A corporate state mentality

“It’s like there’s a hole in my pocket,” a friend says to me, as she wonders where her income from two different jobs goes, despite the fact that both she and her husband live frugally.

This reality for many people has been exacerbated by the Egyptian state’s pricing of goods and services within a market-led philosophy: Goods and services are for those who can afford them.

“You should be grateful,” one official remarks. “Market rates are still higher than those we offer.” This shift in the state’s mentality from serving the needs of citizens to one of a large private corporation can be seen in the responses of government officials to people’s complaints about increases in living costs and hikes in electricity prices and public transportation fares. This shift is not sudden; it has been a gradual process over several decades, and it is one that I will explore further in this piece.

Prime minister: “You should be grateful. A LPG cylinder costs LE115, but we sell it for just LE30.” June 29, 2017

In March 1998, Egyptian newspapers reported that the government planned to convert 43 government agencies that had a primarily economic focus into private companies, with shares to be sold off in public auctions. This was not the first time that such mass privatization had been implemented. But former Prime Minister Atef Ebeid made a noteworthy statement regarding this instance, as reported by the press in the late 1990s: “No price increases will result from the new system.”

Former Prime Minister Atef Ebeid’s statement on the decision

His statement is particularly noteworthy because of the context in which it was delivered, as the cost of public services and utilities had just seen marked hikes at the time.

In order to understand this shift from the provision of basic services based on need to a corporate mentality in which these services are only available to those who can afford them, we need to examine the complex makeup of the governmental bodies that regulate our daily lives.

In the 1960s, there were two types of body, apart from government ministries, overseeing public affairs: Public authorities (either service or economy oriented) and public entities (mostly serving) economic purposes. The government-drafted explanatory memorandum, which was issued in connection with the 1963 Law on the Regulation of Public Entities, attempted to clearly define these entities, distinguishing them from public agencies.

The Nasser-era Ministry of Industry asserted, at the time, that “public entities are largely economic, agricultural, industrial or financial public utilities that were previously part of the private sector, but which the state saw fit to assume the responsibility of. Public agencies, on the other hand, are most commonly government-run authorities that were given legal status by legislators … A public agency strictly provides a public service; it does not conduct any financial, commercial, agricultural or industrial activities.”

Yet, even today, the line is still blurred. Let’s take, as an example, the body that oversees the extraction of petroleum, refining it into gasoline and distributing it to gas stations. Is it a public entity because the first two parts of its mission constitute an economic activity that resembles one conducted by petroleum companies? Or is it a public agency because it provides a basic commodity (energy) to citizens at a subsidized rate?

As this process was taking place throughout the 1960s, the government also attempted to define the role of the state in providing public services more clearly. “The state was initially in charge of public services. But, under the [new] socialist regime, it was seen to be fitting that some of these services be delegated to independent agencies, as this would allow for more administrative flexibility. The key determinant is the purpose that an agency serves: If its primary purpose is to provide a public service, then it is a public agency, even if the service is of a commercial nature.”

By this definition, public entities became more associated with public sector activities at the time. They became oversight bodies for the work of public sector companies.

But the energy sector was a special case. There was an agency as well as a public entity. Since the 1950s, the Egyptian General Petroleum Corporation (EGPC), known as the Egyptian General Petroleum Authority (EGPA) before 1976, has been tasked with “overseeing all public petroleum facilities.” In the mid-1960s, the EGPA was created to “fulfil the national needs of petroleum products.” The authority obtained the state’s share of extracted crude oil and imported the rest, tasking government-owned refining companies with distilling it into fuel products, transport companies with delivering the crude oil to distribution points, and petroleum product companies with marketing it throughout the nation.

Despite the obviously commercial nature of the EGPA’s activities, it was legally bound to sell these products to the public at “the rate preset by the state in exchange for compensation that would cover distribution costs and generate a proper profit,” according to a government-issued explanatory memorandum.

In the mid-1970s, the Sadat administration promulgated the controversial Law 111/1975, which some leftists saw as an effort to undermine the public sector by removing oversight. But the regime argued that the law would provide public sector companies with a greater degree of decentralization, thus allowing them to make the decisions that best suited them.

Regardless of the fact that the mid-1970s did indeed mark the beginning of the dismantling of the public sector, what I mean to highlight here is that the petroleum sector was in trouble: Public petroleum companies had been operating under a public entity, the EGPA. This called for the promulgation of another law, in 1976, stipulating that the EGPC would replace the EGPA, “[acquiring] its rights and [becoming responsible for] its obligations.”

Under the new law, fuel products remained classified as a “service,” not a “commercial good.” The law stipulated that part of the EGPC’s income should come from the public budget, so as to cover “the discrepancies resulting from the sale of petroleum products at lower rates than their cost price.”

You might, understandably, be feeling even more confused now, as the makeup of state bodies is complex. You will be even more confused when you learn that, toward the end of the 1970s, the government started circumventing the previously established purpose of an agency as a “service provider,” and decided to take some agencies out of the remit of the public budget, making them more like private companies.

It was March 1979, to be specific, when a law pertaining to the public budget was amended to take economic public agencies out of the public budget, stipulating that such agencies would be required to draft independent budgets that should be submitted to the Cabinet by the finance minister, and then to Parliament for review and approval.

Let me reiterate that there two types of public agencies: There are “service agencies,” which undertake activities that are not supposed to produce large revenues, and there is another type, which the state considers to be a hybrid between service agencies (which are essential to citizens) and economic bodies (whose activities produce considerable revenue); these types of agencies were referred to as “economic agencies.” The latter is the type that came to have their own separate budgets, while the former remained part of the public budget.

So, which agencies came to be considered by the state as “economic agencies” at the time, even as they provided citizens with essential services?

The most notable examples are the EGPC, Egyptian Electricity Holding Company, Egyptian Railway Authority, Public Transport Authority and General Organization for Greater Cairo Water Supply. In other words: the agencies that provide the basic services that are essential for our daily lives.

Separating the budgets of agencies from the public budget may appear to be a step toward enhancing the state’s role as a service provider. After all, these agencies were not disconnected from the state. They continued, under this legislative amendment, to receive funding from the national treasury and to send surplus amounts back to the state. The publicly stated reason for taking them out of the public budget was to offer them greater relative independence to allow for autonomous budgeting, which would permit more administrative flexibility, and help provide better services to Egyptians.

However, in practice, this measure also allowed for greater transparency of the revenues of these agencies, especially their exemption from public service fees, and enabled the comparing of their revenues to their spending on subsidizing public services. This helped start a conversation about the value of the subsidies provided to these agencies by the state.

This legislative amendment came at a time when complaints about the deterioration of public utilities were on the rise. Some were directly proposing that economic agencies be turned into companies. Ali al-Selmy was one advocate for this motion when he was administrative development minister in 1987. He said that the primary objective would be to enable better management and allow these would-be companies to increase their capital by offering their shares for sale.

Selmy’s rhetoric is perhaps best summarized by a quote attributed to him: “Utilities are declining as a result of poor management, not lack of resources.”

“The report concludes that the company structure is the most suitable for the current public agencies.”

Things changed somewhat in the 1990s. Egypt was steadily on its way toward adopting a neoliberal system after signing a landmark agreement with the International Monetary Fund (IMF) and the World Bank, early in the decade.

As part of the vision that Egypt agreed to with these international funding organizations, and in accordance with the economic restructuring policies that the government was pressured into accepting by international donors, subsidies were no longer seen as an “obligation” toward citizens, that the state had to honor, but a “problem,” leading to price distortion. The goal was therefore to gradually raise the prices of petroleum products and gas, with a plan to match international prices by June 1995. But this did not materialize quite so quickly. Public perception of the state’s obligation to provide basic necessities at subsidized rates cannot be altered in just a few years. It was feared that enforcing neoliberal policies this abruptly might cause major political turmoil — which then-President Hosni Mubarak was aware of, and consistently attempted to avoid.

In this context, the state repeatedly spoke of the losses experienced by economic agencies providing public services, and of the burden that the state bore in subsidizing them, but it continued (as shown by the Ebeid quote in the introduction) to affirm that changes to these agencies’ administrative structures would not mean that the state would stop subsidizing public services.

This sentiment was dominant, even among economists not affiliated with the state. For example, Hanaa Kheir al-Din, an economist who presided over the Egyptian Center for Economic Studies, is quoted in a 2004 interview with the privately owned Al-Alam Al-Youm newspaper talking about the losses experienced by economic agencies. She said it is “necessary for the government to provide reasonable subsidies to public economic agencies that are involved in citizens’ basic needs in exchange for a commitment [by the agencies] not to raise service prices.”

However, at the same time, the state was persistently working to turn these bodies into companies. In 2000, the Egyptian Electricity Authority was turned into a holding company. In 2004, another holding company for drinking water was established.

The creation of the water company killed the price cap policy for water. Previously, it had been set at 23 piasters per cubic meter (which is lower than the cost of production), and governorates had been obliged by the state to abide by this.

The second stage of the transformation was carried out, as economic researcher Abdelkhalek Farouk argues, in the 2005/06 public budget: It was time to do away with energy subsidies.

Farouk’s starting point is the fact that the purpose of subsidies is to cover the difference between the price of a commodity that the state purchases from the free market and the final price at which it is sold to the recipients of subsidies.

But since the 2006 budget, the state has begun to look at subsidies as a hindrance to the sale of public resources on the free market. For instance, the gasoline obtained by the EGPC is produced from crude oil extracted from Egyptian land. But the government has, since the passing of that budget, perceived it as a waste, a product that could be sold on the free market at great profit, but is instead sold to citizens at subsidized rates. From this point on, greater attention was paid to the difference between the potential projected profit and the subsidized prices. The government came to view this difference as the value of subsidies provided to Egyptians, leading to a marked surge in the cost of subsidies as a budget item.

The state has also, since the 2006 budget, been attempting to influence public opinion by presenting subsidies on petroleum products independently from the main budget, thus supporting a rhetoric that portrays subsidies as a waste of resources.

Different governments since then have propagated a narrative similar to that of international funding organizations, one that disingenuously obfuscates the issue. It claims that the growing deficit in the state budget is caused by massive spending on subsidies that do not find their way to eligible recipients. The solution, according to this narrative, would be to save such expenses and reduce the deficit, then direct the resulting savings to development expenses (such as education and health), or forms of subsidy that better target the poor (such as cash subsidies).

The creation of two holding companies for electricity and water did not mark the end of economic agencies — or, at least, the name remained in use. In practice, however, the EGPC has been gradually turning into a company that sells petroleum products to citizens at market cost.

Since the 2014/15 budget, the state has begun to effectively reduce petroleum product subsidies. It has also set a plan to gradually lift electricity subsidies and accelerated the hikes to include water and public transportation (e.g. metro) prices.

Now, the present government is saying things like “be grateful,” and “don’t you see how high market prices are?” Meanwhile, the state is not even honoring its constitutional spending obligations for education and health.

This current “corporation-state” rhetoric reflects a lack of economic policies and even an encroachment on free market policies. First of all, the EGPC continues to have the highest economic surpluses among agencies, while also remaining the biggest recipient of government subsidies. This tells us several things. Most importantly, it shows that the narrative promising that the reform of economic agencies will make for better financial savings without affecting people’s lives, which has been promoted by the state since the 1970s, is wrong.

The EGPC, for example, primarily relies on resources such as oil and gas for its income. The state largely relies on these revenues to resolve foreign currency shortages. But this requires that it pays huge subsidies to the EGPC, which are — in large part — associated with importing petroleum products, such as diesel fuel. These subsidies could have been saved, had the state worked on developing domestic petroleum refining operations in order to be able to produce the petroleum products needed for the internal market, instead of importing them. It could also have sponsored projects that would convert vehicles that use imported diesel to ones that can use other cheaper types of fuel that are available domestically, such as natural gas. Another approach would be to expand the production of high value-added petrochemicals that can be exported to provide revenue. In other words, this is an idle state with no long-term strategies.

Second, the “state-turned-corporate” model does not even adhere to basic free market policies. According to a study by the Egyptian Initiative for Personal Rights that was released in May 2018 (following the latest hike in metro fares), the reason given for the raise was suspect. The Cairo Metro Company had said that it was posting losses, but the figures show that its operations were actually making revenue. The losses, as shown by the company’s balance sheets, were caused by the investment spending that was put toward the expansion of its operations. And, if the CMC had been a private company that decided to unreasonably hike prices like it did, another company would have taken the opportunity and competed for part of its market share by offering competitive pricing, which would ultimately benefit customers — one of the basic principles of the free market economy.

Let’s say the CMC then tried to block this hypothetical competitor, which would be an offense of market principles, because it would be a form of monopolization. As such, this “corporation-state” model is worse than the public sector, even with the latter’s corruption and mismanagement. It is also worse than the free market, even with all the exploitation that it involves. This model does not help develop public resources, as is claimed. Rather, its only goal is to exploit the monopoly that it has over the market in order to maximize the profits made by the bodies operating within it, making it less of a burden on the public budget. This model’s principal source of income comes from the pockets of its largest base of citizens, thus relieving the state of its duty to tax the rich, which is supposed to be its principal source of income.

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