Egypt’s energy bill, already a whopping $17 billion, is probably much higher than official figures suggest.
The country is losing billions in petrodollars because it isn’t taking advantage of the international market where oil can be sold at much higher prices, nor is it closing up channels that breed corruption and allow hidden subsidy costs to take hold.
Officially, energy subsidies account for 20% of Egypt’s budget, costing the government $17 billion every year, but it is likely the government actually spends much more on subsidies every year.
1. Missing out on “opportunity costs”
If the government would account for the opportunity costs (sometimes also referred to as economic costs) of energy subsidies, it’s subsidy bill would be at least 50% higher than the official figure.
This is the money the Egyptian government loses by not selling fuel at the international market price, but at far cheaper rates.
That means the state-owned oil company, the Egyptian General Petroleum Corporation, provides energy at a cheaper price for the domestic market, when it could be taking advantage of the lucrative international oil market.
The difference between the profit that the EGPC could have made from selling the fuel internationally and the oil it sells domestically at a subsidised price is the “opportunity cost”.
In order to capture this opportunity costs, economists use the so-called price gap approach.
2. Lending between ministries has opened up channels for corruption and hidden subsidy costs
The government has made it almost impossible to track the true costs of energy subsidies.
That’s because of poorly recorded budgets and unnecessarily complex bureaucracy between the oil, electricity and finance ministry.
Samir Radwan, a former Egyptian finance minister explained how this internal bureaucracy works:
“When the EGPC provides fuel to the Ministry of Electricity, its sells it at the subsidised price. The Ministry of Electricity, in turn, collects revenues from electricity sales and pays them to the Ministry of Finance which issues a bond to the Ministry of Electricity.
But the subsidies are recorded as an expenditure at EGPC. It would be more correct, however, if EGPC would sell fuel at the international market price to other entities and then account for the subsidies as a loss.”
Intra-governmental funding has made it even more difficult to track how much subsidies are costing the nation and an “amazing labyrinth of connections between different ministries and different entities of the government,” Radwan says.
This only serves to undermine official figures.
But more worrying still is that the convoluted internal financing mechanism is masking an accumulation of intra-governmental debt. The Ministry of Electricity not only owes money to the EGPC and the Ministry of Finance (according to estimates, the Ministry of Electricity pays about 200 million Egyptian pounds a month to the EGPC), but is also owed funds and debts by other ministries and entities.
The question now is: how will the government undertake any energy subsidy reform, if it is not even able to track its own subsidy records?
“Energy subsidies” has become a phrase synonymous with the Middle East’s feeble efforts to reform and rightside budgets.
Governments across the region, including Egypt, Jordan, Morocco, and to some extent even oil-rich Gulf states like Saudi Arabia, have struggled to address their addiction to subsidies that provide cheap fuel to sate the masses. They want to scrap expensive energy subsidies but fear they will provoke riots if they do.
But as huge international institutions like the International Monetary Fund and the International Energy Agency muscle in with their expertise on how to end this costly system that will cost $600 billion this year, a substantial error has been overlooked.
These multinational organisations claim they have the technical expertise to help the Arab world with its most costly problem, but in fact have no standard way to measure energy subsidies, according to energy consultancy OpenOil.
Stephanie Heerwig, writing for OpenOil, explains:
The IMF, IEA, EIA, OECD, UNEP, you name it – use either different methodologies or different assumptions or both and routinely come up with wildly different estimates for the same country in the same year.
Not only are the data swilling around the public domain confusing – I might expect that – but the methodologies and assumptions on which it is based are incoherent most of the time. And what is particularly striking – there is no consensus on how to measure the subsidies. How could that be, given their huge impact on carbon emissions and government budgets?
So while the definition of energy subsidies is easy, there are hundreds of mechanisms that could fall under “an energy subsidy”.
What I have found out, especially when reading a brilliant paper by Doug Koplow, is that not only do major organizations often use different methodologies, they may use different underlying assumptions to arrive at radically different results even with the same methodology.
For instance, according to estimates by the International Energy Agency the total amount of subsidies on oil products in Egypt amounted to $9.2 billion in 2007. The IMF, however, estimates a figure of $3.8 billion, for the same year using the same methodology! That is a difference of about 58 percent! What a statistical margin of error.
Koplow, in the paper, compares 2007 estimates for total amount of subsidies on oil products from two of the biggest organisations, the IEA and the IMF (in billions of US dollars):
Heerwig goes into some detail on how these organisations come to such conflicting data. The conclusion is clear, however: If “experts” can’t even agree on the level of subsidies in each country, how can we expect the Egyptian government which is going through a monumental transition, to come up with a better alternative?
No, this doesn’t mean Egypt is off the hook. But the nation, and others in the same boat, must seek as many different opinions as possible to come to a sound solution. This argument inevitably ends at the same conclusion for Egypt: be more inclusive and do not continue to mistake that working in isolation is a mark of power.