Gas and fuel prices soared this July, after the new Egyptian government reduced subsidies. Electricity shortages continued with the price of electricity set to double over the next five years.
Egypt’s energy crisis is real and presents a major inconvenience and discomfort; the country suffers from daily power cuts and increasing energy prices, but it is not going to go away and often a crisis provides unforeseen opportunities. The situation is unrealistic as it is, with subsidies costing 33% of the budget, according to Sherif El Diwany, Executive Director of Egyptian Centre for Economic Studies. Three quarters of this is for fuel subsidies.
A recent World Bank report estimates that up to 10% of GDP is spent of subsidies, seven times more than on health. The removal of subsidies is hard on the 25% of Egyptians living on $2 a day, but so is a collapsing health sector. Finance Minister, Hany Kadry Dimian, says reducing subsidies has cut $5.6 billion from the budget – this money well spent could have far more impact on improving people’s lives than fuel subsidies.
Although The Economist, in August 2014, warned of the risk of social unrest and Egyptian Initiative for Personal Rights believe that the poor are disproportionately affected, there are very pressing reasons for the overhaul of the subsidy system.
It may seem logical to assume that subsidies assist the poor and are a “good thing,” but research shows that it is actually the most socio-economically advantaged that benefit.
Global Subsidies Initiatives discusses economist Professor Gordon Tullock’s term “transitional gains trap,” which describes the phenomena where “gains accrue to those who can immediately take advantage.” This means that further down the line when the subsidy is inevitably removed, people suffer a transitional loss. This is what is happening in Egypt now.
Cheap electricity, for example, deterred investment and strangled innovation. Electricity prices are among the lowest in the world because it was sold for half its production cost. Correcting that distortion now costs money and massive inconvenience and has serious knock on effects on the economy. However without the increase, there is no incentive, or money to invest in expansion and maintenance.
Also electricity prices all over the world have risen sharply over the last decade in an attempt to reduce consumption of fossil fuels, so Egypt is just part of a global trend. Prices will double, it is from a low base, and merely covers production costs. The immediate effects will be difficult, but the upside is that it encourages wiser use and drives the move to alternative energy sources.
Solar power has great possibilities in Egypt but is not presently financially viable because of the very cheap electricity. Solar lighting is becoming increasingly common all over Africa – it is cheaper, cleaner, and provides a variety of positive employment options. Low skill micro enterprises like solar charging stations for mobile phones are a better deal than running a neighborhood generator – ask any operator in Egypt how difficult this is. It’s expensive, noisy, smelly and high maintenance. The installation and maintenance of either large solar power stations, or household or community size solar options generate employment and, over time, reduce costs. As a result, the poor will be presented with unforeseen employment possibilities. Street lighting can become neighborhood employment and training projects, removing a burden from the state and creating local employment.
Experts attending the recent Cairo Energy Conference report that energy saving LED light bulbs can reduce power consumption by 20% and would cost less to distribute than fuel imports. “There are several ideas that can be studied and implemented, but we have been very slow,” Mohamed Moussa Omran, undersecretary of the Ministry of Electricity, told Ahram Online.
Mohamed Shoeb, former president of the Egyptian Natural Gas Holding Company, also speaking at the Cairo Energy Conference, emphasized, “Solar energy is no longer expensive. The cost of it has decreased by almost 90% during the last 10 years.”
Heating household water uses the most electricity and so a move to solar panels to do this would reduce the need for electricity from the national grid. Twenty million solar panels cost less than a new power station and lead to long-term cash savings for households.
Investment Minister Ashraf Salman, speaking at Al-Mal GTM Conference in Cairo, on Monday the 15th of September, announced that Egypt plans to generate 4 gigawatts (GW) of solar energy and a similar amount of wind energy. Windpower Monthly reports that Egypt is aiming for 7.2GW of operating wind capacity by 2020.
Building technologies that improve insulation cost more at first, but would cut the cost of heating the home in winter and cooling it in summer, both very energy intensive uses. Again this will generate a whole new industry, whether it is researching and using local products like palm fibre, which will also create employment.
Tax breaks for these sorts of innovations are a better are much more cost effective than endless subsidies which never solve the problem, and which rise as need grows. The long-term benefits – as well as the broader tax base created by more employment – are more beneficial than subsidies.
The great thing about these options is that they provide opportunities for small and micro enterprises, the real employment generators. Germany has the highest level of small business, known as the Mittelstand, in Europe. The Economist has spoken admiringly of “Germany’s new Wirtschaftswunder” in its analysis of the resilience of this economy. It is extraordinary that 99.7% of German businesses employ less than 500 people according the German Federal Ministry of the Economic Affairs. Also the green economy has also hugely benefited Germany as one of the “greenest” countries in Europe.
The gasoline increases do cause immediate inconvenience and raised costs, and will raise transport and food prices. However, the unnaturally low price of gasoline – compared even to other African countries – cannot continue indefinitely. The fuel crisis in the 1970’s led to all sorts of clever ways to save gasoline: car sharing and more careful planning. Driving for fun or to a shop close by are outdated behaviors in Europe. The initial inconvenience is compensated by less traffic, less pollution, and better public transport. The public transport sector is in need of an expansion.
Brazil, with an urban population of 110 million has developed a transport system that runs without subsidies or government funding. Aaron Golub’s study ‘Brazil’s Buses – Simply Successful’ describes how 300 hundred buses an hour travel down an avenue in the Copacaban districit of Rio de Janeiro, each carrying 85 passengers and are less than 3 years old: they are comfortable, clean and fuel efficient. They have replaced the minibuses and cars that created traffic and pollution. Dedicated lanes make journeys reliable and smooth.
Better facilities lead to wider use. Clean air-conditioned buses are a better investment than fuel subsidies with no real return. Taking a comfortable bus to work has all sorts of benefits – chatting, reading, social media time – as does taking a walk to the local shop.
In Cairo, river buses might become financially worthwhile if car drivers had to pay the true cost of fuel. Imagine a lovely trip on the river to work and then taking a cool bus or taxi to the office.
Daily News Egypt reported that natural gas exports dropped from $160 million to $30 million from April 2013 to April 2014. This also cannot continue; once an exporter, we are on our way to becoming an importer because of lack of investment.
The cylinder gas used by 75% of homes in Egypt is not ideal – the cylinders use imported butane gas, which puts pressure on the national budget. The distribution of these heavy objects is a problematic and unwieldy undertaking. The World Bank announced the approval of a $500 million loan for the Household Natural Gas Connection Project in May 2014. This will increase the number of homes connected to the gas grid by 40%, from 5.8 million to 8.2 million homes.
Foreign investors and Egyptian businessmen have long advised that increased domestic prices would boost investment. Forbes magazine had the headline “Hurrah!” when the cuts were announced. CEO of international Citadel Capital Mohamed Shoeb believes “the country is full of opportunity.” Sea Dragon Energy (SDX) CEO Paul Welch says, “The time is great now to get involved in Egypt.” This echoes the opinion of many other foreign investors who would not only bring much needed investment, but also create jobs. There are already projects in the pipeline with BP and Italian company Edison launching projects off the North Coast which will go into full production by 2016/2017.
If Egypt used more renewable energies at home and exported a greater proportion oil and gas everyone would win: more employment and self-sufficiency, cleaner air, increased export revenue, and more foreign investment. All of this is possible and optimists would say it is even likely.
By Virginia Crawford