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FORGING AHEAD
The government is offering investor incentives and new models to develop industry in Upper Egypt. But more importantly, say analysts, it has created a comprehensive plan that improves linkages to the more prosperous north and coastal areas of the country.
BY MAGDY SAMAAN
The decaying villas that line the leafy streets of Minya are testimony to better times. The cotton magnates that once lived in these stately mansions have long moved away, their textile factories boarded up or languishing in neglect, the scars of shifting economies.
Life is slowly returning to Minya and dozens of other cities in Upper Egypt as new industrial complexes are built and the government sinks capital into infrastructure. It would seem the Nile Valley’s long-neglected potential may soon be realized. “Upper Egypt is a real opportunity and strength for Egypt,” Minister of Trade and Industry Rachid Mohamed Rachid said during a conference to promote industrial development in the country’s southern region.
During the past three years, the government has shown increased interest in developing and attracting investment to Upper Egypt. Infrastructure has been built, new factories have been opened and investors have been given fresh incentives to establish production lines. More recently, the Ministry of Investment established a holding company with LE 100 million in capital to identify investment opportunities in Upper Egypt and market them to local and foreign investors. Initiatives launched through the company include the establishment of an organic fertilizer plant, hotels in Assiut and Sohag, and a financial leasing company.
It is not the first time for the government to look south. A state initiative in the mid-1990s to develop and attract investments to Upper Egypt created a number of industrial zones in the various governorates, attempting to woo investors with new infrastructure, free land and 10-year tax holidays. Small and medium-sized companies established factories in the zones, but the strategy fell flat when it failed to attract larger firms. Analysts say the project failed because the government was unable to tackle the increasing poverty rates and high unemployment that fueled the growth of extremist groups.
Adel Fahmy, one of the investors who responded to the government’s call 14 years ago and returned from Kuwait to build a paint factory in Sohag, is cynical about the government’s renewed interest in developing Upper Egypt. “If I could go back in time I would never have come to Sohag,” he says. “I regret having come to invest in Upper Egypt. The talk about encouraging investment here is just talk, while the reality is very different. There are problems in every direction when it comes to investment – from a lack of infrastructure to an excess of bureaucracy.” He says promises made 14 years ago, including plans to build the Sohag-Red Sea highway and an airport in Sohag, failed to materialize. “The government has started to carry out [these promises], but only after 14 years of waiting.”
Learning from mistakes
The government does not deny it made mistakes. But it insists it has learned from them. “When we sat together and discussed the issue, we realized there were flaws in the way industrial and commercial development was carried out in the past, because we used to build an industrial zone, give the investor land for free and offer tax exemptions, and our role ended there,” says Rachid. “But this policy does not reflect the reality of industrialization in Egypt, or anywhere else in the world. The issue today is more than just giving a piece of land for free. It is in fact tied to infrastructure – to building roads, training labor, providing housing, building railways and even social structure. All these aspects are pivotal to any economic development.”
The minister emphasized that the government’s new strategy to develop Upper Egypt is a comprehensive one in which a number of ministries work in coordination with one another and with the local governorates. The five-year plan aims to create 120,000 jobs in Upper Egypt by establishing 150 new factories with a minimum capital of LE 15 million. The focus will be on labor-intensive industries such as spinning and weaving, and food processing, while industries that rely heavily on imported materials, such as steel, will be shifted to the coastal areas.
According to Amr Assal, head of the Industrial Development Authority (IDA), there are approximately 200 major factories in Upper Egypt producing commodities such as aluminum, paper and sugar. Apart from these large projects, the vast majority of industry is comprised of small factories, which are often constrained by financial and logistical obstacles. “Many projects are unable to compete, because industrial projects must have the capability to market, to export, to finance and to face the market,” he says. “So some of them are unable to compete, while others are unable to continue in the market because their economies of scale are small, and so they are not successful.”
Rachid says the government’s new development plan addresses this imbalance by taking a top-down approach. "We’ve set a target of building 150 large factories in Upper Egypt within five years, 38 of which have already been built,” he explains. “The presence of these big factories will create dozens of small and medium factories around them and perhaps this is what Upper Egypt lacked; that there was no infrastructure for industry and consequently each factory could not market its product. Each big factory needs small factories around it to provide it with components.”
Another thrust, inspired by the highly successful National Supplier Development Program (NSDP), will encourage companies in the more prosperous Cairo and Delta regions to partner up with factories in Upper Egypt to create extra capacity for their export orders. Large, successful northern companies will outsource a portion of their production to SMEs in Upper Egypt, or leverage their experience to assist them in developing and marketing their products. “They will take some of the small players in Upper Egypt, identify the products they need from them – whether [for their own production] or, if they outsource, for export,” Rachid explains. A large Cairo-based firm might, for instance, use a small factory in Edfu to process the fruit for its juices, while the Edfu factory might have its own dried fruit product that it has been unable to market and would be able to outsource it to the Cairo firm for marketing and export.
The government has also requested that Washington expand the 2004 Qualifying Industrial Zones (QIZ) Agreement to include industries in Upper Egypt. The proposed QIZ cluster would comprise eight towns in southern Egypt: Fayyoum, Beni Suef, New Valley, Minya, Assiut, Sohag, Qena and Aswan. Registered factories in these zones would be eligible to export their industrial products to the US duty-free provided they contain at least 10.5 percent Israeli components. More than two dozen companies have already pledged to invest LE 750 million to trade from the zone, according to Assal.
Building infrastructure
One reason for earlier failures was that the government did not provide sufficient infrastructure for industries to develop. Investment in roads, ports and banking facilities helps attract and anchor capital, while energy-intensive industries such as cement, fertilizers and smelting require access to cheap energy. Most factories are reliant on electricity, but natural gas has started to flow south through a new pipeline. When complete, the pipeline will carry gas from Beni Suef as far south as industries in Aswan, 800 kilometers away. “Natural gas has now reached Minya, and is scheduled to reach Assiut and Aswan in 2009,” says Assal.
Meanwhile, the government has recognized the inadequacy of Nile Valley road networks. Previously, traffic was constricted along the sinewy narrow road that followed the Nile and the more recently built Upper Egypt Desert Road. Meanwhile, just two highways cut across the Eastern Desert to ports on the Red Sea – one running from Beni Suef to Zaafarana, and the other from Qena to Hurghada via Port Safaga. Smaller roads connected Qift and Quseir, as well as Edfu and Marsa Alam.
The Ministry of Transport recently upgraded the Upper Egypt Desert Road, creating a divided highway running 368 kilometers from Cairo to Assiut, with plans to extend this highway as far as Aswan. It is also constructing new highways to provide all governorates with access to the Red Sea. One highway to connect Sohag and Assiut to Port Safaga is due to be completed in 2009. Another highway will link Minya governorate to the oil facilities at Ras Ghareb on the Red Sea.
Access to Red Sea ports will facilitate exports and increase the investment value of factories in Upper Egypt, says Ali Hamza, president of the Assiut Investors Association. “[An inadequate road network] has been an obstacle to attracting investment to the area before, especially when it comes to transporting imported components for industry and finished products to sale destinations.” He points out that of the 85 factories in Upper Egypt with ISO certification, only 7 percent export their products. The new routes should facilitate export operations by reducing the distance between factories and ports.
The government is also improving the long-neglected river transport network, which will cut down transport costs on bulk cargoes by up to 50 percent, according to Hamza. New river ports are slated to open in Qena, Sohag and Assiut. It is also expected that river port facilities will be developed in Mallawy, where there is a large molasses factory, and Samalout, which is near several large limestone quarries.
Construction has also begun on a new airport in Sohag, while another in Minya is to be offered as a public-private partnership (PPP). Assiut’s pint-sized airport will be renovated and enlarged to handle more traffic. The airport receives just two EgyptAir flights a week from Cairo, but has begun to attract private carriers such as Air Arabia and Jazeera Airways.
Role models
Shams El-Din Nour El-Din, chairman of the Minya Investors Association, is skeptical about the government’s new plan to encourage investors to look upstream. He says the state directs investments – particularly foreign ones – to Cairo and Alexandria, while giving only lip service to Upper Egypt and the rest of the country. “For example, the government made a deal with Turkish investors to build new factories all over Egypt, but in the end these factories only materialized in 10th of Ramadan and Borg Al Arab cities. The investment authority could have offered special incentives for certain industries in Upper Egypt, but its plan is an unclear one that does not look beyond Cairo.”
He went on to say that to attract investment capital to Upper Egypt the government needs to “present successful models in certain sectors, as this will encourage other investors to follow in their footsteps.”
One such model, argues Zaki Bassiouny, chairman of the Holding Company for Metallurgical Industries, is the Misr Aluminum plant in Nag Hammadi. Opened in 1975, the factory is Egypt’s sole aluminum smelter, producing about 270,00 tons of aluminum per year, of which 60 percent is exported. The factory processes imported bauxite and alumina, supplying aluminum products to domestic industries and shipping the bulk of its production to foreign markets via Port Safaga, 210 kilometers to the east. The state-owned company is a perennial profit-maker, with net profits climbing 12.6 percent in the first half of FY 2007-08 to reach LE 450.8 million.
Bassiouny, a former chairman of Misr Aluminum, says investors often exaggerate their complaints for the purpose of getting more concessions from the government. “The Misr Aluminum experience in Nag Hammadi has proven that all the excuses given by investors for not going to Upper Egypt are untenable,” he says. “When the factory started to operate in the 1970s, the area did not have skilled labor, so the management trained [local workers].”
Misr Aluminum now employs nearly 10,000 workers, the majority coming from Nag Hammadi and surrounding towns. A compound adjacent to the factory encloses 4,000 residential units providing housing to the factory’s workers, as well as a hospital, school and sporting club.
Bassiouny says the secret of Misr Aluminum’s 30 years of success in Upper Egypt is good management. The company has created a sense of belonging among all workers by tending to their needs, which allows them to be totally devoted to production. “The aluminum factory experience can be replicated in Upper Egypt because its success did not rely on the proximity of raw materials, nor the availability of skilled labor; it relied on good management.” He added that industries in Upper Egypt can exceed the productivity of those in Cairo “because workers here are ready for tough work.”
Enticing investors
Nabil El-Ezaby, governor of Assiut, believes the government’s new initiative for Upper Egypt will succeed where others have failed. He stresses the importance of a unified strategy and comprehensive development, the lack of which doomed earlier attempts to develop his governorate. “When investment started in the Safa zone [25 kilometers northwest of Assiut], the first industrial zone built in Upper Egypt, the notion of investment there had not yet been fully developed,” he says. “Encouraging investment requires more than simply providing an industrial zone with utilities or free land to investors... It also needs an atmosphere conducive to investment.”
In the mid-1990s, the government offered investor incentives in the form of free land and a 10-year tax holiday for factories established in Upper Egypt. The government recently sweetened the deal by offering to pay investors LE 15,000 for every job their industrial project creates. To be eligible, a company must sink more than LE 15 million capital into its project in Upper Egypt and hire at least 250 workers. The financial subsidy is deducted from the factory’s dues to the government, such as utility bills, sales tax and customs duties. “In the end, this is a totally different package from those given to projects... in any other area in Egypt,” says Assal.
But Fahmy says the government’s one-size-fits-all approach when dealing with investors in Upper Egypt will not work. Instead it should tailor investor incentives to each city or district. “Dealing with Upper Egypt as a single entity is a flawed approach,” he argues. “Minya differs from Sohag, Aswan and Assiut. And so, it does not make sense that the government should set a general investment policy for the whole of Upper Egypt.”
Medhat Stefanos, commercial director of the Lafarge-Titan Group, which owns Beni Suef Cement and Alexandria Portland Cement, says the government’s new strategy looks great on paper, but is fundamentally flawed. He says the emphasis on new factories and infrastructure must go hand in hand with real progress in fighting poverty and unemployment. “Developing and modernizing Upper Egypt will not be achieved through the expansion of ceramic and cement factories. These industries do not develop through production, but rather through consumption. In addition, they are machine-reliant industries – the value added and job opportunities come from the consumption of their products in building and construction.”
Statistics highlight the rift. Upper Egypt accounts for about 25 percent of Egypt’s population, yet just 14 percent of all industrial investments. Per capita GDP in Upper Egypt is approximately a third that of Cairo, while the literacy rate is just 55 percent, compared to 81 percent in the capital.
The government hopes to narrow these gaps by directing new investment to the region. But Stefanos warns that plans must take into account the nature of available labor. Skilled labor is in short supply. “The government must have a vision for developing investment in Upper Egypt by directing the investment incentives to those sectors that serve the aim of developing [the region] and accommodating the type of labor available.”
He stresses that it would be a mistake to assume that more factories will inevitably create more opportunities for local residents. “Not all investments can solve unemployment in a given place,” he says. “What the government should do is to analyze the local unemployed labor force and its characteristics, and accordingly incentives should be directed to industries that can accommodate this type of available labor. Otherwise, promoting industries that demand a type of labor unavailable in Upper Egypt will result in transferring labor [from outside the region], rather than employing locally available labor.”
Fahmy says the absence of skilled labor remains a major obstacle for his paint factory. “There are no specialists or efficient labor here,” he complains. “And when we need specialized engineers for maintenance, we have to hire them from Cairo, which costs us double what it would if we were located in Cairo.”
Stefanos points out that when industrial firms evaluate a region’s potential for investment, they weigh the cost versus productivity of the area’s workforce. “Cheap labor alone is not attractive because it does not result in productivity, while the process of retooling labor is difficult for some industries.”
He says there are three additional factors that attract investors to a specific area. “First, the legal environment, in the sense of the legal mechanisms the state provides to encourage investment in a certain place; second, the social culture towards the investor; and finally, the incentives given for investment in a specific area – that is to say, how to make an investor prefer one area to another.”
El-Ezaby, however, is convinced that while there are still shortcomings to the government’s plan, the ball is now in the private sector’s court. “The state has done its job, now it is the investor’s turn,” he says. “The state provided infrastructure and what remains is for the investor to transfer part of their activities to Upper Egypt.”
ADDITIONAL REPORTING BY RÉHAB EL-BAKRY
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