One more step towards the liberalisation of energy prices was taken this week, Mona El-Fiqi reports As part of its plan to gradually eliminate subsidies to the industrial sector, the Egyptian government announced a rise on energy prices starting 1 July. According to the new energy-pricing scheme, non-energy intensive industries that account for 97 per cent of industrial activity, including sectors such as chemical production, would be charged $2 per million British thermal units (Btu) of natural gas instead of $1.25. Energy intensive industries, such as steel, cement and fertilisers, will continue to be charged $3 per million Btu, but will face a 50 per cent rise in electricity costs prices during high consumption periods. Flat glass, ceramics and porcelain will be charged $2.3 per million Btu. The new pricing scheme has been adopted by the Energy Pricing Committee (EPC), formed of members of the trade, electricity, petroleum, investment and finance ministries. The scheme will be presented to the prime minister in the coming week for implementation in the 2010/2011 fiscal year started 1 July. The change has been a long time coming. In 2007 the government announced that it was time to eliminate energy subsidies provided to industrial sectors. At the time Minister of Trade and Industry Rachid Mohamed Rachid made it clear that by 2011 industrial enterprises would pay full market prices for energy, so new investors coming to Egypt would know where they stand. The first phase of the government's plan to reduce energy subsidies targeted 40 of the most energy intensive companies, which received 70 per cent of energy subsidies provided to industry. The second phase was applied in 2008 when the Supreme Energy Council decided to raise natural gas price afforded to non-energy intensive industries from $1.25 per million Btu to $2.65 per million Btu. The government's broader plan to eliminate subsidies was put on hold with the onset of the 2008 global financial crisis. Now, due to the increase of the subsides bill on oil products, which reached LE66.5 billion in the 2010/2011 budget, the government decided to reinitiate its plan to reduce subsidies on energy for industrial activities. The new move to eliminate energy subsidies has elicited different reactions. While experts welcomed the decision, investors expressed that the new pricing scheme of electricity needs clarification and that the timing is bad as the market is currently facing a recession. Hamdi Abdel-Azim, former dean of Al-Sadat Academy for Administrative Sciences, said that it was time to put an end to the energy subsidies. "These companies achieve huge profits and some of them are accused of holding a monopoly in the market," said Abdel-Azim. He believes that subsidies should be directed to the poor and non- industrial consumers who already face high electricity bills. Even if there is logic to the decision, according to Abdel-Azim, the timing is bad as it comes alongside the imposition of new taxes on products such as cement and steel. "This might lead to recession in the real estate sector," Abdel-Azim said. In turn, this might have a negative impact on the prices of other products. The increase in the price of energy, according to Abdel-Azim, can only mean higher cost prices that ordinary consumers will ultimately pay for. One more negative impact of the decision is that the flow of foreign direct investment into industrial activities is expected to reduce during the coming period. Abdel-Azim said that following the new pricing of energy foreign as well as local investors will have second thoughts and will need to conduct additional feasible studies before starting new industrial projects. The erstwhile low price of energy did much to attract investors to Egypt. The impact of the decision on industries will not be uniform. For some industries, the impact will be limited, while it will badly affect others. Sherif El-Gebali, chairman of the Chamber of Chemical Industries at the Federation of Egyptian Industries (FEI), said that the impact of the decision would be low on industries such as fertilisers as the majority of factories are almost electricity self- sufficient. In contrast, El-Gebali explained that non- intensive energy industries, such as paper and glass, would be negatively affected since they depend mainly on electricity. Raising electricity charges by 50 per cent in rush hours is a substantial hike. According to El-Gebali, the majority of factories are working continuously. It is not easy for a factory to stop machines and shift production into non-rush hours. The Chamber of Chemical Industries presented a memo to the government a few months ago requesting a 10 per cent increase of natural gas. The decision was for a 15 per cent increase. "It is not a big deal. The problem is raising electricity charges in rush hours by 50 per cent. It would be better if they raise the price according to consumption levels to avoid problems in production lines," El-Gebali said. El-Gebali added that the decision needed to be clarified since it did not determine rush periods in the summer and winter. Mohamed Sayed Hanafi, manager of the Chamber of Metal Industries at FEI agrees with El-Gebali that it is difficult for factories to stop production in rush hours. Some ovens, for example, stay working for two years continuously. As for energy-intensive factories, Hanafi told Al-Ahram Weekly that they would not be harmed by the decision, which keeps the natural gas price the same as in Decree 1975/2008. Hanafi said that in general the impact would be limited. For example, producing one ton of steel in rush hours would raise in cost by LE10 to LE15 on the current price estimated at LE3,750 per ton, which is acceptable. Hanafi said that the reason behind the new pricing system is not to collect money but to rationalise electricity consumption in rush hours, because there is not enough electricity capacity to cover demand. According to Hanafi, the idea is to encourage industrial factories to shift production to out of rush periods.
