Cheques and Balances
The government must organize its own internal dealings financially and work for more efficiency if the petroleum sector is to balance its checkbooks.
Today, petroleum authorities (the EGPC and EGAS in particular) are heavily indebted to both foreign investors and banks, and despite constant efforts to schedule and organize the payback of these debts, the process has become significantly complex. Most investors in Egypt’s petroleum sector complain of late receivables they have yet to acquire from the government (although most of the complaining is done in private).
The accumulation of debts and lack of liquidity ailing the ministry of petroleum and its entities is a symptom of a much larger financial problem afflicting the Egyptian government. Minister of petroleum Eng. Osama Kamal places the ministry’s dues from government entities to be approximately LE140 billion, while the ministry’s outgoing debts amount to roughly LE120 billion. This includes debts and dues related to entities such as the EGPC and EGAS. The EGPC’s debts to banks alone is estimated at LE80 billion.
Internal debts between ministries, a distinct lack of fluidity, and unhelpful circumstances in both the local and global petroleum markets have resulted in the predicament we witness today, but if the problem is to be solved, the tangled mess that is government finances and ministry-to-ministry debts must be resolved, and the legacy of the old patron state must be discarded.
The 1952 revolution transformed the Egyptian state, particularly with regards to the relationship between the government and the governed. The state effectively morphed into a patron state, practically in charge of providing everything and managing everything. Subsidies are a prominent example of this issue, as the sanctification of state subsidies as an untouchable policy is merely a remnant of the statist age of Gamal Abdelnasser. Today, subsidization of petroleum products constitutes a massive burden on the petroleum sector. The government subsidizes these products at a monumental loss, straining its finances and further chipping away at liquidity.
Experts in the sector have repeatedly called for subsidization to end in order for the sector’s finances to rebalance, among them former petroleum sector Dr. Hamdy El Bamby, who claimed that the removal of subsidies is the only feasible way to resolve the industry’s financial problem. Osama Murad, former head of Barclays Bank, who now works at Arab Finance, added his voice to this argument, claiming that the gradual removal of subsidies is a necessity. He added that the discussion about subsidies has lasted for more than a decade, and that if any steps had been taken in these years to gradual reduce subsidies, the problem would’ve become negligible by now. The petroleum sector cannot afford to pay its debts if it is saddled with irrational subsidization.
Murad also spoke of the lack of responsibility and accountability within the governments as a legacy of the 1952 revolution. He gave the example of the ministry of electricity, which he recalls used to utilize petroleum products without bearing the burden of their costs in any way.
The example he chose to give is telling, seeing as how the ministry of electricity today is one of those most heavily indebted to the ministry of petroleum. Sources within the ministry of electricity reveal that the debts amount to LE15 billion, as per the agreement signed with the petroleum ministry in 2006.
The ministry of electricity relies on petroleum products to generate electricity, with nearly 82% of the electricity generated utilizing natural gas. The electricity ministry pays a monthly LE200 million to the EGPC for resources supplied; the annual value of the resources is in the region of LE6 billion. Now the debt has grown, and the petroleum ministry has faced enormous difficulties in regaining its dues. The problem is an ironic one, as the ministry of electricity itself is facing a liquidity problem due to its own pending dues from other government entities.
The ministry of electricity faces other debts, and has been met with similar hurdles in securing its own funds from other ministries and entities as the ministry of petroleum. The ministry of electricity also suffers from an additional problem, and that is the fact that rising prices of petroleum products mean they can no longer raise electricity prices with every petroleum price increase. In effect, this forces the ministry of electricity to take some of the impact of rising petroleum prices, inflicting it with its own losses.
The debts and bad finances are a characteristic of the entire government, it would seem, as the ministry of petroleum expects late payments from ministries other than the electricity ministry. The ministry of petroleum has contacted the ministry of civil aviation and the ministry of finance in order to clear up overdue finances, but the old way of doing things still prevails, and the inherited conception of the government as one bulky, bloated entity makes such transactions tricky.
The abovementioned facts relay an image of a sector already buckling under the weight of unhealthy finances, but some of the mechanisms of funding and financing adopted by the government add unnecessary complexities and redundant hindrances to liquidity, a rare commodity for the petroleum sector to begin with.
Further exasperating the crisis of liquidity facing the petroleum ministry are a number of ancient policies related to the flow of funds and the involvement of the ministry of finance. Rather than conducting its operations in an independent, self-sufficient manner, the ministry of petroleum works in a redundant, over bloated cycle with the ministry of finance. For instance, funds from government-owned petroleum fields which are currently in production are diverted directly to the ministry of finance, which then chooses to provide liquidity to the ministry of petroleum and others from these funds as it sees fit. Similarly, the signature bonus included in any petroleum agreement with foreign investors goes to the ministry of finance, and is similarly redistributed in accordance with its overall vision.
In effect, this results in the ministry of petroleum and the country’s petroleum resources being used as a crutch to ease short-term strains ailing the national economy. This policy hinders the development and efficiency of the sector, subsequently limiting its potential to be a more valuable asset to the country. If the ministry of petroleum were to be responsible for its own financial cycle, its effectiveness would be greatly enhanced. As it stands, funds are diverted to the ministry of finance, which then agrees deals such as the $235 million loan deal with the Islamic Development Bank to finance the petroleum sector, further upsetting the balances and piling up more debts.
The situation has not been helped by circumstances over the last few years. The global market has changed, amplifying the stress on the ministry due to rising production costs, which are not met by equal rises in the value of what is produced in Egypt. The local landscape has also changed, as consumption shoots through the roof, making exportation unfeasible. Exportation was a major source of liquidity for the petroleum sector in Egypt, as capital flow was strong, allowing the ministry and the entities under its command to meet their financial obligations on time and in cash.
If the petroleum sector is to see the light at the end of the financial tunnel, the petroleum ministry must abandon archaic remnants of a bygone age of statist polices and move forward to become a self-sufficient, transparent financial entity, and this cannot happen unless such an initiative includes the entire Egyptian government.
By Ahmed Farahat