Public Policy Discourse Panel: Policy Research for Sustainable Economic Development

Project Description:

PMC Research Center with the financial support of the Konrad Adenauer Foundation is implementing the second phase of the project “Public Policy Discourse Panel: Policy Research for Sustainable Economic Development.”

The project’s objectives are as follows:

• To identify the issues which are supposed to have significant influence on Georgia’s sustainable economic development
• To conduct research, develop research-based policy recommendations and organize public meetings with the target audience, including key stakeholders, beneficiaries, CSOs, students, researchers and media to start discussion processes on identified topics/issues
• To identify young talented researchers to conduct research on selected issues and actively participate in public discussions on the corresponding issues

The research topics are selected by the steering board, which consists of representatives from Policy and Management Consulting Group, the International School of Economics at TSU, from the Ministry of Economy and Sustainable Development and the Ministry of Energy, the actors closely involved in the assessment/analysis of Georgia’s economic development, conducting research in this direction and elaborating/implementing policy recommendations for the country’s economic development.

Policy researches of the selected issues are conducted by young researchers, selected through a competition based on submitted research proposals and interviews.

During the second phase of the project, the following topics have been selected for policy research:

• Solar power scale: Policy schemes for supporting solar power generation in Georgia
• Service quality in the natural gas sector: EU experience and implications for Georgia
• Assessment of fiscal sustainability of the universal healthcare program in Georgia, 2015-2030
• Agricultural land ownership: the optimal way
• Role of tariff policy in improving energy efficiency in residential sector
• Analysis of the planned pension reform

1. Solar power scale: Policy schemes for supporting solar power generation in Georgia – the goal of the research is to provide in-depth analysis of the advantages of solar power generation, to analyze Georgia’s potential in solar power generation and to estimate its costs. The research reviews the international best practices for solar power generation and the opportunities for its integration in Georgia, defines costs for various policy interventions and provides recommendations on the best options for creating schemes to develop independent solar power generation in households and businesses in Georgia. The research shows that Georgia’s solar power generation potential lies between 1,150 and 1,600 kW/h/m2, with 250-280 sunny days during the year. Solar irradiation levels in Georgia are similar to northern Italy and Spain, southern France and Germany. Hence, Georgia has high potential for the generation of solar schemes for households and businesses, but currently its development level is very low.

Development of solar photovoltaic systems is important for the Georgian electricity system for several reasons. Solar power provides households and businesses with a micro level solution for electricity supply security. Through diversification of power supply sources and improvements in storage technologies, solar power contributes even more to the increase of electricity supply security. The renewable and carbon free nature of solar power will create at least a partial substitute to polluting thermal power generation.

Within the framework of this policy research, to acquire a benchmark cost value per kW/h, a unit cost of electricity generation over lifetime of the system is calculated (LCOE) for Georgia. The levelized cost of electricity (LCOE) appeared to be twice higher than current grid tariff that is derived based on prices from relatively cheap hydro power and gas turbines. With very high LCOE solar rebate and capital grants seem to be too costly for the state budget. In addition capital grant policy makes it hard to ensure efficiency of solar installation.

The Analysis show that support programs, grants and Feed-in tariffs will be a heavy burden for the state budget and low-interest loans policy is necessary to the popularization of solar systems for businesses and households.

2. Service quality in the natural gas sector: EU experience and implications for Georgia – the goal of the policy research is to study the current situation in the natural gas sector in Georgia and to compare this with EU experiences. It introduces problem dimensions, provides comparative analyses of European and Georgian legislation related to the quality of service in natural gas sector, analyzes possible obstacles in the way of adopting European practices in the Georgian natural gas sector and provides recommendations to improve the current conditions and regulations in line with the best practices of the EU member states. Doing so will enable decision makers in the energy sector to consider and implement quality measures crucial for a secure, efficient, competitive and affordable energy supply. The paper concentrates on the experience of the United Kingdom as it has one of the most developed regulatory frameworks in the world that sets necessary incentives for high-standard commercial service quality in the natural gas sector and analyzes the Georgian situation in the gas sector in comparison to the British experience. 

Natural gas (the most demanded source of energy in Georgia) supply to consumers requires constant monitoring to ensure that the product is delivered with adequate quality, which alongside the product (commodity) quality includes service quality.

As the research shows, there are service quality provisions and obligations in the current regulatory framework in Georgia but these are not sufficiently detailed and demanding compared to EU countries and in most cases does not codify any standards or compensation mechanism. The only case where the standards and corresponding mechanism is defined is in the area of new connections. The Georgian National Energy and Water Supply Regulatory Commission (GNERC) has recently introduced new rules for connection to the natural gas distribution grid, which sets particular connection fees and timelines for connection of a particular capacity. Violation of the rules will lead to reduced connection fee by 50% for new customers. Unlike many European countries, today there is no separate document regulating the quality of service in the natural gas sector of Georgia. The “Rules for Supply and Consumption of Natural Gas” defines responsibilities of the natural gas undertakings and allows GNERC to penalize undertakings in violation of the rules. However, customers are not expected to gain any direct benefit from this and are therefore less motivated to reveal violations and, hence, service quality in the natural gas sector is somewhat neglected.

According to the study results, service quality standards must be set in the natural gas field. The financial and technical conditions of the distribution companies must be taken into account, however, ultimately, Georgia will need to develop a common standard. It is highly recommended to define the set of service standards in the gas sector and also to implement and monitor them based on the best international experience. It is important to increase the awareness of society about the consumers’ rights and standards. In this process, civil society organizations should be actively involved.

3. Assessment of fiscal sustainability of the universal healthcare program in Georgia, 2015-2030 – the objective of this research is to analyze preliminary results of the universal healthcare program in Georgia, to assess its financial sustainability and quantify its economic impact. This research informs the public and policy makers about cost projections and economic benefits of healthcare reform. Lastly, the research will provide recommendations to the government about ways to increase the cost effectiveness of the program, to attain higher financing if needed and to ensure fiscal sustainability based on experience of worldwide recognized health care systems. 

The research shows that the universal healthcare program increased the affordability of healthcare for many Georgians, but it faces significant challenges in terms of fiscal sustainability. In order to ensure an efficient healthcare program and decrease the share of out of pocket spending, the government will need to gradually enhance the program by including medicinal expenses and increase its share in total healthcare expenditure. The research analysis is based on the framework developed by Williams and Hay (2005), according to which the upper limit of a fiscally sustainable government health expenditure amounts to 4.5-5% of GDP. We conducted sensitivity analysis of the baseline, negative and positive scenarios. In any scenario, the government will need to find additional resources to finance increased health expenses, otherwise the issue of fiscal sustainability might become a significant concern in the near future. According to fiscal space assessment, the government can obtain additional financing through improving program efficiency, attaining specific health sector recourses, fostering high economic growth and improving tax administration. Further recommendations about improving efficiency and managing fiscal sustainability are provided in the following chapter. The research also assesses economic impact of increased health expenditure based on empirical evidence and elasticity found in the literature. According to the research findings, by decreasing capital spending and financing heath expenses, the government slowed economic growth in the short run (0.2-0.5%) as well as in the long run. But, it should be noted that in the long run health expenditure also generates a positive impact on GDP growth, because healthier people are more productive, attain better education and manage their assets more effectively.

Based on the findings, the policy research paper suggests the following recommendations to strengthen fiscal sustainability of the healthcare program and increase its effectiveness:

• Improve the copayment system by linking copayment rates to income and rankings from the Social Security Agency (poor people should pay lower rates). Medical expenses might be covered only for poor people
• Improve management of health expenditure, reform payment agreements and strengthen effectiveness of monitoring the department to reduce provider-generated demand for healthcare
• Gradually expand the program to cover medical expenses and increase the share of public spending in total health expenditure, in order to increase the effectiveness of the program and reduce catastrophic health expenditure. Otherwise, it will not be able to significantly improve health conditions of poor people
• Improve the primary healthcare system and create appropriate framework to regulate the hospital sector more effectively. This will allow for a decrease of significant health expenditure at a later stage
• Analyze possible ways to ensure fiscal sustainability of the healthcare program and finance expanding health expenditure: price controls (quality might suffer), earmarked taxation (for example, tax on alcohol products allocated to healthcare), increasing VAT or income tax. Financing health expenditure by decreasing capital spending is very costly in terms of economic growth
• To introduce a contribution-based program. Perhaps this might be an option after a significant reduction in informal labor

To conclude, these recommendations will increase the effectiveness of the program and improve its sustainability, but it is very difficult for a public healthcare program to be fully cost efficient. However, inefficiency and welfare loss is much greater without public healthcare, because people do not pay attention to health problems immediately and therefore face higher medical expenses later.

4. Agricultural land owmership: the optimal way – the research aims to identify problems related to agricultural land ownership in Georgia and to develop policy recommendations for resolving them. This policy paper addresses the challenges related to agricultural land ownership, concentrating on three basic problems:

1. 1. Large portion of the non-registered agricultural lands
   2. Large portion of the state-owned agricultural land
   3. Restricting the purchase of agricultural land for foreigners

Based on the research, the following key recommendations are provided in the policy document:

• The Government of Georgia should support the registration of private land and should register the land which is state property
• The government should develop a state-owned agricultural land privatization scheme in order to maintain effective usage of the land resources
• The government should allow foreigners to purchase agricultural land if it does not threaten the country’s security

5. Role of tariff policy in improving energy efficiency in the residential sector – the goal of this research is to develop key policy recommendations to consider the role of residential energy pricing in a comprehensive complex of policies and programs to enhance energy effeciency in the residential sector and to tackle persistent barriers of energy effeciency.

Based on research results, policy recommendations are elaborated. For energy effeciency policy to be effective the appropriate price signals should be made. The tariff should reflect the real price of energy guaranteeing all costs associated with production/ transmission/distribution, otherwise it will add disturbances in the market. The tariff itself as well as tariff policy should be transparent and calculated by an independent authority so that consumers understand it well, and have no doubts about the fairness of the proposed rate. This will help to avoid any political speculation on the topic. The correct tariff was a necessary condition for effective energy effeciency policy, however, if other barriers are not addressed, the tariff design is not a sufficient instrument for promoting energy efficiency.