Covering Some Costs

Many oil-based developing economies tend to offer their citizens subsidies for not only fuel, but also utilities such as water and electricity, among others. Some such economies even extend the subsidies to basic food items such as bread. To name but one example, gas in Iran costs USD0.05 for those who use up to 60 liters of gasoline per month, and USD0.10 for those who wish to drive longer distances. Other oil-based economies follow more or less similar pricing policies. However, government subsidies come with certain downsides: they may encourage citizens to habitually consume more than what is reasonable and disincentivize people to come up with saving and efficiency measures. This can be particularly risky in the case of water, because most oil-exporting countries in the Middle East also tend to be short on water resources.

As such, many oil-based economies in the Middle East that are striving for diversification are gradually eliminating the subsidies for utilities. Oman is a case in point; the country is determined to phase out the subsidies for water and electricity over the next five years. To avoid a price shock, the new tariffs will be introduced gradually during a period between 2021 and 2025.
“Dr. Mohammed bin Hamad Al Rumhy, Chairman of the Board of Directors of Authority for Public Services Regulation (APSR), issued decisions announcing the Cost-Reflective Tariffs (CRT) Regulation and the Permitted Tariffs Regulation for connection and supply of electricity and amending some provisions of the drinking water supply tariffs,” Gulf News reported in December 2020.

The initiative will make the Sultanate’s financial system more transparent and let the authorities to redirect the huge funds spent on subsidies to more important areas such as job-creation, social uplift, and the expansion of Oman’s general infrastructure. The coming into effect of the new subsidy framework does not mean that all subsidies will disappear overnight. Indeed, the government is already launching an alternative national subsidy system (NSS), which will still maintain some subsidies for fuel and certain utilities.

Although the matter has not been fully clarified yet, there are talks that financially disadvantaged subscribers will be granted exemptions from the new tariffs under the watch of the nation’s social security system. At the same time, the more affluent consumers who use significantly more than average will be labeled “large consumers” and pay still higher tariffs.

The new system of tariffs is even smarter than this. Utility tariffs will not be fixed; instead, they will be adjusted throughout the year depending on the season and weather. There will also be special considerations in place for industrial, tourism-related, and government segments, all three of which will pay an equal tariff that differs from the one imposed on residential subscribers. However, agricultural enterprises and fishery-related business well received a better deal than other sectors as an incentive for Omani agriculturalists, fishing fleets, and fish processing industries that are aiding the nation’s diversification efforts.

Naturally, citizens will not exactly relish the idea of paying more for utilities every month, but it is important to keep in mind that this measure is for the greater good: with fairer—and more realistic—tariffs, people will waste less water and electricity; without subsidies, the government will not have to re-inject the petrodollars into the economy in the form of subsidies; and—above all—Oman will be one step closer to becoming a true open market economy and enjoy all the advantages and room for progress associated with that particular economic model.

It should also be noted that the private sector itself will benefit from the restructuring of utility prices. Omar Al-Wahabi, CEO of Nama Holding, the exclusive electricity procurer, transmitter, distributor, and supplier in Oman, told TBY in 2021 that “all power stations that feed the electricity grid are owned and operated by the private sector. In addition, 49% of Oman Electricity Transmission Company was privatized last year.” This means that with the elimination of subsidies, the private sector will become even more active in the open and realistically priced market for utilities.

There is a good chance that by 2025, when the all-inclusive utility subsidies are completely phased out, the consumption rate in the country will drop to international rates—or hopefully even below that. Meanwhile, new private electricity, water, and wastewater companies will be formed. This, in turn, will lead to price competition between private utility companies, to say nothing of the jobs that will be created into the bargain.

Yet another upside of doing away with electricity subsidies is speeding up the installation of domestic photovoltaic electricity generators and storage units that perfectly suit the sunny climate of Oman.