New drive to reduce fossil fuel subsidies

New drive to reduce fossil fuel subsidies
Updated 16 May 2014

New drive to reduce fossil fuel subsidies

New drive to reduce fossil fuel subsidies

LONDON: Fossil fuel subsidies cost governments in emerging markets more than $500 billion every year and are a major contributor to climate change, according to the International Energy Agency (IEA) and International Monetary Fund (IMF).
The biggest subsidies are concentrated in the Middle East, North Africa, Asia and parts of Latin America, according to the IEA’s Fossil Fuel Subsidy Database (iea.org/subsidy/index.html).
Moreover energy-exporting countries accounted for three quarters of all consumption subsidies in 2012, according to the IEA and OPEC members account for more than half the world’s subsidies.
Subsidies account for 82 percent of the cost of electricity and fuel in Venezuela, 80 percent in Libya, 79 percent in Saudi Arabia, 74 percent in Iran, and 56 percent in Iraq and Algeria. By contrast, the average rate of subsidy is just 18 percent in India and 3 percent in China.
In cash terms the world’s biggest subsidies are in Iran, Saudi Arabia and Russia, all of which are major oil producers. Subsidies cost these three countries a combined total of $180 billion per year in 2012.
In September 2009, the leaders of the world’s largest economies meeting at the G20 summit in Pittsburgh committed themselves to phase out inefficient fossil fuel subsidies over the medium term.
According to the IEA, phasing out subsidies for oil, gas and electricity and aligning prices with international benchmarks would cut growth in energy demand by 5 percent and carbon dioxide emissions by 2 billion tons a year by 2020 — equivalent to the current combined emissions of Germany, France and the UK.
Raising gasoline, diesel and kerosene tariffs to market levels would save 4.7 million barrels of oil a day by the end of the decade (“World Energy Outlook 2011“).
Cutting subsidies would also dramatically improve government budgets. Of 58 countries which subsidised gasoline, diesel or kerosene in 2010, 46 were running budget deficits, and in 27 cases the deficit amounted to more than 3 percent of GDP, the IMF explained in a staff note highly critical of the burden on taxpayers.
Halving subsidies would have reduced the average deficit from 2.1 percent of GDP to just 0.8 percent (“Petroleum product subsidies: cost, inequitable and rising” Feb 2010).
Subsidies often crowd out spending on infrastructure, development and social welfare. Indonesia spends more on fuel subsidies than on education or health care.
Venezuela sells gasoline for just 6 US cents per gallon. The cost in lost export revenues is $30 billion, more than the combined value of all state spending on social programs, Jim Krane at Rice University explained in a briefing paper published this month (“Navigating the perils of energy subsidy reform” May 2014).
Governments justify subsidies on the grounds that they alleviate poverty and promote economic development, but neither claim is really true.
Most of the benefits accrue to the middle class rather than poor because middle class families have more electrical appliances and their own cars.
In Indonesia, for example, the top 40 percent of high-income families absorb 70 percent of subsidies, while the bottom 40 percent of low-income families receive only 15 percent of the benefits (“The scope of fossil fuel subsidies in 2009” Nov 2010).
Subsidies also promote wasteful consumption. Saudi Arabia’s artificially cheap gasoline and electricity have made the country one of the highest per-capita energy users in the world and threaten to restrict the amount of oil left for export.
Another problem is fuel adulteration. Most countries subsidize kerosene used in cooking and lighting more heavily than gasoline and diesel used to fuel vehicles. But the resulting price gap encourages the illegal blending of kerosene into the diesel supply. Policies aimed at providing cheap cooking fuel for the poor end up helping middle class families drive motor cars.
And subsidies promote smuggling. Diesel sells for as little as 12 US cents per liter in Iran compared with $1.20 per liter across the border in Pakistan. As a result the IEA estimates 60,000 barrels of diesel are smuggled out of Iran to Pakistan and Afghanistan every day.
To combat smuggling into Yemen and other neighboring states Saudi Arabia inspects vehicles crossing its borders to ensure they only have enough fuel in the tank to reach the nearest refueling station on the other side (“World Energy Outlook 2013“).
The theoretical case for reducing or eliminating subsidies is overwhelming, but in practice progress has been slow. The fact that subsidies are concentrated in exporting countries and typically benefit middle-income and lower middle-income groups is no accident. Subsidies have a political dimension that makes them especially hard to reform.
Cheap electricity and fuel is often an important part of the social compact between governments and the population. “In major energy-producing countries consumption subsidies that artificially lower energy prices are seen as a means of sharing the value of indigenous natural resources,” the IEA explains.
More bluntly, Rice University’s Jim Krane observes: “Fossil fuel subsidies have allowed energy exporting countries to distribute resource revenue, bolstering legitimacy for governments, many of which are not democratically elected.”
Even in energy-importing countries, like Indonesia and Pakistan, subsidized electricity and kerosene is a vital way for politicians to buy support from the urban middle and lower-middle classes — the groups most likely to form the core of protest movements.
Policymakers in most countries acknowledge the need to reduce or remove subsidies, and the approach has strong backing from the World Bank, IMF and IEA. But efforts to reduce subsidies have met with limited success.
Iran, Indonesia, Ghana, Kenya, the Philippines, Mozambique and several other countries have all pushed through substantial price increases over the last two decades.
In other cases, however, price rises have had to be rolled back following popular protests. And the fact that Iran and Indonesia remain among the world’s biggest subsidisers points to how limited the reforms have been even there in the face of tough public opposition.
To succeed reform programs need to be accompanied by a strong communications strategy which points out that most of the benefits from subsidies go to wealthy households who can afford to pay the full cost of energy, and carefully targeted social measures to compensate the poorest households.
Timing is important. Reforms are more likely to be successful if the oil price is falling, when households are less likely to notice the removal of subsidies, than when energy costs are already rising. China and Indonesia both took advantage of lower oil prices in 2009 and 2010 to reduce support.
Even if it proves impossible to remove subsidies altogether, energy prices can be depoliticized by explicitly linking the retail cost of gasoline, diesel and kerosene to international benchmarks with fixed but adjustable formulas.
“Establishing an automatic pricing formula ... can help distance the government from pricing of energy and make it clearer that domestic price changes reflect changes in international prices which are outside the control of the government,” according to the IMF.
Even so, removing subsidies remains fiendishly difficult.
“Many countries have successfully implemented reforms only to see subsidies reappear when international oil prices increase,” the IMF laments. The temptation to reintroduce price controls to help households with rising living costs is strong.
And in the biggest petro-states, including Saudi Arabia, Iran, Iraq, Russia, Kuwait, Venezuela, Libya and Algeria there has been virtually no progress toward more sensible energy pricing.
The result is a prodigious waste of energy. The petro-states are among the world’s biggest and fastest-growing oil consumers and some are now having to import natural gas for power generation to meet electricity demand. And the greenhouse emissions are enormous.
It is all ultimately unsustainable. “The state itself is teaching people to waste resources,” complains one Kuwaiti newspaper editor. But subsidy reform is probably impossible without meaningful political and social change.

— The opinions expressed here are those of the author, a columnist for Reuters.


Mideast's largest mall operator to expand amid vaccine hopes

Mideast's largest mall operator to expand amid vaccine hopes
Updated 1 min 22 sec ago

Mideast's largest mall operator to expand amid vaccine hopes

Mideast's largest mall operator to expand amid vaccine hopes
  • Employs some 43,000 people regionally
  • Revenue fell 7 percent to $8.9 billion last year

DUBAI: The Middle East's largest operator of malls expects revenue and earnings to climb back to pre-pandemic levels by the end of next year and is moving full steam ahead with plans to develop its biggest mall ever.
In a wide-ranging interview with The Associated Press on Thursday, Majid Al Futtaim CEO Alain Bejjani said business is steadily rebounding amid vaccine rollouts in some countries of the region, kicking 2021 off to a relatively strong start.
“We’re not out of the woods across the markets, but things are improving,” Bejjani said. “Going back to the pre-pandemic levels— to 2019 level— in my opinion, will happen by the end of 2022 in terms of financial results."
The company's plethora of retail and leisure holdings include the iconic Mall of the Emirates in Dubai, hundreds of VOX cinema screens and more than 350 Carrefour grocery stores in the Middle East and beyond. Named after its Emirati billionaire founder, the company's largest markets are the United Arab Emirates, Saudi Arabia and Egypt, but its reach extends as far as Pakistan, Kenya and Uzbekistan.
The company's projections of a rebound and its plans for expansion reflect the faster than anticipated recovery of Middle East economies from the coronavirus pandemic, though uneven vaccine distribution remains a concern.
Majid Al Futtaim, which employs some 43,000 people regionally, saw its revenue fall by 7 percent to $8.9 billion last year and earnings drop by 19 percent to around $1 billion due to coronavirus lockdowns and restrictions. The hardest-hit side of the business was its leisure and entertainment arm, where revenue fell by 49 percent to $380 million and earnings plummeted by 122 percent, resulting in losses of $25 million.
Despite last year's slump, Majid Al Futtaim plans to unveil 30 new movie theater screens this year in Saudi Arabia, is developing it’s biggest mall project ever in Riyadh, and is opening what will be the largest mall in Oman at the end of 2021.
“Every country has had their own set of challenges to deal with. The reality is the fastest recovery is the UAE... and we expect very fast recoveries in other markets like Saudi Arabia,” Bejjani said. “We have also seen Egypt being very resilient.”
The United Arab Emirates has rapidly rolled out COVID-19 vaccines, which are free of charge for citizens and residents. Saudi Arabia is also expanding its vaccination rollout and has offered all residents free coronavirus treatment since the start of the pandemic.
It's not back to business as usual just yet, though. Majid Al Futtaim— like many businesses globally— is having to adjust to new realities, including the potential imposition of so-called “digital passports." In Bahrain, for example, where Majid Al Futtaim operates 30 cinema screens, only people who've been vaccinated or recently recovered from COVID-19 will be allowed into cinemas, gyms and other select spaces soon.
Bejjani said the company is “very supportive of any measure” that gives customers the feeling of being safe.
“Whenever there is an additional regulation, that actually gives people even more certainty, I think this is a plus, whether it is the vaccine passport, whether it is something else,” he said. “At the end of the day, what’s important is that people want to go back to normal. People want to go back to consumption.”
The company's rapid growth and expansion since its inception in 1992 mirrors that of its home base of Dubai, where a frenetic construction boom has transformed it from a fishing village into one of the most talked about modern cities in the world. The company's economic rebound is also closely tied to that of Dubai's, where the International Monetary Fund expects the country's overall economy to grow this year by 3.2 percent.
At the height of the pandemic last year, Dubai imposed a 24-hour curfew and government-mandated permits were needed to leave the house. Even then, Majid Al Futtaim's Carrefour supermarkets remained busy.
Because the United Arab Emirates imports most of its produce, meat and poultry, Majid Al Futtaim’s policy of stockpiling a three months’ supply of basic goods proved crucial when nervous shoppers in Dubai rushed to stock up on goods during the first days of growing restrictions on movement.
In the wake of 2020, Bejjani said the company is in conversation with the government of the UAE to increase stockpiles of certain products up to six months. The company is also working with 6,000 local farmers to increase production of fruits and vegetables, while also supporting farmers as far away as Kenya to ensure a diversified supply of fresh food for its UAE stores. A half dozen Carrefours in the UAE began growing their own lettuce and herbs in hydroponic farms last year, Bejjani said.
The company's Carrefour business across the region saw earnings grow by 14 percent to $440 million last year, even as revenue slightly fell. That was due in part to the company's overall 188 percent increase in online sales as people moved toward grocery delivery services.
By the end of last year, the company also saw more visitors returning to its malls and cinemas.
Majid Al Futtaim’s crown jewel in Dubai is the Mall of the Emirates, home to an indoor ski slope and the world’s busiest Carrefour supermarket. A recent walk through the mall showed it's cafes, restaurants and stores teeming with visitors. Still, there were also many shuttered storefronts - evidence of the economic slowdown that had hit Arab Gulf oil exporting nations even before the pandemic.
The region's many sprawling luxury malls aren't just for shopping, though. They offer an escape for millions of people seeking respite from the long summer months. Bejjani said despite some store closures across its malls, there continues to be “big demand” in the Gulf for more entertainment and retail spaces.


ESG investing makes business sense: Saudi PIF chief

ESG investing makes business sense: Saudi PIF chief
Updated 29 min 53 sec ago

ESG investing makes business sense: Saudi PIF chief

ESG investing makes business sense: Saudi PIF chief
  • The PIF has already incorporated ESG principles into its $400 billion worth of global investments as the sector gains in prominence throughout the region

RIYADH: Saudi Arabia’s Public Investment Fund (PIF) Governor Yasir Al-Rumayyan said that environmental, social, and governance (ESG) programs made solid business sense in the Kingdom and worldwide.
“Such action not only helps in protecting climate but also helps economically,” he said during the Future Investment Initiative (FII) Institute’s ESG virtual event on Thursday.
The PIF has already incorporated ESG principles into its $400 billion worth of global investments as the sector gains in prominence throughout the region.
Al-Rumayyan, who also chairs the FII Institute, said that ESG investing should grow in tandem with the sustainable development goals (SDGs) which were adopted by UN member states in 2015 as a universal call to action to end poverty and protect the planet.
“We need to work together on mobilizing ESG for a sustainable future,” he told delegates.
Developing the renewable energy sector was crucial to reducing emissions, he said, highlighting the Fund’s work with ACWA Power, a leading global player in the renewables sector. The PIF in November increased its stake in the company to 50 percent, part of a move to support the wider renewables sector in the Kingdom.
ACWA Power is planning an initial public offering and heads a consortium that will build and operate renewable power-based utilities at the Kingdom’s flagship Red Sea tourism project.
Al-Rumayyan also referred to the Saudi Green Initiative and Middle East Green Initiative to reduce carbon and contribute to protecting the planet as an example of the Kingdom’s progress, which were announced by Crown Prince Mohammed bin Salman in late March.
The green initiatives aim to reduce carbon emissions by 60 percent in the region and deliver the world’s biggest afforestation project. The tree-planting project will be double the size of the Great Green Wall in the Sahel region, the second-biggest regional forestry initiative. The initiative will also work to increase the percentage of protected land to more than 30 percent, exceeding the global target of 17 percent per country.
It aims to reduce carbon emissions by more than four percent of global contributions through renewable energy projects that will provide 50 percent of the Kingdom’s electricity production by 2030.
The initiative is expected to eliminate more than 130 million tons of carbon emissions by using clean hydrocarbon technologies.
The PIF governor said such initiatives represented a clear and ambitious roadmap and would contribute to achieving global targets on combating climate change. He said the Kingdom will raise vegetation cover, reduce emissions, and preserve marine life as part of its efforts to deliver a more sustainable future.
Thought leaders in sustainable investment gathered virtually in Riyadh on Thursday to explore one of the hottest topics in the world of finance — the move to environmental, social and governance (ESG) benchmarks by big global investors.
The event, under the auspices of the Future Investment Initiative (FII) Institute, focuses attention on sustainable investment in the post-pandemic recovery, and the role of emerging markets like Saudi Arabia within the new investment philosophy.
ESG investing has recently taken off, attracting hundreds of billions of dollars into funds that pledge to weigh broader considerations when deciding where to put their money, rather than mere cash returns.
Richard Attias, chief executive of the FII Institute, said: “Although ESG has proven its worth, much remains to be done to ensure we use it to its full potential. The low level of inclusion and participation of emerging markets in the development of ESG frameworks is counterproductive to global sustainability.
“Perhaps the most challenging task, and one that we will address during this event, is how we push ourselves to think beyond ESG as a risk management tool and deploy it to create a truly sustainable future,” he added.

 


More than 6,000 Saudi companies operating in Egypt

More than 6,000 Saudi companies operating in Egypt
Updated 15 April 2021

More than 6,000 Saudi companies operating in Egypt

More than 6,000 Saudi companies operating in Egypt
  • Saudi companies have investments of SR122 billion in Egypt

RIYADH: There are 6,017 Saudi companies in Egypt, with investments of SR122 billion ($32.5 billion), according to data from the Egyptian General Authority for Investments.

The total paid-up capital of these companies is SR82 billion, said Dr. Saleh Bakr Al Tayyar, legal counsel for the Saudi-Egyptian Business Council, citing data from the Authority.

The Kingdom ranks second in the Arab world in terms of participation in foreign projects in Egypt, and in terms of the number of foreign companies invested, he said.

Abdel Wahab, CEO of the Authority, said that obstacles to further investment in Egypt from Saudi companies, will be removed, Al Watan newspaper reported.

Trade between the two countries reached SR26 billion in 2019, Wahab said.


Jordan public debt reached 85% of GDP in 2020

Jordan public debt reached 85% of GDP in 2020
Updated 15 April 2021

Jordan public debt reached 85% of GDP in 2020

Jordan public debt reached 85% of GDP in 2020
  • External debt reached 13.7 billion dinars in 2020

RIYADH: Jordanian public debt surged by 10.6 percent in 2020 to 26.50 billion dinars ($37.4 billion) as the government spent heavily to support its economy during the COVID-19 pandemic.

Jordan’s public debt ended 2020 at 85.4 percent of GDP, up from 75.8% a year earlier, according to Ministry of Finance data. The ministry recently changed its methodology for calculating public debt, excluding obligations from the Social Security Investment Fund, which amounted to 6.67 billion dinars.

The Hashemite Kingdom’s internal debt was 12.78 billion dinars last year, while external debt stood at 13.72 billion dinars, Ministry of Finance data show.

Unemployment rose to 25 percent in the fourth quarter of 2020, with youth unemployment reaching 55 percent, according to International Monetary Fund data.

Jordan responded “quickly and decisively” in its support of the economy during the COVID-19 pandemic and is making progress on its program of economic reforms, IMF Managing Director Kristalina Georgieva said on Monday in a statement to mark the kingdom’s 100th year.

“Timely and targeted fiscal measures have helped protect jobs and the vulnerable, while equitable tax reforms – aimed at tackling evasion, closing loopholes, and broadening the tax base – have helped maintain debt sustainability,” Georgieva said.

However, the country must address high unemployment to deliver durable, jobs-rich and inclusive growth, she said.


Saudi Re aims to boost capital to fund domestic, overseas expansion plans

Fahad Al-Hesni, managing director and CEO of Saudi Re. (Supplied)
Fahad Al-Hesni, managing director and CEO of Saudi Re. (Supplied)
Updated 15 April 2021

Saudi Re aims to boost capital to fund domestic, overseas expansion plans

Fahad Al-Hesni, managing director and CEO of Saudi Re. (Supplied)
  • Despite a difficult year in 2020, Saudi Re recorded SR 60.7 million in net profit before zakat, an increase of 2 percent year-on-year

RIYADH: The Saudi Reinsurance Company (Saudi Re) on Thursday announced plans to increase its capital in order to fund its expansion plans.

Saudi Re’s board recommended increasing the company’s capital from SR 810 million ($216 million) to SR 891 million and converting SR 81 million of retained earnings into capital, giving the company an extra SR 162 million to finance its expansion plans.

Fahad Al-Hesni, managing director and CEO of Saudi Re, said in a statement: “The capital increase will strengthen Saudi Re’s capital base and support the expansion plans in the domestic and international markets. The board’s recommendation comes in line with Saudi Re’s effort to generate better returns and create a greater shareholder value.”

Despite a difficult year in 2020, Saudi Re recorded SR 60.7 million in net profit before zakat, an increase of 2 percent year-on-year.

At the same time, total assets increased 7 percent to SR 2.8 billion and total gross written premiums (GWPs) increased 18 percent to SR 935 million. International business made up the bulk of the GWP growth — up 25 percent year-on-year — while domestic business increased 8 percent.