A new energy pricing system tops measures to encourage investments in the local industry. Mona El-Fiqi reviews its policies Minister of Trade and Industry Rachid Mohamed Rachid announced last week that a new pricing mechanism for natural gas and electricity used by energy-intensive industrial sectors will be applied after bieng approved by the Supreme Energy Council on last Wednesday. The new pricing mechanism is the second phase of a new industrial policy, which includes a series of measures to enhance the efficiency and competitiveness of the Egyptian industry. "After three years of sustained economic reforms, we have successfully put the Egyptian industry on the map as a key driver of growth, investment and job creation," Rachid said at a news conference held to announce the new move. "Now, we are taking our industrial policy to a new level, with a set of initiatives that build on our efforts to create a competitive, transparent and predictable investment environment for the growing numbers of foreign and local investors looking for entering Egypt's industrial sectors." The minister explained that two years ago, the government's goal was to increase industrial investments to reach LE35 billion by 2011, but several positive indicators caused the ministry to hasten the plan. According to Rachid, total investments in the industrial sector during the first nine months of fiscal year 2006/2007 were estimated at LE31 billion, compared to LE16 billion in fiscal year 2005/2006. The new strategy is based on five initiatives, including a new pricing system for energy, raising the number of local cement and steel operators, providing a package of incentives to SMEs, providing support to new entrants in industry and improving the regulatory environment for internal trade. The first step is introducing a new mechanism for pricing natural gas and electricity used by 40 companies operating in industries which consume large amounts of energy. This aims to better clarify and make predictable the prices of energy for investors. According to Rachid, the new system was developed in coordination with both the ministries of petroleum, and electricity and energy. The new system aims to raise the price of natural gas and electricity gradually until it reaches cost recovery. At that level, the price will be free of any subsidies after a three-year transitional period. Accordingly, the price of natural gas will gradually rise from $1.25 to $2.6 per million units, while the price of electricity will be divided into three categories. Very high voltage will go up from 11.1 to 17.8 piastres per KW; high voltage from 13.4 to 21.6 piastres per KW; medium voltage from 18.3 to 29.5 piastres per KW. Rachid asserted that the new pricing system will help reduce the government's budget for subsidies by LE15 billion. Moreover, the ministry will establish a fund that uses part of the redirected subsidies to promote initiatives which help local manufacturers increase their energy efficiency and reduce their energy consumption. A committee will also be established to monitor and regulate energy prices for industry, in order to ensure the smooth transition into the new system. The new pricing mechanism will be applied to 40 factories which are heavy users of energy in four sectors, namely cement, steel, fertilisers and aluminum. Their combined production represents 20 per cent of output by local industry, and uses 55 per cent of subsidised energy. At the same time, the 40 factories employ seven per cent of the industrial labour force. The new system will neither be applied to small industries nor sectors which employee a large number of the labour force. According to Rachid's ministry, these intensive-labour sectors will enjoy current energy subsidies for one more year. After that, the ministry will reconsider their energy prices. The government decision was well received by targeted companies. Mohamed El Kheshen, chairman of Al-Menofiya Company for Fertilisers, one of the 40 companies to apply the new pricing of energy, told Al-Ahram Weekly that the decision is on the right track since it is a move towards making local industry in step with international prices. "The energy prices after the three- year transitional period will remain equal to half of international energy prices." El-Kheshen stated. While he believes that the new pricing system will have some negative effects, such as an increase in prices due to high cost, the decision will help local prices comply with international prices. "Once the energy subsidy is removed, the government should no longer interfere in setting fertiliser prices produced by companies outside the free zones," argued El-Kheshen, especially that the price of natural gas represents 55 per cent of the total cost in the fertiliser sector. The international price for fertilisers is $300 per tonne, which is equal to LE1,800, but the Ministry of Agriculture determines the local price at LE600. El-Kheshen expects fertiliser prices to go up, therefore the government needs to address the expected high cost for farmers. Moreover, after the price hikes the government should provide more incentives to encourage foreign investors. "Foreign investors were attracted to Egypt because the energy, labour and water expenses were lower than other countries," noted El-Kheshen. The new strategy for industry also includes measures to increase the efficiency and competitiveness of the cement and steel sectors. The ministry approved the establishment of 14 cement factories across the country with an average capacity of 1.5 million tonne per line, "to fulfil local market needs which are rising by 25 per cent annually," explained Rachid. According to a study conducted by the Industrial Development Authority, local needs for cement in 2011 will be 55 million tonnes annually, while current production is estimated at a meagre 36 million tonnes. In an attempt to stabilise the local market, Rachid announced that the ministry will raise export duties on cement from LE65 to LE85 per tonne. The decision aims to balance the selling price on the international market and the local market, and help increase domestic sales and meet local needs. On the other hand, Rachid is currently considering reducing export duties on steel products. The government's new strategy also includes a fresh package of incentives and financial support for small and medium enterprises, as part of efforts to boost local industrial competitiveness. Moreover, Rachid's ministry will introduce measures to improve the regulatory environment for internal trade, by simplifying procedures and reviewing current legislation and regulations.
