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Chapter 9 The Future of Egypt--Horticulture

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Export Market for Horticultural Products

Egypt enjoys a significant comparative advantage in the production and export of high value horticultural products. This comparative advantage is based on a number of factors, including favorable agro-climatic conditions, physical proximity to important markets and counter-seasonal production capabilities. The growth in industry cohesiveness and sophistication and an increasing awareness on the part of government toward the importance of private sector primacy in decision-making are also important factors.

Despite the significant growth in exports that has already occurred, a small number of Egyptian horticultural products still command a minor market share in a relatively few export markets. This indicates significant potential for further increases in sales to current markets as well as for entry into new markets.

Any analysis of export potential for Egyptian high value horticultural products must also take into account the market opportunities for processed products. Another major opportunity for increasing horticultural exports is the rapid growth in world demand for organically and naturally grown foods. Egypt is very favorably situated to exploit these markets, particularly in those areas newly opened for cultivation, which have no history of agricultural chemicals application. While the focus is on exports, the Egyptian horticulture industry should not lose sight of the fact that there is also a growing demand for higher quality foodstuffs in the domestic market, led by five-star hotels, up-market restaurants, fast food chains and an increasing number of supermarkets.

In order to fully capitalize on these opportunities, however, the Egyptian horticulture industry must overcome a number of policy, commercial and cultural constraints.

For horticulture, exports of new or non traditional crops now make up an insignificant 4 percent of production. Although exports are targeted to grow rapidly, the bulk of production is unsuitable for export markets. Thus, the determining constraint on output growth is domestic markets. As success is achieved on export markets with non traditional crops, horticulture will become increasingly a tradable commodity with demand not constrained by the domestic market. Horticulture uses rather little land relative to its value of output, thus increasing area at the rate shown is not a substantial constraint if farmers find the crop profitable.

For the Egyptian government and the agricultural industry to develop the horticultural industry to its potential for the export of non traditional crops and to meet the demands of a growing population in the traditional domestic market will require an exceptional level of planning, cooperation and technology. Hence step one is the analysis of the present situation. One tool for that step is the SWOT analysis. The SWOT Analysis is a strategic planning tool used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture or in any other situation of an organization or individual requiring a decision in pursuit of an objective. It involves monitoring the marketing environment internal and external to the organization or individual. The following SWOT analysis represents an amalgamation of Evaluation findings carried out by the Horticulture Export Improvement Association (43) (HEIA)

SWOT Conclusions—Egypt’s Advantages

· Egypt has a significant comparative advantage in the production and export of high value horticultural products, based on location, agro-climatic conditions, availability of land and water, and market access due to counter-seasonal production.

· The horticultural sector assisted by ATUT and other USAID projects is beginning to translate that comparative advantage into competitive advantage at the individual farm and agribusiness firm level.

· The larger grower-exporters served by ATUT, have become relatively sophisticated in production and marketing, and in order to increase their output, they are increasingly willing to help extend their knowledge to smaller-scale growers.

· The industry is also becoming increasingly cohesive, through the growth of trade associations such as HEIA.

· Horticulture crops are more valuable than other crops and use less water per volume and value of production; this is important given projections of potential shortfalls in water availability during the coming decade.

· There are utilized and underutilized opportunities to expand horticultural production.

SWOT Conclusions—Egypt’s Challenges

Education, research and extension systems does not meet the needs of the horticultural industries.

· Shortage of essential skills at all levels within the agribusiness sector, due in large part to the deficiencies of the education system.

· Lack of knowledge leading to failure to apply proper harvest, post harvest and marketing practices.

· Older lands are subject to high level of infestation from soil borne pests and diseases.

· Insufficient linkages between researchers and producers; lack of practical experience and lack of understanding of producer problems on the part of most researchers and an ineffective extension services.

· Poor infrastructure management.

Governmental Processes Need to be More Positive

· Onerous customs procedures.

· Government Accountability Project compliance delayed due to lack of a national strategy.

· Unwillingness of certain government officials/managers to abdicate commercial decision-making in favor of the private sector

· Some remaining problems in sourcing imported planting materials and other agricultural inputs, including government restrictions on testing of seed and pesticides.

· The general antipathy that persists between the government and the private sector in Egypt makes it difficult to forge a fruitful partnership in which the capabilities of the two sectors can be exploited for the benefit of both the industry and the nation.

· The lack of cooperation among different government agencies.

· Land tenure problems associated with slow registration leading to inability to use land for collateral.

Lack of Adequate Market Intelligence

· Inadequate post harvest and marketing facilities

· Absence of efficient market intelligence/market information systems/facilities.

Agricultural Leaders Must Take Responsibility for Major Issues

· Still too many instances of failure to meet foreign buyers’ quality standards.

· Insufficient volume of export quality horticultural commodities available to significantly influence most markets.

· Not enough investment in food processing.

· Lack of organization among small farmers.

· Imbalance in the relative influence between small farmers and traders over costs, price and marketing decisions.

Labor Problems—a Societal Issue

§ Low productivity of Egyptian labor compared with that of competitors.

§ Cultural bias toward women working after marriage (exists primarily at rural lower socio-economic levels).

What Can Be Done to Maximize Horticulture

(41, 50, 60, 61, 62, 63, 78, 86, 114, 115)

Future projects should involve the larger horticulture industry, including fresh exports, food processing, the domestic market and the various support and service industries. It should incorporate comprehensive measures for productivity improvement and integration of smallholders into the commercial horticultural sector including the export sub-sector. This will require a significant expansion in the provision of technology transfers and technical services. While improving production and harvest practices to increase productivity and improve quality will remain critical, equal emphasis must be placed on upgrading post harvest and marketing techniques and technology. Additional emphasis on all phases of marketing is also recommended. Specific components should also be incorporated to enhance industry utilization of information technology and to address policy issues involving genetic engineering to improve existing varieties and develop new varieties that will better meet market needs.

The initial competitive advantage of production and sales will not be maintained without explicit efforts to do so. Market prices are declining both absolutely and in relation to Egyptian prices. Egypt will have to reduce the delivered cost of its products to remain competitive. This will have to be accomplished through the adoption of new technologies for the following:

· production,

· post-harvest handling,

· transportation,

· developing economies of scale, and

· reduced taxes,

· meeting the market’s changing quality needs

· increasing the number of industry participants.

Many Quality and Cost Issues are Affected by GOE Policies, Regulations, and Actions:

· Inadequate post harvest facilities

· costly transportation

· approval of varieties and pesticide

· tariffs and sales taxes

· high commercial financing costs

· inadequate technical and management skills

The details of each of these principal constraints are described in the following paragraphs.

Inadequate Post Harvest Facilities

Quality constraints include the lack of adequate post-harvest facilities, including cooling and packing sheds, refrigerated transport, and cold storage. Improvements have been made. Large growers and exporters are establishing their own facilities and acquiring refrigerated trucks. The availability of refrigerated containers has increased significantly in recent years, and regulations have been changed to facilitate their use and movement at Alexandria port. A new cold store facility is being constructed at Cairo International Airport. However, increasing production and export volumes will require more investment in support facilities. Particular challenges will be faced in extending these facilities to small and medium-sized holders.

Costly Transportation

The costly transportation issue goes beyond the relatively simple, if unnecessarily costly, acquisition of additional refrigerated trucks. Egyptian law does not permit efficient use of non-Egyptian trucks, thereby increasing the cost and availability of refrigerated transportation. Roads are often rough, slowing down the speed or reducing the quality of shipments. Airports in Upper Egypt do not have cold storage facilities in which to hold perishable cargo awaiting shipment.

Approval of Varieties and Pesticides

Other quality factors include the approval of varieties and pesticide issues. GOE time requirements for the registration of imported varieties, although recently improved, still prevent rapid adoption of improved varieties by growers. This is especially crucial with regard to export products where Egyptian producers have to compete with other suppliers having less time-consuming registration requirements—for example, Morocco. The pesticide issue is of very immediate concern given the E.U.’s decisions in 2002 specifying, by name, the chemicals that are acceptable for use on fresh fruits and vegetables consumed in the European Union. The GOE’s recent adoption of a fast-track system, allowing approval of chemicals without proper documentation, has moved it away from earlier protocols that brought its regulation of pesticides more in line with international standards. It is especially worrisome that the fast-track approval system, may result in use of products that do not meet E.U. standards. Should imports from Egypt be found in violation of E.U. regulations, further imports will be endangered until producers come into compliance.

Tariffs and Sales Taxes

The principal GOE-imposed cost factors, other than income tax, relate to tariffs and sales taxes on imported equipment. For example, the tariff levied on imported refrigerated trucks and components remains at 45 percent despite Parliament’s 1998 action reducing it to 5 percent. There also are tariffs on other equipment and materials needed to improve the cold chain.

High Commercial Financing Costs

Commercial financing costs are high—commercial interest rates are 15 percent minimum. Small and medium-sized holders are also constrained by limitations on Principal Bank for Development and Agricultural Credit (PBDAC) financing and high rates of interest charged by other suppliers of credit.

Inadequate Technical and Management Skills

Export product growers and exporters need to improve their technical and management skills. They need to learn more about production, handling, shipping, and marketing quality products. All levels of management need to learn and implement effective general management techniques.

Can Small and Medium Sized Farmers Contribute to the Export Market

Present efforts for export markets have focused mainly on large-sized farmers, but future efforts should offer export markets to small and medium-sized holder farmers. Small and medium-sized holders, especially those who own their own land, spend a much greater portion of their increased income from horticultural export products in their villages than do corporate farms and absentee landlords, who purchase inputs in major cities or directly from foreign suppliers and do not leave the profit from their operations in rural villages. The risk to exporters in using small and medium-sized holders is that emerging quality assurance requirements, such as EUROGAP (147), will prove too costly or risky to justify working with smallholders, as is happening to some extent in the Kenyan fine green bean sector.

The principal constraints to continued development of Egypt’s emerging export sector in non-traditional crops relate to delivered product cost and quality. With total supply from Egypt and other countries increasing and Egypt increasing its market shares, delivered costs, insurance and freight (CIF) are becoming a significant issue. Increased supply and importer quality requirements also increase the need to produce and deliver product that meets buyer specifications.

Opportunities for Growth in the Domestic Market

Traditional fresh horticultural crops are grown primarily for the domestic market, normally sold in bulk, and have a low export-pricing structure. A strategy to maximize rural income, and hence rural employment generation and poverty alleviation, must focus on products grown by a large numbers of farmers, preferably beyond the subsistence farmer level. Desirable products should have high domestic demand and preferably some export demand to secure higher volume and prices, promote increased quality, and provide outlets for increased production.

They are grown primarily by small and medium-sized holders who know how to grow them; they are sold through existing marketing chains; quality is not a major current issue; the crops respond to low-tech agronomic improvements; and the technology interventions to be learned and transferred by extension agents are relatively simple.

The most important traditional crops are tomato, which has the largest harvested area and greatest tonnage production; and potato and orange (including navel, Mandarin, Clementine, and nectarine), which have large cultivated area and production, and established export markets. Approximately 850,000 feddan of these products was harvested in 2000. Together, they are grown in every governorate. Yields are relatively low and can be improved through known low-technology, low-cost changes in cultural practices.

Well Trained Extension Specialists Are a Must

The farming practices employed for Egypt’s principal horticultural crops, grown by hundreds of thousands of small and medium-sized holders principally for domestic demand, can be improved and thereby increase rural income. Costs can be reduced, yields increased, and quality improved through the introduction of even low-technology, low-cost techniques. This has not been accomplished for three principal reasons:

· MALR does not have a sufficient number of well-trained horticulture extension advisers;

· MALR does not have horticulture technology packages for extension advisers to deliver to the farmer; and

· NGO efforts to provide horticulture extension are relatively small.

Role of the Private Sector in Extension

The success of any extension activity is absolutely dependent on its relation with the private sector and key government agencies to ensure that the technology being transferred effectively meets industry (private sector) needs and at the same time is sustainable on a continuing, long-term basis. The ultimate project goal should be to strengthen HEIA and other industry associations to the point where they can be empowered to substitute for government in playing the pivotal industry development role in addition to meeting their own organizational responsibilities.

In addition to the involvement of the Ministry of Agriculture and Land Reclamation (MALR) extension should develop a broad base of cooperation with all government entities involved in the export sector, such as the various components of the Ministry of Foreign Trade, the Ministry of Transportation and other relevant government agencies.

Special Problems for Small Farmers

Most smallholders have not adopted advances in agricultural practices that will lower cost of production and increase yields. Part of the reason for this is lack of financing for capital investments, such as drip irrigation and tunnels, and adequate or improved inputs, such as proper chemicals and certified potato seed. Even low-cost improvements (for example, proper watering, crop rotation, pruning of fruit trees, and reduction in pesticide applications) have not been adopted because the farmer either does not know about them because of the deficiencies in horticulture extension or cannot afford them.

Limits on Credit Availability for Smallholders

Credit availability and cost are major constraints faced by smallholders. Farmers who do not have registered title to their farmland cannot obtain the low-cost (7 percent) loans available from the Principal Bank for Development and Agricultural Credit PBDAC. Those who do have registered title may be restricted to loan amounts that are insufficient to finance inputs needed for optimal production. For example, the maximum PBDAC loan available for potato production is LE 2,992 per feddan. The cost of inputs to attain better-than-average yields (including imported seed) is closer to LE 4,500. An additional LE 1,000 for full fertigation will increase yields another 65 percent. The potato farmer then has a choice—use less than optimal levels of inputs or find another source of credit. Whatever credit cannot be raised from PBDAC or family resources comes from brokers, wholesaler agents, and input suppliers. These sources charge 1.5 percent or more per month. For some crops, PBDAC provides seeds as part of the loan. If these are lower-yield seeds than the farmer could purchase elsewhere, they effectively reduce income. Brokers and agents will also provide inputs, usually marking them up from their cost. They require part or all of the crop as payment, making no differentiation in price for the quality of the crop. The advantage of this system is that it requires virtually no liquidity on the part of the farmer. The disadvantage is that it increases the cost of production, resulting in lower revenue than would otherwise be received.

In addition to the low limits on PBDAC crop loans, there is a limit on the total amount of borrowings a farmer can obtain from PBDAC for farm improvements such as irrigation. For those who have registered title to their land, the maximum allowable is 50 percent of the total expenditure and the interest rate is higher—13-14 percent—than for crop loans.

These limitations may make it difficult for qualifying smallholders to purchase new technology that greatly increases yields—for example, drip irrigation, trellising, and row tunnels. Those without registered title to their farmland usually have no source of credit to make such improvements.

Lack of Market Information Hurts Smallholders

Smallholders are also constrained by their lack of market information. Reliable price information about historical and current prices and market conditions is not widely available. Lack of information about last year’s crop prevents good planting decisions and choice of trader/wholesaler agent for the following year. Lack of information on current prices weakens the bargaining position of smallholders for farm-gate sales.

Water Pollution Hurts Everyone

Water pollution is a problem in the Delta, especially in areas near cities. Areas of particular concern are Kalubia, Beheira, and Alexandria, but large areas of the Delta have problems stemming from the dumping of raw sewage and garbage into the canal system. This raises domestic health issues and may also prevent Delta farmers from selling into European markets when EUROGAP quality provisions are implemented.

Lack of Choice in Varieties is a Constraint

Tomato farmers are limited by the need for resistance to Yellowed Leaf Curl Virus (YLCV) and poor post-harvest handling systems. (AGERI-7) domestic horticultural market is constrained by a transportation and storage system that is very damaging to product quality. It is estimated that up to 40 percent of total production of highly perishable products are damaged or lost

What does the Future Hold?

If USAID continues its current intervention in the export horticultural sector, the support will change the structure of Egypt’s horticultural exports in this decade. The changed sector will see higher rates of growth in exports powered by high-value, non-traditional exports that are less subject to the volume and price swings of Egypt’s traditional horticultural exports.

The amount of land and number of farmers required to produce non traditional agricultural export (NTAE) are relatively small compared with Egypt’s more traditional crops that are oriented to the domestic market.

There is also a question as to how quality and cost-competitive small and medium-sized holders growers will be in the rapidly changing marketplace for NTAE.

The potential to increase small and medium-sized holder income, and hence rural job creation and income, is greater in traditional crops that are primarily oriented to the domestic market than in high-value export crops.

Attaining growth in income among small and medium-sized holder producers of traditional crops will require development of a low-technology, low-cost technology transfer packages and system based on sound market information and using the combined efforts of USAID-financed projects, effective producer associations and cooperatives, governorate MALR offices, NGOs, and private companies engaged in domestic and export marketing.

AERI is one vehicle that USAID and Egypt are using to bring horticultural crops up to their potential.

Horticultural Export Industry Association (HEIA)

HEIA(36, 43) is a trade association, originally spawned by ATUT. It is now a direct beneficiary of USAID funding. HEIA was formed at approximately the same time as the ATUT project got underway. This fortunate juxtaposition was an important element in the success of both ATUT and HEIA. Some 90 percent of ATUT clients were HEIA members. Without the technical assistance provided to its members as well as to HEIA as an organization, the Association could not have progressed nearly as rapidly as it has. In the absence of the ready-made client base provided by HEIA members, ATUT goals would have been much more difficult to accomplish.

HEIA’s Achievements and Impacts

During the past five years HEIA has made significant accomplishments in expanding its membership, in staff development, in technical support, training and other services provided to its members. It also succeeded in establishing the Refrigerated Perishables Terminal (RPT) at the Cairo Airport. The combination of all of these factors has contributed to the significant expansion of Egypt’s horticultural exports. HEIA expanded its membership by 76 percent between 2002 and 2004 and now has about 380 members. Most of the growth has been in the associate member category. Associates pay lower membership fees and have not had access to HEIA’s full range of services. A large number of seminars and workshops provided training on technical production and post harvest handling practices over the past five years. Training to attain compliance with international standards, particularly EUROGAP and BRC, has been an important part of the training program. HEIA’s system of arranging technical assistance visits by international horticultural specialists is widely credited for enabling members to implement the production and post harvest practices that are required for export. Members report that participation in observational study tours organized through HEIA was a very valuable source of learning and technology transfer.

Based on the evaluation team’s analysis it is clear that HEIA played an important role in expanding the export of the horticultural crops. A significant number of members we interviewed indicated that they would not have been able to venture into horticulture for export without HEIA. Some said they would not be able to continue without the services provided by the association.

Organizational Structure of HEIA and Coordination of Services

It seems that the future of HEIA includes some significant organizational challenges. According to the review done by Development Associates, Inc. January 31, 2005, HEIA does not have a well developed cost accounting system, and its financial accounts do not permit an analysis of all of the individual services. Their analysis indicates that the revenues of most services fall far short of covering full direct costs and that overall, HEIA’s service revenues provide only some 25 – 30 percent of the direct costs of providing the service.

When the reviewers asked groups of members, what would be their reaction if HEIA is obliged to increase the current prices of its services by 100 percent, they felt disappointed and said that the demand for most services would decrease, particularly what is demanded by smaller growers. Others indicated that without services they could afford, they would be inclined to drop their membership.

HEIA’s staff has developed a draft budget to explore how the association will operate without grants to support it. According to the budget, most of the key service departments are expected to generate the revenues to cover their direct costs. The Team reported that HEIA still needs to do considerable additional work to devise a more realistic budget.

To the review team, it appears unlikely that HEIA will be able to provide some of the services that have proven to be very valuable, if their full direct costs are to be covered with user fees. Services in this category include foreign expert visits and overseas observational travel. It will also be difficult for many HEIA members to afford the cost of its own field consultants. There appear to be ample grounds for some form of continued USAID support to HEIA, and it appears that funds for such support already exist in the partner activities of AERI.

HEIA aims to expand its membership and services to Middle and Upper Egypt, and the association has already opened an office in Luxor. Experience with this office has demonstrated that it will be expensive for the association to expand and operate in the area. To effectively meet the needs of AERI clients and other smallholders in the area, HEIA’s services will have to be restructured to deal more with groups, and to overcome the logistic problems posed by farmers who may be illiterate or have limited access to transportation.

Even in a restructured form, it is unlikely that many smallholders would be able to bear the full cost of HEIA’s current services. Other critical issues that must be addressed include the improvement of transport facilities, development of a proper cold chain system, improving access to new planting materials, providing better extension services, and measures to develop and retain more semi-skilled and skilled workers.

Recommendations Made by the Review Team for HEIA

Hire a full-time Executive Director ASAP. Clarify in writing the differentiation of his/her roles from that of the Board.

It is advisable to have more Board members participate in board training. One product of the training would be a workable executive policy that all will commit to. This policy should focus on the Board’s role in formulating vision and strategy, with day-to-day operations left to the Executive Director.

Review the core business processes such as consultant visits from a process improvement point of view.

HEIA should develop explicit responsibilities and more efficient procedures for monitoring and evaluation as well as internal auditing.

HEIA should identify additional ways of informing firms of the HEIA advocacy efforts and providing venues and opportunity for member involvement in the advocacy process.

HEIA must go through each service that it offers to analyze existing and potential user demand, the prices that users would be able to pay, and HEIA’s cost of providing the service. It should also consider how costs might be reduced by re-structuring the way that services are offered.

In its analysis of alternatives, HEIA must give broader attention to membership expansion, especially among smallholders. This should include an evaluation of restructuring membership fees, perhaps through use of a sliding scale.

A full range of cost reduction alternatives must be considered. This will include restructuring services so that they may be offered at a lower cost and eliminating services that cannot be re-organized to cover their costs.

Decisions on HEIA’s proposed Luxor Terminal and other handling facilities in Middle and Upper Egypt remain to be considered by the association. The final decision on the Luxor Terminal should wait until it can be said that the Cairo Terminal has proven its financial viability.

Summary of Comparative Advantages

In order to fully capitalize on these opportunities, however, the Egyptian horticulture industry must overcome a number of policy, commercial and cultural constraints.

These constraints include:

· transport restrictions;

· regulations affecting easy access to new varieties, agricultural chemicals, fertilizers, transportation equipment, etc.;

· lack of linkages between research and extension and between producers and researchers;

· insufficient export volumes;

· lack of access to technology particularly on the part of small and medium-scale growers;

· ineffective horticultural extension services;

· the absence of post harvest facilities;

· inadequate market information and market intelligence systems and;

· some remaining elements of mistrust that still exist between the private sector and the government, among government agencies and within the private horticulture sector.

The growing shortage of semi-skilled and skilled workers at all levels of the industry also poses a serious constraint.

One of the most urgent of these specific problems is the impending imposition of the EUROGAP protocol being promulgated by major European retailers. This embodies food quality assurance measures combined with social and environmental responsibility standards. Failure to meet those standards will deny Egyptian horticultural products access to current European markets and will prevent entry into new EU markets.

Evidence of Progress in Food Marketing—The Food Council

Food Export Council Ministry of trade and industry

This article is a quote from: Business Today April 2006 (118)

"New activity in the food processing industry fueled record industrial growth of 5.1% last year as companies tapped lucrative Gulf and European markets. Members of the new Food Export Council are convinced they can grow last year’s $500 million in exports to $3-4 billion within a decade. Here’s how. After serving as a brake on economic growth for the last 20 years, Egyptian industry is finally picking up speed. Last year, overall industrial growth clocked in at 5.1%, up from 3.5% in 2004, according to newly released figures from the Ministry of Trade and Industry (MTI). That surge has considerably narrowed the gap with GDP growth, which analysts expect will come in somewhere between 5.7% and 6.0% when the final 2005 figures come out some time later this month. New industrial jobs are finally being created, and industry is catching up with services and raw materials as a major driver of exports, as Egypt begins to shake off the legacy of a command economy, protectionist policies and an utter lack of national vision. With industry now at a crossroads, pessimists still argue that it lags too far behind the rest of the world to catch up in this generation, and economic nationalists continue to argue for import substitution. But while the early numbers are encouraging, signs that Egypt’s manufacturing base may be on the verge of a breakthrough transcend the hard data. Confidence, development economists have long argued, is an unquantifiable factor as important as performance in the early stages of a recovery, and a new generation of industrial leaders is increasingly optimistic that it can help catalyze economic growth. We recently caught a glimpse of how Egyptian industry is changing. Beyond the numbers and the wordy industrial strategies coming from government, we saw an example of how a long-dismissed sector can turn itself around and redefine the meaning of ‘business as usual’ in Egypt thanks to an injection of confidence at the right moment in the cycle. “With 117 new factories and LE 4 billion worth of new investments in 2004-05, processed food was one of our fastest growing industrial sectors and the best turnaround of the year,” says Helmy Abouleish, managing director of the MTI’s Industrial Modernization Center (IMC). The lion’s share of the expansion came from new Egyptian ventures, many of them funded by Gulf cash, although a statistical breakdown was unavailable at press time.

Food processors have adopted an ambitious export-led growth strategy — one dismissed by critics as too ambitious as recently as last fall — that could serve as a blueprint for other manufacturing sectors, blending highly targeted government assistance with private-sector know-how.

“Exports are the only way to turn industry into the angel of growth,” Abouleish says.“We cannot move from an industrial growth rate of under 3% to the 10% that we require without exporting. With a small domestic market, only exports can help us grow.”

According to Tarek Tawfik, managing director of vegetable processing giant Farm Frites (the largest single-company exporter of processed foods in 2005) and the head of the Food Export Council (FEC), Egypt’s total processed food exports in 2004-2005 skyrocketed by 70% over the previous fiscal year. In 2001, Egypt barely squeaked out $100 million in processed food exports. By 2005, that figure topped $500 million. “It’s still a flimsy sum — far from where it should be,” says Tawfik, “but it’s nonetheless a significant increase. It shows that there is interest, and it was a real eye-opener for us. I think there was a snowball effect: All the changes that the sector and the country have undergone in the past few years — starting with the devaluation of the Egyptian pound, which brought with it new foreign and local investment — are finally beginning to show results.”

Tawfik also cites factors including financial support from the government in the form of export subsidies, legislative reforms, easier access to and use of industrial land and the overall facilitation of licensing procedures as having helped drive growth. We have seen several multinationals acquire local food companies in the past couple of years, and some have started using Egypt as a regional hub for their exports,” he says. To cite one high-profile example: Dairy foods giant Danone purchased 100% of Olait, a leading Egyptian maker of plain and fruit-flavored yogurts and desserts, last October for an undisclosed sum, giving it a local factory with 25,000 tons of annual capacity and a toe-hold in a market that consumes 110,000 tons of fresh dairy each year.

“Migrating industries are leaving the United States and Europe because they can no longer compete. As they’ve moved here, we have suddenly found ourselves exporting semi-commodities to Europe and the US. Egypt has now been identified as an alternative global supplier for many products based on the fact that we have a reasonable agricultural base.

Momentum is building,” says Tawfik. Could the days in which a ‘Made in Egypt’ tag was seen abroad as a warning label, not a selling point, be coming to an end? Just 20 companies account for 64% of the nation’s food exports. The Americana Group (owners of local joint ventures with multinationals including Heinz and Farm Frites) alone was responsible for LE 340 million in exports last year. Juhayna Group’s dairy and juice exports came in third at LE 142 million.

The two top single-company exporters were Farm Frites with LE 147 million and Greenland Dairy, which was acquired by Americana in 2004, with LE 134 million. Other large single-company exporters include Juhayna Juices (LE 121 million; its dairy division exported LE 21 million), Faragallah Juices (LE 116 million) and confectioner Cadbury (LE 104 million), according to FEC figures.

Mineral water exports grew by 183%, sales of olives climbed 125%, while frozen vegetables climbed 56%, dairy 45%, olive oil 40% and juice 17%. Dairy, juices and concentrates and confectionery were the top-three processed food exports by chapter last year.

“Some of our largest export markets for processed food are regional,” says Tawfik. “Interestingly enough, Libya is one of the largest purchasers of our dairy products, while Saudi Arabia is a large market for both dairy and juices.” Regional markets are barrier-free and do not demand changes in unit sizes or labeling language.

According to MTI figures, Egypt sold European Union nations LE 515 million worth of processed foods in 2005, a 37% increase over the previous year, making it the largest non-Arab market. Egyptian food processors already enjoy a reasonably good reputation in the EU, having been helped along by projects including the USAID-funded Agriculture Led Export Business Program and previous incarnations of the IMC, both of which focused heavily on European markets.

A meager LE 1.3 million went to the United States under the new Qualified Industrial Zones (QIZ) protocol from only two companies: Farm Frites (frozen vegetables) and Kato Group (herbs and spices). “The US was never really in the picture for us before, but that is starting to change. It will take time to develop our market there, so it is really unfair to measure the effect of the QIZ on the food sector for the time being.”

“In the food business, cultivating a market is a very long process,” he continues. “You have to produce the right agricultural varieties and then go into trials before you even become qualified. It requires both time and investment. So right now, we are not even on the map when it comes to the US. Next year, I think we [the industry] can probably hit somewhere between LE 13-20 million, and by 2007 maybe we can double that figure,” adds Tawfik.

Last year may have broken records, but 2005-06 looks even more promising. According to IMC and FEC figures, the processed food sector has already achieved 219% of its export target for the first seven months of the year, which started in July 2005 and ends in June. Growth should increase later this year as new production capacity comes on stream: During the last two months alone, 149 new processed foods factories have been established.

“Not only has food been a fantastic turnaround, but there will be huge potential for the sector as the new investments start to mature and contribute positively to export figures,” says Minister of Trade and Industry Rachid Mohamed Rachid. “They have one of the best managed export councils run by some of the most outstanding, experienced and dedicated businesspeople in the country.”

Rachid says that while the government has given strong support to the sector over the last couple of years, a more important factor in its success is that “people [in the industry] have started getting their acts together.” “We gave them some strict conditions, like sticking to very stringent quality standards and approvals, without which they would not get our support,” the minister says. “For the first time, this put some serious pressure on the companies to conform to worldwide quality standards. But in essence, they are the ones who have made it happen, they brought about the turnaround.”

The Export council like all manufacturing sectors, processed food has its own council to liaise between the private sector and the government. These were first launched as commodities councils in 1997 by former Minister of Supply and Provisions Ahmed Guweily; last year, Rachid ordered them transformed into export councils. According to the business leaders involved with the new councils, the change has been more than cosmetic.

At a recent meeting of the FEC at Edita’s Sixth of October City factory, it was clear that its members were not merely there to network or put on a show for Rachid. Armed with PowerPoint presentations and hard data, they ran a concise, informative and well-planned meeting in which they briefed the minister on the latest developments in their sector, highlighting both strengths and weaknesses. In the course of the meeting, Rachid struck an impromptu agreement that will see the Netherlands’ Quest, a leading international producer of flavors, fragrances and additives that recently opened a factory in Cairo, join the National Supplier Development Program to help solve local sourcing problems it has been facing, particularly in the acquisition of dried onion.

“The councils have changed from being committees for policy advocacy to real export advisory boards,” says Tawfik, who has chaired the FEC for three consecutive terms, predating Rachid. “The new councils are all made up of volunteers who represent the various subsectors. In food we have at least 13 subsectors. Since last year, our function has changed in a very positive sense. For instance, we are deeply engaged with the government right now in preparation for negotiation files for various free trade agreements. This private-sector perspective combined with the government’s technical experience has led to a very positive partnership,” says Tawfik.

Last year’s signing of the QIZ agreement caught many producers off guard. There was widespread confusion concerning what, exactly, could constitute the required 11.7% Israeli component of the local manufacturing process. Industry leaders were moreclosely involved with the technical details of the FTA negotiations conducted with the US and Turkey in the fall of 2005.

“This way you are not suddenly faced with an FTA that you know nothing about. Instead, you understand what’s coming and can therefore plan for and make proper use of it. We are being educated and contributing at the same time, and it’s all in the best interest of the industry,” he adds.

According to Rachid, “The Food Export Council was the first to come up with a very clear program regarding data analysis with a system that has really set a precedent and helped them to build effective strategies and policies that are now starting to pay off.” For the first time, the export council can provide its members with weekly, near-real-time data on production and exports by company, subsector, sector, country and region. “This has given us a lot of insight into the decision making process,” says Tawfik. “Of course it is still very basic data, but as basic as it is, we never had it before, so it is a big step forward.”

The FEC is also looking into how Egyptian exporters can make better use of the time they spend at international food fairs and exhibitions. Randomly choosing those to attend, with basic booths and mid-level representatives handing out business cards, is no longer seen as a productive strategy.

“Instead, we want these attendees to go and meet with the major multinationals and their business development managers,” says Tawfik. “We want them to be able to give presentations on Egypt’s competitive advantage. They don’t necessarily have to come back with contracts, but we want to create awareness of our industry abroad.

“While we may see that we have an edge in certain industries, the reality is that we are not even on the agenda of most multinationals — they don’t even know that we exist. So just highlighting some of the strong points of the economy and the facilities in the country would be an eye-opener.”

Technology transfer centers

Quality control has never been Egypt’s forte, to say the least. Across all sectors, industry’s failure to meet international quality standards has been one of the biggest obstacles to the penetration of foreign markets. Manufacturers in all sectors have repeatedly identified the need for qualified technology centers close to home to deliver technical expertise they are unable to import on their own. Past attempts to establish technology centers have been legion, and most have proven ineffective. Last year, the Ministry of Foreign Trade and Industry began overhauling its existing centers and establishing new ones. There are now a total of 13, ten of them sectoral and three cutting across industry lines for packaging, clean production and total productivity management. All of them are adopting proactive, client-centered business models.

“The idea is to offer Egyptian industry the latest technology. We are still far from the innovation stage; in our current stage of development, technology transfer is vital,” says Abouleish. “The concept for all these centers is very clear. They are stakeholder-managed and rely on international expertise.

“We are currently investing a lot of money in this area in the hope that quality systems will move,” he adds, stopping short of saying how much, exactly, he has budgeted. The technology centers will be supported and financed by the government until they are strong enough to spin off as self-sufficient corporations operating at least on a cost-recovery basis.

“Once they start offering services and recording revenues, the government will pull out completely,” says Hany Barakat, a PhD management guru and first undersecretary at the Ministry of Trade and Industry responsible for the technology centers. “The new management model is based on a private-public partnership and has brought about very encouraging results thus far,” he adds, noting that the textiles and plastics tech centers have already broken even and are now offering their services to over 500 companies.

Late last year, MTI formed a new steering committee to restructure the Food Technology Center (FTC) and reposition it to cater to the needs of subsectors including meat processing, confectionery, baked goods, edible oils, fruits and vegetables, and dairy. Among the committee’s members are industry leaders such as Hani Berzi, chairman and CEO of Edita, the company that makes popular snack foods including Bake Rolls, Molto and Hostess Snack Cakes at two factories, one each in Sixth of October and Tenth of Ramadan.

“What was missing with the FTC before was the private-sector mentality. Previously, no one in the industry knew of or used the FTC. Now, we are the ones trying to make it all come together,” says Berzi, who pegs his exports at $4 million per year despite his products short shelf-lives. “As a manufacturer of food, I personally need the technical support that a center like this can offer” on issues including best practices and foreign quality standards.

In January, members of the FTC’s steering committee went on an MTI-financed study tour of Europe to visit similar food technology centers in Spain, Germany and Denmark. The outcome was what they call a ‘dynamic model’ for the Egyptian FTC that will see it adapt to the changing needs of the sector.

“The FTC will be run as a demand-driven private business in every sense of the word,” Berzi says, “with the overall objective of helping the Egyptian food industry develop into world-class exporters. We will tackle issues like accreditation, hygiene, food safety, technical assistance, testing and professional training.”

“We want the FTC to become a one-stop shop for the entire industry,” says FTC steering committee member Nada Khadr, who is also senior purchasing and quality assurance manager for McDonald’s Egypt. Khadr says McDonald’s Egypt currently works with 70 key finished-goods suppliers, with 90% of their total purchase basket now coming from local companies.

“Whether it’s quality, food safety, or manufacturing systems, McDonald’s has very strict standards,” says Khadr. “As McDonald’s, it is in my best interest to see the local food sector develop itself. We sometimes go and do factory checks on our suppliers and potential suppliers who claim that they are HACCP [Hazard Analysis Critical Control Points, currently one of the most popular accreditation programs in the food industry] certified, for example, and we find that they are not. It would save a lot of time and effort if we had a body like the FTC that could coordinate all these activities. Everyone from small factories to large exporters who want to upgrade could come to the FTC. We would do the matchmaking and tailor the training to meet their needs,” she adds.

The FTC has just hired a new European managing director whose mandate will, in part, be to assess the center’s current resources and create a pool of technical advisors. “Once he gets a full understanding of market demand, he will work closely with the steering committee to drive the business development of the center,” says Khadr. “Right now, we are also in the process of working out a budget and an organizational chart. We need to have very specific, measurable targets that can be reviewed — and our new managing director will be held accountable for these targets. “We want to give the FTC a business flavor and let people know that we are serious about our services,” adds Khadr, who is adamant that the center will not replicate the “ineffective foreign-expert syndrome” that has seen critics dismiss the technology centers in the past.

According to Berzi, the FTC will be integrating some of its services with other arms of MTI (including the IMC) that currently offer companies some of the same support the center will be selling, including accreditation and technical support. The FTC’s steering committee is aware of the overlap, but claim “massive demand” for services and the high-quality of expertise the FTC will be providing will put it on a profitable footing. “Any redundancy in the services we provide will eventually be phased out as all food-related technical assistance gradually falls under the umbrella of the FTC,” says Khadr. Berzi says the center should be fully operational by May.

“The way that the stakeholders are approaching both the export council and the FTC indicates that there will be more good news coming out of the food sector,” Rachid suggests. “What’s really impressive is that the effort that the various companies have put in is not only for their individual benefit, but for the benefit of the industry as a whole. “People used to say that there is no teamwork in this country,” the minister continues. “To see a group of companies come together like this for the first time for the welfare of an industry is very encouraging. While the initiatives are being taken by representatives of our larger food manufacturers they are not the ones who need the services the most. It’s the small- and medium-sized companies that are really going to benefit from what they are trying to create.”

Goals

According to Tawfik, the processed food sector has the capacity to export something in the range of $3-4 billion per year, an ambitious goal in light of today’s $500 million figure. But he and others on the export council are convinced they can make it happen. to take responsibility for everything,” Tawfik says. “Everyone has to carry his own weight — we can’t always have to look to the government to bail us out. There are lots of things that we can do collectively on our own behalves. Of course it will take time and a lot of personal commitment to change the image of Egyptian exports and really see our sector become world-class, but I see that the community spirit — at least in our council — is a huge step in the right direction.”

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