Energy subsidies don’t work, but try telling that to the poor



Bear with me. This isn’t really about Nepal. But it is where I must start. You see, my wife recently suggested we buy a generator for the school she’s helping out over there. It now gets all its electricity from a clutch of solar panels. But they provide only enough power for small bulbs that cast feeble glows against the night. A diesel generator would help the children study and do homework in the evening.

All this got me mulling over the price of energy that poor countries like Nepal must pay.

At a minimum, US$400 (Dh1,469) should get the school the generator it needs. Buying it, however, is the easy part, because the school then will have to keep finding money for fuel. A litre of diesel is 103 Nepalese rupees – about $1. While this might not seem outrageous to us, in local terms it can be a severe hardship. To put it into context, the school’s fees are at most about $5 a month.

But that diesel price isn’t even the real cost. Nepal imports all its fuel from India, and if you tag on haulage into the hills, mountains and valleys, insurance and other expenses, it actually comes out to 112 rupees. The difference in selling and import price – for cooking gas as well as diesel – will cost the country $10 million this month alone.

And as winter beds in and river flows drop, hydroelectric plants will produce less power. So the thud-thudding symphony of generators will rise, as will losses for the state.

The dilemma for Nepal and other poor countries, including Egypt and Jordan, is that while the state can’t afford to keep underwriting the cost of fuel, citizens already can’t even afford the subsidised rates.

Professional cogitators in think tanks and newspaper editorial writers – as a class, people who don’t have to take responsibility for putting to work anything they suggest – will tell you that subsidies must go.

Well, duh. (Note: even beauty pageant contestants don’t hope for world peace anymore.)

Yes, people should pay the going rate. But we make the mistake of thinking that all markets are alike, that oil prices are set in the same way as prices for, perhaps, shares.

Yet, there’s a difference between a market for what people want – like stocks in Facebook, Twitter and GE – and a market for what people need – like oil, wheat and rice.

You may want to own shares in Facebook, but you don’t need them. So there is a bias towards keeping prices fair. Otherwise, who would buy them? And just as crucial, what is bought is kept and eventually sold again. So buyers eventually become sellers, which means there is another built-in incentive to keep things fair all around.

In the end-market for oil, however, buyers destroy – burn, that is – everything. They never become resellers. Instead, they must keep coming back to buy more. So sellers always have an edge.

This doesn’t mean that markets for commodities are always disadvantageous to buyers.

Down by the agora in 400BC, they did a decent exchange for olive oil. But an important element of that trade is that the Thales family bought as much or as little as their neighbours.

The market for oil, on the other hand, is dominated by the US, China and Europe. And what mostly sets prices is the expectation over how much America will burn between breakfast and dinner. It would take Nepal nearly three years to use what the US consumes in a day. The result is that small economies don’t matter in setting prices. Tiny Niue’s price for the roughly 20 barrels of fuel it consumes each day is pegged to the fair price for America’s 18-million-barrel appetite for crude.

So maybe it’s a little disingenuous to keep banging on about poor countries and how they need to keep to market rates. They are irrelevant to the pricing system.

Ganging up won’t work either. In fact, rich countries have tried this, but even they failed to influence prices to their benefit. That’s because, ironically, the market does (sort of) work. Except that it’s biased towards accurately gauging demand from big users. (So major buyers’ needs already are all priced in.) But for a commodity that everyone on the planet needs, “sorta works” is kinda not good enough.

Then there’s our distaste for subsidies. And quite right it is too. Our instincts against this were formed out of the post-war economic consensus. Subsidies distort trade, and that’s a bad thing for building prosperity.

But surely there’s a difference between subsidies for steel makers and subsidies to stay alive in the winter, to commute to earn a living and to cook meals?

Of course there is. Only, we’ve managed to jumble it all up.

Beyond the immediate imperative of fixing fiscal deficits and family budgets, subsidies prompt deep and fundamental political worries as well.

For if we don’t fix this, we’ve perpetrated a terrible hoax on the poor. We’ve invited them to cast aside ancient social restrictions and free up horizons for individuals to live their lives. We’ve tempted them along to the political project of modernity with its material benefits. But now we tell them they can’t afford it. After all this, it’s no surprise that protests against subsidy removal in turn have rehabilitated old -isms and political dead-ends of the left.

We must fix this, then. But no one seems to know how. So let’s just say that for now, my wife and I really ought to think about how to fuel that generator in Nepal.

Tion Kwa is Assistant Editor of The National. He was for many years an editorial writer at this and other newspapers

What drives subscription retailing?

Once the domain of newspaper home deliveries, subscription model retailing has combined with e-commerce to permeate myriad products and services.

The concept has grown tremendously around the world and is forecast to thrive further, according to UnivDatos Market Insights’ report on recent and predicted trends in the sector.

The global subscription e-commerce market was valued at $13.2 billion (Dh48.5bn) in 2018. It is forecast to touch $478.2bn in 2025, and include the entertainment, fitness, food, cosmetics, baby care and fashion sectors.

The report says subscription-based services currently constitute “a small trend within e-commerce”. The US hosts almost 70 per cent of recurring plan firms, including leaders Dollar Shave Club, Hello Fresh and Netflix. Walmart and Sephora are among longer established retailers entering the space.

UnivDatos cites younger and affluent urbanites as prime subscription targets, with women currently the largest share of end-users.

That’s expected to remain unchanged until 2025, when women will represent a $246.6bn market share, owing to increasing numbers of start-ups targeting women.

Personal care and beauty occupy the largest chunk of the worldwide subscription e-commerce market, with changing lifestyles, work schedules, customisation and convenience among the chief future drivers.

LEADERBOARD

-19 T Fleetwood (Eng); -18 R McIlroy (NI), T Lawrence (SA); -16 J Smith; -15 F Molinari (Ita); -14 Z Lombard (SA), S Crocker (US)

Selected: -11 A Meronk (Pol); -10 E Ferguson (Sco); -8 R Fox (NZ) -7 L Donald (Eng); -5 T McKibbin (NI), N Hoejgaard (Den)

David Haye record

Total fights: 32
Wins: 28
Wins by KO: 26
Losses: 4

Company Profile

Name: Direct Debit System
Started: Sept 2017
Based: UAE with a subsidiary in the UK
Industry: FinTech
Funding: Undisclosed
Investors: Elaine Jones
Number of employees: 8

The specs

Engine: 2.0-litre 4-cyl, 48V hybrid

Transmission: eight-speed automatic

Power: 325bhp

Torque: 450Nm

Price: Dh359,000

On sale: now

DSC Eagles 23 Dubai Hurricanes 36

Eagles
Tries: Bright, O’Driscoll
Cons: Carey 2
Pens: Carey 3

Hurricanes
Tries: Knight 2, Lewis, Finck, Powell, Perry
Cons: Powell 3

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

Getting there

The flights

Emirates and Etihad fly to Johannesburg or Cape Town daily. Flights cost from about Dh3,325, with a flying time of 8hours and 15 minutes. From there, fly South African Airlines or Air Namibia to Namibia’s Windhoek Hosea Kutako International Airport, for about Dh850. Flying time is 2 hours.

The stay

Wilderness Little Kulala offers stays from £460 (Dh2,135) per person, per night. It is one of seven Wilderness Safari lodges in Namibia; www.wilderness-safaris.com.

Skeleton Coast Safaris’ four-day adventure involves joining a very small group in a private plane, flying to some of the remotest areas in the world, with each night spent at a different camp. It costs from US$8,335.30 (Dh30,611); www.skeletoncoastsafaris.com

UAE players with central contracts

Rohan Mustafa, Ashfaq Ahmed, Chirag Suri, Rameez Shahzad, Shaiman Anwar, Adnan Mufti, Mohammed Usman, Ghulam Shabbir, Ahmed Raza, Qadeer Ahmed, Amir Hayat, Mohammed Naveed and Imran Haider.

MATCH INFO

Fixture: Ukraine v Portugal, Monday, 10.45pm (UAE)

TV: BeIN Sports

Kill

Director: Nikhil Nagesh Bhat

Starring: Lakshya, Tanya Maniktala, Ashish Vidyarthi, Harsh Chhaya, Raghav Juyal

Rating: 4.5/5

SHALASH THE IRAQI

Author: Shalash
Translator: Luke Leafgren
Pages: 352
Publisher: And Other Stories