(1,14, 15, 17, 18, 21, 26, 27, 30, 35, 37, 40, 50, 51, 59, 72, 80, 81, 86, 92)
Governments must work with agriculture-based industry to minimize the difficulties of adjusting to increased competition when liberalization occurs. Globalization of the world economy is an established fact. Removal of trade barriers, increased foreign investment, and enhanced competition should be accepted with purpose, care and with ample safeguards, but accepted just the same. Since the 1980’s, the Egyptian government has moved toward trade liberalization and a market economy especially through the agricultural economy. Agricultural reform began in 1986 with the Agricultural Production Credit Project followed by the Agricultural Policy Reform Program in 1996.
In terms of APRP benchmarks, these results have produced dearly visible benefits regarding: a) state withdrawal from cotton pest management, b) promotion of trade associations, c) effective use of real-time irrigation system information, and d) improvement in agricultural statistics.
Benchmarks where some initial benefits have emerged or where there is high potential for future benefits include: a) reorientation of agricultural research and extension services, b) establishment of the private-sector operated cold storage facility at the Cairo airport, c) promotion of cooperatives, autonomy and functioning (including cotton marketing), and d) promotion of private-sector participation in policymaking.
The study documents the fact that policy reform is more than issuing decrees, passing laws, and promulgating regulations. Appropriate technical content is critical, but the process of change cannot be ignored. In support of the changes in roles and in achieving the benchmarks, APRP has contributed to results in the following ways:
· APRP provided technical expertise in analysis, international best practices, data collection methodologies, and training course design Particularly important was assistance to the process side of reform in work shop design and facilitation, implementation planning / monitoring, awareness and dissemination.
· APRP served as a neutral broker between the Government and the private sector, and between government agencies. The various sets of actors remained confident that APRP was not taking sides, and thus were willing to listen to and follow APRP experts' recommendations.
· As a policy interlocutor with the Government throughout the elaboration of the benchmarks for the program's tranches, APRP helped to design implementation roadmaps, and facilitated legitimization of the benchmarks as targets.
· APRP's implementation reform support strategy, by working simultaneously at multiple levels (central to local) with many partners (public and private) and by building in some early successes, maneuvered around implementation roadblocks, showed stakeholders that change was possible.
· APRP successfully leveraged its resources and impacts. This contribution is exemplified by the collaboration with GTZ's Cotton Sector Promotion Program.
A number of lessons emerge from the study:
· The public and private sectors need to work together as partners to take advantage of each one's distinctive competencies/ capacities.
· Policy projects can serve as an important impetus for initiating change, and their budget support is a motivator for pursuing reform.
· The Government of Egypt's gradualist implementation strategy has led to series of short-run successes, but some interpret it as ambivalence and weak commitment. For long-term benefits, reformers and donors need to "stay the course."
· The demand side of policy reform is critical. Government commitment and ability to supply reform is enhanced by pressure from the private sector and civil society. Private-sector demand making capacity is not always used in support of intended agendas of reforms, but this is not a reason to abandon reform. Some degree of deviation from the ideal is to be expected.
· When using pilots as an implementation strategy, scaling up is critical to generating intended program impacts. Key challenges include:
1. Marshalling the resources to facilitate the expansion
2. Coping with insufficient existing capacity to support scaling up
3. Confronting interest group politics, whose effects can to some extent be mitigated in pilots, which emerge more forcefully with scaling up.
The GOE took several steps towards liberalizing and privatizing this sub sector; however, a more comprehensive approach to' 1iberalizationis still needed. Despite the government’s efforts to liberalize the cotton sub sector, public sector textile companies are still struggling wi1hhigh prices for cotton, which is the main input of production, amounting to 60% of the production costs. In addition, public textile companies are bound by the government wage and bonus system that entitles workers to' an annual raise of 15% regardless of the company's sales and revenues. Thus public sector companies are heavily burdened by rising costs and decreasing revenues. It is very difficult to privatize the public textile companies. under such operating conditions.
Encouraging imports of cheaper shorter -staple lint is one way to reduce spinners' input costs in Egypt. To this point, public spinning companies have obtained imported lint only through the Holding Company. If the Holding Company is concerned about burgeoning lint stocks and excessive carryover from one year to' the next, it will not import shorter -staple lint even if it is priced far lower than the cheapest Egyptian varieties, Gizas 80/83.
The stagnation in the privatization program in the textile industry is in part due to the over all unfavorable market conditions; however, it is mostly due to the chronic problems that are plaguing the public sector textile companies. These include excess labor, large accumulated losses, large bank debts, and most of all unmarketable output. High prices for Egyptian lint are a major handicap for public sector textile companies in the domestic market. After the devaluation, public sector companies have been able to capture greater domestic market share; however, they are still facing stiff competition in the export market. High raw material costs for Egyptian lint, redundant labor, and poor quality yarn hurt the international competitiveness of domestic spinners, particularly public ones.
Improving the quality of yarn products is key if public sector spinning and textile companies were to succeed in reducing their large inventories and improving their financial situation. Some observers argue that many public sector spinners spin too wide and too low a range yarn counts and should narrow the range and, if possible, increase the average count. Other observer’s feel that most public spinners. should concentrate on spinning low counts of yarn using cheaper, shorter-staple imported lint. Whatever strategy is chosen, it appears unlikely that significant funding will be made available for technical restructuring, particularly upgrading plant and machinery. Without such upgrades, the long-run validity of many public spinners can be called into serious question.
A comprehensive plan is needed to restructure the cotton and textile sub sector. Without dealing with the root of the problem, it will be difficult to privatize public textile companies. Note that CSPP and the High Cotton Council are leading a cotton sub sector strategy exercise that may attempt to define, more accurately, public spinning industry requirements. This strategy exercise is not, however, intended to address privatization issues. Nevertheless, developing a comprehensive strategy to deal with the sub sector’s problems and the underlying issues that hinder privatization would have a positive impact on encouraging private participation in the cotton and textile sub sector, which can boost the privatization program of public textile companies.
To facilitate the sale of ginning capacity, a necessary first step is to deal with the excess capacity in the industry. The GOE should start by implemen1ing the unpublished Holding Company plan to close 13 public gins to reduce capacity to a more optimum level. This would likely allow ginners to charge higher rates, which could make ginning more profitable. Once made more profitable, public ginning companies would become more attractive privatization prospects. Higher returns would also allow ginners to invest more in improved ginning cleaning and baling techniques.
Finally the GOE moved in the right direction when it adopted the new strategy to privatize the loss-making companies. However, more aggressive unbundling of public companies may be required to encourage their sale in the near future until a more comprehensive plan to restructure the sub sector is adopted.
The overall performance of public sector companies has been deteriorating over time. In addition, the financial performance has been worsening at an increasing rate over the past five years between 1997 and 2001. In 1997 net revenues of the HC were more than LE6.3 million but fell by almost 54% to reach LE 2.9 million in 2001. Earnings before taxes for the profit-making companies declined by 54% as well while loss-making incurred an increase in losses by 30.7% over the same period.
In the annual report presented to the board of the SWRMC-HC at the close of FY 2000/01 the HC identified interest pa and wages for redundant labor to be the main reasons behind the continued poor financial performance. Excluding the non-textile companies, the HC burdened by LE 1 billion of accumulated interest payments in June 2001, up from slightly less than LE 900 million in 2000. In addition, the burden of redundant labor wages was up 4.4% from LE 226 million in 2000 to LE 236 million in 2001, with higher salaries off setting the lower number of workers. It is worth noting, however, that most of the burden and drain on the HCs resources can be attributed to the textile companies and their worsening performance over the past five years.
In an attempt to prepare public companies for privatization, the S\\'RMC -HC sought the expertise of specialized management firms. Through the newly established Egyptian Company for Development of the Textile Industry, the HC is in the process of implementing and monitoring four management contracts in Misr-Helwan S&W, Nasr-Mehalla S&W, Shourbagui, and and Cairo Artificial Silk. Unfortunately, the overall performance of these management contacts has not been satisfactory.
Ginning industry privatization started in 1996/97 with the sale of Arabia Ginning and Nile Ginning. Both were majority privatized through the stock market, through small groups of investors quickly controlled a majority of the shares. The sale of other public ginning companies has stalled due to the high value of the land on 'which the gins are located. In addition, a large excess capacity exists in the industry and, thus, the private sector is reluctant to invest when ginning revenues and net returns remain low. At this point, the prospects of privatizing the remaining public ginning companies seem rather slim.
Both public and privatized ginning companies have implemented ERPs. through which a total of 540 workers were released from the industry at a total cost of LE 12.5 mil1ion and an average cost per worker of LE 23.190.
The privatized companies, particu1ady Arabia Ginning have witnessed considerable technical and managerial improvements after the transfer of ownership to the private sector. Arabia's new management has improved seed-cotton cleaning and introduced full and partial mechanized feeding which resulted in a 35% increase in output per unit of time. In addition. a new quality control department was established to review ginning operations and ensure quality for exports. Arabia has also imported new ginning stands from India and replaced the equipment in a number of its gins. The new stands have the advantage of saving energy, as their power consumption is 15% less than traditional stands and their post-devaluation cost was 66% of that of the traditional English ones, including custom duties. Also, both Arabia and Nile Ginning have introduced new UD bale presses. Exporters can export lint cotton directly from the gins avoiding costly Farfarra (blending) and repressing in Alexandria..
According to the limited data available on the financial performance of privatized companies, Arabia Ginning witnessed a significant improvement in its financial performance with an increase in profits of 25.6% immediately after- privatization. Arabia maintained the same level of profits into 1998/99. Nile Ginning, on the other band, recorded a decline in profits for the year immediately following privatization.
So far the GOE succeeded in privatizing four companies (Unirab, Alexandria Spinning & Weaving, KABO. and Bolivara), in addition to liquidating one company (Cairo Silk). Production units in four other public companies have been 1eased long-tenn (5-10 years) to private operators. Most of the privatization achievements took place between 1996 and 1998, and the progress in privatizing textile companies has been halted since 1999.
The privatization of the rice milling companies was completed in 1998/99, by which time the private sector had already invested heavily in new mills. Therefore, the privatization of public mills was of little interest to the private sector at that point which resulted in selling all 7 rice mills to Employee Shareholder Associations (ESAs). The rice milling companies were majority privatized with the ESAs having 90% of the shares and the HC keeping 9.9% of the shares. The remaining 0.1% was sold to individuals to ensure that the company qualifies as a shareholder's company under the Egyptian Law.
Since privatization, employment in ESA rice milling companies dropped by almost 57% by early 2002. This drastic reduction in labor vas achieved through both early retirement and regular retirement programs. At an average cost of LE 22.592 and a total cost of LE 70 million., the HC released 3.107 workers of the rice milling companies through the early retirement program (ERP).
In a number of areas, reform progress has been steady but is still incomplete. There is a need for more work in cotton, cooperatives, pesticide licensing, registration of dealers, and field supervision and research and extension, There is serious danger of back-sliding on fertilizer use and supply. The wheat sub sector, particularly the milling industry, has significant GOE intervention, a set of policies that seem to work at cross-purposes, and an overcapacity problem that has gotten worse since APRP began. The immediate danger in rice appears to be past but there seems to be no real GOE support for a paddy buying system dominated by the cooperatives or forced through PBDAC sales rings, so little is likely to change in 2002/03. Greater paddy supplies, with a larger crop, should lead to lower paddy prices, easing criticism of private traders.
There are many critical issues associated with the production and marketing of cotton. Private sector market shares in cotton trading, ginning, spinning, and exporting increased during APRP, but future gains will be difficult to realize without a renewed GOE commitment to liberalization and more active efforts to privatize pubic trading, ginning and spinning companies.
· the number of market participants,
· the number of public and private sector market shares,
· the number of PBDAC rings allocated to private firms (by variety),
· the volume of seed cotton bought through these rings,
· the number of private rings set up by private firms (and covered by CATGO graders) and
· the volume of seed cotton bought through these venues.
It is also important:
· to monitor public/private shares in trading, ginning, spinning, and exporting;
· to examine why cotton yields have stagnated during the past 15 years;
· to monitor closely and review the cotton “sector” strategy plan and action program undertaken jointly by the MALR and the Cotton Sector Promotion Program to formulate a coherent strategy
· to do a needs assessment of the Domestic Cotton Traders’ Committee. It has played a minor role in cotton policy for most of its life and especially during the past two marketing seasons, despite
· representing most of the participants in seed cotton marketing, including public and private trading, ginning and spinning companies.
There were several comments about building local capacity to do applied policy research and extension. APRP is not generally perceived as having left much capacity in place, though it provided expertise in policy reform design, implementation, monitoring and evaluation. Such work continues to be heavily dependent upon expatriate-led technical assistance teams. At the height of APRP (mid-1998 through September 2000), there were ten expatriate advisors working in MALR and seven in MWRI.
Despite the acknowledged dependence on expatriate TA, no consensus emerged on how to lessen this dependence and develop sustainable institutional capacity. Different discussants preferred strengthening capacity in different types of institutions: GOE ministries, trade and industry associations, and local universities. Barring any radical departure from past practice, the current technical assistance model, where local consultants are hired from universities, a thin layer of consulting firms, agricultural research institutes, and among a pool of retired civil servants and holding company officials, is likely to prevail.
One way to strengthen the capacity of Egyptian universities would be to award competitive research grants to specific departments, under the leadership of strong individual academics. Rather than merely hiring professors as consultants, USAID and other donors could encourage interested academics to work in teams of professors (senior and junior) and graduate students, developing coherent proposals and work plans for doing a particular contracted piece of research. While this would place more burden on USAID contractors to select grantees, competition would be introduced into academic consulting. A premium would be placed on the quality, feasibility and cost of particular proposals, rather than on seniority or academic prestige.
Another way to develop capacity to do market research and improve market information is for advocacy organizations to fund or co-fund such work. The stronger industry and trade associations need to develop their own capacity (and use their own funds) to gather, interpret and publish market information. Their willingness to pay competitive salaries (or consulting fees) to qualified professionals who can perform these services remains uncertain, however.
I am pleased to represent our monitoring, verification and evaluation (MVE) unit in its review of APRP. They were joined by the efforts of many at the Ministry of Agriculture and land reclamation (MALR), Ministry of Water Resources and Irrigation (MWRI), Ministry of Foreign Trade (MOFT), Ministry of Public Enterprise (MPE) and Ministry of Supply and Home Trade (MSHT).
The Agricultural Policy Reform Program has advanced reforms in several ways:
· Key GOE technical offices and USAID contractors have been neutral brokers between the government and the private sector, and between government ministries;
· The Program focused on implementation at a central and governorate level with both public and private partners;
· APRP built on early successes and continually showed stakeholders that change was possible- and that it is important to celebrate past successes, and
· Finally, APRP successfully leveraged the government’s resources with resources of several donors, as exemplified by the collaboration with GTZ’s Cotton Sector Promotion Program and our USAID project.
The agricultural policy reforms and liberalization of the agricultural sector have changed people’s lives for the better. In areas where these reforms have been implemented, they have opened up new opportunities for rural people and contributed to a marked improvement in social indicators - healthcare, educational attainment, child health.
We need to consider economic reform initiatives in five policy areas:
· trade and customs
· competition
· education
· the public/private partnership framework
· financial sector performance
These key areas of reform are import to the agricultural sector. Implementing reform in all of these areas is crucial to more rapid agricultural growth and to the continued successes of many of the changes made under the APRP.
Exports of agricultural products, both fresh and processed, are critically important to the future of Egyptian economic growth. There is compelling evidence that expanding trade improves living standards in those countries engaged in cross-border commerce. Benefits include lower prices and a wider range of goods and services for consumers, and enhanced competitiveness for domestic industry. To capture those benefits, the Government of Egypt has liberalized trade in important ways. Agriculture is increasingly a focus of international trade negotiations. Egypt is party to several important trade agreements including the WTO, the Egypt-EU partnership, COMESA, and the Arab Free Trade Agreement. These present major opportunities for increasing market access, profiting form Egyptian intellectual property, and benefiting from bio-technology. Egyptian agricultural experts must be fully engaged implementing these new institutional arrangements in a way that works to the advantage of Egypt.
A decade ago a major adjustment in the exchange rate accelerated agricultural growth and exports. Recent devaluations of about 26% are again making Egyptian agricultural exports more competitive on world markets. But high tariffs and technical barriers continue to limit trade. In addition, customs procedures are reducing the competitiveness of Egypt’s agricultural exports. Part of the problem is that many people tend to think that customs procedures affect only imports. Quickly implementing the Government’s commitment to lower tariffs, remove barriers, and change customs delays from weeks to hours, would have a salutary effect on agricultural sector growth, rural incomes, and job creation.
USAID and the Government of Egypt recently launched a program to promote trade reform. We are currently exploring an agreement to help modernize the Customs Service.
Government must work with agriculture-based industry to minimize the difficulties of adjusting to increased competition when liberalization occurs. Globalization of the world economy is an established fact. Removal of trade barriers, increased foreign investment, and enhanced competition should be accepted with purpose, care and with ample safeguards, but accepted just the same.
Mexico and Egypt are half a world apart, but they share common problems and challenges. In both nations, the food industry is based on family-owned small operations. Import protection led to inefficient companies supplying customers with outdated, unattractive products. The business environment limited firm competitiveness and there were few supporting firms for exporters wishing to sub-contract. With
shallow economic linkages, firms were less able to compete with foreign producers.
In Mexico the processed food industry has now undergone a dramatic and successful, though painful, adjustment to international trade. Here’s the result: between 1990 and 2000, foreign direct investment in Mexico increased from $2.6 to $13 billion, a 400% growth, and exports increased from $41 to $167 billion, 311% growth. Egypt’s food industry has only a few years to ‘get ready for WTO’, and time gets shorter each day. USAID is here to help with this transition.
In fostering competition, let us not lose sight of privatization’s importance. The Government has reduced its role in producing and distributing goods. Because of its past successes, the privatization program is held to high standards and expectations, but today investors are concerned about the slowing pace. Privatization in the sugar and cotton sub-sectors needs continued serious attention. Renewed emphasis on privatization would be a clear signal to domestic investors who stand ready to invest in the agricultural sector.
Farmers are now free to choose what to grow, how to grow it and where to sell it. Market forces have taken hold and new agribusinesses are emerging everyday. As the sector grows, specializes, and becomes more export-oriented, stakeholders realize they need information that MALR extension and research institutions should provide. Much of this - market data, economic analysis, relevant technology - has not been readily available in the past from public or private sector providers. This has limited the participation of small holders in the growth of the agricultural sector. Richer farmers can pay for these services privately, and many already do so. Harnessing the private sector to provide information and training to smaller producers is a challenge for the next decade.
APRP has assisted the MALR in collecting and disseminating farm-level agricultural and economic statistics. Improved crop yield forecasting for wheat and cotton are allowing more timely decision making. The program has helped the Ministry of Water Resources and Irrigation (MWRI) to better match irrigation water needs and supply at the local level. The need for information and support for transport decision making will continue to grow rapidly. Facilitating use of information by the private sector needs tocontinue as a high priority for the government.
Egypt has 14 public universities and 18 agriculture faculties with well-trained professional staff, but these schools are not producing the applied skills for business, technology development, and farm management that Egypt’s exporters, agribusinesses, and research institutions need. Better use of this national treasure of educational infrastructure in the future is an area which needs urgent attention.
APRP’s work with trade associations and agricultural commodity councils has helped the private sector mobilize support for agricultural and economic reforms. Effective business and trade associations will play a pivotal role in the future development of Egyptian agriculture.
In a liberalized economy, public and private sectors work jointly to promote economic growth with a shared interest in increased exports, employment, and incomes. This partnership depends upon mechanisms that represent and give voice to private sector interest. There need to be mechanisms that bring together government policymakers and private actors for discussion and dialogue. Before liberalization, Egypt had few such mechanisms.
APRP has contributed to an understanding of the emerging roles of the public and private sectors in three ways:
· First, government policy reform can serve as an important impetus for initiating change. The Government has implemented reforms gradually and this led to short-run successes. However, some interpret the slow pace as ambivalence and weak commitment. For long-term benefits, reformers need to “stay the course” and fully implement policies that initiated change.
· Second, public and private sectors should work together to take advantage of each one’s distinctive competencies and capacities. The demand side of policy reform is important. Government commitment and ability to supply reform is enhanced by pressure to implement reform from the private sector and
· Finally, the past few years have shown that the private sector is capable of responding to and expanding on many of the GOE pilot efforts. In agricultural input distribution, processing, and marketing, the private sector has grown rapidly in many areas to fill Egypt’s needs. The many successful pilot activities that have been explored under APRP need follow up support and broad implementation.
The experience of other countries suggests that there is a real reward to implementing policy reforms. This reward takes the form of growth, social and economic stability as well as an enhanced ability to cope with shocks. Policy reforms can and must be undertaken - and the sooner, the better. I can foresee Egypt recapturing the momentum of the early 1990s and then attaining growth of 8 to 9 percent, placing Egypt among the leading emerging market economies. This is the foundation for creation of the
jobs that young Egyptians need. Egypt - the largest nation in the Middle East and the center of Arab learning and scholars - can inspire other countries in the region on the way forward.
This review of the impact of APRP can pinpoint how success can follow implementation of reform. I encourage you to identify the benefits of trade reform for the agricultural sector, the rewards of competition in agro-industry, the gains from the widespread use of information and skilled management, and finally, the opportunities to build on the success of the many public-private partnerships you have initiated.
I applaud your efforts to take on these difficult, but rewarding tasks. I wish you every success in your efforts.
WILLARD PEARSON, USAID Director
The Agricultural Policy Reform Program is built on the legacy of many of the policy components of previous USAID-funded projects, including The California Project and NARP. It has addressed a wide range of policy issues and fostered the participation of public and private stakeholders in the process. It has developed the capacity to analyze broad cross cutting-issues such as trade policy and gender, while addressing sector-specific policy constraints affecting cotton, cereals and other commodities. And it has done so by building positive consensus between the GOE and the private sector. APRP has laid the groundwork to cover a similar scope of policies in the future. Moreover, this assessment asserts that progress must be made in all of Egypt’s commodity sectors to achieve fast growth in agriculture, and that the policy and regulatory environment will play a critical role in achieving this progress. Therefore, continuation of policy formulation and implementation is essential.
APRP helped open the door to private sector and academic community involvement in the policy dialogue and formulation process. Its work with HEIA is a good example of education, training and collaboration with an important private sector constituency. It is also a prime example of the importance of sector-specific policy analysis. However, APRP’s autonomy from MALR and the private sector is valuable. Though agribusiness associations need more help to develop their own policy analysis and advocacy capabilities, the independence and objectivity of an APRP-type unit can help push for the policy reforms and implementation required by the fast growth scenario.