Egypt has applied for a USD4.8 billion loan from the IMF to get its economy back on track. Egyptian Finance Minister Mumtaz al-Said has pledged economic reforms which, he said, were not required by the IMF but were included in the Egyptian reform plan. Foremost among the reform is a reduction of the energy subsidy.
The figures are staggering. During the fiscal year of 2011/2012, Egypt’s energy subsidy bill rose to some EGP95.5 billion. The figure constituted 71 per cent of total subsidies, and exacted a heavy burden on the economy, estimated at around 19 per cent of total expenditures and some 6 per cent of Gross Domestic Product (GDP). The 2012/2013 budget promises the subsidy for petroleum products will go down to EGP70 billion, still a horrendous sum, and one whose price in social stability is yet unknown.
Yet this summer has seen Egyptians severely disgruntled over record power outages that occur daily and last for hours on end. Scant surprise when, according to the State-owned Cairo daily al-Ahram, there has been a 3,000 per cent increase in air conditioner use over the last 13 years. While there were some 196,000 air-conditioner units in Egypt in 1999, there are more than six million today. A spokesman for the Ministry of Electricity said they account for 20 per cent of the total electricity use.
The largest portion of the energy subsidy, however, is directed to energy-intensive industries.
Fix the system
Given that the petroleum products subsidy is the difference between the production cost and the local market prices, the cost of this subsidy has risen substantially over the years owing to the international rise in petroleum product prices and the local rise in consumption, while the local prices of these products remain almost unchanged.
Over the past few years many people in Egypt have come to believe that energy subsidies not only add up to an astounding figure, encourage runaway consumption—with energy that cheap, who can be expected to rationalise on it?—but are also inefficient and inequitable. The wealthy portions of society, which tend to have higher patterns of energy consumption, benefit more from it than the poor.
No two persons can thus argue over the dire need to fix the energy subsidy system.
The gains to be made are considerable. The strain on the national budget would be eased. Wasteful consumption would be reined in, and the subsidy reallocated to those who need it most, namely the poor. An additional gain would be made for the benefit of the environment by achieving fair distribution of the country’s already limited energy resources between our generation and many generations to come.
Restructuring the subsidy
A recent seminar at the Egyptian Centre for Economic Studies (ECES) had economists and energy experts demand the rationalisation of consumption of petroleum products, and stress the importance of finding alternatives for conventional energy sources.
Magda Qandil, Egyptian expert with the IMF, says the higher-income urban classes benefit from 33 per cent of the subsidy on petroleum products, while the subsidy directed to the low-income rural population is a mere 3.8 per cent. Natural gas and fuel oil subsidies make some 13 per cent of the total subsidy of petroleum products; given that these two products are widely used by the poor, raising their prices comes to the detriment of the disadvantaged.
It is consequently imperative to restructure the subsidy programme in favour of the most needy. Subsidy on products such as finest quality 95-octane gasoline, jet fuel and liquefied petroleum gas must be cut and reallocated to other products heavily used by the poor such as low-octane gasoline and kerosene. Another option is to cut off subsidies and replace them with direct cash transfers.
Dr Qandil cites several strategies for cutting down the energy subsidy bill. One scenario would be to phase out the subsidy through incremental price adjustments. Alternatively, and to benefit low-income brackets, price adjustments could be accompanied by cash transfers to the poor in both rural and urban areas. A third scenario would be to adjust the prices of petroleum products and redirect 50 per cent of the resulting savings either to all households or only to poor households.
In parallel, Dr Qandil says, a strategy must be outlined to improve the energy efficiency of most energy-intensive industries such as the cement, fertilisers and metal industries.
Price vs cost
Engineer Mohamed Hafez, executive vice-president of planning and projects at the Egyptian General Petroleum Corporation (EGPC), points out that in accordance with article 4 of law No.20 of 1976 issued by the General Petroleum Authority, the national treasury is committed to keep a difference in prices between local prices and production costs. Butane cylinders are filled in 51 factories, nine of which are owned by the public sector company Petrogas while the other 42 are owned by localities and private sector, with Petrogas holding 35 per cent of total energy. As for distribution, only 170 depots are owned by Petrogas versus 2690 privately-owned depots.
The Petroleum Authority, Hafez continues, worked on many studies and suggestions aiming to properly allocate the subsidy of petroleum products, ease the burden on the State budget and reallocate part of the subsidy to support other services.
The suggestions focused on fixing a unified price for the same petroleum product to reduce smuggling; the prices of the different types of fuel must be related to their calorific value and adjusted every five years. The price of fuel used to provide public service, such as diesel fuel which is used in public transport and the transport of food or agricultural goods, must be linked to the services provided and the size of the user group. Furthermore, the most feasible solution to properly bring the subsidy bill down is to expand the use of natural gas as a cheaper alternative to conventional fuel in households as well as in commercial and industrial establishments.
Gas-driven
In fact, a national plan is being laid out fully to substitute natural gas for petroleum fuel, confirms Tamer Abu-Bakr, head of the energy committee in the Federation of Egyptian Industries (FEI). A law is being drafted to shift all public transport vehicles and government cars to natural gas and ban the Public Transport Authority from purchasing new vehicles which do not run on natural gas. All taxis in Greater Cairo and Alexandria are required to shift to gas within a period of three years, all Lower Egypt microbuses within five years and Upper Egypt microbuses within seven years. Providing customs incentives for local and foreign-made cars that use natural gas would help people shift to such type of vehicle, and hence this type of fuel.
As for the industrial sector, natural gas is expected to substitute for mazut; it is therefore imperative that the natural gas grid should be expanded to reach major consumers of fuel oil, diesel and butane gas. A practical and realistic process must be swiftly implemented to deliver natural gas to industrial plants at the expense of the State. This must be accompanied by a three-year gradual increase in natural gas prices sold to the local market, especially to energy-intensive industries, until it reaches USD5 per MBtu.
In addition, a wide-scale national campaign is required aiming to rationalise energy consumption (electricity, diesel and butane gas) under the supervision of a sovereign body, using the expertise of top houses of investment in this field.
The FEI head of the energy committee calls for the urgency of establishing programmes and procedures to expedite the shift to natural gas which will have a swift impact on lowering the energy bill in Egypt. It will significantly reduce the energy subsidy without having a negative impact on the low-income brackets, and will naturally lead to reduce carbon dioxide emissions.
WATANI International
16 September 2012