After being put on hold due to the global financial crisis, Egypt's program to gradually phase out energy subsidies is set to resume in January.
The new round of reductions will increase the cost of electricity and oil by about 20 percent for non-energy-intensive industries, according to Khaled AbuBakr, an associate member of the International Gas Union and managing director and chairman of the executive committee at TAQA Arabia, an energy solutions group whose activities range from engineering to distribution and fuel marketing. The January actions will be the second reduction in energy subsidies for non-energy-intensive industries (many of which are also labor-intensive industries) and represent another phase in the government's energy subsidy restructuring plan, which began in 2007.
The first subsidy decreases were in 2007 for energy-intensive industries and 2008 for non-energy-intensive industries. The goal is to phase out subsidies until domestic energy prices match those of the international market.
Though some in industry have criticized reducing subsidies, others see the phase-out as necessary. AbuBakr sees the plan as an important way to reduce the drain on the national budget and solidify Egypt's economic future. For example, he says, energy subsidies accounted for 20 percent of the government's budget in the fiscal year 2007-08. That was 1.7 times more than was spent on education, 5 times more than on public health and 5.5 times more than on wheat. AbuBakr adds that the package of energy subsidies in 2007-08 cost the government about $60 billion, which includes actual out-of-pocket spending as well as the amount of revenue forfeited by selling energy at below-market prices.
Energy prices for Egypt's industries are increasing at an annual rate of about 20 percent, AbuBakr says, though it remains unclear for how long that will be the case. While he says the phase-out of subsidies should be complete by 2014, Amr Assal, chairman of the Industrial Development Authority, pegs the date at 2017. Assal explains that a committee of members from the ministries of trade and industry, investment, petroleum, electricity and finance is responsible for tracking energy prices worldwide as well as setting subsidy rates.
However, determining which industries qualify as energy-intensive or non-energy-intensive has proved problematic. Assal says the energy subsidy decreases for different industries were initially based on whether an industry was defined as energy-intensive or non-energy-intensive. This was ultimately based on industry-wide energy consumption rates. Factories classified as energy-intensive total about 50, whereas 30,000 others are designated non-energy-intensive, says Assal, noting that those 50 receive about 60 percent of the subsidies.
Consequently, energy-intensive industries faced higher energy prices in 2007, when subsidies for those consuming a lot of energy - such as cement, steel or fertilizer producers - were decreased. Subsidy reductions did not apply to non-energy-intensive industries until 2008.
According to Assal, however, the government quickly realized that this system of charging high-energy-consuming industries more for energy failed to account for other factors. "You could be a textile factory and consume the same amount [of energy] as a fertilizer or cement [factory]," he says, noting that in a textile factory 10,000 people may be employed compared to about 400 in a typical fertilizer or cement factory.
Energy-intensive industries that were also labor-intensive, such as the textile industry, voiced their complaints to the committee responsible for setting prices, says Assal. They felt that being charged the same new energy prices as energy-intensive industries was unfair given that they employed so many people and operated with significantly lower profit margins than substantially more profitable businesses, such as cement and steel.
Consequently, the classification of an industry as energy-intensive or non-energy-intensive was changed so that the price of energy factored in the large number of employees in labor-intensive industries. Assal explains that the decreases in energy subsidies per industry were changed and are now determined according to the amount of energy consumed per employee. Because of the change, many labor-intensive industries are categorized as non-energy-intensive.
While the new energy subsidy formula is in place, the effects of the January price increases remain unclear. Labor-intensive industries, such as textiles, should be able to absorb higher costs since energy expenses represent only 8-12 percent of their budgets, says AbuBakr.
But some in the industry disagree. Magdy Tolba, chairman and managing director of Cairo Cotton Center, says higher energy prices will further reduce the textile industry's already low profit margins of 4-5 percent and erode one of its last remaining competitive advantages vis-à-vis other major players in the textile industry, such as China or India. Subsidized energy has helped to keep the prices of Egypt's textiles low and competitive worldwide, a necessity for the industry, which Tolba sees as already suffering from higher costs for production, overhead, construction and taxes.
Others, such as Assal, argue that other competitive advantages, such as cheap labor, still exist. "Industries are enjoying in Egypt a low cost of labor and other benefits... they charge here around LE 800-1,000 [in salary per month]. In Turkey, it's around $1,000." Tolba disputes that assertion: "In countries like India and China, the average [hourly pay] is 45 cents... In Egypt three years ago it was 40 cents. Now, it's 88." He adds that much of Turkey's textile industry has left the country because it could not compete globally.
Increased energy costs combined with rising wages for the already struggling textile and garment industry in Egypt could result in layoffs and decreased production, says Tolba, which constitutes a significant risk when considering that his Qalioubiya factory employs 3,750 workers and is undergoing an expansion that will create 750 more jobs.
As for the removal of subsidies for energy-intensive, high-profit industries such as cement, steel or fertilizers, Tolba agrees with the steps taken by the government. "[Phasing out] the energy subsidies for such industries will not hurt them, and everybody knows it," he says.
Both Tolba and AbuBakr agree that the garment and textile industries of China and India, among others, are more competitive than those in Egypt. AbuBakr attributes this to the Egyptian industry's dependence on highly subsidized energy. "Other competing countries are taking the energy at higher prices and they're still doing better. So we're doing something wrong," says AbuBakr, who points out that South Africa, Malaysia, Nigeria, Ghana and Mozambique are producing and exporting successfully despite paying significantly more for energy. Tolba, however, counters that even if China and India pay more for energy, their textile industries receive more government assistance than Egyptian companies.
AbuBakr says non-energy-intensive and labor-intensive industries rely on government assistance because of old business practices that render them inefficient. "Reducing the subsidies for these companies will help them to focus on other areas, to enhance their management and quality," and to become more productive, says AbuBakr. Most notably, he remarks that utilization of modern management techniques and increased energy efficiency combined with an educated, well-trained labor pool will help these same industries to better compete. By redirecting the funds from energy subsidies to areas such as health and education, and by reducing the country's dependence on inexpensive energy, Egypt's industries could fare significantly better in the world marketplace.
Tolba's assertion that the government should provide more support to industries like his is disputed by AbuBakr and Assal, who explain that part of the energy subsidy restructuring program includes the availability of assistance through the Industrial Modernization Center and Industrial Training Council. These two entities provide training and consulting services to any industry seeking to modernize its business practices, cope with higher energy costs, reduce energy consumption, or increase productivity and profits.
AbuBakr acknowledges that while the transition might be challenging for many labor-intensive industries, "these same people are going to benefit five times more on another front [from the redirecting of subsidies]: education and health."
He points out, moreover, that the removal of energy subsidies could help to change the country's pattern of rampantly over-consuming energy at all levels of society. "Energy is very important and it's very expensive," says AbuBakr, who explains that internationally priced energy will encourage reduced consumption. "We should use it very carefully."
By Sarah Marquer
© Business Monthly 2009
