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Optimizing Egypt’s Fuel Distribution Scheme

In Focus

By Nataša Kubíková

Drivers of cars, taxis, micro buses, and trucks know the drill by heart. Line up in front of a petrol station, wait for hours, fill up your tank, and drive away. Fuel shortage crises in Egypt erupted on countless occasions in the last few years. The government seems in denial that these crises are genuine; reflecting on deficiencies in the country’s downstream sector. Yet, it has started implementing a new fuel distribution system. The government awaits its new smart cards scheme to do the trick, and generate a massive improvement in fuel supplies to end customers.

Egypt saw fuel shortage crises over lack of diesel in March, June and mid September of 2015. Queues outside fuel stations showed that the country’s distribution system is lagging behind, unable to meet demand. The government responded in two ways. It has repeatedly stated a vague explanation that it was merely rumors about fabricated fuel shortages or about pending fuel price hikes that were behind the problems, causing confusion and chaos with ‘unjustified crowding’ at filling stations, according to state officials quoted in the Egyptian press. People’s panicky filling their cars with fuel made petrol stations ran out of diesel or gasoline, to which effect the government increased supplies to different governorates accordingly. Instability in the market was thus attributed to this social dynamic solely. Further, there some reported cases of fuel being hidden at filling stations to be later sold in the black market, which supported government’s claims that instead of fuel shortages, illicit trading with fuel and rumors were behind temporary reductions in fuel supplies. Another response from the government introduced a new electronic fuel distribution system based on smart cards issued for every depot, petrol station, and customer. The smart cards scheme is envisaged to tackle several problems in the industry.

Monitoring Fuel Distribution Channels

The government seems to have denied structural deficiencies openly. It states that the main reasons for fuel deficiencies are smuggling and abuse of subsidized fuel by consumers. Experts, however, point to mismanagement of fuel distribution across the country, depletion of state budget finances, inefficient downstream infrastructure and low production output at local refineries. It is therefore difficult to estimate if smart cards will contribute to the structural reform and deliver much needed improvements in the country’s downstream sector.

The official aim of the nationwide program to tackle recurring diesel and petrol deficiency is to modify the petroleum products distribution system by increased monitoring and optimizing fuel supplies to end customers. The project comes in three phases.

In the first phase, which started in mid 2013, completed in mid 2014, GPS devices were installed in tanker trucks and smart cards readers were produced for gas stations. In addition, a national electronic database of distribution points – depots, storage tanks, and companies was set up, which allows for a centralized monitoring of fuel transportation and distribution cycle. It is designed to tackle smuggling outside of the country and curb corruption in fuel trade.

The second and third phases were kicked off in October 2014. In the second, electronic meters at fuel depots and on storage tanks were to be installed. They will be connected through regional headquarters of each distribution company, as well as linked to the Egyptian General Petroleum Corporation (EGPC), in order to better track distribution flow and record the volume of supplied, consumed and available fuels, ensuring that subsidized fuel products reach citizens. It will allow to observe fuel consumption patterns, as a necessary prerequisite for future rationing for efficient supplies. The third phase was to issue smart cards for citizens who are eligible to receive subsidized fuel. Customers’ cars will be registered in the national database and their fuel consumption will be recorded. The government rejected to set any limitations to purchased volumes of fuel per customer amid vocal outcry against the proposed measure.

The implementation phases were reported in the media in a rather incoherent way, and hard to say if the planned progress has been achieved or not.

Optimizing Fuel Subsidies

The government has rested its trust in the new system. It envisions that it will lead to restructuring of fuel subsidies, curb fuel smuggling, combat the black market, and provide a necessary basis for fuel self-sufficiency of the country in the near future.

It is clear that hopes are high. Expectations are fed with a notion that smart cards will provide a one-for-all solution. Aspirations, as projected by the government, however, remain to be fulfilled.

The government aims to trim the budget deficit by achieving efficiency in the consumption of subsidized fuel, and thus decrease the burden of fuel subsidies on the state budget by 25% to 30% in up to six years. The fuel subsidies slimmed in two consecutive years. Overall fuel subsidies decreased to EGP 56b in the 2015/2016 fiscal year, compared to EGP 76b in the previous year and EGP 100b the year before. The subsidies share of the budget, initially predicted to remain at the level of EGP 61b in 2015, was reported to further decline by additional 30-35% amid low global oil prices. The cuts thus raised fuel prices by 78% since 2014.

What is more relevant, however, is the fact that according to an earlier statement by the finance ministry, 80% of overall fuel subsidies do not reach eligible citizens, who need such a support. According to previous reports by the World Bank, it was more than 60% of the fuel subsidies used by people from higher social classes, while poor low-income citizens had reached out to merely 7% of the overall subsidies. Until now, all Egyptians could have bought unlimited volumes of subsidized fuel with no restrictions. The government has therefore continued with the plan to implement the smart cards system, which will allow only eligible citizens to buy unlimited amount of fuel for subsidized price, and those without smart cards will pay unsubsidized price. This move is estimated to possibly save up to additional EGP 40b of the fuel subsidies package in the state budget a year, without rising fuel prices, ridding the state budget of yet another burden, as efficiently as the bread subsidies savings seem to have achieved over recently introduced systematization through bread smart cards.

The bread smart cards scheme, launched under the former president, Mohamed Morsi, allocates subsidized bread to eligible consumers, and has reduced paid out subsidies by more than 30%, according to official figures. The wheat consumption for subsidized bread decreased and in effect reduced the size of wheat imports needed. The current government tends to foresee similarly efficient structural changes to be introduced through the fuel distribution system. However, this expectation may be more difficult to live up to in the oil industry. Not only has the bread smart cards system imposed a cap on the amount of purchased loaves per family member per day, it has also prevented people from buying in bulks and necessarily cut sales of subsidized bread to ineligible consumers. The infrastructure of bakeries seems to be operating efficiently in the country, with much lower investments needed; incentives for black market sales of bread are less promising.

In comparison, the petroleum products sector is more appealing for illegal sales, offering higher profits. The gap between subsidized price of fuel and market price of gasoline and diesel are incomparable with bread prices, which in itself is almost an invitation for joining unlawful fuel trading. In addition, the volume of fuel sold per customer will not be limited, which may further encourage black market and lead to overconsumption of fuel. Further, the sector is far more demanding in investments, technologies, and maintenance than bakeries, as fuel distribution to end customers undergoes a complex cycle of production processes and shipments. This indicates that the fuel sector scheme may be less likely to strike the same balance as bread smart cards did, or generate overall savings on petroleum products for the state budget in the upcoming years due to cracks in the downstream sector’s structures and processes. There are still many other challenges ahead.

Smuggling and Black Market

As fuel commodities are by default more prone to be traded on black market or smuggled, this undoubtedly represents one of government’s worries.

Egypt’s fuel has been smuggled abroad at a rate of 20% of overall supplies each year, according to an official quoted in the Egyptian media. The first phase of the new fuel distribution system allowed monitoring truck routes, which, according to EGPC, led to a drop in smuggling operations in the country by 60% in September 2014. Nonetheless, it was also reported that fuel smuggling through tunnels and waterways from the Sinai town of Rafah had increased at the time, despite Egyptian state’s operations against fuel shipments to Gaza in 2013. In raids, banned underground tanks and tunnels in the area transferring fuel to the impoverished Palestinian territories had been destroyed. No further cases of disclosed smuggling routes were documented since, or other related achievements of the Egyptian state were witnessed. The figures are therefore difficult to measure or verify or use as a basis to assess the impact that the new monitoring system has had on the sector.

In fact, it appears that the Egypt’s government is facing a persistent conundrum in detecting smuggling routes, despite medialized previous successes. Petroleum Minister, Tarek El Molla called for a meeting with heads of fuel companies in October 2015 to help the government prepare a comprehensive plan to tackle smuggling and black market with petroleum derivatives. It was first then concluded that aside of the GPS devices, ATC system is to be installed in fuel trucks. Meters would give accurate updated information about the shipment channels. As this comes more than a year since the alleged completion of the first phase of the project, uncertainties remain about what effects the new monitoring system may deliver in terms of cross-border smuggling. Equally so, it remains to be seen to what extent the system may guarantee fuel supplies stability and counter domestic black market.

The Federation of Egyptian Chambers of Commerce had previously stated for the press that as there is no cap for consumption of subsidized fuel defined, black market within the country is unlikely to evaporate. According to experts, the given rate of 20% of fuel illegally smuggled outside of Egypt includes an unknown rate of fuel being sold in the black market within the country. The issue, however, seems to be muted in the media and in official statements, with cross-border smuggling taking priority over curbing domestic diversion of fuel flows from the official supply chains.

Two main explanations of this trend are at hand; pricing policy and fuel patronage networks. Experts have stressed that large discrepancy between subsidized price and market price of fuel is making prospects for the black market highly tempting. The pricing policy, however, is not the single variable in the equation. There are reported phantom petrol stations that exist only on the paper and the data about the number of petrol stations, depots and transportation routes were missing in the national database until recently. Government’s strategy to minimize fuel trading outside of official channels would thus need to embark upon a major initiative to formalize such businesses and adopt a comprehensive and efficient legislation to that effect, as EOG learned already in October 2014, speaking to Sherif El Diwany, the then Executive Director of the Egyptian Center for Economic Studies. Other experts noted that in order for the formalization of fuel distribution businesses to be completed, the government will face a complex of insurmountable obstacles. This relates to reported extensive patronage networks that created the core of the fuel black market in the country. The networks are believed to be a legacy of country officials controlling such channels, operated by their affiliated gas stations owners, who both have vested interest in preserving the price gap in the midst of lacking oversight, management, and control.

The government appears to be focusing on short-sighted vision of curing slandered state funds on subsidized fuel, without addressing related structural problems, such as minimizing negative effects of low production in refineries, aging infrastructure, smuggling or black market webs. A complex enhancement of the fuel supplies infrastructure aimed at overhaul reforms of the downstream sector with targeted investments may be a more promising strategy in a long term that may lead to financial and structural sustainability and guarantee fuel deliveries to citizens.

Lack of Clarity amid Delays

Currently, the implementation phases of the smart cards system are seeing delays, and remain veiled in unclear progress.

The delays have been accompanying the implementation of the program from its onset. Initially, first components of the system were to come into effect in July 2013, which was delayed over the then political context. What followed was that the government announced in October 2013, that the scheme was to come into operation some time during 2014, but this did not materialize. In January 2015, a schedule was set and the smart cards were to start functioning six months later, in June 2015. It was only a few days before the project was to come into force, when the government said it would delay it further, until all smart cards were delivered to customers and all provinces were covered.

At the time, E-Finance, the company commissioned to operationalize the project, explained that the government was slowing the process, as it continued waiting for consumers to register and obtain their cards, but did not specify any particular obligatory deadline to follow. And E-Finance officials stated for Daily News Egypt that the system was ready to go with more than 12,000 selling points distributed across the country’s gas stations. In May 2015, some 3.7m cards were issued, which were to be distributed to 27 provinces, according to the company’s Chairman, Ibrahim Sarhan. In Q3 of 2015, E-Finance’s project manager responsible for the smart cards scheme, Khaled Abdul Ghani, told the media, that some 162,000 cars had been added to the database from all provinces, in addition to 100,000 cards issued for tok-toks, bringing the total number of cards for direct consumers to 5.5m. Initially, it was reported that the program aimed at issuing 1m fuel cards for diesel consumers and 5m cards for petroleum consumers, which would suggest that the target has been met. In January 2016, Abdul Ghani added that additional 50,000 consumers were registered, out of 6.2m recorded as eligible for fuel subsidies. In December 2015, the government proposed yet another deadline in May 2016, without giving any indicative information as to the progress or its capacity to accomplish the program.

Although the publicized information is difficult to unify to get a clearer picture of the progress of the project, what is more debatable is when it will take effect, and to what extent it may help resolve the recurrent fuel crises.

Towards Fuel Self-Sufficiency

The delays represent merely a fragment of challenges that the Egyptian government is about to stumble across in relation to the downstream sector. Rising demand of fuel, prospects for continued over-consumption of diesel and gasoline, and insufficient production capacity of local refineries may weaken intended effect of the smart cards system. Projected savings through optimized fuel subsidies may easily be swallowed by petroleum products imports, if Egypt delays much needed improvements of the structures and processes in the sector.

The government is thus still to outline a complex energy sector reform that will incorporate all individual measures to achieve stability and sustainability on the fuel market. Without a clear strategy, Egypt’s aspiration for fuel self-sufficiency is most likely to remain unfulfilled in the foreseeable future.

Distribution EGPC Fuel subsidies