BACKGROUND AND FINANCING SCHEMES MEMO

On Financing of "Alternative Energy" Projects2

Date: 12/4/1981

Energy consumption in EGYPT has been increasing with high rates lately due to the increase in economic development rates. The electric energy consumption has jumped from 8.5 to 18 million kW/h during the period between 1974-1980, while

oil and gas increased from 6.5 to 14 million tons during the same period.

As we come closer to reaching the maximum limit of utilization from the river Nile, we find that the dependability on oil to generate electricity has begun to increase enormously. Oil products used in the electricity sector have jumped from 1 million tons to about 3 million tons between 1974/1980.

If we are going to keep depending on oil completely to generate electricity, we have to use about 30 million tons of oil per year to satisfy all the programs by year 2000, in addition to all the other oil usages which are expected to reach 35 million tons per year by the end of this century.

2 Reproduced verbatim.

Needless to say that because of the growing escalation of oil prices after 1973, gener-ating electricity from oil has become the most expensive source and represents some kind of waste and extravagance that even the rich countries cannot afford. Therefore, they turned to less expensive sources to generate electricity, such as coal, nuclear power and pump storage to face peak loads. On the other hand the increase of oil prices has encouraged oil producing countries to fund costly programs to extract more oil from the depleting fields.

According to the right economical planning in the field of energy and to reduce the consumption of oil, countries must diversify their sources of energy by relying on nuclear energy and other sources, and to expand extracting more oil from the exist-ing fields which prove to be economically justifiable.

Since the financing requirements for projects of alternative energy planned to be implemented by the year 2000 would amount to no less than US $20 billion (1980 prices). It was the subject of discussion between the Deputy Prime Minister for Production and Minister of Petroleum, and Deputy Prime Minister for Finance and Economic Affairs and Minister of Planning, Finance and Economy.

It was found appropriate to keep aside part of the excess foreign currency revenues of the Oil Sector starting from fiscal year 1980/81, for the purpose of creating a foreign currency reserve fund to finance the above mentioned projects. Helping to achieve this is the expectation that the net foreign currency balance for the Oil Sector will increase more than the set amount of net foreign currency balance in the 1980/81 Budget of the Oil Sector. (The net foreign currency balance means: the value of exports minus all the need to the Oil Sector in foreign currency to cover the importa-tion of consumables, supporting and capital goods, unforeseen expenditures and all due payments according to provision 6 of Law 20/1976).

Indications show that this increase will reach 15% yearly in the coming years.

However, because of international oil price escalation and the development of oil production sources in Egypt, the rate of increase will surpass this percent. That is why it was agreed to set aside whatever is more than this yearly percent increase in net balance (i.e. the 15 %) to finance the project of alternative energy. The set aside amounts plus their interest (at a rate of 6%) will be kept in the form of bonds issued by Ministry of Finance in foreign currency, in the name of the Egyptian General Petroleum Authority. These bonds would be due at times conforming with implementation progammes of those projects. The due dates should be agreed upon between the concerned sectors. The value of the bonds would then be transferred to the account of the authority responsible of the executive of those projects with the approval of the Minister of Petroleum.

It will be deposited in National Investment Bank to be used for financing project of alternative energy according to their financing programmes approved by the National

Investment Bank, and within the investment budgets certified by Ministry of Plan-ning and according to the actual execution stages.

The Egyptian General Petroleum Authority will deposit the set aside amounts of foreign currency in the Central Bank of Egypt to the account of the Ministry of Finance, and, in return, it will get the bonds issued by the Ministry of Finance payable at any time.

The draft Law takes into consideration exempting the set aside reserve fund for financing alternative energy projects, its bonds, interest, machines and equipment imported for those projects, from all kinds of taxes and levels, and at the same time prohibits the use of exempted machines or equipment for purposes other than what it was imported for.

This draft Law has been prepared incorporating all provision agreed upon in this regard between the two Deputy Prime Ministers.

Deputy Prime Minister for Production Deputy Prime Minister for Finance and and

Minister of Petroleum Economic Affairs A.E. Helal Dr. A.A. Meguid

Annex i n

SECTOR UNDERSTANDING ON EXPORT CREDITS FOR NUCLEAR POWER PLANTS12