My previous blog discussed the causes of the “botagas crisis” in Egypt. I argued that the root cause has been an indiscriminate subsidization of fuel consumption through below-cost pricing. This has mainly benefited affluent households, which has led to overconsumption, uneconomic investments, enormous and unsustainable fiscal cost (reported to be over 130 billion Egyptian pounds – or more than US$21 billion -- for the coming fiscal year), near-bankruptcy of fuel suppliers, and fuel supply shortages. I also argued that such policy has been neither socially just nor economically sound. I asked what could be a better way to achieve both a better social protection and a more efficient and affordable energy consumption in today’s Egypt?
To answer this question, perhaps one could start by looking for clues in people’s behavior. When they manage to get a bottle of botagas, many Egyptians, especially the poorer ones, sell it on the secondary (“black”) market. This does not mean that they don’t need the gas, but that they need something else even more - money. Quite understandably, they sell botagas to get cash to buy what is the most important to them at the moment.
Why then wouldn’t the government, instead of cheap botagas, give cash to needy families? The cash amount could be equal to the full cost of botagas needed for cooking and water heating, say about two bottles a month. This would amount to around 130 pounds at today’s prices – more than what two bottles would fetch in the black market. The families could then decide how to spend that cash. Some may indeed buy two bottles of botagas, but some may spend it differently -- for example, on one bottle of botagas and on public transport to help a family member attend a school or find a job in another part of town. Botagas would be sold to everyone at full cost. The black market would disappear and so would overconsumption and waste. Everyone would benefit: families receiving the subsidy would get more money, botagas suppliers would cover their cost and be able to sustain fuel supply, and more taxpayers’s money could be used for other needs – jobs, health, education, public transport... That is, everyone except for two well connected and influential groups: the middlemen controlling the black market, and the high-income households that would not qualify for cash subsidies.
Perhaps that is part of the reason that makes changing the current fuel subsidy policy difficult. To illustrate the point, let’s assume that a middleman in the black market gets 10 pounds per bottle of botagas – about one sixth of its full cost – and that only every fourth bottle is sold in the black market. This means that about 900 million pounds (US$150 million) would be pocketed by botagas middlemen every year! Clearly, they have little interest in the disappearance of the black market, and their resistance has nothing to do with better social protection.
The ESMAP/World Bank study, mentioned in my previous blog, concluded that switching from the untargeted subsidies based on low fuel pricing to income-targeted cash subsidies would result in large savings to the government budget even if the subsidies were extended not only to the poor but also to the middle-income families. The amount of cash could be progressively reduced for higher-income groups. The subsidies could be indexed to botagas prices so that they do not lose real value with inflation. This concept could of course be extended to other fuels as well. Why should, for example, tourists and owners of villas or highly profitable commercial activities and industries benefit from subsidized gasoline and diesel? As mentioned above, the resulting budget savings, in the tens of billions of pounds, could be used for creating jobs, improving health, education, public transport, and other programs with greater social and economic benefits.
Another solution, simpler to start with although not as good as the cash subsidies, would be a voucher system. Qualified families – or initially all, until proper qualification criteria are established and an administrative system developed – would receive vouchers for a certain amount of LPG – and other fuels – at discounted prices. Other than these voucher-covered quantities, in part paid for by the government budget, the fuels would be sold at higher and, eventually, at full market prices.
There could be a number of variations of these schemes, as well as challenges with implementing them, such as agreeing on who needs to be subsidized, establishing a proper administrative system that ensures that all those in need are included, and that the system cannot be cheated. Reforming fuel subsidies is a sensitive political and policy issue, quick to inflame and make people take to the streets if the program is not well designed – particularly if the political process is incomplete and communication between the government and the people is broken. However, it is certainly possible that a better system can emerge than the current one, as a number of other countries have proven.
Ideas and options to make energy available and affordable, with better social protection and lower fiscal cost, are not limited to reforming the subsidy systems only. Botagas is a nice fuel for cooking and heating – clean and efficient -- but it is not the only such fuel and not always the best one, especially when portability is not an important consideration. Botagas can be very dangerous if mishandled and is also quite expensive, costing currently more than 100 pounds a million British Thermal Units (mmbtu) (a 12.5 kg bottle has about 0.6 mmbtu), 3-4 times more than natural gas. Another World Bank study, completed several years ago in preparation for a gas connections project in Egypt, showed that it was much more economic to extend the natural gas network, especially in more densely populated areas, than to use botagas. The economics are even stronger now, since botagas prices have significantly increased since then.
Roof-mounted solar water heaters need no fuel and are particularly well-suited for individual houses or smaller apartment buildings, which dominate rural and peri-urban areas in Egypt and thus nicely complement natural gas distribution. But the use of solar water heaters is not encouraged despite their merit in Egypt with its abundant sunshine. Even electricity, with its wide-spread availability, may be economically competitive with botagas for cooking and heating. The government could introduce policies that help people buy combined botagas/electricity stoves. There are many other energy savings opportunities, from more efficient compact fluorescent light bulbs and better air-conditioners to less energy intensive industrial processes, conversion of brick factories to natural gas or vehicles to compressed natural gas (CNG) with more CNG stations added, etc. Too little has been done on this front in Egypt.
The future of Egypt’s energy sector is bright, but it will take an earnest effort to correct the ills that are undermining its potential. Egypt is breaking with the past in many ways and its fuel policies should be a part of the change if the country is to build a stronger underpinning for faster, more sustainable and equitable economic growth. There is a great deal of experience from other countries to lean on, although Egypt will need to find a solution that suits its own circumstances. It may take time to transition to a better system given how deeply rooted the current practice is, but there is little time to waste for taking the first steps.
I have mentioned a number of ideas, but there is one more, perhaps the most important: the government should open up the energy sector and its technical and financial performance to better public scrutiny. That would strengthen the trust between the sector, the government, and the public, and establish a firmer foundation for debating and reforming energy policies and social programs in a manner that is well understood and socially acceptable.