An announcement by the government that it will lift energy subsidies provided to heavy industries has stirred controversy in the business community, Mona El-Fiqi reports Earlier this month, the government announced that it is considering removing energy subsidies for some heavy industries including steel, cement, fertilisers, ceramics and glass. Following a meeting organised by the Supreme Council of the Armed Forces with a number of ministers charged with handling Egypt's economy along with 40 businessmen representing the key production and services sectors, Hazem El-Beblawi, deputy prime minister and finance minister told the press that the government recognises the importance of rationalising energy subsidies and limiting them only to those industries entitled to receive them. Energy subsidies provided to heavy industries mean the loss of massive amount of energy. Experts said that those industries enjoy double privilege since they receive oil, natural gas and electricity at low prices, and sell their final products in international markets at high prices. The amounts of subsidies allocated for the oil and gas sector are excessive. Energy subsidies comprise a significant portion of Egypt's expenses. It contributes to more than 70 per cent of total subsidies, and almost 20 per cent of total expenditures in Egypt's first draft 2011/2012 budget. The Supreme Council for Energy, which includes representatives from ministries of petroleum, electricity, industry and finance, and is authorised to take the decision to remove energy subsidies, is currently discussing the issue. To clarify the government's view, Ismail El-Nagdi, head of the Industrial Development Authority (IDA), said that raising energy prices for those industries is logical since the final products are sold at high prices, allowing these companies to achieve high profits. El-Nagdi added that this move will not cause any losses for these sectors since the prices of final products have been recently hiked to unprecedented levels in both local and international markets. Experts agree with the government's view to lift the energy subsidy since it neither increases competitiveness nor gives local consumers affordable products. Adel Beshai, professor of economics at the American University in Cairo said: "I am all for it. This is the only thing that would show that the industry now is really competitive. However, where it comes to policy, I do not approve of sudden changes of policies. It has to be a process, not an act. A transparent process will be when subsidy is lifted in three or four years." The government's shift has another positive impact. Hamdi Abdel-Azim, former dean of Al-Sadat Academy for Administrative Sciences, said that the move is a good step to restructure the whole subsidy system and it would save a part of the subsidies bill that goes to rich people (factory owners) who do not deserve it. "It does not make sense to provide subsidised energy to these companies, some of which, after being privatised, are owned by foreigners," said Abdel-Azim. Last week, when the government announced its intention to remove energy subsidies to heavy industries, El-Nagdi asserted that the move will have no negative impact on the flow of foreign and local investments due to the fact that the Egyptian market remains a large one, in addition to a series of trade agreements Egypt signed with different countries giving more privileges to Egyptian products. Abdel-Azim agreed that the decision would not badly affect investments since the profits in these sectors are very high, reaching 70 per cent. "The problem will just be a reduction in their profits to average 50 per cent which remains very acceptable for many local as well as foreign investors," Abdel-Azim explained. To provide evidence for his opinion, Abdel-Azim said that the government received many requests from investors to get licences to establish steel factories a few days ago following the official announcement of the government's intention to lift energy subsidy on heavy industries. However, the picture is not so rosy since producers are expected to raise the final price of products in response to lifting energy subsidies if the decision is taken. Abdel-Azim said that the government should interfere to determine a price ceiling for products such as steel and cement. According to anti-monopoly law, the government has the right to set a regulatory price for products whose producers do monopolise the market. The law states that if a company produces 25 per cent of total production of a commodity, then it is controlling the market. Abdel-Azim said that, for example, Al-Ezz Company for Steel is a clear monopoly case since it produces 67 per cent of total production. One more negative impact mentioned by Abdel-Azim is that the value of these companies' shares in the stock market is expected to be reduced, but that would not be of great harm to the economy in general. Businessmen, however, said the decision would have a far-reaching negative impact. Ali Moussa, head of the Construction Materials Division at the Federation of Chambers of Commerce, said that the decision is a sensitive one since it is expected to lead to less production, less taxes, fewer exports in addition to its negative impact on labour. Raising energy prices means an increase of total cost price and fewer profits. The result, according to Moussa, is that both local and foreign investors are expected to run away to other countries such as the Gulf states. For example, Moussa said that, "in Saudi Arabia, lands are almost free, energy is subsidised, finance is available at low interest rates and labour is cheaper, so I am afraid that investors would go to other countries." To reassure producers, Deputy Prime Minister El-Beblawi said that the government will respect its previous commitments and contracts with the private sector as long as these contracts are legal without any inaccuracies. However, Moussa said that this announcement means the government would keep its promise for some companies to sell them energy at low prices for a specified period, sometimes reaching 15 years, according to their previous contracts, which is unfair. It would be unfair competitiveness for other factories. Moussa said that if the government decides to lift energy subsidy, it should be applied gradually, and that the new investments that started operating this year should be given a five-year grace period to be able to pay their loans. The price of energy after lifting the subsidy is not decided yet. A study conducted by IDA asserted the importance of raising gas prices provided to heavy industries to reach $4-5 per Btu. Mohamed El-Kheshen, head of the general division for fertilisers at the Federation of Chambers of Commerce said: "I am for removing the energy subsidy provided that fertiliser prices would be free at local markets according to supply and demand." As for fertiliser producers, El-Kheshen explained there are two groups; the first one includes four companies, namely Alexandria, Mobica, Helwan and the Egyptian Company for Fertilisers in duty-free zones which produce for exporting. These companies would not be affected by raising energy prices. However, according to El-Kheshen, raising energy prices will cause a real problem for the second group of factories, namely Al-Delta, Abu Qir, Al-Nasr and Kima which produce for local markets at a price set by the government estimated at LE1,450 per tonne. "If the regulatory price policy continues after lifting the energy price, these companies would lose a lot of money," he said. El-Kheshen added that the energy price represents 55 per cent of fertilisers' total cost price, which means that the total cost price will rise from currently $140 to $210 per tonne if natural gas rose from currently $3 to $7 per Btu. El-Kheshen suggested that it would be better to support farmers directly on their output, for example when cultivating strategic crops such as wheat, rice and corn, than to provide subsidies to fertilisers since providing subsidies to inputs creates a black market where a tonne of fertilisers is sold at LE3,000 instead of LE1,450.
