Reinventing Egypt’s Energy Subsidies

It is easy to get weighed down in the debate over energy subsidy reform in Egypt.

After all, the Egyptian government has done a good job of confusing us by announcing a multitude of different measures that have mostly evaporated into thin air.

In fact, major government measures have actually aggravated the problem. 

In December, the subsidy on 95-octane petrol used by the wealthiest Egyptians was scrapped. That drove some motorists to buy lower-grade fuel, raising the demand for subsidised 92-octane gasoline.

Then, in a bid to prevent smuggling and other abuses,the government restricted distribution of heavily subsidised low-grade gas oil used by trucks, tractors and buses to filling stations owned and operated by the military. All this caused was longer lines at the pumps and increased economic disruption.

Finally, in April, Egypt raised the price of subsidised cooking gas canisters to 8 Egyptian pounds (roughly $1.17) from the previous 5 pounds ($0.73) but this also sparked scepticism considering only poorer households use gas cylinders and the money raised from price lift was minimal.

Meanwhile, many other initiatives have not moved forward.

In November 2011, the cabinet issued a decree to end subsidies on natural gas to energy-intensive industries in January 2012, but this did not occur. Similarly, the minister of supply and internal trade announced a new coupon system for distributing butane canisters in September 2011. The plan would distribute 14 million ration cards to the neediest Egyptians. It was supposed to be initially implemented in two sparsely populated governorates, then rolled out to other governorates, but was not.

Finally, the government continues to delay a nationwide plan to introduce ration cards nationwide for subsidised fuel. Once slated for July (which itself was a delay from April) is now planned for September, the country’s new oil minister Sherif Haddara has said.

One thing everyone agrees on is that energy subsidies must be reformed and the current system is untenable. Here’s why, in a nutshell:

Egypt has a system of subsidies for commodities such as petroleum and flour that is hugely expensive and works very poorly.

It spends about 20% of its national budget on keeping down fuel prices for the general public even though it pays out more to support wealthier households whose fuel consumption is higher than in needier ones. The public debt is further swelled by the fact that, because of Egypt’s declining domestic output and the sporadic disruption caused by strikes, a growing portion of the subsidised petrol and natural gas is imported.

However, the Morsi government is unlikely to tempt fate by altering the fuel subsidy status quo amid the uncertainty over the parliamentary election expected in October.

So what is going wrong?

Apart from the general incompetence of the Morsi administration, experts in the oil industry reckon Egypt’s proposed reforms just won’t work and the country needs to rethink its approach.

Rebel Economy spoke to Johnny West, who runs OpenOil, an energy consultancy which promotes transparency in the oil and gas industry. This is a brief overview of what he would propose: 

  • Why won’t the ration card system work in Egypt?

Any solution which involves calibrated targeting (like ration cards) will fail because there has not been any history of successful implementation in the past.  Anything which involves targeted distribution, coupons or an allowance is going to be abused because it allows corruption or abuse of the system, and administrative error to potentially damage the system. 

Plus the administration is under increased pressure and decreased capacity to deliver.  It wasn’t even able to deliver in less-stressed times. 

  • What do you propose?

There’s a much simpler way to do this which is to create direct cash dividend which is absolutely flat for everyone in the population and therefore does not needed to be targeted.  At the moment you have 93% of the gas subsidy consumed by 20% of the richest Egyptians, so this guarantees that everyone gets a fair share. 

  • Through what mechanism?

You would encourage the mobile phone networks, or any number of other ID systems to act as a food distribution network system.  This type of system has also worked in far more degraded environments than Egypt, for example the United Nations used a similar food distribution network in Haiti after the 2010 earthquake. 

In addition, 10% of Kenya’s gross domestic product is transferred using a mobile-phone money transfer service called M-Pesa.  Egypt’s mobile penetration is almost 100%, so this system is realistic. 

  • Talk us through how it would work.

 You wouldn’t liberalise all prices immediately but through quarterly implementations of staggered price rises over 5 years. Instead, all Egyptians would receive a dividend upfront so money is in their hand before any price rises take place. 

Based on the 2010/2011 budget, you are talking about 30 Egyptian pounds ($4.30) per adult per month. 

The system is entirely self-financing, and given the current urgency of the energy subsidy problem, Egypt would realistically implement this system, with very little preparation. You would need better demographic data of all Egyptians but than can be achieved in a month. 

  • The system seems too good to be true. What criticism has it attracted?

There’s an inbuilt bias, particularly against the Muslim Brothers, that this system is unfair as it subsidises the rich. Everyone would get a subsidy, including Naguib Sawiris, but our perspective is that energy resources are not government-owned but belong to the people. 

In almost all countries of the world, apart from the USA and Canada, citizens are shareholders of the country’s resources and the government is only acting as steward on those resources. Therefore in all activities we see, revenues that would accrue from that would belong to the citizens. 

One objection is that it is bad to give something for nothing, while another is that it represents a weakening of the government because the system is less reliant on the state. But we say the government is about legitimacy not control.

Ultimately, a flat dividend has a much higher chance of gaining political consensus than targeted saving which would see some not get any subsidy, and others receiving a monthly welfare package. 

 The cost of subsidies is also very much a global issue, costing $600 billion. There is massive consensus on the need to reduce but different perspectives on how to do this.

A flat dividend would address the urgent need to reform subsidies, gain broad consensus and be a first step to more complex calibrated systems further down the line. 

  • […] Two brief examples. First, as a reward for signing a peace treaty with Israel in 1979, Egypt became the second-largest beneficiary of US military aid in the world. Vast sums poured into the military’s budget in exchange for peace with Israel, the repression of the Palestinians and keeping the Suez canal open for business. In 2005, the Mubarak government began selling natural gas to Israel, supplying it with 30% of its total fuel needs at below market rates. This continued until last year, when the deal was suspended under intense popular pressure. Also in 2012, Egypt began importing natural gas for the first time to meet a rising domestic demand that is so heavily subsidised it consumes 25% of the national budget. But 93% of that is consumed by the richest fifth of the population. […]

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