Industrial woes plague Egypt

By  Nehal Mounir, Marwa Mufrah, Walaa Gamal and Mostafa Fahmi

Egypt’s industrial sector had some of the highest economic growth rates before the revolution, realizing rates of more than 12% at a time when overall growth was around 7%.  However, the repercussions of the political unrest that followed the January 2011 revolution caused those rates to decline and even to become negative in some cases.

Restoring industry to its original activity has remained a goal of Egypt’s rulers since the January revolution.  They hoped that it would improve economic conditions and create jobs and deliver the higher standard of living sought by Egyptians.

While it’s impossible to know how many factories faltered and closed after January 2011 because of a lack of credible official figures, industrialists and officials say the industry did not come to a halt.  Rather, there has been a lag in operation rates and a decline in production as a result of political disorder as well as the insecurity and labor strikes and port closures that followed.

In statements delivered prior to the ouster of President Mohamed Morsi in July, the former Minister of Trade and Industry announced that industry growth had reached 3% in the ten months of Dr. Hisham Qandil’s government. This would be 1% more than the overall economy, demonstrating the ability of the industry to drive economic growth.

For the past three years, the industrial sector has looked into solving its main problems in order to restore operation to its pre-revolution rates. The challenges are mostly in the insurance of industrial areas, energy-saving, and concessional financing.

Minister of Trade and Industry Mounir Fakhry Abdelnour recently declared the determination of the government to support faltering factories through EGP 500 million in government funding.  The money is a part of a plan announced by the government to stimulate the economy.  Although the minister did not announce the mechanism through which the government would provide support to the factories, he did go over its disbursement through the National Bank at subsidized interest rates for the benefit of factories operating on sound economic foundations.

The government has also allocated EGP 3 billion, within its economic stimulus package for the construction of industrial cities and for completing the construction of cities that only need modest sums to operate.

Chairman of the Industrial Investors Syndicate Mohamed Junaidi said there are industries which suffered to drops in production of varying degrees during the last term due to poor economic and security conditions.  Some industries, especially those that rely on tourist activity, completely stopped production.  However, the industry has not come to a complete standstill over the past three years.

Most investors have focused on maintaining existing investments and stopped the establishment of new production lines over that time, he said. This is especially in light of conflicting government decisions and the large gap between the policies of successive governments that do not encourage expansion or fulfill the needs of investors.

“The food industries and pharmaceutical industry are the sectors least affected due to the permanent market need for their products,” he said.

The pre-revolution industrial growth rate of approximately 12% had suffered a tangible decline on the ground due to the complete or partial suspension of factories stemming from political and economic unrest, he said.

Mohamed El-Morshedi, president of the Transportation Investors Association and chairman of the Chamber of Textile Industries of the Federation of Industries, denied the claims about the suspension of industry in Egypt.

“These claims are simply the attempts of some countries to portray the Egyptian economy as being in a state of total collapse. Industry has, however, suffered as a result of political circumstances over the past three years, with a decline in production rates in some industrial areas that experienced a breakdown in security.”

El-Morshedi said the Egyptian industrial sector was still intact with many factories barely affected by political events. Small industries were most affected by the security breakdown where some factories had partially halted production or chose not pursue expansions in production lines until the security situation was stabilized.

While it could be argued that industry has not made much progress over the three years since the outbreak of the January 25th revolution there was no negative decline that would threaten Egyptian industry. El-Morshedi stressed the importance of the political will to help revitalize the sector.

There are conflicting statistics related to the number of faltering factories and the number of those that faced funding issues which forced them to close after the January revolution.  Whereas the Ministry of Trade and Industry claims that the precise number is approximately 800 factories, some of the statistics of investor associations indicate that the figure may be as high as 2000.

Investors attributed the high number to what they called the intransigence of the banking system in dealing with investors and their refusal to allow them to pay back their debts in installments.  They called for new and innovative financing mechanisms so as to provide concessional financing and thereby contribute to the rescue of factories in default.

A number of the investors recommended the implementation of the Minister’s plan – and before him, that of the Industrial Modernization Centre (IMC) overseeing the files of faltering factories – for the establishment of an investment fund. Whether operating through private equity or venture capital funds the investment fund would contribute to financing the capital of defaulting factories.

Engineer Alaa’ El-Saqati, President of the Investors Association in Badr City, said that the number of suspended factories in Badr City’s industrial area had reached about 50. In a memorandum his association submitted to the Ministry of Trade and Industry, the association demanded that the Ministry provide EGP 500,000 per factory to restore the plants to full capacity and lower unemployment rates.

He also recommended the establishment of a venture capital fund initially financed by the state for the support of faltering factories.  After the initial phase, associations could also contribute to it to resolve the crisis of suspended factories.

“If these recommendations to rescue approximately 20% of the Republic’s defaulting factories are not completely or partially implemented and serious mechanisms not put in place to solve the problem, more than 50% of factories across the country will be forced to close – a disaster for the Egyptian economy by all accounts.”

Osama El-Taba’i, president of the Damietta Investors Association and vice-president of the Federation of Investors, said there were about 28 faltering factories in Damietta’s industrial area.  This figure was likely to increase if no solution is found.  Most of the troubled factories were small and medium-sized and in varying activities such as furniture, building materials and printing materials.  The causes ranged from financial or administrative reasons to lack of prior study of the nature of the market. To fix the problem we needed to accurately diagnose the nature of the struggle and then begin to solve it with that nature in mind, he said.

Meanwhile, president of the Federation of Industries Mohamed El-Suweidi attributed the faltering of factories to a cessation of the banking system’s support to industry and the difficulty that exporters face in opening lines of credit, which has hampered the export plan of companies.

The amount announced by the Ministry of Trade and Industry to resolve the crisis of stalled factories was like a life buoy. Small and medium-sized businesses would be the biggest beneficiaries of the EGP 500 million.

El-Suweidi added that the Federation had formed a committee, in cooperation with the IMC, to look into the distressed factories and uncover the reasons for their defaulting as well as to develop rapid solutions for the crisis and to revive the factories.

The Federation also demanded that Dr. Hazem el-Beblawi’s government develop a roadmap, in collaboration with the ministers of the economic community, for the speedy resolution of the crisis of stalled factories to return them to full productive capacity. These steps would also contribute to the elimination of unemployment.

Abu el-‘Ela Abu el-Naga, secretary-general of the Federation of Investors and member of the Board of Directors for the Tenth of Ramadan Association, suggested the formation of a committee for a detailed study of the causes of the factories defaulting. The problem was growing every day, especially with the increase in security and political turmoil, with the number of stalled factories in the Tenth of Ramadan currently about 200.  Abu el-Naga recommended that, following the study’s preparation, a fund be established to float the factories without the involvement of the banks, which have completely refused to assist in resolving the problems of faltering factories.

President of the Beni Suef Investors Association Mohsen El-Jebali said that there were approximately 12 stalled factories in Beni Suef’s industrial zone as a result of financial or administrative problems. No study was conducted on the nature of the needs of the market and thus, factory products suffered with the arrival of the recession.

El-Jebali added that the reluctance of banks to finance the faltering factories – or at least permit installments for the repayment of their debts – has contributed to the aggravation of the problem.  He called for the state to help through a fund to revive and float the defaulting factories as well as to offer the required raw materials or equipment for the production process. The funding would come from more than one source and the government would assume its direct supervision.

Mohamed El-Shandawili, president of the Sohag Investors Association, identified the percentage of stalled factories in the region as approximately 40%.  This had contributed to a rise in the migration of residents from the southern province to the north, to Cairo and Alexandria, as they lost hope that the crisis would end.

He called for the new government to quickly adopt the necessary measures to solve the crisis after the political situation settled.  His association would hold an extensive meeting with the ministers of the economic community to present their actual problems and elaborate on their needs, he said.

Their demands included the need for state funding for faltering factories as well as fully-functional factories, to facilitate their access to the raw materials necessary for production.  This was especially because factories were currently relying on self-financing to pay worker wages.

Fathi El-Sayyed, president of the Investors Association in Buhaira Province, said the number of factories that have faltered since the outbreak of the June 30 revolution has increased because of the unrest and the imposition of a curfew. The defaulting was mostly occurring in small factories across various activities, including the weaving, printing and foodstuffs industries.

He stressed that the Association would not make any demands of the interim government until a new constitution was issued and elections held for the House of Representatives and for a new president for the Republic. At that point, it would demand a solution for the factory crisis, as well as the stabilization of the country’s security situation.

According to Magdy Kamal, president of the Investors Association in Port Said Governorate, four factories in the area have stopped production.

Hamada el-Qaliouby, President of the Mahalla Investors Association, said their industrial zone has about 40 suspended factories.  He indicated that the relative competitive weakness and the increase in exchange rates led to the deterioration of industry and a rise in the proportion of factories’ defaulting.

El-Qaliouby considered the stabilization of the political situation and a return of security to the Egyptian streets to be the most important solutions for this dilemma as well as the application of the labor law, the implementation of its regulations and a restructuring of the financial and administrative divisions of companies and factories.

President of the Apparel Export Council Magdy Tolba previously said that most of the small- and medium-sized factories closed their doors due to their inability to continue and cope with the crisis. The burden was now on the large factories which had suffered since the January 25 revolution and through the June 30 revolution.

Tolba believes that the state should obligate the banking system and individual banks to adopt banking policies to solve the crisis as well help with export subsidies, tax rebates, and installment plans for social insurance debts.  He called on the government to continue the program of placing the tax burden on investors and businessmen.

Legislation regulating labor law had to be put in place to stop protests and sit-ins that workers partook in “without reason” and for those workers to be held accountable in the event of default or a decline in production.

Mohamed el-Morshedy, president of the Transportation Investors Association, said that approximately 40% of transport factories were suspended. The state should create a favorable environment for producers and limit illegal or unfair competition, tax evasions, customs avoidance and any selling at a price less than the cost of production.

President of the Minya Investors Association Alaa’ Morsi said the state of faltering factories was extremely critical, especially after the unrest that the industrial cities faced after June 30.  The turmoil has increased the burden on the factories because of the problems of insurance, which has increased the financial severity of the crisis, in addition to the difficulty of transporting goods between provinces.

Morsi added that the number of stalled factories in Minya province has reached 45 and stressed the need for the state to work on solving the problems faced by those factories rather than leaving it to the banks which had completely refused to finance them.  He emphasized the need to activate the role of the Industrial Development Bank (IDB) for which the contribution to solving these crises was within its jurisdiction.  The IDB should have a local base in every province and contribute by way of simple benefits and long repayment periods.

On a related note, Ali Hamza, vice-president of the Federation of Investors and a member of the Board of Directors of the Assiut Investors Association, said that the problem of suspended factories stemmed from the rigidity of banks in financing the factories.  He demanded banks leave behind this routine and set up bank securities and facilitate lending to investors.  He also called for the activation of the Social Fund’s role in supporting small investors, a study of default cases and debt rescheduling for small and medium enterprises.

Hamza also supported the idea of establishing a venture capital fund to support state-financed factories as an initial solution to emerge from the current crisis.  He pointed out that the number of stalled factories in Assiut had reached approximately 30.

Board member of the Federation of Industries Mohamed el-Shebrawi said that over the coming period, the Federation would work to identify the suspended factories in order to present a clear plan to the IMC to solve the factories problems. The new board of the Federation of Industries had placed the issue of stalled factories at the top of its priorities for the next stage, he said.

According to el-Shebrawi, the revival of a suspended factory was much cheaper for the state than looking for new investments.  He called for the government to take steps towards offering stimulus to the faltering factories, such as offering tax exemptions for a period of five years for factories that resume their work.

Vice-president of the Chamber of Engineering Industries Mohamed el-Mohandes blamed the reluctance of banks to allow debt rescheduling for stalled factories for exacerbating the crisis and increasing the numbers of faltering factories in every region.

El-Mohandes added that the decline in the value of the local currency and the increase in the value of the dollar, in addition to the political turmoil that the country has witnessed, contributed to a decline in the ability of producers to compete and a decrease in export contracts.  This has played a part in the exacerbation of the crisis in industrial areas, he said.

Meanwhile, Mohie Hafez, the vice-chairman of the Public Syndicate of Industrial Investors, demanded that sufficient funding for stalled and faltering factories be offered and that the price of land and services be reviewed.  He also called for a new policy of exemptions to be used to encourage investors to address their defaulting and restart their suspended factories.