother if utilities were not initially free, since their managers would have more funds and better incentives to modernize and conduct repairs. Even now, the government still subsidizes a portion of the fees, so the road to a market-based pricing is incomplete.
Conclusion
Turkmenistani society has been paying a high price for free welfare benefits. Not only were they inefficient and inequitable, but getting off their hook has also been a challenge.
References
Alternative News of Turkmenistan. A “surprise”, which no one had expected. https://habartm.org/archives/2070. 2015.
Annayev, J. Turkmenistan will reduce utility subsidies. CA-Portal. http://www.ca-portal.ru/article:21865. 2015.
Bing, S. Dictator of the week. Fortune. http://fortune.com/2007/08/28/dictator-of-the-week/. 2007.
Chronicles of Turkmenistan. How much does free natural gas in Turkmenistan cost? http://www.chrono-tm.org/2013/04/skolko-stoit-besplatnyiy-gaz-v-turkmenistane/. 2013.
EurasiaNet.org. Turkmenistan set to scrap core welfare benefits. http://www.eurasianet.org/node/75016. 2016.
Gurbanguly Berdymukhamedov, the current President of Turkmenistan, cut the benefits. In 2014, he ordered installing gas meters in homes. All natural gas, consumed beyond the 50 cubic meter allowance per person, was charged at 7 U.S. dollars per individual. Most urban residents still use free natural gas, but villagers, who heat their homes and barns with it, now have to pay. The President also restricted electricity provision. A 1-2 person household is provided 90 kilowatt hours of free power each month. For larger households, each resident receives a monthly allowance of 35 kilowatt hours, reports EurasiaNet.org.
The costs of free utilities
Turkmenistan’s welfare system is inefficient. For individuals, consuming just the free amount or more, in-kind benefits (provision of free goods, rather than cash) have the same effect, as a cash benefit for the market price the utilities have, i.e. they only increase quantity demanded of normal goods and services, as more money is available for spending. Economists call this increase the income effect. Individuals, who use less utilities than the norms require, substitute more expensive goods and services. Economists call this change in preferences the substitution effect. This increase in purchasing power would be cheaper for the government, if it provided cash, instead of in-kind benefits.
Some argue that consumers may spend cash unwisely. This paternalistic view is common in the CIS countries. Most economists, however, believe that the government should generally permit consumers to choose what to buy, if the purchase does not violate the rights of or impose costs on third parties, including the children of recipients. The government cannot determine, what’s best to consume. Groups with vested interests may dominate over other people.
A free utility is charged at a zero price floor, below the market price, since the cost of an additional unit is above zero. Without subsidies, the price control creates shortages, as demand exceeds supply. The subsidy must be sufficient to cover the shortage. In practice, shutoffs in Turkmenistan were frequent. According to Farid Tukhbatullin, Chair of the “Turkmen Initiative on Human Rights”, a Turkmenistani independent human rights organization, utilities lack funds to conduct repairs of pipelines and power lines, so they malfunction, reports the Chronicles of Turkmenistan, the organization's website.
Nevertheless, Turkmenistan’s subsidies were burdensome. According to Bairam Annameredov, former Representative of the regional department of the Ministry of Economic Development and current Minister of Railroad Transportation, they amounted to over 22% of Turkmenistan’s GDP in 2015, reports Jumaguly Annayev, of CA-portal, a political and economic website, focusing on Central Asia.
Combining market power of natural monopolies and subsidies of utility services enable gaining at the expense of the rest of the population. In a perfectly competitive market without externalities, profit-maximizing firms generate the maximum net social benefit. Subsidies induce producing more than that amount, at lower prices, with a portion of government expenditures that nobody claims. With no competitors to undercut its price, an unregulated or inadequately regulated monopoly produces more expensive goods, and in lower qunatities, than the efficient amount. Combining monopoly power and subsidies yields higher profits for monopolists, at the expense of consumers and taxpayers, than would exist under a properly regulated natural monopoly.
One may argue that access to utilities should not depend on income. However, universally distributed in-kind benefits help the rich, as well as the poor. For example, since the rich can afford to buy larger housing and more appliances, they consume more electricity.
Charging fees
A botched transition to market-based utility pricing still burdens Turkmenistani people. In early 2015, the total annual cost of utility services, included in the rent for a typical 2-room apartment (an equivalent of a 1-room apartment in the U.S., since in the CIS region, a living room is counted as a room) in a new district of Ashgabat rose 15 times over 2014, reports the Alternative News of Turkmenistan, an online project, founded in February 2010 “to promote openness in Turkmenistan and develop a strong civil society that believes in freedom of speech and values justice.” The increase could have been smoother if utilities were not initially free, since their managers would have more funds and better incentives to modernize and conduct repairs. Even now, the government still subsidizes a portion of the fees, so the road to a market-based pricing is incomplete.
Conclusion
Turkmenistani society has been paying a high price for free welfare benefits. Not only were they inefficient and inequitable, but getting off their hook has also been a challenge.
References
Alternative News of Turkmenistan. A “surprise”, which no one had expected. https://habartm.org/archives/2070. 2015.
Annayev, J. Turkmenistan will reduce utility subsidies. CA-Portal. http://www.ca-portal.ru/article:21865. 2015.
Bing, S. Dictator of the week. Fortune. http://fortune.com/2007/08/28/dictator-of-the-week/. 2007.
Chronicles of Turkmenistan. How much does free natural gas in Turkmenistan cost? http://www.chrono-tm.org/2013/04/skolko-stoit-besplatnyiy-gaz-v-turkmenistane/. 2013.
EurasiaNet.org. Turkmenistan set to scrap core welfare benefits. http://www.eurasianet.org/node/75016. 2016.
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