Economics Training Series
Introductory Course
Subsidies and Cost Recovery
ADB Criteria for Subsidies
a) What are subsidies?
b) ADB’s general treatment of subsidies.
c) Impact of unjustified subsidies.
d) Exceptions to the norm.
e) Framework for ADB criteria on subsidy
and cost recovery.
Subsidies - 1
• A subsidy is a negative tax or transfer payment
equivalent to the difference between the
revenues generated by the output of a project
and the cost of producing that output.
• A cross subsidy is when one or more elements of
society, within the same sector or across sectors,
subsidize other elements of society.
• The estimate of a subsidy varies depending upon
whether inputs and outputs are valued at
prevailing market prices (i.e., financial subsidies)
or their true opportunity costs (i.e., economic
subsidies).
Subsidies - 2
• Financial subsidies are equivalent to the
amount of budgetary support necessary to
make a project financially
viable/sustainable.
• Economic subsidies provides an indication
of whether a project is efficient in terms of
resource allocation from the national
viewpoint.
ADB’s General Treatment
of Subsidies
The use of subsidies is generally discouraged,
except where they can be clearly justified on
grounds of efficiency or equity.
Where subsidies are used, they should be:
a) made transparent.
b) clearly targeted.
c) reduced or eliminated in a systematic manner
unless they can be explicitly justified.
Impact of Unjustified Subsidies
May lead to:
a) macroeconomic pressures via the budget.
b) inefficient resource allocations.
c) iniquitous distributional effects.
Exceptions to the Norm
a) Situations of “positive externalities” where
social returns exceed private returns.
b) Decreasing cost sectors where individual
producers need to be subsidized to obtain
socially optimal levels of output.
c) Special considerations, such as in the
context of transition economies with
weakly developed market institutions.
Cost Recovery
and Subsidy Analysis
•ADB’s Guidelines for the Economic