When I started working in the Middle East and North Africa (MENA) region two years ago, the surprising thing I discovered is that although the region is known as an energy powerhouse – it produces 30% of the world's oil, has 41% of the known gas reserves, and hydrocarbons are its most important export - the countries in the region barely meet domestic demand for electricity, partly due to a chronic shortage of gas.
The ongoing political transformation in the region is having a significant effect on the power sector in particular, as power cuts have become pervasive in many countries, feeding in to citizens' dissatisfaction with the state. This is true in Egypt, Iraq, Tunisia and Lebanon, as well as in Yemen, Syria and Libya, where civil war is deepening power shortages. In a World Bank enterprise survey, 49% of firms in MENA identified electricity as a major business constraint, more than in any other region. Having worked in South Asia where power cuts are common, these results were at first surprising to me, until I realized that power cuts are a relatively new phenomenon in the MENA region.
There is a growing recognition in the region that energy subsidies are contributing to the problem, and will need to be gradually eliminated. In 2011, the region as a whole accounted for almost half of all global energy subsidies, and subsidies were equivalent to 8.6 % of the region’s GDP and represented 22% of government expenditures. For the most part, these subsidies are not well targeted, benefitting the rich far more than the poor, and encourage excess consumption. They also represent an important drain on the public purse. The costs of providing energy services must be significantly reduced if countries are to meet citizens' demands for more spending on jobs, education and health services, as well as social safety nets.
More investment is also needed in the energy sector to improve services. Almost all of the ministers of energy I meet are grappling with the challenge of doubling the electricity grid within a few short years. The annual growth rate for electricity demand ranges from 4 to 8% across the region, and by as much as 25% in Kurdistan, Iraq. We anticipate that the elimination of energy subsidies would somewhat reduce energy consumption, and that more could be done to implement energy efficiency measures, although this would take time. However, in countries like Jordan, which has already eliminated all fuel subsidies, and where new rates has meant the power sector is now recovering over half the cost of supplying energy, electricity demand is still rising at an annual growth rate of 5%. The demand for electricity will continue to grow, driven by economic growth, a youth bulge, and other factors such as the increased affordability of air conditioning – an important factor in the Gulf countries and the Maghreb.
Countries are responding to the challenge of rising energy demand in a number of ways that is not only focused on increasing prices. Governments in Jordan, Egypt and Morocco are also providing a credible promise of better supply and quality of service. This is consistent with international experience in Turkey and India, where we have learned that shifting from cheap electricity to market-priced tariffs hinges on improving the quality of service. The successful introduction of this new deal on energy will also require measures to support people that do not have the means to pay the new rates. Governments will also need to persuade the middle class and industry of the ultimate benefits, as their buy-in will also be essential.
In addition, a number of countries in the region are realizing that the private sector will have a significant role to play in ensuring that all MENA citizens have access to reliable power every day and all day. Jordan, Iraq and Egypt have decided to shift away from the old development model, where the public sector was almost exclusively responsible for meeting power demand.
The question is whether the region can learn from successful transformations elsewhere, and shorten the transition time to a more sustainable and reliable model for the energy sector. In Vietnam and Turkey, this process took 10 to 20 years. There are a number of concurrent reforms that have proven effective, including creating opportunities for private sector participation in the energy sector, developing rigorous and independent regulators that promote competition – which will promote more efficient services - simplify bureaucracies to encourage more effective decision making, and a change process focused on increasing efficiency and productivity to improve the performance of utilities.
From experience elsewhere, achieving these objectives will require building effective institutions, with a sound understanding of the social and political aspects of reforms. A strong outreach to citizens, and tools to ensure that citizens hold government accountable for service delivery improvements are also key ingredients. Given the fiscal burden of the energy sector in the region, it is also critical to learn from international best practice to reduce costs of power generation, and to optimize investments in the sector by facilitating a regional trade in energy, which has the potential to reduce investment costs to meet the projected demand for energy in 2020 by 25%.
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