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Egypt business pushes Sisi for energy subsidy cuts

Source: Reuters - Wed, 21 May 2014 07:05 GMT
Author: Reuters
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* Subsidies could pose huge challenge for Sisi

* Egyptian tycoons want bold action from former army chief

* Fearing protests, Sisi could hesitate

By Maggie Fick

CAIRO, May 21 (Reuters) - Former army chief Abdel Fattah al-Sisi has kept Egyptians guessing about how he will handle energy subsidies, one of the most explosive issues coming his way if, as seems certain, he is elected president next week.

Cautious campaign language shows he is well aware subsidy cuts that would help repair ruinous government finances might also spark the kind of unrest that helped topple two presidents in three years. Yet he may find his resolve to stem the expense stiffened from an unlikely quarter - some of Egypt's wealthiest, whose businesses have benefited greatly from state largesse.

Several leading business figures, including in the energy sector and in energy-intensive manufacturing industries, have told Reuters they hope Sisi grasps the nettle and reins in subsidies on fuel and electricity even at the risk of anger on the street, in order to avert a collapse in public finances.

As a long-standing bulwark of the 30-year rule of Hosni Mubarak, during which the subsidy regime was entrenched, Egypt's big business establishment has a voice that is likely to count with Sisi, whose probable victory in a vote to be held on Monday and Tuesday will restore a military man to Cairo's presidential palace after the brief hiatus of Islamist control.

The political and economic turmoil since Mubarak fell in 2011 and last year's removal by Sisi of President Mohamed Mursi of the Muslim Brotherhood has exacerbated problems for a state budget, a whopping 13 percent of which is spent on letting businesses and consumers buy energy at well below market prices.

The business leaders interviewed by Reuters have concluded that an economic system, suffering from a weakening currency, massive unemployment and a widening budget deficit, is no longer sustainable and poses a greater risk to stability - and to their own profits - than does the upheaval of cutting subsidies.

FEAR OF STREETS

Toying with the gold band around his cigar as he sits behind his desk and reflected on his empire, Egypt's "fertilizer king" Sherif el-Gabaly embodies for his critics the "crony capitalism" that led allies of Mubarak to dominate the economy - though Gabaly insists all his business has always been above board.

"We need the masses to be also stable," he said. "We cannot work in the situation where we live on our own and just grow and make money and live our own lives in closed compounds and the rest of the country is in shambles.

"Because the next day they'll turn out in the streets and your production and everything will go chaotic."

Many business leaders argue that eventually the poor will benefit from the scrapping of a subsidies system that has long failed to serve them, while eventually also adding to the profits of magnates whose factories have run on cheap fuel.

"We should not continue being lazy. We cannot live with the government subsidising everything," said Hussein Sabour, a 77-year-old real estate and engineering mogul who made his money in part through a joint venture with the largest state-owned bank.

Sabour, who cruises to his Nileside Cairo office in a German luxury car powered by fuel costing him little more than bottled water, said inertia on the energy cushion was undermining the interests of business: "In the long term, it's bad for all of us if we continue like this," he said.

The basic grade gasoline on which most poor Egyptians rely can be had for about 12 U.S. cents a litre - less than a tenth of the cost of a standard equivalent in Europe.

Ahmed Abou Hashema, chairman of Egyptian Steel, is another who sees the subsidy regime as having outlived its usefulness: "Today I ride in my car - I'm a man with a factory, I'm a businessman," he said. "Why does the country subsidise me?

"Don't subsidise me."

MEMORY OF UPROAR

Sisi has said little beyond assuring voters that subsidy reform must be gradual. He faces tough choices. Cutting subsidies could anger millions who still live in poverty three years after Mubarak's overthrow raised hopes of a brighter future. Keeping energy prices low could sink the economy.

He need only look back to 1977 for a reminder of the scale of the problem. President Anwar Sadat cut subsidies on bread and other staples in half. Riots that killed dozens were only put down when troops were deployed and Sadat reversed his decision.

Mubarak did not touch the subsidies for decades, fearing the slightest adjustment could trigger street violence in the Arab world's most populous nation. Yet it was the rich who benefited more - and not just because they consume far more energy, with their cars and air conditioners, than the poor majority.

The likes of the cement, steel and fertilizer industries have been powered by heavily subsidised natural gas for decades - though rates vary, the current cost of natural gas to industry is about a third of the level in western Europe.

Now businessmen are calculating that the damage done to the economy from subsidies far outweighs the benefits of cheap energy that is, due to lack of investment, getting harder to get hold of. Clarity on cutting subsidies could restore confidence among investors who have viewed successive governments as indecisive.

Mursi, in the year between his election and overthrow, worked out an agreement with the International Monetary Fund that would have included austerity measures, higher taxes and a reduction in subsidies in exchange for a $4.8 billion loan.

The plan was not implemented, and the loan talks ended with no deal. The IMF estimates Egypt's energy subsidies amount to three times what it is the spending on education and seven times the expenditure on health.

Grateful Gulf states that supported Mursi's removal gave Egypt billions of dollars in aid, including petroleum products, offering the army-backed interim government some breathing space. But Sisi wants to be more self-sufficient.

He has been vague on his plans, however. Officials in the interim government have said phasing out subsidies could take 3 to 5 years. The finance minister said last week that structural reform was a priority, adding it would mean better capital allocation between companies and ordinary citizens. Sisi, by contrast, has not set any timeline for the subsidy phase-out.

He speaks of trying to dampen soaring energy consumption - for example, suggesting young Egyptians walk to work or school and promoting the use of energy-efficient light bulbs.

But many experts say Egyptians are unlikely to curb their energy use significantly until prices are raised. Foreign investors, meanwhile, will not help renovate the electricity grid, build new power stations or invest in solar energy until prices reflect the actual cost of power generation.

"BACK TO WALL"

The new president must act, said Tarek Zakaria Tawfik, deputy chairman of the Federation of Egyptian Industries:

"Your back is against the wall," he said. "Either you reform or you fail and you get a third revolution."

Sisi said in a recent television interview that action on subsidies would not happen immediately as his priority was to get industry back to normal and raise living standards first.

But business leaders, who have watched investment dry up, are tired of hearing excuses over inaction year after year.

Tamer Abu Bakr, chairman of Mashreq Petroleum, said energy subsidies have become "catastrophic".

Bakr, who served as vice chairman of Egypt's state-owned oil company for four years under Mubarak, presented a report to the government last month calling for gradual price increases.

"We are at a very critical point, because every time we have said, 'Wait, we have an election', 'We have this, or that'," he said. "Now we are waiting for the president to come.

"It's getting worse and worse." (Additional reporting by Shadia Nasralla in Cairo and Sujata Rao in London; Editing by Michael Georgy and Alastair Macdonald)

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