Factories struggle in Egypt as costs, risks rise

Wed Feb 27, 2013 9:00am EST

Related Topics

* Study estimates over 4,500 factories shut since revolution

* Power cuts, strikes, poor security, financing difficulties

* Government pressured into hiking industrial fuel price

* Currency depreciation should be boon to exporters

* But operating environment too poor for many to profit

By Asma Alsharif

MADINAT ELSADAT, Egypt, Feb 27 (Reuters) - The blue steel gates of Abu al-Makarim factory, once busy with staff carrying Egyptian carpets for export, are now rust-encrusted and bolted shut after worker strikes and financial problems forced the plant out of business eight months ago.

The abandoned facility in Madinat Elsadat, near Cairo, is one of thousands that have fallen victim to the instability of post-revolution Egypt. Many that remain open are plagued by power cuts, strikes, poor security, and difficulty securing loans in credit markets where they are squeezed out by an indebted government.

The plight of Egypt's industrialists points to the wide range of ways which the economic environment has deteriorated in the two years since Hosni Mubarak was toppled.

Because of endemic political conflict, foreign investment has shrunk and foreign currency reserves have slid to critically low levels as President Mohamed Mursi's Muslim Brotherhood prepares for parliamentary elections starting in late April.

At Madinat Elsadat, 75 of the 525 factories that once operated in the complex have shut down since the revolution, according to a report by the Centre for Trade Union & Worker Services. Up to half of the factories are struggling.

Countrywide, the report estimates over 4,500 factories have shut since the revolution, swelling by hundreds of thousands the ranks of unemployed in a nation where two-fifths of the people live on or around the poverty line. The unemployment rate is around 13 percent, according to official data, but private analysts believe the actual rate is much higher.

The Abu al-Makarim Group, which had employed more than 4,000 workers at seven factories, had been struggling even before the uprising against Mubarak erupted in January 2011. The wave of industrial action that ensued was the final nail in its coffin.

"There were strikes, asking for raises. Each day cost hundreds of thousands," said Hassan Abu al-Makarim, who ran the company before the revolution. "There was also a shortage in financing to buy material."

It is a complaint echoed by many other businessmen. The government is borrowing heavily to finance a budget deficit forecast to hit 10 percent of national output this fiscal year. That is soaking up the money available to industry.

The risks of doing business are heightened by a security vacuum which the police have been unwilling or unable to fill since Mubarak's rule ended.

In Madinat Elsadat, set up in the 1980s to shift population out of Cairo, police are few and far between. Gangs intercept shipments and steal goods on their way out of the industrial area.

"Some investors closed up and left because of the lack of security and stability," said Ahmad Shaheen, owner of a facility where fruit and vegetables are stored and frozen for export.

He said his clients had in many cases hired armed guards to protect trucks during transit to and from the depot.

For some business owners, the security risks come from their own employees. Workers at one Madinat Elsadat clothing factory detained the owner overnight after salary payments were delayed for two months, said Abdulaziz Ghaslan, who used to work there.

"There is no control over workers anymore. They were under a lot of pressure before the revolution so when everything became so loose, they became people who do not want to be controlled, asking for their rights," he said. Ghaslan lost his job at the factory following work stoppages.

Workers demanding better salaries barricaded the gates of their cement factory with concrete blocks during one recent burst of industrial action.

RISING COSTS

In some ways, the revolution still promises to benefit industrialists. By sweeping away some of the entrenched business interests and corruption that surrounded Mubarak, it offers new freedom and opportunities to investors.

The slide in the Egyptian pound, down about 8 percent since late December to record lows against the U.S. dollar, is a boon to some exporters. Egyptian investment firm Citadel Capital , which owns stakes in companies which export over $300 million a year in various industries including food, says it is profiting.

"Currency devaluation is affecting our business positively. If you are investing in an exporter or import substitute, then you'll benefit," Citadel founder and chairman Ahmed Heikal told Reuters, predicting that exports would rise substantially.

But many or most Egyptian companies feel they are in no position to take advantage of the positive changes because the operating environment is so poor.

Energy shortages, for example, have resulted in gas supplies being diverted from businesses to the national pipeline; factories that depend on gas to function have either cut back their output or shut down altogether.

The cost of subsidising imported fuels sold by the state below market prices is becoming unsustainable for the government, and this is creating further uncertainty.

Last week, the government announced a 50 percent increase in the price of fuels used by some industries, triggering protests by brick factory workers whose sector was one of those affected.

In coming months the government hopes to secure a $4.8 billion loan from the International Monetary Fund, easing the financial pressures on it, but to obtain the deal it is expected to have to commit to further subsidy cuts.

Foreign investors were excited by the opportunities that Egypt had to offer just after Mubarak was toppled, said Mohamed Talaat Khalifa, a financial analyst. Would-be investors now list concerns about everything from logistics to security; some are postponing projects until the situation is clearer, he said.

"There are problems with shipping, problems with the logistics and even security in transporting goods from the factory to the port," he said.

As a result, insurance premiums and other costs have risen to levels where projects may no longer be economically viable.

"They're definitely eager to invest in Egypt. Just as the Gulf has oil, Egypt's oil is its people...but there cannot be an appetite unless there is stability." (With additional reporting by Mirna Sleiman in Dubai; Editing by Tom Perry and Andrew Torchia)

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