Power Sector Cooperation Planning Survey in Arab Republic of Egypt
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ARAB REPUBLIC OF EGYPT Ministry of Electricity and Renewable Energy (MoERE) The Egyptian Electricity Holding Company (EEHC) Power Sector Cooperation Planning Survey in Arab Republic of Egypt Final Report (Appendix) October 2018 Japan International Cooperation Agency (JICA) Tokyo Electric Power Services Co., Ltd. (TEPSCO) 7R JR 18-030 Appendix Appendix 1 Financial Analysis of Egyptian Government .................. 1 Appendix 2 Outline of environmental standards necessary for project implementation ..................................................... 12 Appendix 3 Transmission related data ........................................ 26 Appendix 4 Human resource development materials ..................... 60 Appendix 5 Seminar materials .................................................. 90 Appendix 1 Financial analysis of Egyptian Government (1) Financial position Table 1 Transition of fiscal result (LE Million) Source: Central Bank of Egypt、Ministry of Finance Above table show financial situation in the past 10 years, the financial situation has deteriorated in the last ten years. The revenue increased 308% over the past 10 years, while the expenditure increase rate is 353%. As a result, the budget deficit has increased significantly from LE 50 billion in 2005/2006 to LE 279 billion, and increased 5.5 times. The fiscal deficit against revenue ratio was 33% in FY2005 / 06, but it increased to 60% in FY2014 / FY2005. This means that it is necessary to increase revenues by 60% in order to balance finances with an increase in revenue, which is a very difficult. Fiscal deficits are fundamentally debt financed. As a result, liabilities increase, and liabilities expansion increases interest payments. An increase in interest payment will lead to an increase in expenditure and the budget deficit will expand in a chain reaction. The table below shows the fiscal situation by ratio to GDP. From FY 2011/12 onwards, the fiscal situation has deteriorated seriously and it can be seen that the regression of the economy after the Arab Spring has a negative impact on the fiscal situation as well. Both revenues and expenditures are decreasing as a percentage of GDP, but the rate of decrease in revenue is large. While the decrease in revenue to GDP ratio is 4.4%, the decrease in income tax to GDP is 2.2%. Half of reduction is caused by income tax. Total expenditures to GDP have been decreasing, but personnel expenses and interest to GDP are increasing. Interest is inevitable because of the increase in liabilities, but personnel expenses can be improved politically and it is a future task. Regarding subsidies, the subsidy reform was carried out by the El-Sisi administration, and subsidies were drastically -1- eliminated. Therefore, subsidies, aid and benefits have decreased from 11.4% in FY 2013/14 to 8.6% in FY 2014/15. Table 2 Transition of fiscal result (ratio to GDP) Source: Central Bank of Egypt、Ministry of Finance As for revenue, tax revenue increase 3.13 times and it exceed average revenue increase of 3.08 times. However, increase of income tax (main tax resources) is 2.69 times and this rate is below average. Generally, if value added increase, income increase accordingly. Then, it leads to tax revenue increase. Income tax revenue increase is lower than GDP growth means that there may be a problem with either or all of tax system, assessment and collection. In expenditure, amounts of Subsidies, Grants and Social Benefits are outstanding. Below list shows portion of 3 items in total expenditure. Portion increase every year and it reach to 82.7% in FY 2013/14. It decreases to 80.5% in FY 2014/15 because of subsidy reform. The higher the proportion, the more rigid the fiscal budget, the less budget is distributed to necessary fields such as civilian living. 80.5% in FY 2014/15 is high enough, so that reform will continue to be carrying out. Regarding subsidies, reductions are planned in the future, and expectations will also be given to public servant reform. Table 3 Rate of 3 items in expenditure Source: Central Bank of Egypt、Ministry of Finance Below list describe total debts of the nation, as a result of the above financial situation, and it increases to 96.7% of GDP in 2016, almost equivalent to GDP. If the debt increases, -2- the repayment burden of interest increases, and it also affects the country's trust. In the case that the rating company drops the rate, it is necessary to issue the bond at a higher interest rate. The influence is serious. Table 4 Total debt and ratio to GDP (LE Million) 2011 2012 2013 2014 2015 2016 Total Debt 1,044,898 1,238,137 1,527,378 1,816,582 2,116,345 2,619,594 Ratio to GDP 76.2% 73.9% 82.1% 85.3% 86.6% 96.7% Source: Central Bank of Egypt (2) Rating Ratings by rating agencies are basically evaluations from the financial side, but they also have aspects of national economic evaluation, and their ratings are important in terms of international credibility. The table below shows the trends in the rating of Egyptian government bonds by the three companies in the past 20 years. It can be seen that the ratings are falling from the Mubarak era of the late 1990s and the 2000s. At the end of the 1990s, when had the highest credit rating, S & P and Fitch ranked BBB-1 at the marginal investment grade, but after that it has fallen into a category that is classified as speculative. After the Arab Spring, it has fallen to B except for one period. Currently B-, B3 and B-2, the three companies rate the same rank. Every rating agency is judging that the worst conditions are over, but they are not at a level that can be trusted yet, considering fiscal deficits and high-level debts. 1 Meaning of Rating “BBB” is as follows and mark “-“ means close to below rating. S&P: An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Fitch: 'BBB' ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity. 2 Meaning of Rating “B” is as follows and mark “-“ means close to below rating. S&P: An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair theobligor's capacity or willingness to meet its financial commitment on the obligation. Moody’s: Obligations rated B are considered speculative and are subject to high credit risk Fitch: 'B' ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment. -3- Table 5 Rating of Egyptian national bonds by 3 major rating companies S&P Moody's Fitch Date Rate Outlook Date Rate Outlook Date Rate Outlook 2016/11 B- Stable 2015/04 B3 Stable 2014/12 B Stable 2016/05 B- Negative 2015/11 B- Stable 2014/12 B Stable 2015/05 B- Positive 2014/10 Caa1 Stable 2014/01 B- Stable 2013/11 B- Stable 2013/05 Caa1 Negative 2013/07 B- Negative 2013/05 CCC+ Stable 2013/01 B2 Negative Watch 2013/01 B Negative 2012/12 B- Negative 2013/01 B3 Negative 2012/08 B Negative 2012/06 B Negative Watch 2012/02 B Negative 2012/06 B+ Negative 2011/11 B+ Negative 2011/12 B2 Negative Watch 2011/12 BB- Negative 2011/10 BB- Negative 2011/10 B1 Negative 2011/02 BB Negative Watch 2011/05 BB Negative 2011/05 Ba3 Negative 2011/01 BB+ Negative 2011/02 BB Negative Watch 2011/01 Ba2 Negative 2009/08 Ba1 Stable 2008/08 BB+ Stable 2005/03 BB+ Stable 2008/06 Ba1 Negative 2007/06 BB+ Positive 2003/08 BB+ Negative 2003/11 Ba1 Stable 2002/08 BB+ Stable 2002/05 BB+ Stable 2002/01 BBB- Negative 2000/07 BBB- Negative 2001/11 Ba1 Negative 2000/09 BBB- Stable 1997/11 Ba1 Stable 1997/10 Ba2 Positive Watch 1997/01 BBB- Stable 1997/10 Ba2 Positive 1997/08 BBB- N/A 1996/10 Ba2 Stable Source: http://jp.tradingeconomics.com/egypt/rating (3) Subsidy reform As mentioned above, the national finances are in danger and urgent reform was required, but successive regimes were unable to take effective measures. In 2014 the El-Sisi administration embarked on subsidy reform and decided to drastically reduce fuel subsidies. As a result of this decision as shown in the table below, the regime succeeded in reducing the fuel subsidies for LE 126,180 million in FY 2013/14 to LE 73,951 million in 2014/15. Moreover, there was a second fuel price revision in November 2016. Transition of subsidy system The history of Egypt's subsidy system is long. In 1941 during the wartime food distribution system was started, but at that time there was no price control, securing basal foods (sugar, kerosene, cooking oil, tea etc.) was the policy purpose in the era of food shortage3. Under the "Arab socialism" regime, the recognition that "it is a responsibility of the state to supply cheap goods and services to satisfy the people's lives" had become established, and the target items also expanded gradually (wheat, sugar, Rice, cooking oil, soap, kerosene, 3 Policy advocacy research "social justice" and redistribution policy - issues and perspectives of reform of subsidy system in Egypt – IDE-JETRO, Yuko Ido -4- cotton products).