Electricity production began in Egypt in the nineteenth century.1 In the 1940s, Egypt issued a law regulating private sector investments in public utilities.2 This law regulated the duration of any concessions granted to companies to provide public services, and the prices the public were to be charged for those services (while ensuring that provision remained profitable). In 1948, a specialized department was established to regulate concessions in the electricity sector.3
The private sector continued to be a player in electricity production in Egypt until the wave of nationalizations that took place in the 1960s.4 The processes of nationalization reflected an ambitious state vision to expand the coverage of the electricity network. Indeed, in 1964 a public body was established that was responsible for planning the extension of electricity provision across the republic.5 Seven years later, a specialized department was created for the electrification of the Egyptian countryside.6
The state’s role in electricity production was one element of the ‘Arab socialist’ economic model deployed from the 1960s until the end of the 1980s, under which the state managed the provision of essential services. Under this model, electricity was sold to the population at prices consistent with prevailing wage levels. In this process, the state played a crucial role in determining job availability within the private sector.7
However, the worsening of the external debt crisis through the latter half of the 1980s prompted the Egyptian state to embark upon a comprehensive programme to dismantle the ‘Arab socialism’ model – a move which was also a conditionality of a loan from the IMF received in the 1990s.8 The essence of the programme was the withdrawal of the state from the economy in order to give the private sector space to expand, and to end price-distorting policies such as controls over interest rates and both currency and commodities exchange, as well as opening up the country to external financing in lieu of central bank borrowing (i.e. printing money).
Adjusting the electricity price tariff was one of the propositions put forward in the new economic programme of the 1990s, with the aim being for the price of energy to match the actual cost of energy by 1995. However, this was not achieved.9 The retreat from liberalization of the electricity sector was one of several instances in the 1990s of the state withdrawing from its commitment to the IMF measures due to fear that it would cause popular discontent. Decades of ‘Arab socialism’ had contributed to the politicization of economic life; relinquishing this political responsibility demanded a gradualist approach on the part of the state.
In contrast to the resolute efforts of the state to withdraw from its social role during this period – clearly embodied in the acceleration of privatization within the state industrial sector in the 1990s – there was a great deal of prevarication over the liberalization of both fuel and energy prices. On this basis, it is clear why the 1990s and 2000s saw many legislative amendments that aimed to liberalize the electricity sector. However, despite these amendments the sector largely continued to operate in the same fashion as it had over the previous decades. Thus, in one of its papers, the World Bank describes the dynamics of liberalization during this period as involving more a change in appearance than in substance.10
One such apparent change was the 1993 transfer of responsibility for electricity distribution from the Ministry of Electricity to the Ministry of the Public Enterprise Sector. The latter was a newly-created ministry, the role of which was to manage the greater part of both the public industrial and services sectors. Importantly, the ministry had the ability to dispose of their assets, including the ones relating to electrical energy. This transfer of responsibility between the two ministries was seen as a step towards the privatization of public entities under the new ministry’s control; however, again, this did not occur.
In 2000, the public electricity production and distribution companies, as well as the Egyptian Electricity Transmission Company (EETC), were merged under a holding company. Within this new form, these companies were in a position to be able to offer a percentage of their shares as an initial public offering (IPO). However, once again, this did not occur.
In 1996, an important legislative amendment was made to the law regulating the Egyptian Electricity Body,11 which allowed for the proliferation of a novel form of exploitation under the BOT system, albeit with provisions for the return of the assets concerned to the government after an agreed period. This was the most serious attempt to liberalize the electricity sector to take place in this period. The amendment was largely consistent with the aims of the fiscal policies of the late 1990s, which focused on reducing the budget deficit. However, because liberalization was only partial, the conditions were not ripe for the continuation of the BOT system. While the 1996 amendment enabled the private sector to step into energy production, the Ministry of Electricity continued to hold a monopoly over the purchase of energy from companies. In light of the ministry’s commitment to maintaining prices at a specific level for the end consumer, investing with the state remained risky – crises had the potential to widen the gap between the price at which the private sector sold electricity to the state and the price at which it was sold to the end consumer. In such a scenario, the state might be unable to meet its commitments to the private sector.
This risk seemed still more probable after Egypt was forced to devalue its local currency in 2003 as a result of two major crises: the East Asian financial crisis, and the damage to the tourist industry incurred by terrorist acts.12 Since the state’s contracts with private sector electricity producers demanded it adjusts prices in line with changes in exchange rates, the cost of its commitments were likely to become exorbitant. Hence, the state reneged on its plans to expand the usage rights of independent producers.13 Thereby, only three independent producers got these usage rights and came to account for approximately 10 per cent of all electricity production in Egypt.14
In this period, the state continued to expand in the field of electricity infrastructure, relying on financing from state-owned banks and development partner countries to do so. This occurred alongside the application of limited increases to the tariffs charged to end consumers, which the World Bank deemed to be insufficient to meet the real price of electricity production, in view of inflation.15
By the end of the first decade of the 2000s, the contradictions within the electricity subsidy model had reached a critical point. The public treasury was unable to finance the expansion and adequate maintenance of electricity production and distribution networks. This was due to two factors: first, the rapid growth of demand, which was reinforced both by the expansion of service across almost the whole of Egypt, and energy-intensive investments attracted by cheap energy pricing; second, the fact that public spending was severely restricted by the policy of deficit reduction, and the implementation of non-progressive tax policies, as a means of attracting investment, which limited the collection of public revenues.16
Figure I: Consumption trends by energy source (in Million Tonnes of Oil Equivalent, Mtoe) 17
In terms of electricity transmission, Egypt’s loss rates were relatively high, as a result of both the poor quality of the distribution networks, and the theft of electricity (reaching 15 per cent of the total energy produced, according to the Ministry of Electricity). Furthermore, the efficiency and availability of power stations was five to eight per cent under the accepted average.18
Figure II: Electric power transmission and distribution losses (% of output) – World Bank
Moreover, power stations operated according to the ‘normal cycle’ system, one major shortcoming of which is the high levels of fuel consumption involved: only 40 per cent of the fuel used produces electricity, with the remainder wasted.19 Due to the continued dependence on traditional fuels such as natural gas and mazut (fuel oil), any shortages of, or increases in, the price of petroleum products causes a crisis in regard to the production of electricity.
Figure III: Total energy supply by source – Egypt – International Energy Agency (IEA). Units in terajoule (TJ).
With the entry into the 21st century, such a crisis arose due to a drastic decrease in the availability of petroleum products, for various reasons. In fact, during the second decade of the 2000s, Egypt’s position shifted from being a net exporter to being a net importer of petroleum products. This reliance on imported fuel inputs to generate electricity worsened the production cost crisis.
Figure IV: Petroleum exports ($ billions) and petroleum imports ($ billions)
The decline in the production of petroleum products was not simply the outcome of natural causes pertaining to resources in Egypt. Energy subsidies for the end consumer – including fuel for cars, energy for industry, and electricity for consumers – alongside the scarcity of financial resources, also contributed to widening the gap between the price of petroleum products purchased from oil extraction companies, the majority of which were (and continue to be) foreign companies,20 and the price of the final energy product. As a result, the state’s accumulated inability to pay what was owed to extraction companies21 led the latter to reduce their investments in Egypt.22
After the momentous events of the January 2011 revolution, due to the instability of the regimes that followed, the Ministry of Petroleum withdrew from new exploration agreements, a decision also fuelled by Egyptian Gas companies’ latent anger at the 20-year-long period of fixing the purchase price of foreign partners’ shares.23 Hence, the weak investment rates in the energy sector and the decline of petroleum resources led to a greater dependence on imports, which, in turn, increased the costs of petroleum inputs for electricity production, putting the subsidies system under still greater strain.
Due to general political instability and the deterioration of foreign exchange reserves after the January 2011 revolution, the government persisted in the policy of imposing power cuts in order to reduce costs. These power cuts took a heavy toll in terms of public discontent within private households – the major electricity consumers – and economic losses in both the production and service sectors.24 These developments paved the way for the accelerated liberalization of the electricity sector, and the further integration of the private sector into the energy production system, whether as a funder of governmental projects or as an independent producer.
In this period, international financial institutions pushed for the dismantling of the electricity system created in the 1960s, as the only solution to the sector’s crises. These institutions argued that through the liberalization of fuel and electricity prices it would be possible to reduce unnecessary energy demands, such as wealthy families’ increasing reliance on energy-intensive air conditioning. Additionally, the same institutions proposed curbing support expenditures (subsidies), which, they argued, significantly contributed to the budget deficit.
Figure V: Fuel subsidy (Egyptian pound (EGP) billion) and electricity subsidy (EGP billion)
These international financial institutions argued that liberalization would transform the Egyptian Electricity Holding Company (EEHC) from a net loss-making body into a profitable one, which, they argued, would make its contracting parties, particularly international funders, more favourable towards it. Moreover, it was argued that liberalization would also aid the rapid development of infrastructure, while improving efficiency and reducing energy waste.
Ultimately, liberalising the tariff of electricity produced from natural gas will increase the competitiveness of renewable energy. Indeed, liberalisation would make the market of renewable resources attractive to the private sector. It would lead to investment in solar and wind-powered electricity plants, diversify electricity resources, and reduce the potential of crises emanating from the lack of traditional fuels.
The following section explains the ways in which international finance was utilized to eliminate the growing problem of power cuts, paving the way for the accelerated liberalization process, which moved the electricity sector away from state control.