International Cooperation Minister Sahar Nasr’s recent comments on public utility privatization in Egypt caused an uproar. Although they were swiftly denied by the government, plans for infrastructural privatization have continued to move forward.
In an article published in the Wall Street Journal on November 23, Nasr wrote: “Through public offerings, Egypt will be partially divesting from several state-owned enterprises and banks. For the first time this will cover public utility companies, which have historically been excluded from divestiture as a strategic sector.”
Following a media spree over the possibility of leaving utilities — particularly people’s basic access to water, sanitation, electricity and gas — in the hands of the private sector, the International Cooperation Ministry issued a statement on November 26. It affirms: “Unlike what has been inaccurately published by some websites, no reference has been made in the article to service sectors including electricity, sanitation and water, given that the state owns the dominant share of these projects.”
The Cabinet’s Information and Decision Support Center (IDSC) also denied the existence of a government offer to sell these utilities in a statement released on November 28, on behalf of the International Cooperation Ministry. It claims that “the state owns these projects with a governing stake and they have not been offered for sale.”
However, Egypt has focused its sights on luring back investors in the hope of stimulating an economy battered by years of instability and political turmoil. While the country has been privatizing traditional economic sectors for decades, the current administration’s pledge to liberalize the economy and let the private sector lead growth makes it likely privatization will expand into non-traditional sectors, such as utilities, health and education.
Recent years have seen the drafting of several bills which will essentially leave electricity, gas, water and sanitation in the hands of the private sector.
Although the proposed legislation did not directly privatize state-owned companies, it aimed to minimize the companies’ roles by opening the market to the private sector, which the government claims will ensure competitiveness.
In September the Cabinet approved a new water and sanitation bill which aims to regulate the sector, and permits the participation of privately owned companies.
Parliament has not yet received the bill according to Alaa Waly, a member of Parliament’s Housing, Public Utilities and Reconstruction Committee.
A draft of the bill published on the privately owned Youm7 news outlet shows that the Egyptian Water Regulatory Authority (EWRA), established in 2004, would be responsible for ensuring competitiveness among service providers and setting prices. The government is then responsible for setting the tariff at which consumers buy the service. If the tariff is lower than the price the government subsidizes the difference.
However, urban researcher Yahia Shawkat argues that in this case citizens would be paying more for utilities than they already are, as the government would be subsidizing not only the cost of production, but also the companies’ profit margins from taxes.
He also speculates that since the government is already undergoing a fiscal consolidation process, it may ultimately drop utility subsidies altogether in an effort to curb the rising budget deficit. In 2014, the government reduced water subsidies for the first time in eight years, imposing the new prices at the beginning of that June.
Under the bill, the government would also offer up land for any water or sanitation project.
The bill specifies that EWRA’s resources would come from the issuance of licenses to service providers, fines and its investments.
Allowing the private sector to provide utilities creates a market which leaves them vulnerable to demand and supply, says Abd al-Mawla Ismail, member of the Right to Water Forum in the Arab Region. He adds that this ultimately means that utilities will be provided only to those who can afford them.
A new law regulating the electricity market was ratified by President Abdel Fattah al-Sisi in 2015 and passed by Parliament in January 2016.
The most significant change brought about by the new law is that it allows the private sector to invest in the distribution of electricity to consumers, whereas previously only the state-owned Egyptian Electricity Holding Company was permitted to sell electricity.
The law delegates regulation of the electricity market to the Egyptian Electricity Regulatory Authority (EERA), which is not only responsible for issuing licenses for businesses in power generation and distribution, but also contracts with them and sets the tariffs in advance. The regulator also aims to ensure competitiveness in the market.
Before the law, the private sector was able to invest in electricity generation under the Build, Own, Operate, Transfer (BOOT) agreements, under which the public sector grants rights to private companies to build facilities like power plants and operate them for a certain period to cover the building costs and provide a return on the investment, before transferring them to public sector grantors.
However, the private sector’s role in power production was further expanded by the deals signed with General Electric to establish power stations in Assiut and West Damietta, in Upper Egypt, and with Siemens in the new administrative capital, Beni Suef and Burullus in March 2015.
Akram Ismail, engineer and consultant in the electricity sector, tells Mada Masr that contracting with the private sector in an unstable economic environment undermines the government’s ability to set the tariffs. He argues that to convince the private sector to invest in the provision of electricity, the tariffs would have to take into account the changing prices of fuel and the foreign exchange rate, among other shifting factors.
On November 28 the State Council submitted the gas market bill to Parliament after technical revisions and ahead of a final ratification.
The bill is part of a plan to liberalize the gas market. A unit was established within the state-owned gas company in 2015, charged with supervising the sale and distribution of natural gas by private companies, according to the Petroleum Ministry.
The new regulatory unit aims to ensure competitiveness, set tariffs and issue licenses for the transportation, shipment, procurement, distribution and storage of gas. The government hopes that the liberalization of the gas market will encourage foreign gas companies operating in Egypt to direct their sales to the domestic market.
According to a statement issued by the Petroleum Ministry, the government plans to allow any party within Egypt to import gas from anywhere in the world, provided it does not affect Egypt’s national security.
The statement asserts that “this is a step toward the future liberalization of the gas market in Egypt.”
Importers will be allowed to use the gas themselves, or resell it to other companies, paying a tariff to transport it through the national grid.
Commenting on the commodification of public utilities, Shawkat says, “Once the private sector enters, these utilities become a commodity rather than public services.” He adds that this is problematic, as to gain access to basic utilities citizens will no longer pay only for the cost of production, but also for the companies’ profit margins.