Energy Policy Reform: The key to unlocking New Egypt

Reform of Egypt's bankrupt energy policy will lay the foundation for a more just society by freeing up capital for investment in health, education and job creation, says a top Egyptian business leader

Egyptian policymakers have a once-in-a-generation opportunity to capitalize on the nation’s newfound democracy dividend by enacting a sweeping package of meaningful reforms that will transform Egypt not just into a regional powerhouse, but a more just and comfortable society for all citizens, a top Egyptian business leader told attendees at the annual Euromoney conference today in Cairo.

“The future of the Egyptian economy — and, indeed, the nation — is limited today by four critical imbalances,” said Ahmed Heikal, Chairman and Founder of Citadel Capital, the leading private equity firm in the Middle East and Africa with US$ 9.5 billion in investments under control.

“We have a stark under-investment in health and education. Our rate of labor productivity lags significantly behind those of our primary global competitors. Our use of water per unit of GDP is far too high. And last, but certainly not least, we use far too much energy per unit of GDP. We have, in essence, mis-priced our resources through the continued extension of a system of energy subsidies that today accounts for nearly a quarter of all government spending,” Heikal said.

“We have mis-priced all petroleum products — from natural gas to diesel and petrol — alongside electricity and water. We have attached far too low a value to education, leading to a stark under-investment in our children — the workforce of tomorrow,” he noted.

The result of low energy pricing in the market is clear: Egypt’s share of total petroleum production is c. 42 million tons per annum (MTPA). At the same time, consumption stands at 80-83 MTPA today, forcing Egypt to import approximately 40 MTPA of petroleum products annually — and making the energy sector to account for nearly 100% of the country’s current account deficit.

“The arbitrage opportunity between local and global prices is phenomenal,” Heikal explained. “This is expressed in everything from illegal smuggling of products outside our nation’s borders and — quite legally — by producers in energy-intensive industries who consume energy at local prices and bring to market products at international rates. Our fast-rising rate of consumption will accordingly see the energy sector’s contribution to our current account decision grow far beyond today’s US$ 16 billion or so rate.”

A decade ago, annual price rises of as little as EGP 0.10 per unit of energy (of all types) could have averted today’s looming fiscal crisis — and resulted in Egypt’s total debt standing at exactly zero today, Heikal says.

“Instead, we need today to accept a much more aggressive strategy as regards pricing. Energy prices need to be liberalized gradually and over time lest we wish to see a spike in inflation at the same time as we face rising unemployment as a result of failing enterprises. With that in mind, we need to cushion the impact of price rises through a system of direct cash subsidies to consumers,” Heikal noted.

Energy and other subsidy reforms backed by cash subsidies for consumers has proven to work in emerging markets as diverse as Brazil, Mexico, Indonesia and Iran.

“It is clear we can no longer continue along the same path. Egypt’s energy policy has failed, and its failure is both resulting in energy shortages — of butane, diesel, electricity and petrol — and under-investment in health, education and job creation,” Heikal said.

Asked about Citadel Capital’s role in helping Egypt tackle the challenge, Heikal noted that the firm has invested USD 4 billion in Egypt since 25 January 2011, including the arrangement of full financing for a US$ 3.7 billion petroleum refinery that will help reduce by 50% Egypt’s present-day diesel imports, generate more than US$ 300 million in annual benefits to the state treasury, and reduce by nearly one-third the country’s present sulfur dioxide emissions.

“Looking ahead, we have identified a number of opportunities in the energy efficiency and energy infrastructure sphere and we are optimistic we will easily match the USD 4 billion figure in the coming years,” Heikal said.

“The challenge is not financing — financing is available through what I call the ‘triple combo’ of Gulf-based sovereign wealth funds; Asian, American and European export credit agencies; and development finance institutions such as the IFC, DEG, FMO, AfDB, EIB, EBRD, the Islamic Development Bank and PROPARCO, among others. This group has allowed companies such as ours to undertake large infrastructure projects such as our US$ US$ 3.7 refinery. It’s not SME investing.

“Instead, the challenge rests with our new, democratically elected government and the bureaucrats that serve this nation,” he explained. “While financing is available, the obstacle is bureaucratic inertia. It is fear. And it is easy to see why: It is not reasonable to expect a government official who spends his morning under investigation for a completely legitimate decision he made yesterday to turn around and sign paperwork for a new project this afternoon. Our government has inherited a significant challenge on the decision-making front, and the resolution of this quandary by protecting honest people who make legitimate decisions must be their top priority today.”

“Egypt does not want for resources, and our national character favors fairness and an entrepreneurial spirit. We have been held back for generations not for lack of solutions, but for a lack of the willingness to make their implementation a national project that is supported by the majority of our citizens,” Heikal concluded.


Citadel Capital (CCAP.CA on the Egyptian Stock Exchange) is the leading private equity firm in the Middle East and Africa. Citadel Capital focuses on building regional platforms in select industries through acquisitions, turnarounds, and greenfields executed via Opportunity-Specific Funds. The firm’s 19 OSFs now control Platform Companies with investments worth more than US$ 9.5 billion in 15 countries spanning 15 industries, including mining, cement, transportation, food and energy. Since 2004, Citadel Capital has generated more than US$ 2.2 billion in cash returns to its co-investors and shareholders (on investments of US$ 650 million), more than any other private equity firm in the region. Citadel Capital is the largest private equity firm in Africa by PE assets under management (2007-2012, as ranked by Private Equity International). For more information, please visit

For more information, please contact:
Ms. Ghada Hammouda
Head of Corporate Communications
Citadel Capital (S.A.E.)

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