Egypt: when is a subsidy not a subsidy?

Energy subsidies are without doubt one of the main problems of Egypt`s ailing economy. Officially accounting for 20 percent of Egypt’s budget, the government has proposed a long list of subsidy reforms (the latest being a smart card reform) as it struggles along to pay its bills – or not at all with the Egyptian General Petroleum Corporation (EGPC) currently owing up to $20bn to oil companies and banks.
If that would not be enough, there are two reasons why Egypt`s subsidy bill has not only eaten up a staggering $17 bn ($120bn), but probably a lot more.

1. They just got the methodology wrong

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 percent higher than the official figure.

Opportunity costs have long been a part of the academic discourse and deemed crucial by economists like Bassam Fattouh. They are basically all the money that the Egyptian government loses by not selling fuel at the international market price, but below.
For instance, out of its production sharing agreements with international companies, the EGPC gets oil and gas which it could sell on the international market. Instead, however, it provides it at a cheaper price for the domestic market. Exactly, this difference between the profit that the EGPC could have made from selling the fuel internationally and selling it domestically at a subsidised price instead is the opportunity cost.

In order to capture this opportunity costs, economists have usually use the so-called price gap approach. Using this approach, the International Energy Agency estimates that Egypt`s subsidy bill was at around $24 bn ($7 bn higher than the current budget estimate) in 2011. And setting a political signal of the importance of subsidy reforms, the IMF has recently published an estimate of around $22bn in energy subsidies in Egypt for 2010 alone (the IMF also accounts for post-tax subsidies
which means the costs that the Egyptian government pays for not taxing fuel “efficiently” as to account for negative externalities as pollution and so on).

2. Budget records are convoluted opening channels for corruption and hidden subsidy costs

During an interview Samir Radwan, former minister of finance, told me that many costs of the government are recorded badly or simply the wrong way making it impossible to track the true costs of energy subsidies:

“When I started to look at the budget file, I realized that it is not simply about the amount of energy subsidies. There is an amazing labyrinth of relations between different ministries and different entities of the government that wherever you try to pull a threat, you find yourself entangled in a ball of spaghetti. […] within this spaghetti some of the costs of subsidies just get lost. Official figures are not credible. On what basis does the government want to reform subsidies?”

And just to give an impression about the entanglement, Radwan outlined how the budget records, for instance, the provision of subsidised fuel to the Ministry of Electricity:

“When the General Authority of Petroleum, an arm of the Ministry of Petroleum, provides fuel [natural gas] 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. The weird thing is that the subsidies are recorded as an expenditure at the General Authority of Petroleum. Something I have never seen in any other country. It would be more the correct, however, if the General Authority of Petroleum would sell fuel at the market price and then account for the subsidies as loss.”

And by the way, Radwan does not seem to be the only one who discovered that the government records subsidies in an obscure way. A paper by Vincent Castel, principal coordinator at the African Development Bank, for instance, reads: “…Energy subsidies are not reported clearly and accurately…”. Castel even states that the official figures do not cover electricity subsidies properly.

Another interesting aspect of this administrative convolution is, of course, that also a whole bunch of other government expenditures are recorded badly, particularly pensions according to Radwan, opening up possibilities for corruption on an unknown scale:

“Half of the petroleum ministry is in prison, not only because of supplying gas to Israel.”

The main question of course is then, how the government is going to undertake a fuel subsidy reform, if it is not even able to track its own subsidy records – even it is actually interested in doing so.

But that is another story.

Category: Africa, Blogs, Egypt, Subsidies · Tags:


One Response to “Egypt: when is a subsidy not a subsidy?”
  1. Mikki says:

    I have asked exactly the same questions…noting that a lot of the problems associated with environmental degradation caused by oil exploration are caused by weak regulatory mechanisms, with the divestments occuring in Nigeria’s oil industry by the foreign oil MNCs to local companies and considering that many of these companies have worked as contractors and staff to these foreign IOCs can we rightly say now and in the future that we are truly over the past? So many issues are being glossed over in these take-over contracts that should be given greater attention and more so greater accountability for environmental responsibility should be expected from local companies.