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Egypt’s faltering factories: Not producing the goods

Fady Labib -Mariam Adly

11 May 2016 12:36 pm

 

For years, one cabinet after another has taken the file of the faltering factories under its wing, but without ever finding a solution. Some of these factories were already in trouble when the Arab Spring erupted in Egypt in 2011; others fell into almost insurmountable problems in the wake of the turmoil that followed. The result was that production in many factories halted, severely affecting both national output and the workers working in these factories.

The crisis originated with the bad debts many factories sustained because of their inability to master such factors as managerial inefficiency or weaker demand. As a result, hundreds of factories closed down and thousands of skilled workers joined the ranks of the unemployed. Billions in investment money turned idle.

Today, Egypt faces the predicament of having to look for possible solutions to bring these factories back to life and create new job opportunities for a growing workforce.

 

Different causes

For the economy to regain its strength and the production rates to rise again, Mr Hussein Sabbour head of the Egyptian Businessmen Association, insists that the State must stand by the faltering factories, especially the serious investors who faced problems due to hard economic conditions of the last five years. The causes of their floundering must be remedied for them to resume production.

 “The number of faltering factories cannot be accurately determined,” says Muhammad Zaki al-Seweidy, head of the Federation of Egyptian Industries (FEI). “The definition of ‘faltering’ differs from one factory owner to another; some factories have actually foundered while others are facing challenges.”

Mr Seweidy explains that the industry sector has had to face the many crises affecting a number of small and medium-sized factories, especially since 2011 in the wake of the Arab Spring. The political unrest and security vacuum that followed caused a downturn in the economy that hit the industry sector and led some 900 factories to announce officially that they had failed. He says the government must work hard on solving the problems of factories which have closed down and finding alternatives for the idle workforce; in this regard, the FEI is working closely with the Central Bank of Egypt (CBE). However, fixing the ailing economy in general and the faltering factories in specific requires more cooperation between the different ministries, Mr Seweidy says. The government must come up with new creative plans to support the Egyptian industry, he insists, such as applying import bans on the commodities which have locally-made substitutes, boosting exports, providing land for industrial projects, encouraging banks to finance these projects, and lowering interest rates on loans granted to new factories.

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Rescue fund

Minister of Industry, Trade and Small Industries Tarek Qabil has announced that 871 faltering factories have closed down; 17 of them owing to bad debts with banks, and 80 for problems related to government authorities. In addition, 107 factories have had to close down for shortage of financing. The Ministry of Industry and Trade, Dr Qabil said, was currently devising a plan to solve the problems that led these factories to close down; this includes establishing a fund to bail them out.

“A fund is currently being established to support the faltering factories in cooperation with the Ministry of Planning and Administrative Reform and the Industry Modernisation Centre (IMC),” says Abla Abdel-Latif, Chair of the Presidential Advisory Council for Economic Development.

The establishment of the faltering companies fund is expected to be announced soon, starting with aiding 47 faltering companies as a first step. The Ministry of Finance has allocated EGP150 million to be deposited in this fund.

Tarek Amer, Governor of the CBE, had said that a holding company with EGP7 billion in capital would help faltering factories get their wheels rolling again.

“The sum of EGP150 million which the State has allocated to support faltering firms is definitely insufficient,” Mr Seweidy says. “But it can be a first step in the direction of finding a solution to the problem.” Mr Seweidy says the IMC will be the body responsible for managing the faltering factories fund. He also says that the CBE has pledged to provide financial liquidity in the upcoming period to support the industrial sector and revive exports. “The Ministry of Industry is negotiating with several parties to participate in financing the fund and increasing its capital,” he says.

 

Financial evaluation

Ahmed Taha, executive director of the IMC and the man in charge of the faltering factories file, says the fund would be financed by several sources including the national Tahya Misr fund and would be managed by specialised companies. “According to the statistics conducted by the IMC a year and a half ago, the number of faltering factories was 870,” he says. “However, this number is no longer accurate and new statistics must be conducted to determine the updated number of such factories.

“The IMC published four advertisements, the last of them in October 2013, asking faltering factories to identify themselves so that their situations could be studied and solutions could be set. More than 920 such factories applied; specialised committees studied these cases and a financial administration was established to conduct a financial evaluation of their budgets.

“The outcome of this process is that the factories which matched the criteria of faltering factories set by the Ministry of Industry amounted to only 35, employing 4,500 workers, with investments estimated at EGP900 million. The total amount of money needed to revive these factories is EGP200 million, which amounts to an average of EGP5 million per factory in the form of loans, not grants.”

Mr Taha says that after these factories were investigated they refused to present their financial files and budgets whereas the remaining establishments did not comply with the conditions because they were either business sector or commercial and touristic companies or hotels and farms. He also says that there were many factories which closed down decades ago; many are now deserted and others have cases which are being handled in courts, in addition to others that have bad debts to banks.

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Falsified receipts…and other problems

Muhammad al-Bahey, FEI head of taxes committee, says that among the main impediments that led many of the factories to falter are the falsification of receipts and the increase in the informal sector of the economy. “This is the result of the strict procedures imposed by the authorities for issuing factory permits,” he says.

According to Mr Bahey, the causes of failure abound. Many factories halted production owing to reasons beyond their control including the economic downturn, the increase in the price of the US dollar against the Egyptian pound, the flooding of the market with low-quality low-priced merchandise, the increase in the price of raw materials, and the decline in exports.

To compound matters, Mr Bahey says, the factories found themselves unable to obtain loans to buy raw materials and production inputs and equipment, and the financial policies of banks often conflicted with the instructions of the CBE. Faltering clients are often placed on black lists for a period of five years, after which banks are required to resume operations; those who have shown goodwill would resolve their problems and resume dealing with the banks normally. However, banks are often reluctant to do business with them, since they are treated too strictly by the financial eligibility committees in banks.

“Pumping the fund money into the faltering factories will revive them and bring a big part of the idle workforce to production,” Mr Bahey says. “It will also result in an additional tax yield for the State treasury and a 30 per cent increase in revenues from exports.”

 

Management law

Mr Bahey says that for the faltering factories fund to be of any use it must have a capital of not less than USD3 billion coming from foreign grants and aid, and should evaluate the assets and the potentials of the factories. It must be managed according to a special law by a group of professional experts who these factories. Loans would then be granted based on a partnership agreement between the fund and the factory; in this way, the fund would always generate profits which would later be further used to aid other faltering factories; this principle is called the revolving credit agreement.

Mr Sabbour stresses the role of Egyptian banks in financing these factories and companies, leading thus to better salaries, increased production, and a decrease in budget deficit. During meetings between President Sisi and a group of prominent businessmen, the industry sector complained about the building tax levied on factories and the increase in the price of land in industrial areas.

Sherif al-Gabaly, head of the Chamber of Chemical Industries at the FEI, says that a number of fertiliser and cement plants halted production on account of the shortage of natural gas to power them. Despite the fact that the size of investment in these plants comes close to USD15 billion, the State directs available natural gas supply to electrical power stations and houses and cuts them off the factories for months on end.

 

Halt in tax levy

Dr Gabaly said the government must hurry to establish the fund for faltering factories and that it must stop levying taxes on industrial equipment to support Egyptian industries. The labour law must set clear rules and mechanisms to regulate the relation between workers and business owners so as to have a positive impact on Egyptian industry.

Another important point Dr Gabaly raises is the restructuring of the national technical education and vocational training system to improve the skills of factory workers. More measures must be adopted to protect Egyptian industries and introduce them to global competitiveness, he says.

On the other hand, the director of the building taxes administration, Samia Hussein, said that executive instructions would be issued to tax authorities to establish a mechanism that would exempt faltering factories from paying building taxes. The committee is currently studying the cases referred to it on an individual basis to exempt those eligible.

Labour leader Abdel-Ghani Said says that some 250,000 workers were laid off in the wake of the Arab Spring uprising without being given any compensation, on account of faltering firms. He believes that the President must issue a decree to reopen all closed factories in order to produce alternatives for imports and thus halt the devaluation of the Egyptian pound and reduce unemployment.

 

Watani International

11 May 2016

 

 

  


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