CAIRO:Tom Walter has a tough job doing business in Egypt.He is chairman and managing director of ExxonMobil Egypt, the local subsidiary of one of the leading global marketers of fuels and lubricants. In this country, the market remains over-regulated, heavily distorted by state subsidies and sees only modest growth.
But this environment makes his advice all the more valuable to newcomers. ExxonMobil is one of the sponsors of the current Egypt Invest 2005 Conference, and the day before the conference,Walter looked forward to sharing his experiences, saying that they “.can help others who are considering investments in the country to see where the opportunity lies, understand what the challenges are and recognize that they can overcome those challenges.
Walter also has advice for the government. Due to subsidies, fuel prices in Egypt are amongst the lowest in the world, and margins for fuel marketers are regulated. “We can improve our returns by being more efficient in the way we operate, but yet the returns over the past number of years have not been very good.So we would encourage the government to look for ways to improve the returns or improve the regulatory leeway in the downstream business.
One of the first reform measures implemented by the Ahmed Nazif cabinet, which took office in July 2004,was to reduce subsidies on diesel fuel. The price for diesel had been unchanged for 10 years and was raised by 50 percent, from LE 0.4 to LE 0.6 per liter.A government official at the time estimated that the true cost per liter should be around LE 2. Prior to the change, the government spent some LE 5 billion on subsidizing diesel.
The budget deficit for fiscal year 2005/2006, the first budget presented by the Nazif government, amounted to 9.2 percent of Egypt’s GDP, raising the eyebrows of local and international analysts who were thus far pleased with the cabinet’s performance.
Subsidies on food and energy make up almost half of the government’s expenditures,but the issue of subsidies is the most sensitive surrounding economic reforms in Egypt and the public has a close eye on it at all times.When gas stations began selling 92-octane gasoline in February at LE 1.4 per liter, compared to 90-octane gasoline at LE 1 per liter,accusations were immediately voiced that this was a backdoor attempt to introduce higher prices.
One possible option out of the dilemma is better targeting of subsidies.Parliament has discussed handing out fuel subsidy cards similar to the food subsidies system,which would allow low-income drivers to buy fuel at lower costs then others.
Walter, who has been in Egypt for two years after holding various posts at ExxonMobil in Africa, says that he is unable to predict whether the government will further reduce fuel subsidies in the future, but hopes that the government’s own interests will help.
“What I see in the government, they are very serious about creating a welcoming and sustainable business environment, and that means not only creating an environment where businesses can work well, but also creating a fiscal environment for the government that is sustainable in the long run.
A reduction of subsidies would not only improve the state’s fiscal situation, but would also have positive effects on the environment. An estimated two thirds of the vehicles circulating on Cairo’s streets are older then 10-years.A price hike would prompt car owners to replace their vehicles with newer models that consume less fuel and blow fewer toxins into the air.
From his office on the Corniche, Walter has a superb view of the Nile. He says that a few days ago, the smog covering Cairo grew so thick that he was barely able to see the other bank, just a few hundred meters away.
To date, last fall’s cut of diesel subsidies remains the only reform measure taken directly affecting the business of marketing fuels and lubricants in Egypt; public fuel marketers still maintain a strong market share. The government has started to privatize companies in the refinery segment of the energy sector, but there are no reliable indications that the down-stream businesses might soon follow.
But Walter says he welcomes any competition induced by privatization and shows a great deal of confidence.”This would not be a concern to me. There might be a little turbulence in the market, but if the government decides to go that way, it’ll be fine.
Walter also suggests modernization of those parts in the regulatory framework governing the technology used in logistics. “We have regulations that are quite a few years old; they need to be reviewed in light of modern technologies that would allow us to operate more efficiently, said Walter, citing the limited size of underground tanks permissible in Egypt.
ExxonMobil has been in Egypt for more then 100 years and today has some 400 employees and indirectly gives job opportunities to up to 8,000 more through contractors and dealers, says Walter. Its annual sales amount to more then $500 million, accounting for two thirds of ExxonMobil’s sales in Africa, while its office in Egypt also oversees activities in other North Africa countries. It is also busy implementing a global fuel marketer trend to incorporate retail stores into service stations to compensate for modest growth rates in their core business. Walter says that the 11 retail stores are among the best selling ExxonMobil’s stores worldwide.
Although his market has not received full attention from reformers thus far,Walter lauds the cabinet and says the company has nonetheless significantly benefited from the economic reform program implemented. This has prompted ExxonMobil to invest more in its operations in Egypt, and Walter hopes to share his expressed optimism with potential investors during Egypt Invest 2005. “Hopefully a few people might hear that and say ‘Hey, we are going to try that too.,’ said Walter.
