Report No. 13208-EGT Arab Republic of Egypt Sugar Subsector Study December 21, 1994 Agriculture Operations Division Country Department II Middle East and North Africa Region TS | J 5, X | l r '.2~~~~~''. 143~-'%* -.'_. F ~~~~~~~~~~- I _t, O, , kl , +W <, r43w | . l E i z I m ,=,,~~~~~~~~~~~~~15 I i§*;~~~~ CURRENCY EOUIVALENTS (As of December 1994) US$ 1.00 = 3.39 Egyptian Pounds (L.E.) L.E. 1.00 = 0.29 US$ WEIGHTS AND MEASURES 1 centimeter (cm) = 0.394 inches 1 meter (m) = 39.370 inches 1 kilometer (k1m) 0.620 miles 1 square kilometer (km2) 0.386 square miles 1 feddan (fed) 0.420 hectares, 1.037 acres 1 hectare (ha) = 2.470 acres, 2.38 feddan 1 cubic meter (m3) 35.310 cubic feet 1 cubic meter per second (m3/s) 35.310 cubic feet per second 1 liter (1) 1.057 quarts 1 liter per second (1/s) = 0.035 cubic feet per second 1 kilogram (kg) 2.205 pounds 1 metric ton (t) 2,205 pounds 1 qantar = 45 kilogram 1 kilowatt (kw) 1.360 horse power PRINCIPAL ABBREVIATIONS AND ACRONYMS USED DRC Domestic Resource Cost DSC Delta Sugar Company GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product HFCS High Fructose Corn Syrup MALR Ministry of Agriculture and Land Reclamation MOS Ministry of Supply O&M Operation and Maintenance SCRI Sugar Crops Research Institute SCC Sugar Crops Council SIIC Sugar and Integrated Industries Company USAID United States Agency for International Development GOVERNMENT OF THE ARAB REPUBLIC OF EGYPT FISCAL YEAR July 1 - June 30 ARAB REPUBLIC OF EGYPT SUGAR SUBSECTOR STUDY Table of Contents Chapter Page No. Foreword Executive Sunmnary ............................................ i-iv I. EGYPTIAN ECONOMY UNDER REFORM ....................... 1 A. Macroeconomic Reform Program ............................ 1 B. Reforms in the Agriculture Sector ............................ 2 II. THE SALIENT FEATURES OF THE SUGAR SECTOR .... ........... 3 A. Sugar in the Egyptian Economy ............................. 3 B. Sugar Crop Production ................................... 6 C. Sugar Milling ......................................... 10 D. Environmental Issues .................................... 11 E. Key Institutions ....................................... 12 III. RECENT SUBSECTOR REFORMS AND KEY ISSUES .... ........... 14 A. Recent Reforms ....................................... 15 B. Key Subsectoral Issues ................................... 16 IV. EFFICIENCY MEASURES OF SUGAR PRODUCTION .... ........... 20 A. World Sugar Market and Prices ............................. 21 B. Measures of Competitiveness and Investment Efficiency .............. 23 C Welfare Implications of Present Policy Regime. ................... 26 V. POLICY ISSUES AND A PROGRAM FOR FURTHER REFORMS ....... 28 TABLES IN THE TEXT 2.1 - Sugar in the Agriculture Sector .................................. 4 2.2 - Summary Statistics of the Sugar Subsector ........................... 5 2.3 - Sugar Consumption and Prices .................................. 5 2.4 - Per Capita Sugar Consumption in Selected Countries .................... 6 2.5 - Water Consumption per ton of Sugar .............................. 9 2.6 - Age and Capacity of Cane Sugar Mills ............................. 10 2.7 - Costs of Production - 1993 .................................... 11 3.1 - Farmgate Value ........................................... 19 3.2 - Present level of Protection ..................................... 19 4.1 - Measures of Comparative Advantage .............................. 24 4.2 - Returns for Potential Investments ................................ 25 4.3 - Summary of Transfers and Losses ................................ 27 FIGURES IN THE TEXT Figure 1 - World Market Sugar Price ................................. 21 Figure 2 - Financial and Economic Costs of Sugar ......................... 24 Figure 3 - Desirability of Investment and Operation (Cane) .................... 25 Figure 4 - Desirability of Investment and Operation (Beet) .................... 28 APPENDIX I - Sugar Crop Production and Milling ...................... 34 APPENDIX II - The Economics of Sugar Production ...................... 46 APPENDIX III - Transfers and Welfare Losses .......................... 79 MAP IBRD 25764: Arab Republic of Egypt - Sugar Factory Locations ARAB REPUBLIC OF EGYPT SUGAR SUBSECTOR STUDY EXECUTIVE SUMMARY Introduction 1. Over the past few years, the Government of Egypt has been pursuing an ambitious economic reform program, encompassing measures aimed at achieving macroeconomic stability, as well as real and financial sector reforms. The agriculture sector has been at the forefront in implementing reforms, and considerable progress has been made in liberalizing the sector; the Agricultural Strategy for the 1990s identifies measures needed to further intensify sector growth, and to deepen the program of reforms. Prior to implementing sector reforms, both the cotton and sugar subsectors were charaterized by heavy Government involvement. While much progress has been made in liberalizing the cotton subsector, the sector strategy identified the sugar subsector as being an area where controls remain, and highlighted the need to consider options for its deregulation. To identify such options, the Government sought World Bank assistance, within the framework of the ongoing Economic Reform and Structural Adjustment Program, in carrying out a study of the sugar subsector. 2. Domestic sugar production, which is able to meet about two-thirds of the national annual consumption, comes predominantly from cane; over the past decade the Government has encouraged sugar beets, recognizing its lower demand on the country's limited water resources. Together, sugar crops occupy about 4 percent of total agricultural lands, contribute 4 percent to agricultural value added, and consume an estimated 10 percent of the water resources used in the sector. Sugar crops are typically grown by small scale private farmers; however, the Government has a monopoly on sugar processing. All cane sugar mills, as well as the sugar refinery, are under the Sugar Integrated Industries Company (SIIC), which is one of nineteen public sector companies within the Food Industries Holding Company. In addition, a beet sugar factory was established in 1982 as an autonomously managed company. 3. Recent Reforms. As part of its program of sector reforms, the Government has implemented measures since April 1993 aimed at the partial liberalization in sugar trading. The reforms implemented so far include: reduction in the level of subsidy provided through rations; rescinding the ban on private sector marketing and handling of sugar, and freeing retail pricing of non-rationed sugar. There are no quantitative restrictions on the ainount and grades of sugar which the private sector can import; as a result, the private sector was responsible for all sugar imports during 1993 (the tariff on imports was raised from 2 percent to 20 percent). Furthermore, the Government has clearly stated that no measures will be taken for expanding the area presently placed to cane and thereby increase domestic cane sugar production. While the Government is committed to implementing further reforms, it does at the same time have concerns on account of the social and political implications of such reforms, particularly in Upper Egypt where the sugar related activities are an important source of present employment and incomes. In implementing its reform program, the Government of Egypt is particularly concerned that economic progress proceeds within a framework of social equity and stability. 4. Key Issues. While the Government has taken important steps towards liberalizing the sugar subsector, there are a few remaining issues which militate against realizing greater efficiency in resource use. Among the more important distortions at present are: the absence of a mechanism that would lead farmers to consider the value of the irrigation services and irrigation water (this distortion of course has wider implications for the economy, and goes beyond the sugar subsector); mechanism for cane pricing which does not take into account the sugar content of cane; the absence of full incentives for the sugar companies to minimize their costs; access of sugar companies to concessionary financing; and the sugar consumption rations provided through the Ministry of Supply (MOS). The net costs to the Government - ii - of interventions in the sector are estimated at LE 492 million annually (0.4 percent of GDP). The thrust of the Government's efforts at deepening the program of reforms of the sugar subsector need to emphasize the implementation of a program of further liberalization, which moves the subsector towards market-determined prices in the product and factor markets, and better targeted subsidy programs for the poor; and of implementing a program of privatization, taking steps which move the factories towards greater commercial orientation in the management of their operations. In addition, while mill performance is generally good, there are concerns regarding air and water pollution. These clearly need to be addressed, and steps taken to strengthen the environmental sustainability of sugar related activities. Efficiency Measures of Sugar Production 5. While recognizing the political economy surrounding sugar, the decisions to produce sugar within Egypt and undertake new investments in the subsector need to be guided by economic considerations to ensure efficiency in resource use. The results of analysis, which takes into account the complete process of sugar production (on-farm and factory), indicate the following: - At current yields and prices, the production of sugar from beets is marginally uncompetitive in Egypt (DRC of 1.1); however, taking into account the potential for further increases in beet yields and projected world market sugar prices, Egypt has a comparative advantage in the production of beet sugar (DRC of 0.83); sensitivity analysis indicates that the cut of cost of capital, beyond which investment in beet sugar production is undesirable, is LE 448 per ton of sugar produced; - new investments in cane sugar production, which would incur the full cost of capital associated with installing a new factory, are not economically desirable from the resource use efficiency perspective (DRC of 1.45); - With the existing sunk costs in the sugar production industry, where the incremental capital resources needed for continuing operations are lower than those needed for establishing a new factory, the analysis indicates that from the perspective of economic efficiency, the existing cane sugar mills could continue to be economically operated in the future under current economic conditions; furthermore, the analysis indicates that investments for a major rehabilitation of an existing mill are undesirable if the cost of capital is in excess of LE 238 per ton of sugar produced. The results of the analysis indicate that Egypt has a comparative advantage in the production of beet sugar, given the existing potential to increase sugar beet yields; in addition, it is also clear that additional new investments for increasing cane sugar production are not economically desirable. Program for Further Reforms 6. The key themes underlying the program for further reforms articulated for the sugar subsector in this report include the following: (i) the need to implement measures aimed at promoting greater resource use efficiency within the sugar subsector; this requires a program of further liberalization under which the remaining distortions in the product and factor markets are removed, and there is emphasis on the use of the free market in guiding activities within the sugar subsector; and (ii) the need to implement a privatization program aimed at diluting public sector involvement in commercial sugar production. 7. Policy Environment. Despite the liberalization of sugar trade and distribution, the institutional environment of the sugar subsector is, at this stage, not fully supportive of private sector involvement, and uncertainties on the sustainability of policy changes in this regard remain. Discretionary - iii - interventions, such as the possible reversal of the earlier policy decision under which the MOS excluded itself from retailing non-ration sugar in the market, need to be avoided, as they contribute to uncertainties and adversely impact on private sector initiatives; equally, changes in international prices should not be smoothed out through the adjustment of import tariffs. Private sector involvement in the sugar subsector requires a stable and predictable institutional and policy environment. It is important for the government to consider its options and commit itself to a long term policy regime with respect to trade and domestic marketing and pricing, with the emphasis being on increased liberalization and the removal of subsidies. 8. An important element of the Government's economic reform program is the promotion of the private sector, which is expected to provide the engine for future growth. However, within the sugar subsector, all new investments in milling infrastructure are presently being undertaken within the public sector. Clearly, such a policy is contrary to the underlying emphasis of the Government's reform program to divest itself of public sector owned commercial enterprises; the policy for new investments and the management of the existing mills should embody the following principles: - New investments for enlarging sugar milling capacity should be carried out by the private sector, and not add to the existing stock of public sector owned capital stock; - Greater competition should be introduced within the publicly owned sugar milling industry, for facilitating both better resource use efficiency and for the implementation of a privatization program. 9. Pricing of Sugar Crops and Sugar. The involvement of the Government in setting prices militates against the efficient operations of the market; a program for further liberalizing the sugar subsector needs to incorporate measures aimed at price liberalization. - It is desirable that government involvement in the pricing of both cane and processed sugar should be discontinued, and a system adopted whereby prices are set by the market, based on negotiations between millers and farmers on the one hand, and the operations of a free market in the case of the final product; - The existing arrangement whereby a uniform cane price is set for all mills, which is not based on sugar content, distorts incentives for both growers and millers to maximize the efficiency of the industry as a whole. As long as sugar crop prices are regulated, the introduction of sugar content based and regionally differentiated cane prices should be adopted, as the existing system has the potential for creating adverse incentives. - In line with its commitment, the Government should terminate its program to provide untargeted subsidies through sugar rations. 10. It is important to note that once sugar crop prices are deregulated and private investment in sugar factories becomes possible, the absence of using the price mechanism for water resources' demand management could give rise to a situation in which private investment leads to an undesirable expansion of sugar cane. Clearly, the preferred approach for addressing this issue from an economic perspective would be the general introduction of water charges, and not address the issue from the sugar subsector perspective alone. As indicated in the Agricultural Strategy for the 1990s, the introduction of water saving irrigation technologies and a system of demand management of the country's water resources, using price incentives, is the optimum approach for ensuring a more efficient use of water in the agricultural sector. However, since the Government is reluctant to levy charges for water use on account of social and political considerations, second-best alternatives which could be considered, would be a tax on land grown with cane or a tax on cane itself. While neither of these taxes are based on the volume of water actually - iv - used, and would not contribute to improved on-farm water management, in a liberalized environment such taxes would become necessary to avoid incentives for private investment in sugarcane expansion. Of the two alternatives, a tax on output cane would be the preferred second-best alternative, since a tax on land would create incentives for intensifying land use, and contribute towards increasing the consumption of water relative to land. Another alternative which could be considered in the absence of water charges would be reduced protection of sugar through lower import tariffs. 11. Management of the Milling Industry. Complete government ownership of the milling industry, combined with centralized decision making, results in limited competition, and is restrictive in promoting technological improvements and the adoption of new management ideas and systems. Clearly, the program of price liberalization needs to be complemented with the implementation of a program of privatization, where the competitive environment of the free market would ensure greater resource use efficiency. While divesting the public sector of its role in the sugar processing sector would indeed be desirable, it is recognized that the government already has a significant program of privatization, and that the sugar companies do not form part of the present core program for privatization. Nevertheless, it is important that sugar factories be allowed to operate and market their output independently, so as to contribute towards their commercialization and to prepare for privatization. A program of divesting the controls presently exercised by the SIIC to the individual factories and to facilitate privatization would require the restructuring of the sugar mills into separate entities. Steps which need to be considered in this context would include: - Discontinue access to concessionary sources of investment funds for sugar mills' rehabilitation or repair activities; - Decentralization of commercial decisions to the level of sugar factories should take place, under which the factories would be allowed to independently market their output; in addition, the factories would become responsible for procurement of needed inputs, staffing and overall financial management; - Restructure the sugar factories as joint stock companies, if necessary with the SIIC initially being the sole owner, in order to minimize uncertainty; however, the objective would be to allow the factories to operate independently, including raising of finance for new investments or rehabilitations and the preparation of separate accounts; - Presently, the SIIC is only subjected to an audit from the Central Audit Organization; in order to move in the direction of greater commercial accountability, the accounts of SIIC and the factories should be prepared in accordance with internationally accepted accounting standards and principles, and audited by qualified private firms of auditors; - Initiate a program of privatizing the mills. Existing mills should be offered for sale to private sector interests involved in the sugar industry (farmers, mill employees, and others involved in the sector). In those cases where mills exercise monopsony power, privatization should proceed with a view to having majority ownership by farmers. Implementation of measures aimed at decentralizing commercial decision making, including marketing, to the factory level would require complementary initiatives aimed at strengthening factory level management within the critical areas of financial management, stock controls, marketing, as well as monitoring and evaluation. Management contracts could also be entered into for selected factories, in order to facilitate the transition and to introduce more modern methods of factory management. ARAB REPUBLIC OF EGYPT SUGAR SUBSECTOR STUDY I. EGYPTIAN ECONOMY UNDER REFORM 1.01 Fundamental measures for liberalizing the agriculture sector have been implemented by the Government of Egypt over the past several years; this report provides a basis for further deepening the reform process in the country with respect to the sugar subsector, and to promote a more efficient use of the country's key resources. It has been prepared in cooperation with the Government, which sought World Bank assistance in carrying out a study of the subsector within the context of the ongoing economic reform and structural adjustment program. It follows an earlier report defining an Agricultural Strategy for the 1990s for the Arab Republic of Egypt, prepared during 1992'. A. Macroeconomic Reform Program 1.02 Over the past few years, the Government of Egypt has been pursuing an ambitious economic reform program, encompassing measures aimed at achieving macroeconomic stability, as well as real and financial sector reforms. The program marks a fundamental shift by the Government in the underlying approach to economic management of the country's resources: it entails a shift from a centrally planned economy with a relatively small private sector, to a decentralized, market based and outward oriented economy, in which the private sector is expected to play the leading role. 1.03 Historically, Egypt pursued a public-sector-led and inward-looking development strategy stressing social welfare objectives. As a result, state-owned enterprises played an important role in the economy, accounting for one of the largest shares of gross national output and employment among developing countries. While a program of partial liberalization was initiated in the mid-1970s, the Government persevered with its underlying strategy to pursue public-sector-led growth. However, worsening credit-worthiness and the significant fiscal and current account deficits which emerged brought this growth strategy to a halt in the late 1980s. In order to restore macroeconomic stability, the Government of President Mubarak embarked on a wide ranging economic reform program in 1990. 1.04 The initial phase of the economic reform and structural adjustment program involved the removal of many of the existing distortions in the price system, as well as some of the key impediments to trade and investment. The stabilization program was successful in achieving many of its goals. These achievements have included: a major reduction in the fiscal deficit; initiation of financial liberalization, including the decontrol of interest rates; the unification of the exchange rate system, liberalization of most prices, the start of a multi-year program for liberalizing the trade regime; and the initiation of a program of reform and privatization of public enterprises. While the overall progress achieved thus far has been significant, private sector investment remains weak. 1.05 After having successfully implemented the first phase of its reforms, the Government has put in place a large number of policy measures over the past one year that underpin the next phase of its comprehensive economic reform program. The main aims of the second phase, which focuses on maintaining macroeconomic stability while proceeding with real and financial sector reforms, are to consolidate the gains that were made during the first phase, and to deepen structural reforms, for facilitating a strong and sustainable supply-side response from the private sector. j/ WorLd Bank, "Arab RepubLic of Egypt: An AgriculturaL Strategy for the 1990s", December 1992. - 2 - 1.06 The economy is facing several medium to long term challenges that substantially complicate the process of economic development: high population growth (around 2.2 percent), that has led to a rapid increase in the labor force, which for a number of years has outpaced the job creating capacity of the economy; gradual increase in the level of poverty as economic growth has fallen below the rate of population growth; the high rates of illiteracy in the work force, particularly among females; and a degradation of the environment. Clearly, the task of bringing about sustainable development in Egypt, as in many other developing economies which are also pursuing change, is formidable. It will require a continued and strengthened resolve by the Government to implement and deepen the process of reforms already initiated, and more importantly to seek the confidence and active partnership of the private sector in pursuing the fundamental objectives of growth and equity. For this, it is clearly important that an enabling environment exists, in terms of both the regulatory framework and an institutional framework which takes a more pro-active role in facilitating change. Most important, it requires a stable and predictable policy environment. B. Reforms in the Agriculture Sector 1.07 The Government places high importance on the agriculture sector, recognizing its contribution to the economy and its capacity to provide employment and incomes to the poorer segments of the Egyptian population. Whiie its dominance has declined in recent years, the agriculture sector still accounts for 20 percent of both GDP and total exports, and about 36 percent of employment. 1.08 The agriculture sector operated under conditions of significant Government interventions up to the end of the 1970s; however, dramatic changes have been introduced to the sectoral policy enviromnent since the mid-1980s, with the sector having been at the forefront of the country's liberalization program. Over this period, the Government has implemented several measures to deregulate production, prices, marketing, and trade of agricultural products, with a view to liberalizing the agriculture sector and making it market based. The main measures implemented include: removal of crop area allotmen's and delivery quotas; liberalization of agricultural producer prices, and of trade and marketing of most agricultural commodities; removal of feed, fertilizer and pesticide subsidies, and of the implicit exchange rate subsidies applicable to the imports of inputs; higher interest rates for agricultural lending, which are now more in line with the rest of the economy; initiating a program for selling reclaimed state-owned land to the private sector; providing a larger role for the private sector in the distribution of inputs, mainly fertilizers; complete liberalization of land rents over a five-year period, starting with an upfront three-fold increase in land rentals; and initiation of some cost sharing by beneficiaries of irrigation and drainage O&M costs in the new lands, and of capital costs of newly installed drainage facilities in old lands. 1.09 The agriculture sector strategy for the 1990s sees an important role for the agriculture sector in the economy, but also highlights the need to promote broad based rural development. The key themes underlying the strategy include the need for measures aimed at ensuring efficiency and environmental sustainability in the management of the most important natural resources of the country, i.e. water and arable land; emphasis on using free market considerations, in particular the promotion of the private sector, in resource allocations; recognition of the social and political issues, and the need for social safety nets to assist in absorbing some of the potential dislocations which might accompany the implementation of a comprehensive reform program; and the need to initiate a program of institutional reforms. The strategy also emphasizes the fact that an increase in rural incomes and employment cannot come from primary agricultural activities alone; there is need to push for diversification in the rural areas into small scale industries, services and other activities, many based on agriculture. The key challenge for the Government, of promoting private sector investment in the rural areas, will require both an attitudinal change at different levels at which the Government presently operates in the sector, as well as a close review of the role of the Government in the changed environment in order to ensure success. While the - 3 - process has certainly been started, it needs to be further intensified so as to facilitate increased private sector participation, particularly targeted at getting increased value added from the rural sector. 1.10 Following the preparation of the agricultural strategy for the 1990s, further reforms have been implemented during 1993. These measures have created a favorable policy environment and enhanced competition, with beneficial effects on the agricultural economy. While the recorded average growth rates for the sector have been modest during the last decade, more recent indicators point towards a positive supply response in several areas, as evidenced by the increased areas cultivated, and the higher crop yields and production. 1.11 Prior to the implementation of sectoral reforms, both the cotton and sugar subsectors were characterized by heavy Government involvement. While substantial progress has been made in liberalizing the cotton subsector over the past few years, the sector strategy for the 1990s identified the sugar subsector as being an area where controls remain, and highlighted the need to consider options and measures aimed at deregulating the subsector. Sugar crops (sugarcane and sugar beets) are presently planted over an estimated 311,000 fed, and contribute about 4 percent of total agricultural value added. The subsector is presently characterized by a privately owned, small farmer dominated, sugar crop production system, and a public sector dominated sugar processing and marketing system. The issues facing the sugar subsector are complex, and include the question of how to deal with the significant investments already made in industrial infrastructure, as well as the efficiency of resource use, specifically water. Given the water resource constraint faced by the country and the high intensity of water use in sugarcane cultivation, it is clearly imperative for Egypt to pursue appropriate policies and measures which ensure the most efficient use of the country's limited water resources. 1.12 In line with its commitment to liberalize the economy, the Government has already taken measures for partially deregulating the sugar subsector. The thrust of this report's recommendations are aimed at further deepening the reform process and more specifically at improving efficiency in the management of the industrial side of sugar processing, and at increasing private sector involvement in the sugar processing subsector. In order to outline a program for the future, Chapter II of the report provides a brief overview of the sugar sector in Egypt, highlighting the role of the sector within the economy and the important environmental issues which need to be addressed, while Chapter III reviews the recent reforms carried out, and outlines the principal issues which need to be tackled. Based on the analysis of the present situation, as well as technical potential for improved resource utilization, Chapter IV presents the conclusions from the quantitative analysis donie on the efficiency measures of sugar production, and their implications for subsectoral policy. Finally, Chapter V summarizes the key policy issues and broad themes for future development initiatives and also outlines a program for further reforms within the subsector. II. SALIENT FEATURES OF THE SUGAR SECTOR A. Sugar in the Egyptian Economy 2.01 Domestic production of sugar in Egypt comes predominantly from cane. However, over the past decade, the Government has been pursuing a policy of encouraging sugar beets, recognizing its potential and its lower demands on the country's limited water resources. Sugarcane is presently planted over an estimated 271,000 feddan (fed) in Upper and Middle Egypt of which 222,000 fed supply the sugar mills; cane from the remaining area is used for direct consumption, small scale rural processing, and seed cane. Sugarbeet is grown in the Delta on about 40,000 fed. On a country wide level, sugar crops occupy about 4 percent of total agricultural lands, and contribute 4 percent to total agricultural - 4 - value added. In addition, the Table 2.1: Sugar in the Agriculture Sector subsector provides employment to an estimated 190,000 farmers Sugar (Cane Agriculture Share of growing sugarcane and beet and Beet) Sector Sugar (representing about 5 percent of the farming households), and Land Area (Million Fed) 0.31 7.50 4.15% around 21,000 people who are Water (BilLion M3 3.40 35.60 9.55% around 1,000 eople ho are Farms (Million) 0.19 3.90 4.87% employed by the cane and beet Population (Million) 0.95 19.50 4.87% sugar factories. While the sugar VaLue Added (LE Bitlion) 0.80 22.00 3.64% sector of Egypt is relatively small Imports (LE MilLion) 0.50 7.97 6.28% in terms of its contribution to the Source: MALR Data, CAPMAS Statistical Yearbook 1993, IMF International Financial Statistics, Mission Estimates. Egyptian economy, it is a major All Data for 1992/93. user of the country's most important natural resource - water; it is estimated that the sugar crops consume an estimated 10 percent of water resources used in the agricultural sector. 2.02 During 1993, total domestic sugar production amounted to about 1.0 million tons2, of which 0.91 million tons was produced from cane and the remainder from sugar beets. Domestic sugar production in 1993 was complemented by imports of about 0.5 million tons, which represented 33 percent of total domestic needs for the year; these mostly originated from Brazil, but also from Cuba and the European Union. Total value of sugar imports represent about 6 percent of agricultural imports and just above 1 percent of total imports into Egypt. As can be seen from Table 2.2, increases in the area and the yield of the sugar crops over the past decade have led to an increase in the self sufficiency ratio for sugar (domestic supply as a percent of domestic consumption) from 46 percent in 1983 to 66 percent in 1993. Sugar Consumption levels 2.03 Up to the early 1970s, Egypt was generally self-sufficient in sugar, and was actually a net sugar exporter. However, since around 1974, sugar imports increased significantly, and presently account for about one-third of annual consumption. Available data indicate that annual sugar consumption in Egypt increased significantly during the 1970s, going up from around 530,000 tons in 1971 to about 1.55 million tons in 1983; however, it has remained largely unchanged in the region of 1.5 million tons annually, over the past decade. These data on historical consumption indicate that while per capita consumption increased dramatically from about 15 kgs in 1971 to 35 kgs in 1983, it had declined to a level of 27 kgs by 1993. Almost all sugar consumed is refined, although of lower quality (99.6 percent pol) than the white sugar typically consumed in Europe or North America. 2.04 Historically, domestic sugar consumption in Egypt has been influenced by a ration and subsidy system, under which monthly quotas of sugar are provided at subsidized prices to the population through ration cards. The subsidized sugar rations of the Ministry of Supply (MOS) transfer significant resources from the government budget to sugar consumers. Till recently the basic ration was set at a level of 1.5 kg of sugar per person per month sold at a subsidized price of LE 0.25 per kg (or about US cents 3.4 per lb). Total subsidies on sugar accounted for more than 20 percent of total food subsidies in 1992/93. Measures taken by the government in 1993 have significantly reduced the level of subsidies provided under the ration system. The Egyptian ration system is broad-based rather than targeted by administrative 2/ All references to weight of sugar in this report are based on refined sugar equivalent unless explicitly stated otherwise. - 5 - measures; currently, an estimated 90 percent of Egypt's 56 million people are eligible to purchase rationed sugar at subsidized prices. Table 2.2: Summary Statistics of the Sugar Subsector Year 1971 1983 1988 1993 Total Cane Area (000 fed) 137.0 249.0 275.3 271.0 Cane Area, Delivered to Mill (000 fed) n.a. 196.1 209.6 222.0 Cane Yield, Delivered to Mill (t/fed) n.a. 35.9 37.9 38.0 Cane Crushed (000 tons) 7,030.0 7,947.0 8,444.0 Sugar Produced from Cane (000 tons) 591.0 697.0 823.0 909.0 Sugar Recovery - Cane (%) 8.6% 9.9% 10.4% 10.8% Sugar Produced per fed (ton) 3.6 3.9 4.1 Total Beet Area (000 fed) Nil 17.9 41.6 40.0 Beet Area, Delivered to Factory (000 fed) Nil 18.2 37.6 39.9 Beet Yield, Delivered (t/fed) n.a. 12.6 14.8 18.0 Beet Sliced (000 tons) n.a. 229.6 545.3 719.2 Sugar Produced from Beet (000 tons) Nil 22.1 67.5 95.8 Sugar Recovery - Beet (%) n.a. 9.6% 12.4% 13.3% Sugar Produced per fed (ton) 1.2 1.8 2.4 Total Sugar Produced (000 tons) 591.0 719.4 891.4 1,004.8 TotaL Imports (000 tons) Nit 831.0 868.0 502.3 Self Sufficiency (%) 100.0% 46.4% 50.7% 66.7% Production + Imports (000 tons) 591.0 1,550.4 1,759.4 1,507.1 Population (million) 33.8 44.2 50.0 56.1 Consumption/Capita (kgs) 14.6 35.1 35.2 26.9 Source: MALR, SIIC, and DSC Data * The subsidized sugar Table 2.3: Sugar Consumption and Prices rations transfer significant resources 1983 1988 1993 from the government budget to consumers. Production (000 ton) 719.4 891.4 1,004.8 However, since the Imports (000 ton) 831.0 686.0 502.3 subsidy is largely Total Supply 1,550.48 1,759.4 1,507.1 untargeted, it has MOS Distribution limited effectiveness Ration (000 ton) 715 859 577 full subsidy 384 408 577 as an instrument of add subsidy 331 451 0 social policy. The Open market (000 ton) 600 576 930 government has TotaL 1,315 1,435 1,507 committed itself to Consumer Price completely phase out Ration fuLl subsidy LE/ton 100 100 500 the sugar rations by add'l subsidy LE/ton 300 300 0 1995. Non-ration LE/ton 300 700 1,650 Ave ration price LE/ton 105 123 500 Ave retail price LE/ton 242 404 1,210 2.05 T o t a I s u g a r (CPI 94=100) (19) (44) (96) Ave retail price 94 LE/t 1,262 921 1,259 consumption rose during the Ave ration price 94 LE/t 547 280 520 1970s through early 1980s due to rising incomes, declining real prices and the high population growth. As in some of the other countries in the region (Morocco, Syria, UAE), per capita consumption of sugar seems to have peaked, with a decline now evident over the past few years. Since 1989, per - 6 - capita consumption has fallen by more than 13 percent (estimated at 27 kg in 1993), largely due to the declining real per capita incomes and the government's actions to reduce subsidies. Between 1989 and 1993, the retail prices in real terms of ration system sugar increased by over 90 percent, while the free market retail price increased by over 30 percent. Egypt's sugar consumption is about the same level as other countries in the region with similar income levels (eg Syria), but is considerably higher than that of developing countries in other regions. About 1.15 m tons of the sugar is consumed directly and the rest is used by the soft drinks and confectionery industries. Table 2.4: Per Capita Sugar Consumption in Selected Alternative sweeteners Countries presently represent a small share of the sweetener Year UAE Saudi Jordan Syria Morocco Egypt Indonesia market; of the installed Arabia capacity in the country to (kg/person - refined sugar) produce high fructose corn 1961-65 37.2 9.7 45.7 15.7 25.6 11.8 5.4 syrup (HFCS) (in one private 1966-70 45.9 13.8 36.0 17.4 24.1 12.8 6.1 sector company) of 100,000 1971-75 39.8 13.7 25.4 21.6 25.5 14.7 7.3 tons (equivalent to about 1976-80 30.5 15.2 40.0 26.6 30.4 20.2 8.5 1981-85 20.5 20.7 38.9 35.3 33.0 29.7 11.7 70,000 tons of sugar) only 1986-90 23.9 21.9 41.3 30.1 29.0 30.8 12.5 about 50 percent is presently 1991 GDP utilized (based on 1992 data). USS/Person 21,097 7,563 1,409 870 950 773 685 About 75 percent of the About 75 percent of the Source: International Sugar Organization production, which relies on imported corn, is sold to the local soft drink bottling industry, while the remainder is used in the confectionery industry. B. Sugar Crops Production 2.06 Sugarcane cultivation is presently concentrated in four governorates in Upper and Middle Egypt, giving the sugar subsector particular importance in a regional context about 58 percent of the total area planted to sugarcane is in the Qena governorate (representing 48 percent of the governorate's winter cropping pattern), while 22 percent is in Aswan (55 percent of the winter cropping pattern), 11 percent in Minya and 8 percent in Sohag. The median farm size of cane farmers is 3 to 4 fed, with an average of 1.5 fed planted to cane. Farmers indicate a strong preference to grow cane, since it requires less intensive farm management than vegetables or the other traditional field crops grown in Egypt; furthermore, marketing poses minimal problems. Sugar beet is grown primarily in the Kafr Sheikh governorate in the Delta, where it represents an estimated 7 percent of the winter cropping pattern. Since sugar beet occupies the land for only half the year (180-200 days), and cannot be planted on the same plot for three years, sugar beet farmers practice a more diversified cropping system than cane farmers, and consequently, within a free market situation, are less vulnerable to changes in the price of sugar crops. Both cane and beet cultivation is carried out by private farmers, who are typically small scale agricultural producers. However, given the close interrelationship between farmers and mills, since the timing between cane harvest and crushing is critical for sugar recovery, there is a high degree of integration between the farmers' and mill operations. 2.07 Sugarcane. Sugar cane is cultivated in a four or five year cycle (including three to four ratoons), with two planting seasons - in spring (February to April) or in the autumn (mid September to mid November). The autumn is the preferred planting season, as it gives the farmer a chance to grow a profitable winter crop interplanted with cane. Researchers are promoting spring planting on the grounds - 7 - that it will lead to some water savings. As land leveling and seed bed preparation are expensive activities, the ratooning ability of new varieties needs to be evaluated, and cultural practices to increase the number of ratoon crops may need to be encouraged through the extension services. Increasing the ratoon crop to 5 to 6 years would generate advantages, in that each year a smaller area would need to be levelled and prepared for planting, and there would be a saving in the seed cane used. As with other crops, the levels of fertilizer application have been very high in the past, to a large extent due to the subsidies which were then available. 2.08 The average sugar cane yields under the current cultural practices of about 90 tons per ha (or 38 ton per feddan), as recorded by deliveries to the factories3, are excellent in comparison with results obtained under similar conditions elsewhere. For example, smallholders in Pakistan average only 35 tons per ha, whilst plantation culture in Sudan averages around 60 tons per ha; the potential under high levels of management can be estimated from arid plantations in Iran, Ethiopia and Peru, where yields average 120 tons per ha or more. The current variety, 54C9, which is grown on over 92 percent of the sugar cane land, is about 15 years old. There are five new promising Egyptian varieties which are being multiplied and may replace as much as 50 percent of the current variety over the next 5 years. 2.09 Sugar extraction rates obtained in the factories are good by world standards, and sugar recoveries as a percent of cane are similar to or better than those obtained by countries with similar ecological conditions. The main factor encouraging good quality is the low winter temperatures, which would be effective for about four months (December to March); thereafter, quality would decline as temperatures increase. The percent sucrose in cane ranging from 12-13 percent, is not as high as could be expected under the ripening conditions which exist in Egypt. With the introduction of new varieties, and possible changes in cultural practices, a sucrose content in cane of 14 percent should be possible. The present levels of fiber in cane of 12-14 percent should yield sufficient bagasse to fuel the factories and produce a surplus for by-product utilization. The sucrose and fiber contents of cane are partly a function of the dehydration of the cane, and their modest levels indicate that cane is not excessively "dried off" prior to harvest. The level of extraneous matter (trash etc.) delivered with the cane of 2 percent is excellent. 2.10 Sugar Beets. Although sugar beets have been grown in Egypt since the mid-sixties on demonstration plots, it only became an important commercial crop after the beet sugar factory was set up in the Delta in 1982. Sugar beets are cultivated mainly in the Delta during the winter, with a planting season which starts from mid-August till mid-October; it has a 180 -200 day cropping season, and is harvested from April to the end of July, giving about 110 days of milling season. Beets are grown in a three year crop rotation, which is very important to prevent the deterioration of the crop due to build up of diseases and pests. 2.11 The skill of farmers in the Delta who produce sugar beets matches that of those who grow cane in Middle and Upper Egypt. Present yields average in excess of 18 tons per feddan (they have shown a consistent upward trend over the past ten years, since they were first introduced in Egypt on a commercial basis); with the continued improvements in cultural practices and the introduction of better varieties, further improvements in yields can be expected. While yields vary from field to field, depending on time of planting, cultural techniques, timely availability of water, etc., yields of 25 tons per feddan in farmers fields are not unusual; experimental plots indicate that 35 tons per feddan are possible. Technologies that need to be improved include planting densities and the use of fertilizer (as with cane, the application of N fertilizer is excessive). The target of equalling the current sugar yield 3/ MALR data, derived from pLot sampLing, indicate a higher average yield of 43 tons/per fed; in conformity with international norms, the report adopts the factory weigh bridge data. per feddan from cane (4.2 ton of sugar per feddan) seems possible: it would require beet yielding 28 ton per feddan at 15 percent recoverable sugar (16 percent is the norm for payment purposes). 2.12 At the moment beet seed is imported from several countries in Europe. Due to manual labor involved in growing beets, the varieties imported are of the multygerm type. The aim of the Government is to produce Egyptian bred beet varieties; however this would involve a high economic cost, particularly since flowering is difficult and therefore needs to be induced. The possibility of seed multiplication under license should however be pursued. 2.13 Potential for Wider Beet Cultivation. In view of the possibility of conserving irrigation water (see Table 2.5) and recognizing the relatively high beet yields being obtained in Egypt, the Government has pursued trials to assess the feasibility of replacing/supplementing cane in Middle Egypt by beet. Any significant development along these lines, however, needs further evaluation. Research and demonstration plots do show that potential yields are similar to those obtained in experimental plots in the Delta, and that sucrose contents are about equal. However, the much larger seasonal temperature variations in Middle Egypt will enforce a more rigid planting season and, more important, would allow a shorter harvest period. Beet would not extend the processing period of a cane factory, as the short beet season would correspond to the middle of the cane campaign. Thus, additional investment on a beet diffuser only would not increase total sugar production, as the "boiling house" capacity would have to be reserved for beet juice, and cane deliveries would have to cease. The alternative would be, in effect, to build a complete beet factory for a brief (less than 60 days) campaign. 2.14 In addition, there is the issue of whether farmers presently growing cane in Middle Egypt would be willing to diversify into beet cultivation. Farm income analysis done to assess the importance of cane to farmers' incomes shows that a typical farm has sugar cane on 50 percent of the farm land, and the farmer receives 60 percent of income from cane in Aswan and 40-45 percent in the other governorates. The effects of dropping cane from the cropping patterns depends on the assumptions about alternative crops and cropping intensity effects. For Qena govemorate, the farm model analysis shows that with sugar beet substituting for either part of sugar cane or for other crops, farm income would remain roughly unchanged. Therefore, from a pure financial point of view, there is no reason to assume that farmers in this region would not be willing to adopt sugar beet to their cropping pattern, either as an addition to or a replacement for some of their sugar cane. Interviews with farmers, however, have shown a strong preference for growing cane based on the less intensive management demands of this crop. From a technical perspective, sugar beets are more prone to insect and fungus attacks thus requiring a higher use of pesticides than sugar cane which practically does not need any pesticides under Egyptian conditions. Furthermore, the three year crop rotation practiced for beets means that the total area for beets is substantially higher than for cane, for a given amount of raw material. In preparing this report, the issue of introducing beet in Middle Egypt has been looked at primarily from a technical viewpoint. As mentioned above, there are various behavioral issues from the farmers perspective, as well as the important management issues of such a venture, which need to be carefully evaluated prior to making any investments; for this purpose a detailed study is recommended. Irrigation Water Use 2.15 Sugar cane is a heavy user of irrigation water, with consumption per feddan depending on the type of soil and the availability of irrigation water; the efficiency of irrigation water use is reportedly low. Average water consumption is around 12,000 m3 per feddan per year. In contrast sugar beets have a much lower water requirement per year than sugar cane, due to a shorter growing season; the crop requirements range between 30004000 m3 per growing season. As shown in Table 2.5, at present levels of technology and on-farm water management standards, one ton of sugar produced from beet requires about half the volume of irrigation water as compared to that produced from cane.It is important to note, -9 - however, that these differences in water Table 2.5: Water Consumption per ton of Sugar consumption per unit of sugar are largely due to the Canesugar 1/ Beetsugar environmental differences between Upper Egypt and the Per Fed. Water Cons. 12,000m3 3,500m3 Delta: beet is grown in a Sugar Prod. per fed (1993) 4.1 tons 2.4 tons winter environment whichlhas Water/ton of Sugar 2,927m3 1,458&3 an average evaporative demand of about 4 mm per 1/ Average water consumption per feddan is based on norms used by MPWUR for releasing water into the irrigation delivery system. Experience day, whilst cane grows in various areas shows that consumption for sugarcane may be lower throughout the year with an (see para. 2.16); however, as shown in Appendix II, the basic concLusions of the report on the competitiveness of cane sugar average demand of around 8 remain unchanged even with more efficient use of irrigation water. mm per day. Beet cannot be grown in Upper Egypt, but even if it could, its water consumption would be much higher than that in the Delta; the situation in Middle Egypt is intermediate, but due to the various considerations as indicated above, beet may not be an attractive commercial proposition. 2.16 As with other crops, there is potential for more efficient use of irrigation water in sugarcane. The low water use efficiency is a result of several factors, including poor scheduling. In order to minimize the water used by the sugar cane crop, the efficiency of three improved irrigation systems was evaluated at the Komombo research station for four years. The results showed: - The imnproved surface irrigation, in which the land was fine levelled using laser technology and irrigation water was delivered using lined channels, resulted in total average water use of around 8,900 m3/fed. - Sprinkler irrigation: The average water consumed per feddan was between 10,700 and 13,750 m3/year; this proved not to be successful due to the high evaporation rates during the summer season. - Drip irrigation: The observed water consumption was estimated at around 9,200 m3/feddan/year. While there is potential for saving water resources by adopting improved technologies, the presently prevailing incentive structure, where the full financial implications of excessive water use are not felt by the farmers, does not provide an incentive to farmers who are willing to take measures in this regard. While formulating the overall agricultural sector strategy, considerable discussions have taken place with the Government on the issue of increased cost sharing between farmers and the Government on meeting irrigation related costs which are presently borne by the Government, and for implementing effective demand management measures. While the Government feels that the issue has significant social and political implications, a move in this direction is clearly desirable, which needs to be complemented with: - strengthened farmer based institutions for improving on-farm water management, and for increasing farmer awareness towards saving water resources; and - the implementation of water saving technologies, including the wider and improved application of laser levelling on cane fields, using resources available with the SCC; the private sector should be encouraged to provide such services. - 10 - C. Sugar Milling 2.17 The Government has maintained a monopoly on sugar processing since 1963, when the then existing private cane sugar mills were nationalized; the present eight cane sugar mills, as well as the one sugar refinery and distillery at Hawamdia, are under the Sugar Integrated Industries Company (SIIC), which is one of nineteen public sector companies operated by the Food Industries Holding Company (set up under Law 203 of 1991). In addition to the cane sugar mills, a beet sugar factory is located in the Delta (Kafr el Sheikh), which was established in 1982 as an autonomous company (with private Table 2.6: Age and Capacity of Cane sector participation and support from the Sugar Mills International Finance Corporation). Proposals Lave been prepared for expanding the sugar Factory Date Seasonal Capacity production capacity within the country, primarily Estb. Capacity Uti n. from beet; some increase in the capacity of the 'ooo t % cane mills has also taken place recently during the Cane course of major rehabilitation work carried out. Armant 1869 1300 89 A second beet sugar factory, also under public N. Hamnadi 1896 1800 85 sector ownership, is under construction in Abu Qurqas 1904 700 80 Komnombo 1912 1700 95 Dakhaliya (with an annual refined sugar Edfu 1962 1200 90 production capacity of 120,000 tons, which is KoLs 1968 1600 95 Dishna 1977 1000 80 expected to commence operations during Guirga 1987 1100 48 1995/96), and proposals have been prepared for setting up beet sugar factories in Fayoum (capacity of 60,000 tons) and Nubaria (100,000 tons). 2.18 The eight cane sugar mills are all located in Upper and Middle Egypt; the capacities range between 4,500 to 12,000 tons of cane per day. The dates of establishment, seasonal capacity and the level of capacity utilization are summarized in Table 2.6. Egypt is following international trends by increasing the share of sugar that is refined to a level of 99.6 percent pol in the existing sugar factories rather than processed in separate sugar refineries. 2.19 The measures of overall mill performance in Egypt are generally good and compare favorably with industry averages around the world. The mills operate on three shifts a day, and annual crushing days are around 160 per season. Based on the available information, average milling extraction fates are estimated at around 95 percent and the overall extraction rates are between 82 to 84 percent; the time lost to stoppages is only about 3 percent. The relatively low value of lost milling time is indeed creditable, and is the result of a well organized cane supply system (using an efficiently operated rail transportation network for hauling most of the cane) which supports continuous mill operation during the season, and a well motivated and trained staff who have accumulated considerable experience over the years. During the 1992/93 season, an estimated 8.44 million tons of cane were crushed, resulting in average level of capacity utilization of 87 percent; total sugar production of 909,000 tons resulted in a ratio cf 9.2 tons of cane per ton of sugar (i.e. 10.8 percent). 2.20 Based on the available information on financial costs, the production costs of cane sugar (99.6 percent pol) produced in 1993, up to the point of sale to wholesalers, are estimated at LE 1,150 per ton (US$343 per ton, or US$0.16 per lb), net of the value of byproducts, broken down as shown in Table 2.7. Of the total revenues generated of LE 1,242 per ton of sugar, about 54 percent accrues to the growers, and the remaining 46 percent is available to the mills. While in financial terms it may appear that the split of sugar revenues is biased towards the factory, when compared with other sugar producing countries where a larger percent of revenues generally accrues to growers, it is necessary to recognize that the growers do not face the full financial costs of delivering irrigation water to the fields. - 11 - Despite the overall high levels of operational Table 2.7: Costs of Production - 1993 efficiency at the mills, further improvements are possible and desirable, as discussed below. Cane Sugar 2.21 In order to maintain the milling LE/ton g Payment for Cane 670 efficiency at the current high levels in the Factory Costs 269 sugarcane factories, exceptionally large volumes Capital and H.b.Costsi' 248 Value of by-products (92) of imbibition water are used. In addition to Profit at 5 percent 55 putting strain onto the last mill, it reduces thermal 1,150 efficiency and causes very high moisture levels in 1/ For marketing, distribution, administration the bagasse, which in turn leads to environmental and financing charges. Estimates based on pollution. Moisture levels in bagasse are about 5 information from 4 factories. percent higher than the more normal 45 to 48 percent levels. Calorific value is thereby reduced, and supplement fuel oil is often required to aid combustion: and the smoke emitted contains excessive quantities of unburnt particles. The extra imbibition water also calls for additional energy to boil off this water during processing. 2.22 Beet factories are totally dependent on imported energy, so are designed for high thermal efficiency. In contrast, the cane factories are designed in the traditional way, with the low thermal efficiency objective of disposing of all bagasses. Technologies are readily available for the improvement of thermal efficiency, including low cost options such as producing drier bagasse, reducing the dilution of the mixed juice, and rebalancing the factory to reduce steam consumption and exhaust. Others require significant capital expenditure that can only be justified when equipment becomes due for replacement, such as the replacement of low pressure boilers by high pressure equipment, and increasing the surface of heaters in evaporators. These modifications will reduce the consumption of fuel oil to near zero, and will release bagasse for other purposes. 2.23 On average, each mill employs about 1700 staff, of which about 25 percent are seasonal employees. When compared to factories in other countries of similar capacity, the level of staff is clearly high. However, while there is potential for reducing the number of employees at the factories, from a purely economic perspective, the low share of labor costs in the total cost of producing sugar in Egypt, results in a situation where the economic viability of sugar production is not highly sensitive to reduced labor costs at the mill. 2.24 The beet sugar factory in Kafr el Sheikh operates efficiently by international standards. It has now reached its production capacity of 6500 tons of beet per day. The factory was initially designed for the production of a higher sugar quality than that demanded by the Egyptian market. Therefore, it is excessively equipped for the sugar quality currently produced. At the moment, filter cake from the factory is not utilized even though it could be used in the manufacturing of bricks. D. Environmental Issues 2.25 The sugar cane mills have a reputation of intensive air and water pollution, although these effects can be controlled relatively easily. Currently, black particles (fly ash) of not fully burnt bagasse enter the chimney of the mills and are deposited in the surroundings. While most cane sugar mills are already equipped with fly-ash arresters, these need to be cleaned and maintained periodically in order to increase their effectiveness and reduce particle outflow. However, the quantity of fly ash produced is too large for current arresters to handle. The air pollution problem is exacerbated by the fact that the moisture content of bagasse is unusually high, therefore causing an incomplete burn. The practice of adding fuel-oil further adds to undesirable emissions. - 12 - - From an environmental perspective, it is recommended that among other measures, the industry seriously consider reducing the moisture of bagasse burnt by the mills, and eliminate the burning of oils, combined with the installation of wet scrubbers where flue gases are washed in a spray of water. 2.26 A serious cause for water pollution lies in the washing of factories. The effluent from washing contains oil, chemicals, sugar, molasses, and other pollutants. Currently, the effluent is led directly into the Nile, and creates a major environmental concern. The effluent should be collected and disposed off through a water treatment plant, as is the practice in other sugar producing countries. The Government has prepared feasibility studies for such plants; however, financing has not been assured for all mills. - Given the importance of the Nile waters to the nation, and the overall environmental concerns in this regard, it is clearly important for the sugar industry to accelerate the developmental plans for waste water treatment plants at each factory. 2.27 At each cane sugar factory, warm waters coming from mixing condensers after having condensed the vapors from evaporators and vacuum pans are returned to the Nile. Their rate of disposal is high, at 15 to 20 m3 of water per ton of cane. This water is taken from, and after use, returned to the Nile at a temperature differential of 20 to 25 degrees centigrade, which is not a significant level of thermal pollution owing to the substantial dilution rate in the Nile. 2.28 In the beet sugar factory, water resulting from the washing of beets is normally sent to settling ponds, which are large enough to receive mud from one full season and then left to evaporate all year long. From the beet crushed in a season (700,000 tons), the quantity of dry mud produced is about 15,000 tons. Dry mud is subsequently removed and returned to the fields. E. Key Institutions Sugar Crops Council 2.29 The Sugar Crops Council (SCC) was established in 1978 by the Ministry of Agriculture and Land Reclamation as an umbrella agency responsible for coordinating all aspects of policy related to the farm production, research, processing, marketing and trade of sugar. The Council was established primarily to address the decline which took place during the mid-1970s in the production of cane and processed sugar in Egypt, at a time when the demand for sugar began to increase and Egypt had to resort to imports in order to meet domestic needs. Overall self sufficiency ratios for sugar declined from 114 percent in 1960, to 96 percent in 1974 and 53 percent in 1981. Reportedly, the decline in cane production took place primarily on account of serious disputes which arose between the growers and the millers (on prices, payments to farmers, issues related to cane weight and sampling), as well as the neglect of the Government's cane related research and extension services, which impacted adversely on yields and production. 2.30 The Board of the Council is made up of representatives of cane and beet growers, the Sugar Crops Research Institute, Directorates of the MALR in Cairo and in the governorates concerned with crops development and agricultural extension, the sugar factories, the Ministries of Supply and of Public Works and Water Resources, and of farmers cooperatives in the sugar crop growing governorates. The main programs financed/supported by the Council, by subcontracting the work to relevant public sector agencies, include: research on varietal improvement, as well as on pest management and control, including the reduction in the use of pesticides; setting up of a laboratory for the control of parasites; soil surveys for fertilizer and micro-nutrient recommendations; support for extension and training program - 13 - for farmers; soil improvement programs, including the supply of gypsum, in the sugarcane growing areas; and support for the laser levelling programs for improving on farm water use efficiencies. The Council has also contributed towards the capital for establishing agricultural mechanization companies, in association with the private sector, which provide services to farmers at a cost. The Council also provides interest free loans to farmers for buying farm related equipment as well as for fertilizers. In addition, the Council has contracted with the Ministry of Supply to check the weighing balances at the factories, to ensure that they are properly calibrated. Finally, the Council plays an important role in making recommendations to the Government on the price to be paid to farmers by the mills for their cane and beet. 2.31 All activities (including the interest free loans to farmers) of the Council are wholly financed by revenues raised from the cane and beet farmers, who contribute at the rate of LE 1 per ton of sugar crop (cane or beet) produced and delivered to the mills. The average revenues of the Council during the past three years have been around LE 10 million. Total permanent staff of the Council are about 15, all based in Cairo; all other work is done and paid for on a contractual basis. The accounts of the Council are subject to audit by the Central Audit Organization. 2.32 The Sugar Crops Council has played an important role in the subsector and, as a representative of the sugar crops growers, fulfills an important function to protect their interests. Its activities have contributed towards stabilizing the sugar industry in Egypt, and in increasing on-farm yields and sugar recovery during processing. At the same time, the manner in which its activities are financed, is an important departure in a positive manner, from most other farmer support agencies in Egypt; through their contributions to the Council, farmers are contributing towards the cost of extension, research, as well as other key activities for supporting the subsector. However, the SCC has so far been largely using public sector agencies in implementing its programs; within the context of the underlying objectives of economic liberalization being pursued by Government, it should move more towards encouraging private sector initiatives. For example, the SCC should consider promoting private irrigation advisory services, as well as private sector technicians for carrying out some of the work necessary for supporting the sugar crops subsector. Management of the Sugar Milling Industry 2.33 The sugar milling industry is dominated by the Sugar and Integrated Industries Company (SIIC), which accounts for all the cane sugar produced, as well as for refining all imported raw sugar. It also has a controlling interest in the Delta Sugar Company (DSC) which produces beet sugar, and owns a paper pulp factory, two distilleries, an organic chemical plant, equipment factory, and a food, flavors and fragrance factory; a new plant is under construction for the desugarisation of molasses. There are plans for establishing subsidiaries or joint venture operations (with private sector participation) for a pulp and paper company in Edfu and a particle board factory in Komombo. The Board of the SIIC is headed by its Chairman and Chief Executive Officer, and includes 4 members from outside the company and 4 members representing the employees; it reports to the General Assembly of the Food Industries Holding Company. The book value of total assets of the company are estimated at over LE 2.0 billion, and it has an annual turnover of around LE 1.2 billion; total employees number around 20,000, of whom about 15 percent represent seasonal workers. The annual accounts of the company are audited by the Central Audit Organization. Detailed financial information on the overall operations of SIIC were not available for the purposes of preparing this report; however, information on the direct production and overhead costs at the factory level were made available for four of the factories, which provide the basis for the analysis done. 2.34 Within the context of the changes introduced to reform the public enterprise sector, SIIC operates as a public sector organization, albeit with increased commercial autonomy, under central Cairo- - 14 - based management, with each sugar factory and associated enterprise operating as a production unit. Each unit has technical autonomy and separate accountability as a cost center; the central company management in Cairo provides technical support to each operating division, and determines short and medium term plans and budgeting parameters in conjunction with the management of each of the units. Investment and financing decisions for amounts in excess of LE 50,000 are centralized, and the marketing functions are wholly the responsibility of the central office. Details regarding the financing arrangements for the SIIC are not available. However, while funds were earlier obtained from the National Investment Bank, most investments are now reported to be funded either from internally generated resources or from loans available on concessionary terms from the regional Arab funds. 2.35 Under the existing arrangements, each sugar factory is only responsible for the production aspects, with no direct involvement in marketing decisions, which are centralized in Cairo. While there is a system of cost control in each of the operating units within SIIC, there is no scope for determining the profitability of each unit, as revenues from sales are not accounted for at the level of the factories. Operating costs of the production units are aggregated and financial statements prepared for the group as a whole, and profitability is determined on an aggregate basis. 2.36 Beet sugar, accounting for less than 10 percent of total domestic production, is produced by the Delta Sugar Company (DSC), a joint stock company established under Law 230, whose majority shareholder is the SIIC (54 percent), and whose other shares are held by various public sector banks and other agencies (around 41 percent), a French multinational company (3 percent) and the International Finance Corporation (about 2 percent). Within the context of Law 230, the DSC operates as a technically and commercially autonomous company. 2.37 The key issue related to the sugar milling industry is that it has so far been operating within a protected environment, and at present virtually the entire milling industry is owned and managed by one public sector company; and within the SIIC there is a considerable degree of centralization in management. While significant policy changes have been introduced by the Government recently (see Chapter III), the principal issue of the present institutional arrangements is that, given the considerable degree of centralization in decision making which presently prevails within SIIC, it lacks sufficient commercial orientation and management accountability at the level of the production unit, i.e. the sugar mills. Furthermore, much of the investment in the processing industry at present is financed and owned by the SIIC; and with the major involvement of the Ministry of Supply in the market at present, output prices are significantly influenced by the Government (see para 2.30). Consequently, the sector benefits little from the efficiency gains which one would normally expect in a more competitive environment. The company has performed relatively well and has an experienced cadre of technical staff, who have been working with the company for many years. While this has supported ongoing operations at the existing level of technology and efficiency, the absence of other operators in the sector has inhibited the introduction of innovations. III. RECENT SUBSECTOR REFORMS AND KEY ISSUES 3.01 Prior to the implementation of the economic reform program, the sugar industry in effect operated as a mechanism for implementing Government policy for the sector. The Government controlled the overall production strategy for the sector and the required investment in production facilities. Till recently, all sugar mills were required to sell their entire output to the Ministry of Supply, which sold the sugar at subsidized prices throughout the country; in addition, the import of sugar used for direct consumption was also regulated by the Government, in order to retain its monopoly on distribution. - 15 - 3.02 The past policies of Government intervention in the sugar subsector were guided by various objectives, including the aim of maintaining a high degree of self sufficiency for strategic commodities, protecting small scale producers who dominate cane production to ensure rural employment, providing consumers with low priced sugar and shielding them from the fluctuations in world prices, and to provide for an expansion of employment in the milling sector. Within this context, market forces played a very limited role in the allocation of resources within the subsector, and between the subsector and the rest of the economy. Overall, the policies followed by the Government for the subsector have reflected very much its underlying strategy for the economy as a whole, which emphasized social welfare objectives through public sector led development. A. Recent Reforms 3.03 As part of its program to correct sectoral inefficiencies and to further enhance the market orientation in overall policy, the Government has initiated a program of reforms for the sugar subsector, and certain measures aimed at partial liberalization in sugar trading have been introduced since April 1993. The reforms implemented so far include: - the level of subsidy provided under the ration sugar system has been reduced. The price of rationed sugar was increased from LE 0.25 per kg to LE 0.50 per kg in April 1993, and the amount of rationed sugar made available was reduced from 1.50 kg to 1.00 kg per person per month; the annual fiscal savings generated as a result of this change are estimated at about LE 72.0 million; - rescinding of the ban on private sector marketing and handling of both locally produced and imported sugar. Other than the 577,000 tons of refined sugar needed for the ration system, which the sugar mills provided to the Ministry of Supply (MOS) in 1993, the remainder of the local production is now made available for sale on the local market through the private sector; - there are no quantitative restrictions on the amount and grades of sugar which the private sector can import; however, in view of the distorted world sugar markets and the levels of international protection afforded to sugar, the Government has raised the assessed tariff on imported sugar from 2 percent to 20 percent, in an effort to shield domestic sugar production. - as a result, the private sector was responsible for all sugar imports during 1993, which it was free to sell on the open market; of total imports, 400,000 tons were refined sugar (most of it 99.6 percent pol), and around 100,000 was raw sugar (96 percent pol), which the private sector had refined at the Hawamdia refinery (at a cost of US$40 per ton in 1993), and then sold on the free market; - the delta based beet sugar company (which in 1993 supplied about 60 percent of its total production to MOS, with the remainder going into the private sector distribution system) is able to export the byproducts (molasses and pulp), to earn foreign exchange; - retail pricing of non-rationed sugar, which was previously controlled by the MOS, has been freed; importers are now free to set their prices according to market forces. Furthermore, the Government has stated that no measures will be taken to expand the area presently planted to cane, and thereby to increase the volume of domestically produced cane sugar. - 16 - 3.04 Employment and Social Aspects. While the Government is committed to a program of further reforms of the sugar subsector, it does at the same time have concerns on account of the social and political implications of such reforms, particularly in areas where the sugar related activities are the major source of present employment and incomes. In implementing its reform program, the Government of Egypt is particularly concerned that economic progress proceeds within a framework of social equity and stability. With the high level of unemployment presently prevailing (estimated at around 15 percent) and the implications it has on maintaining social stability within the country, the main concern of the government is that reforms should not lead to an increase in unemployment. The cropping patterns in the command area of cane mills is dominated by cane; in parts up to 80 percent of the land is planted to cane. Furthermore, cane sugar production represents an important industrial activity in Upper Egypt, a region where broader investments in industry have not been significant in the past. As a result, agricultural life is oriented to a large degree towards the growing of cane, and closure of a cane mill would almost certainly imply a significant disruption of rural life in the affected areas. Ensuring social stability in the various parts of Upper Egypt is a matter of concern for the Government, since the sugarcane growing areas of Upper Egypt face a higher incidence of poverty and unemployment as compared with the rest of the country. In this context, the Government sees the role of the sugar industry, particularly in Upper Egypt, as a means also of ensuring the social stability of the region, particularly during an interim period when private sector investment is not yet forthcoming a, a scale necessary for diversifying economic activities in those parts of the country, and thereby providing alternative sources of employment. B. Key Subsectoral Issues 3.05 The Government has clearly taken important steps towards liberalizing the sugar subsector. Furthermore, as discussed in detail in the next chapter, the analysis for assessing the economic efficiency of resource use in the sugar subsector indicates that, while investment in new cane sugar factories is not economically desirable, the continued use of the existing cane and beet sugar factories is economically justified from an economic efficiency perspective, given that significant sunk costs exist within the industry. The main impediments towards more efficient resource use at present result from the distortions which remain in the product and factor markets, as well as the lack of a competitive environment within the sugar processing industry. Among the more important distortions presently impacting the sugar subsector are: the absence of a mechanism that would lead farmers to consider the value of the irrigation services and irrigation water (this distortion has wider implications for the economy, and goes beyond the sugar subsector); mechanism for cane pricing which does not take into account the sugar content of cane; the absence of full incentives for the sugar companies to minimize their costs; access of sugar companies to concessionary financing; and the sugar consumption rations provided through the Ministry of Supply. Consequently, the thrust of the Government's efforts at further deepening the program of reforms aimed at the sugar subsector needs to emphasize the implementation of a program of further liberalization, which moves the subsector towards market-determined prices in the product and factor markets, and better targeted subsidy programs for the poor; and taking steps which move the factories towards greater commercial orientation in the management of their respective operations, through a program of decentralization, with the objective of implementing a program of privatization. For the latter, it is clearly important that there is an enabling regulatory environment, which would facilitate increased private sector involvement within the sector. As indicated earlier, an important consideration underlying the Government's past policies towards the subsector, was the pursuit of higher levels of self sufficiency, in view of its concerns about the high volatility of world sugar prices and its consequent desire to partially manage domestic prices. Clearly, there is need for policy consensus on this issue, whilst articulating a program of further reforms. - 17 - Sugar Self Sufficiency 3.06 While there is broad consensus on the definition of food security as aiming to ensure adequate access to food both internally and externally generated, the domestic self sufficiency of sugar is desired by the Government largely in view of world market distortions and the volatility in world market prices, and given the high and rapidly increasing demand for sugar within the country during the 1970s and 1980s (see Table 2.4). On account of these issues, sugar is considered as a strategic commodity by the Governmnent, and there is a desire to achieve a measure of stabilization in producer and consumer prices. Significant investments related to both cane and beet processing have recently been completed, some are ongoing, and more are planned for the future, primarily with the objective of protecting the domestic producers and consumers from the uncertainties of the world sugar market, and with a view to reaching a high level of self sufficiency. The policy of pursuing public sector investments for achieving self sufficiency has also resulted in a situation where market forces play a minor role in the allocation of resources, and where the private sector is virtually absent in financing investments; resources for financing new investments come either from internally generated resources of the publicly owned sugar companies, or from publicly owned financial institutions or through funds available on concessionary terms from the regional Arab funds. 3.07 From an economic standpoint, the volatility of world sugar prices should not provide a guiding criteria for pursuing a policy of self sufficiency, as other instruments are available to hedge against this. As a measure of the effects on the Egyptian economy, even a doubling of world market prices to LE 2500 per ton would, for example, result in a net cost to the economy of only around LE 360 million, or 0.3 percent of GDP. Consequently, the aggregate risk of sugar price fluctuations to the Egyptian economy is limited and would not justify a policy of sugar self sufficiency, unless domestic production was competitive. From a purely economic perspective, investment in the sugar subsector should be guided by economic considerations; Egypt would have a comparative advantage in domestic production, when net benefits valued at their true economic prices can be expected to exceed costs also similarly valued. 3.08 It is important to recognize that gains arising as a result of intervention, in terms of reduced uncertainty, are not always clear cut. To protect against short term sugar price changes, price stabilization measures such as buffer stocks and import subsidies (or taxes at times of low world prices) are sometimes considered. However, price stabilization measures often carry a large cost and are rarely effective. Often they go hand-in-hand with measures of protection which increase the level of domestic prices and impose a cost on domestic consumers. Price stabilization is revenue neutral in the long run only if long term prices are correctly forecast. From the country's perspective, it is worth pursuing actions aimed at exploiting the use of resources which are subsidized by other countries. Use of Water Resources 3.09 As highlighted in the Agricultural Strategy for the 1990s, the limitations on water resources availability to Egypt provides a major challenge for the sector, and close attention is needed for their efficient management. Under the prevailing policy regime, farmers do not face the full costs (financial or economic) related to water use while making cropping decisions, which contribute to inefficiencies. From a purely economic perspective, these inefficiencies could be addressed by implementing a policy whereby the price mechanism is used for ensuring that the value of water and the related costs of delivering it to the fields is taken into account by farmers; this would ensure both the recovery from the users of the costs to the public exchequer for investing and operating and maintaining the irrigation and drainage system, as well as using the price mechanism as a means of managing demand for the limited water resources of the country. Presently, however, the Government is extremely reluctant to move in this direction, as political and social resistance runs high against any attempt by the Government to charge - 18 - for water. In preparing the agricultural strategy for the 1990s it was generally agreed that a two pronged approach needs to be pursued for improved water resources management in the agriculture sector: firstly, viable water saving technologies need to be encouraged; and secondly, cost recovery of the irrigation O&M costs of the irrigation network, leading eventually to price incentives for more efficient use of water also have to be introduced. The sugarcane crop is a major user of this valuable resource; and, estimates made while preparing the agricultural sector strategy indicate that it is associated with a relatively lower amount of total value-added per cubic meter of water used (LE 0.1) as compared with the other major crops (LE 0.4 for maize, LE 0.7 for beans, LE 0.8 for wheat). From a resource use efficiency perspective, the exclusion of the value of water while determining sugar crop prices contributes towards inefficiencies. 3.10 In analyzing the efficiency of sugar production in Egypt, the economic value of water used within the subsector has been taken into consideration. This includes two components. Firstly, the economic cost of operation and maintenance expenditures, including the cost of major replacements, which has been estimated at LE 17 per thousand cubic meters4 based on the findings of the recently completed Water Cost Recovery Study financed by USAID. Secondly, the opportunity cost of water, being the marginal benefits from water in its best alternative use, needs to be taken into account in order to assess resource use efficiency in the sugar sector. In the short run these would be cropping pattern changes elsewhere in the system; the analysis indicates a short run opportunity cost of LE 40 per thousand cubic meters. In the long term, the opportunity cost of water is reflected by the potential benefits from horizontal expansion: LE 166 and LE 91 per thousand cubic meters at 10 and 12 percent discount rates, respectively. However, limitations caused by inadequate data availability introduce some uncertainties on these estimates; the discussion in this report is therefore supplemented by sensitivity analysis. As a point estimate for the base case analysis, a long run opportunity cost of water of LE 100 per thousand cubic meters has been used in this report, being close to the lower bound for expected returns to water in land reclamation. Sensitivity analysis has been done to measure the impact of alternative values for the opportunity cost of water on the results and conclusions of the analysis. Sugar Crops and Sugar Pricing 3.11 The Government is presently involved in setting the cane and beet prices paid to farmers. In doing so, the principal consideration is that the price offered is competitive with the net benefits generated from the main alternative rotations available to cane farmers. In the case of beets, the comparison is done primarily with the returns from wheat, which is the principal competing crop in the Delta. Based on an analysis done jointly by the Sugar Crops Council, cooperatives and the sugar mills on per feddan returns, a price is recommended by the SCC. After further discussions between the Ministries of Agriculture and of Industry, and the SIIC, a final recommendation is made to the Pricing Policy Commnittee of the Cabinet. The Cabinet approves the final price which is to be offered to the farmners. Farmers are paid for cane on the basis of weight, regardless of sugar content. On the other hand, beet farmers are paid according to sugar content, and receive a bonus for early planting. 3.12 The present structure of financial prices for cane and beet, as compared to the respective economic costs of production at the farm level are shown in Table 3.1. Due to the absence of incorporating the value of water in financial costs, the financial price of cane is 20 percent below economic production costs, while that of beet is 6 percent below the economic cost of production. A comparative analysis of returns to different cropping patterns shows that, with the exception of Minya governorate, farmers receive some excess return to their land by growing cane. Consequently, farmers are willing to grow sufficient sugar crops to supply the factories close to capacity. While the Guirga factory is an exception (with a relatively lower level of capacity utilization), this is largely a start-up and 4/ All figures in the report are expressed in constant 1994 price terms unless otherwise noted. - 19 - management issue, rather than an issue of inadequate cane prices. Table 3.1: Farmgate Value 3.13 The price at which the sugar producers Cane Beet (SIIC and DSC) sell sugar to the Ministry of Supply (LE/ton) as well as the price at which SIIC sells sugar to the private sector is determined on the basis of Financial Price 72.5 81.0 production costs. During 1993, these were set at Economic Cost of Production 91 86 LE 1,205 per ton for the SIIC (including a tax of LE 55.6 per ton on sales to the private sector, and a tax of LE 43 per ton on sales to the Ministry of Supply); for the DSC, sales to the MOS were made at a price of LE 1,150 per ton. For 1994, prices at which sugar would be sold to the private sector are expected to go up by LE 100 per ton. Within the private sector, wholesale prices are around LE 1,365 per ton for 50 kg bags, and around LE 1,440 per ton for smaller packaged sugar. At the consumer level, retail prices for the latter range around LE 1,650 per ton. 3.14 Measures of Existing Protection. As reviewed earlier, the government has taken important steps in initiating a program of subsectoral reforms. However, several issues remain as potential barriers to efficient resource utilization in the sugar subsector, resulting in the estimates of protection afforded to the sugar subsector as summarized below. These distortions arise primarily as a result of the factors highlighted in para 3.05; in addition, the remaining energy subsidies have a relatively minor effect on the subsector, since bagasse is the major source of energy for cane sugar production; however, they provide disincentives for more efficient bagasse use as an energy source by the sugar factories. The net effect of the distortion of domestic incentives on sugar production is summarized by the Table 3.2: Present Level of Protection protection and subsidy coefficients shown in Table 3.2. The nominal protection coefficient Cane Beet (NPC) measures the level of subsidy, based on Sugar Sugar a comparison of financial price paid to sugar companies and import parity price of sugar. Nominal Protection Coefficient 1.15 1.10 Effective Protection Coefficient 1.31 1.17 The effective protection coefficient (EPC) takes Effective Subsidy Coefficient 1.57 1.20 into account the distortions in the prices of outputs as well as in traded inputs (financial value added as a ratio of economic value added). Finally, the effective subsidy coefficient takes into account all price distortions, including those for domestic resources (the most important among these are those related to irrigation water). 3.15 Trade and Domestic Marketing. Currently, domestic sugar production is protected by a 20 percent import tariff (plus a 2 percent import fee), which is levied on the c&f price of landed sugar. The import tariff protects domestic producers but increases the cost of sugar to domestic consumers and reduces the incentives for cost savings in the domestic sugar industry. The recently concluded Uruguay round of the GATT effectively sets the prevailing import tariff of 20 percent as a ceiling for the tariff in the future. It is the government's intention to stabilize domestic prices by varying the import tariff within the band of 0 and 20 percent. In view of recent increases in the world market sugar price, a reduction of the tariff is currently under consideration; in addition, a differentiation in the tariff rates between those for raw and refined sugar imports (with a lower rate for the former) is also being considered. If the import tariff on raw sugar imports were to be eliminated, it would increase the c&f price gap between imported refined and raw sugar from the current US$40 per ton to about US$85 per ton. The principal danger of differential tariffs would be that it could encourage additional investment in refining; this should only be undertaken if it is justified by an economic cost-benefit analysis. At the - 20 - same time, pursuing a policy of smoothing out the changes in the international price through changes in the import tariff is not desirable as it militates against the proper functioning of the market. 3.16 The program of liberalization introduced by the Government in 1993 has clearly encouraged a wider involvement of the private sector in the import and retailing of sugar on the domestic market. Overall however, the domestic sugar market for direct consumption is dominated by the intervention of the Ministry of Supply in implementing the ration system for sugar, as well as by retaining the power to acquire sugar produced locally by both the cane and beet mills at a controlled price. Projected Demand for Sugar 3.17 Future consumption and demand for sugar in Egypt will be influenced by population and income growth, and by the continuation of policy reforms to decontrol prices, marketing and trade. With the considerable reduction in sugar subsidies, and the manner in which the ration system operates with virtually all Egyptians eligible to participate, the sugar rations serve as an income transfer from government revenues to the consumers, and are considered as being mostly inframarginal while analyzing present and future demand for sugar. The projected removal in subsidies can be expected to result in some reduction in sugar consumption. Income growth during the 1970s helped boost sugar demand, but as in other countries in the region, there has been a decline in per capita consumption in recent years. With the removal of subsidies on imported sugar, the projected expectations on world sugar prices and domestic real incomes, the introduction of a 20 percent tariff on sugar imports, and the freeing of sugar prices, a further decline in per capita consumption is expected. 3.18 However, the effects of higher prices will be limited by the estimated inelastic consumer response to price increases, since there are few substitutes for sugar (price elasticity of demand estimated at -0.1 in the short run and -0.3 in the long run); the income elasticity of demand for sugar for direct consumption is estimated to be around 0.3. In addition, future consumption could also be influenced by the ongoing public education campaign aimed at reducing per capita sugar consumption, which the government has embarked upon in view of health concerns surrounding high sugar consumption. Overall, during the medium term, per capita consumption is expected to decline slightly to about 24 kg by the year 2000. Total sugar demand will consequently depend primarily on the growth of population and of real per capita incomes, and is estimated to reach about 1.6 million tons by the year 2000. Based on the available sugar production capacity of around 1.0 million tons, and present plans to enlarge capacity by around 280,000 tons, Egypt is expected to remain a sugar importing country in the foreseeable future; however, the level of self sufficiency would increase to around 80 percent. IV. EFFICIENCY MEASURES OF SUGAR PRODUCTION 4.01 While recognizing the political economy surrounding sugar, both domestically and on the international market, the decisions to produce sugar within Egypt and undertake new investments in the subsector need to be guided by economic considerations to ensure efficiency in resource use. This chapter summarizes the results of analytical work done, with a view to providing policy makers with key guiding criteria which need to be considered, from an economic standpoint, for evaluating proposals for the future development of the sugar subsector. The economic value of domestic sugar production by Egypt is equivalent to the resources saved by not importing sugar. Consequently, the analysis is done on the basis of comparing the economic costs of domestic production with the economic costs of importing sugar. The analysis is based on the estimated costs of sugar production in Egypt at present, and takes into account the value of the main byproducts. Key aspects and issues underlying the analysis are discussed first, prior to summarizing the results of the analysis. - 21 - A. World Sugar Market and Prices 4.02 Historically, the world sugar market has been characterized by market distortions and trade restrictions in many countries. In several countries, including USA and the European Union, domestic production has been protected by producer support prices significantly higher than world market prices. Since the free market is a residual market (with only about 20 percent of global sugar production being traded) isolated from most domestic markets, small changes in production or consumption can induce large price changes, and historically the sugar price has been one of the more volatile commodity prices (see Figure 1).Since the Government of Egypt has not entered into long term agreements with the major sugar producers, it has been subject to the vagaries arising from the price fluctuations; this has been the reason for the government's policy to pursue higher levels of domestically generated self sufficiency. Consequently, the Government has not taken world market prices fully into account in assessing the financial and economic viability of proposed investments in the sugar subsector. 4.03 The Government has World Market Sugar Price reservations on the use of the sn import cost, based on the free 3,500 world market price of sugar, as a 3,000 benchmark for assessing the efficiency of domestic production, 2,500 in view of the distorted world sugar market. However, from an 2,000 economic perspective, the production of sugar by Egypt 1,500 using domestic resources is only desirable if it can be done more 1,000 cheaply than the cost of imports. 500- In this context, it is important to review and keep in perspective 0L the historical volatility of world 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 Year market sugar prices. As can be Raw Sugar ISA fob Caribbean (constant 1994-4) seen from Figure 1, since 1957, After 1993: World Bank forecast with 70% probability band. the sugar price was out of line with current levels only during FigUre 1 three short periods of extremely high prices, and two periods of low prices. - From a resource use efficiency perspective, expansion of the sugar sector through additional investments should be subjected to detailed cost-benefit analysis and be considered only if it is profitable at expected import parity sugar prices which, in economic terms, represent the opportunity cost of sugar for the country. The analysis in this report is based on present (US$225 per ton) and projected world market sugar prices (US$259 per ton for the year 2000, expressed in 1994 constant price terms), on the basis of which the import parity price of refined sugar of the quality produced in Egypt has been estimated. In carrying out the analysis, processing byproducts (molasses and beet pulp) have been valued at export prices, while bagasse has been valued implicitly at its fuel equivalent; the value of on-farm byproducts (cane tops) has also been taken into account, using prevailing local prices for tops sold as fodder. - 22 - GATT Impact on World Su,ear Prices 4.04 Under the General Agreement on Tariffs and Trade (GATT), agreement has been finally reached on completion of the Uruguay Round talks. While the agreement on agriculture falls short of the liberalization in trade which had been hoped for, it does nevertheless provide the setting for further adjustments in the future. The agreement will require most member countries to make specific policy changes in domestic price supports, market access and export subsidies. The phase-in period for the changes varies, with industrial countries required to make the policy changes over six years, and the developing countries required to implement the changes over ten years. The "least developed" countries are effectively exempted from subsidy and tariff reductions. The key features of the agreement include: - reduction in support payments by 20 percent from the average levels of 1986-90; - all non-tariff barriers to imports of agricultural products to be "tariffied", and these tariffs to be cut by an average of 36 percent in industrial countries and 24 percent in developing countries, with a minimum of 15 percent cut for each specific commodity; - countries must allow trade access to 3 percent of the 1986-90 average domestic consumption in the first year of the agreement, which is to be increased to 5 percent; - export subsidies must be reduced by 36 percent in total outlays for export subsidies and 21 percent in the volume of commodities eligible for subsidies from the 1986-90 average levels; as an option, the decline can be calculated from the 1991-92 average of subsidized exports. 4.05 Sugar remains one of the world's most protected commodities. While the impact of the GATT agreement on sugar world trade is likely to be less than in the case of the other commodities, in the longer term it would contribute to reducing the extent of world market price volatility, which has characterized sugar trade in the past; price peaks can be expected to be lower, and price levels during the troughs higher. The relatively lower impact of the agreement on world sugar trade is due to the fact that measures taken in both USA and the European Union in the past with regard to agriculture commodities have already met the GATT requirements. In addition, sugar prices are expected to move upwards, albeit by a relatively small degree as a result of the agreement. Overall, as compared with 1993 price levels, it is expected that world market sugar prices in real terms are projected to be 16 percent higher in the year 2000 and 35 percent higher in 2005. 4.06 While recognizing the concerns of the Government regarding possible dumping, it is important to note that the recent GATT agreement provides for recourse against such actions. Egypt presently does not apply anti-dumping or countervailing duties on imports although provisions exist under Article 8 of the Customs Law and Articles 94 and 95 of the new Import/Export Regulations issued in May 1991. Under the GATT agreement, improved regulations (relating to, among others, dumping margin calculations, injury determination definition of domestic industry, investigation procedures and standard of evidence) have been provided for to act against dumping. These regulations would allow for actions to be taken when countries reduce prices of goods and offer direct or indirect subsidies or apply other means which would adversely impact on domestic production in importing countries. - 23 - B. Measures of Competitiveness and Investment Efficiency Cost of Capital 4.07 Egypt has made significant investments in establishing the cane milling industry; the costs related to these investments constitute a significant share of the total production costs of sugar. However,a large share of these investment costs is sunk and could not be recovered if Egypt were to discontinue producing sugar. Consequently, the opportunity cost of capital of producing sugar at the current output level consists only of the salvage value of the existing factories and the cost of future capital investments required to maintain their levels of operation. However, the cost of capital for expanding the overall capacity of the sector by investing in new factories to produce sugar would be the full cost of capital of establishing new factories. 4.08 From the perspective of assessing efficiency of resource use, the options available to the country are to expand sugar production, using either beet or cane, as well as to maintain the existing cane and beet sugar mills at their present levels of production. For the purposes of analysis, the investment options available for the economy, with their respective costs of capital, are set out below. The cost of capital per ton of sugar for the different options is based on the estimated initial investment and necessary replacement over fifty years, annualized at a discount rate of 10 percent. - Expansion in sugar production capacity, through the establishment of new cane or beet sugar mills; the cost of capital of a new factory are estimated at LE 370 per ton of cane sugar and LE 444 per ton of beet sugar; - Undertaking investments/expenditures for maintaining operations at current levels of production and efficiency at the existing mills, which have recently been established/rehabilitated; for this scenario, the cost of capital of cane sugar is estimated at LE 155 per ton and for beet sugar at LE 164 per ton; - Undertaking major investments for the purposes of rehabilitating the cane sugar mills (which included some expansion in production capacity), as has been done in the case of Nag Hammadi and is ongoing at Armant, which carry a cost of capital of LE 213 per ton. Complete data on the historic investment costs in the sugar industry in Egypt are not available. Consequently, the costs of capital for the above scenarios are based on estimates prepared for this study, using available information relating to recent sugar mill investments in the country. Domestic Resource Costs 4.09 The analysis of the competitiveness of sugar production from sugarcane and sugar beet is based on the comparison of economic production costs in Egypt with the import parity price. Taking into account the full cost of capital, the economic costs of producing cane sugar are estimated at LE 1,412 per ton, while for beet sugar they are estimated at LE 1,209 per ton; these compare with an estimated import parity price of LE 1,088 per ton. Figure 2 presents the financial and economic costs of producing sugar in Egypt from both cane and beet, and compares these with the cost of imports. Table 4.1 below summarizes the key measures of competitiveness under a situation where the full costs of capital are taken into account. The domestic resource cost (DRC) is a measure of comparative advantage defined as the ratio of domestic resources used in production and the economic value added; a DRC below one indicates comparative advantage in domestic production. It is clear from the results that at the present levels of technology, and given present prevailing world market prices, the production of sugar from beet is - 24 - marginally uncompetitive (DRC of 1.13), while that from sugarcane is Financial and Economic Costs of Sugar uncompetitive (DRC Domestically Produced and Imported (wholesale level) of 1.45). 1,800 4.10 However, 1,400 1,412 r e c o g n i z i n g t h a t 1,249 11310 competitiveness is a 1.2W1oo41,0 dynamic concept, and 108 that there is potential to 1 - | change the technological parameters within which .. sugar is produced in D_ Egypt, DRCs have been estimated for possible 400 scenarios for the future, particularly with regard 20 to sugar crop yields and wol marketo pcanes.gar, a Cane (Fin) Beet (Fin) Import (Fin) Cane (Econ) Beet (Econ) Import (Econ) the case of cane sugar, a Co atr mot Tn DRC of 1.18 is estimated Crop [ Factry Import E Tarif using projected prices in Figure 2 the year 2000, and of 1.06 with higher productivity. In the case of beet, the analysis results in a DRC of 0.96 when the projected higher prices are used, and of 0.83 if Table 4.1: Measures of Comparative Advantage the projected higher yield potential were to be Cane Sugar Beet Sugar realized. Recognizing 1994 Projected 1994 Projected the uncertainties Price 2000 Price 2000 surrounding future price Import Parity Price (LE/Ton) 1,088 1,202 1,088 1,202 for sugar, Vatue Added 719 833 966 1,080 projections for sugar, Domestic Resource Cost (DRC) 1.45 1.18 1.13 0.96 further sensitivity DRC - With Incr. Productivity 1.15 1.06 0.93 0.83 analysis carried out (Assumed Crop YieLd - tons/fed) (42) (26) shows that using the base case import parity price for sugar (1994), the switching value for sugar beet yield (at which the DRC would equal 1.0) is around 22 ton per feddan. As indicated earlier in the report, farmers are already obtaining yields in excess of this, and furthermore, experimental plots indicate potential yields of 35 tons per feddan. Finally, the analysis shows that even with the most extreme (and unrealistic) assumption that the opportunity cost of water were zero, the DRC for cane sugar would still be in excess of 1.00; in the case of beet, since its water consumption does not significantly exceed that of the average cropping pattern, its DRC is not sensitive to the assumed opportunity cost of water. - The results suggest that Egypt has a comparative advantage in the production of beet sugar, given that there is considerable potential to increase sugar beet yields; however, it is also clear that additional new investments in cane sugar production are not economically desirable from the resource use efficiency perspective. - 25 - The results are in line with the prevailing Government policy to promote new investments for beet sugar production; no new investments for setting up cane sugar mills are presently proposed. Analysis of Possible Investment Options 4.11 A broad analysis of the investment options presented in para 4.08 has also been done, using the same basic data that were calculated for estimating the DRCs. In carrying out the analysis, projected world market prices for sugar have been used; and, recognizing that considerable sunk costs exist in the sugar industry, the costs of capital indicated in para 4.08 for the different options have been used. The results of the analysis for the six possible options available to the country are presented in Table 4.2 below. As can be seen from the results, if the cost of capital sunk in the extensive industrial infrastructure is excluded Table 4.2: Returns for Potential Investments from production costs, sugar production is economic from Cost of Total Net cane as well as beet. Capitat Costs a/ Benefits Benefits (LE/ton) - Therefore, the Cane Sugar Investments c o n t i n u e d New Factory 370 1,345 1,213 (133) u o Ongoing Factory 155 1,130 1,213 83 utlization of Major Rehabititation 213 1,188 1,213 25 existing production Beet Sugar investments fclte o ua New Factory 444 1,209 1,213 4 facilities for sugar Ongoing Factory 164 929 1,213 284 from beet and cane a/ Based on production costs of cane sugar of LE 975 per ton, can be justified and of beet sugar of LE 765 per ton. from an economic efficiency perspective. Furthermore, the analysis indicates that investments for the rehabilitation of existing facilities and for new beet factories would be desirable, while those for establishing new cane sugar factories would be economically undesirable (similar to the conclusions of the DRC analysis). 4.12 Figures 3 and 4 Desirability of Investment and Operation (Cane) illustrate the sensitivity of the Invest irent Costs (LE/t) above results to alternative 5 tm assumptions regarding - - - nvstmntoporattoi investment costs and sugar ni.si l import parity prices, for the 40 various investment and options __ Imort Pary Pric 11LE operation options related to 4 Eqauezod Foreat 12 3E cane and beet sugar, , ForeCa for20O I E cane ~~~~~~~~~~~~~~~~~~~~~~~~~~~~(70% ProbaMlWty: 818-17151-E) respectively. The diagonal lines in these figures 200 represent the various points at which costs equal benefits, 1oo nI t/o,eration thereby separating the desirable from the ~~~~~~~~~desirable d e s i r a b I e from the I I I undesirable investment and 600 700 800 900 1W0o 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 operation scenarios. As Benefits: Sugar Import Parity Price (LE/t) shown in Figure 3, at the Costs=Benefits New Cane Mill Existing Cane Mill Rehabilitation projected import parity price -------.- -. -. -. .. for sugar for the year 2000 of Figure 3 LE 1,202 per ton, new - 26 - investments for either a major rehabilitation of an existing cane sugar factory or for enlarging its present production capacity, is undesirable if the cost of capital is in excess of LE 238 per ton of sugar produced. In the case of beet (Figure 4), the cut off cost of capital is estimated at LE 448 per ton of sugar produced. 4.13 The results of the above analysis, which indicate that under current economic conditions the cane sugar factories could continue to be economically operated in the future, provide a broad framework for guiding policy decisions for the future. However, it is important that any plans for major plant rehabilitation, including investments for the expansion of existing capacity, be subjected to a detailed economic cost benefit analysis. 4.14 It is important to note however, that the issue of efficient use of economic resources and that of public or private ownership of assets involved in production activities need to be considered separately. While the results of analysis presented in this chapter indicate that it is economically justified for Egypt to continue operating the existing cane sugar factories and to invest in new beet sugar factories, it does not at same time imply that the Government should continue to be involved in commercial sugar production. Actions regarding the latter should be guided by the Government's stated policy of implementing a program of divesting itself of involvement in direct commercial production activities within the context of the underlying strategy to promote private sector led growth. C. Welfare Implications of Present Policy Regime 4.15 As a result of the present policy regime and government interventions in the sugar subsector, welfare losses as well as transfers occur between the government, producers and consumers. These are summarized in Table 4.3. Taking into account the full cost of capital, the economic costs of domestic production presently exceed the import parity price for all factories. Recognizing that there is significant capital sunk in the sugar processing infrastructure, some of the welfare losses and transfers could not be reversed even if all sector distortions were to be removed. 4.16 The net total costs of interventions in the sector to the government are estimated at LE 492 million. Of this cost, the largest share is the subsidized consumer ration through the MOS, which transfers LE 417 million to consumers and LE 89 million to producers (who are paid more than the economic price for the output). The costs of the irrigation system for the incremental water used in the sugar subsector (water use above that of alternative crops) and other farm input subsidies amount to LE 35 million. The sugar factories' access to concessionary borrowing and subsidized fuel imposes an estimated cost of LE 62 million on the government. Set off against these transfers, are revenues to the Government of LE 111 million, generated by the sugar import tariff. 4.17 Sugar farmers receive net transfers of LE 37 million, consisting of LE 177 million transferred to farmers through input prices (LE 35 million input subsidies, primarily irrigation services, and LE 142 million opportunity cost of incremental irrigation water used for sugar crops), and a negative transfer of LE 140 through output pricing. Sugar factories receive net transfers of LE 52 million. 4.18 Consumers receive net benefits of LE 204 million from the sugar sector. The transfer of LE 417 million through MOS consumer subsidies is offset by pricing of non-rationed sugar above the import parity price (LE 111 million of tariffs to the government, LE 67 million to sugar producers, and LE 27 million to traders). Also, sugar pricing above import parity causes a welfare loss to consumers of LE 7 million (foregone consumer surplus). Currently traders of domestically produced sugar enjoy a transfer of LE 27 million (windfall profits resulting from tariff protection above the level of domestic factory sales prices). The potential alternative users of incremental irrigation water used in sugar cultivation are foregoing LE 142 million. The welfare loss due to domestic production costs above import parity prices - 27 - amounts to LE 306 million. Taken together with LE 7 million foregone consumer surplus, the efficiency cost of all interventions in the sector amount to LE 313 million. Table 4.3 Summary of Transfers and Losses Cane Sugar Beet Sumar Inorts Total LE/t NLE LE/t NLE LE/t NLE MLE Total Goverrnent -984 -546 -889 -57 222 111 -492 Total MoS -884 -455 -829 -51 -507 To Consumers -723 -372 -723 -45 -417 To Producers -161 -83 -106 -7 -89 Farm Inputs (Irrigation System) -37 -34 -12 -1 -35 Factory Subsidies (Finance, Fuel) -63 -57 -48 -5 -62 Tariff Revenues 222 111 111 Total Producers 90 82 76 7 89 Total Farmers 40 36 5 0 37 Farm Inputs (Irrigation System) 37 34 12 1 35 Opportunity Cost of Water 153 139 31 3 142 Diff Pricing-Welfare Loss -150 -137 -38 -4 -140 Total Factories 50 45 71 7 52 Factory Subsidies (Finance, Fuel) 63 57 48 5 62 Diff Pricing-Welfare Loss -13 -12 23 2 -9 Total Consumers 502 285 502 37 -222 111 204 To Producers -161 -63 -106 -4 -67 To Traders -60 -24 -115 -4 -28 To Goverrvnent (Tariff) -222 -111 -1f1 From MoS 723 372 723 45 417 Foregone Consumer Surplus -7 Potential Alternative Water Users -153 -139 -31 -3 -142 Traders 60 24 115 4 0 0 28 Total Welfare Losses 324 295 121 12 313 Production Losses 324 295 121 12 306 Foregone Consumer Surplus 7 Grand Total: Transfers and Losses 0 0 0 NS: Nurbers may not add due to roundings. 4.19 The model prepared of total transfer and welfare effects can be used to analyze the effects of various policy changes; three scenarios have been simulated. The first scenario is based on the complete removal of MOS consumer subsidies. This would lead to reduced government expenditures of LE 507 million. Under the prevailing pricing structure, consumers would lose transfers of LE 545 million, with the balance of LE 38 million being transferred to traders. At the individual level, the removal of sugar subsidies would eliminate an income transfer of approximately LE 12 per capita per year; this income loss, when measured against an income per capita at the poverty line estimated at about LE 500 per year, would reduce per capita income at the poverty line by about 2.4 percent. As indicated earlier, the present subsidies are untargeted, and do not present an effective mechanism for addressing social policy. Current data on income distribution and the number of individuals/households lying below the poverty line are not available. However, if the sugar subsidy were to be removed and the savings of LE 507 million were to be targeted at individuals below the poverty line, incomes of over 2 niillion individuals could be increased from LE 250 per year to the poverty line of LE 500 per year. 4.20 A second scenario is analyzed in which all input market distortions are removed (farmers pay for the services of the irrigation system and face the opportunity cost of water; and crop and sugar prices - 28 - reflect economic costs). In Desirability of Investment and Operation (Beet) this scenario, sugar import Investment Costs (LElt) tariffs would have to be _- raised to 32 percent in order to grant sufficient protection for domestic producers to 400 investmen toperatior compete with imports. The undesirable net effect of this scenario is 30 - ImportParty Price 1994 IO8LE an increase of government Forecaqt for 2W0 1202LE revenues by LE 54 million, (70% PrOtabit8181715LE) loss of transfers to farmers 200 - - - - ________ (LE 37 million and factories........... ... . . .... ... ........... ......... ............ . . . . . (LE 37 million) and factories (LE 52 million). Consumers ioo investme t/operation would lose LE 94 million due to the increased sugar price. ~ eIraIlI Finally traders would lose LE 600 700 800 900 1000 1100 1200 1300 1400 1500 16Do 1700 1cO 1900 2000 21 million, and gains to the Benefits: Sugar Import Parity Price (LE/t) owner of water rights (which Costs=Benefits New Beet Factory Existing Beet Factory Addition of a Beet Line could be the sugar farmer - . ..... themselves) would be LE 142 Figure 4 million. Note that there is no reduction in efficiency losses in this scenario since domestic sugar production is not reduced in this scenario. The foregone consumer surplus rises by LE 7 million due to increased domestic prices. 4.21 At the present world market price, the import tariff of 22 percent exceeds the level of protection necessary for domestic sugar production to be financially competitive. As a result, there are windfall profits for the private traders who purchase the domestically produced sugar at the regulated price and sell it at the import-determined market price. The third scenario simulates a reduction of import tariffs from 22 to 16 percent. This is the level of protection required for domestic cane sugar production to be financially competitive under prevailing international prices, and would result in the reduction of welfare losses and the excess profits presently accruing to traders. This tariff reduction would lead to LE 28 million less in government revenues, gains to consumers of LE 57 million, and a LE 26 million reduction of traders' excess profits. V. POLICY ISSUES AND A PROGRAM FOR FURTHER REFORMS 5.01 Following the review of the sugar subsector in Egypt, this chapter outlines a program of measures aimed at further liberalizing the subsector. In outlining this agenda, there is the underlying recognition that the next generation of economic and policy changes, following the liberalization programs already implemented, will be critical for defining the sustainability of the fundamental changes already brought about by the government. After decades of reliance on public sector enterprises to provide growth and employment, the Egyptian economy had become dominated by such publicly owned enterprises, which, prior to the implementation of the reform program, had been operating under a protected economic environment. During the past few years, the government has indeed taken important steps aimed at changing the underlying bias of historical policies of public sector led growth towards one where the engine for economic growth would come from the private sector. It is important that these policy reforms are further deepened, particularly with a view to ensuring that public enterprises are not seen to be operating in a manner which create adverse incentives for increased private sector investment, - 29 - on which the government is placing much emphasis as a vehicle for realizing growth and creating employment. While recognizing the significant political challenges which the government faces, the resolve to persevere on the path to change is critical for ensuring that growth at a scale necessary for tackling the underlying problems of the people of the country does indeed materialize. 5.02 Despite the progress achieved in adjustment and redressing the domestic and external macro- economic imbalance, unemployment in Egypt remains a major problem for the economy; consequently, medium term economic prospects are fragile, critically depending upon, among others, domestic economic performance. The Government's short term development agenda derives from the immediate need to accelerate growth and reduce unemployment; in the medium term, the emphasis is on the need to further develop human resources and reduce poverty, and most importantly, to ensure that development programs are environmentally sustainable, given Egypt's very limited natural resource base. Broad themes for Sugar Subsector Development 5.03 The sugar subsector of the country, while relatively small in terms of its contribution to overall value added, is nevertheless important and provides a vehicle for the government to reiterate and demonstrate its resolve to bring about the needed change. While the agricultural element of the sugar subsector is wholly private sector owned and managed, sugar processing is dominated by the public sector which faces little competition either from within or from outside, to initiate the sort of changes which are needed to fundamentally alter the manner in which industry operates in Egypt. Furthermore, some distortions remain, which militate against the more active involvement of the private sector within the sugar industry of Egypt. The key themes underlying the program for further reforms articulated in this report include the following: - the need to implement measures aimed at promoting the more efficient use of resources presently being used in the sugar subsector; this requires a program of further liberalization under which the remaining distortions in the product and factor markets are removed, and there is emphasis on the use of the free market in guiding activities within the sugar subsector; - the need to create an institutional climate and an enabling regulatory environment that is more supportive of private sector involvement in the subsector; and the implementation of a privatization program aimed at diluting direct public sector involvement in commercial sugar production, with all new investment related to sugar production coming from the private sector; - measures to strengthen the environmental sustainability of programs related to the sugar subsector. 5.04 In line with its commitment to liberalize the sugar subsector, the Government has already implemented important measures which have significantly changed the policy environment within which the subsector is presently operating. The sugar subsector used to be characterized by pervasive government controls and distortions of economic incentives. Many of these distortions have been removed, on account of actions taken under the wider economic reform program for the sector, and the more specific sugar sector related reforms implemented during 1993. With minor exceptions, purchased farm inputs are no longer subsidized; and private sector participation is now allowed for import, distribution, and retail of sugar. The retail price of sugar is now determined by market forces. The principal distortions remaining in the sugar subsector include: a sugar processing subsector which is largely owned by one public sector company, and is consequently not subjected to any domestic competition; absence of a mechanism that would lead farmers to consider the full value of the irrigation - 30 - services and water (this is an issue which has resource use implications beyond the sugar subsector); weight based cane pricing, which does not take into account the sugar content of cane; a pricing mechanism for sugar at the factory level that reduces the incentives for the sugar companies to minimize costs; the protection of domestic production through import tariffs; and the sugar consumption rations provided by the Ministry of Supply. Other distortions with minor effects on the subsector include energy provided below economic costs, and the availability of concessionary loan funds for financing investments in the public sector owned processing industry. These remaining distortions have implications in terms of resource use efficiency and resource transfers, as has been highlighted in this report. Regulatory/Policy Environment 5.05 Despite the liberalization of sugar trade and distribution, the institutional environment of the sugar subsector is, at this stage, not fully supportive of private sector involvement, and uncertainties on the sustainability of policy changes in this regard remain; the existence of a non-discriminating and conducive regulatory environment is a precondition for attracting private sector capital into the subsector. The government is committed to removing the subsidies provided through the sugar rations system by the end of 1995. While the plans for 1994 regarding the extent of MOS involvement in the sugar market have not yet been finalized, there were indications, albeit not yet confirmed, that the MOS may be considering acquiring a larger share of total domestic production, and getting directly involved in sugar retailing at non-ration prices. If actually implemented, such a move would clearly have a negative impact on the emerging private sector involvement in the sugar trade, and lead to uncertainty within the private sector regarding the program of liberalization. Such uncertainties and ad-hoc interventions would constitute a significant barrier to private investment in sugar processing facilities. Equally, changes in international prices should not be smoothed out through the adjustment of import tariffs. Private sector involvement in the sugar subsector requires a stable and predictable institutional and policy environment. It is important for the government to consider its options and commit itself to a long term policy regime with respect to trade and domestic marketing and pricing, with the emphasis being on increased liberalization and the removal of subsidies, and the establishment of an enabling regulatory environment. Discretionary interventions need to be avoided, as they contribute to uncertainties and adversely impact on private sector initiatives. 5.06 An important element of the Government's economic reform program is the promotion of the private sector, which is expected to provide the engine for future economic growth and result in increased incomes and employment. At the same time the government is committed to a program of public enterprise reform, which through a program of privatization, is expected to dilute the extent of public sector involvement in commercially oriented production activities. However, in the sugar subsector, all new investments in milling infrastructure, both in the context of establishing new factories and in enlarging the existing milling capacity are presently being undertaken within the public sector. Clearly, such an approach is contrary to the underlying emphasis of the Government's reform program to divest itself of revenue earning public sector owned commercial enterprises. Within this framework, the policy for new investments and the management of the existing industrial infrastructure should embody the following two critical principles: - New investments in the sugar milling industry should be carried out by the private sector, and not add to the existing stock of public sector owned capital; and - Measures should be taken to introduce greater competition within the publicly owned sugar milling industry, with the principal objectives of encouraging greater efficiency in resource use and for facilitating the implementation of a privatization program. - 31 - Pricing of Sugar Crops and Sugar 5.07 Clearly, a program for further liberalizing the sugar subsector needs to incorporate measures aimed at price liberalization. The involvement of the Government in setting prices militates against the efficient operations of the market. Consequently: - it is desirable that government involvement in the pricing of cane should be discontinued, and a system adopted whereby prices are set by the market, based on negotiations between millers and farmers on the one hand, and the operations of a free market in the case of the final product; and - the existing arrangements whereby a uniform price for cane is set for all mills, and which is not based on sugar content, distorts the incentives for both growers and millers to maximize the efficiency of the industry as a whole. As long as sugar crop prices are still regulated, the introduction of sugar content based and regionally differentiated cane prices should be adopted. The existing system has the potential for creating adverse incentives; for example, more than optimum levels of irrigation would contribute to increased cane tonnage, without a corresponding increase in sugar content. 5.08 The selling price of sugar produced by the milling industry is presently determined on the basis of production costs. Such a pricing mechanism allows for the recovery of high production costs, and reduces the incentives for more efficient resource use within the companies. Based on the assessment of operation parameters, the day-to-day operations of the factories appear to be cost effective. However, there is need to better analyze and justify the capital investments being undertaken, particularly with a view to ensure that premature plant rehabilitations, which would divert resources from other more productive uses elsewhere in the economy, are not carried out. Since SIIC has access to concessionary sources of investment funds, incentives exist for higher than necessary levels of investments. The system of pricing sugar on a cost-plus basis should be discontinued, in order to increase the incentives for cost savings in the sugar companies; the present pricing mechanism allows for the recovery of high production costs and reduces the incentives for efficient resource use within the sugar companies. Furthermnore, and in line with its commitment, the Government should terminate its program to provide untargeted subsidies through sugar rations. 5.09 The exclusion of the value of water in determining crop choices by farmers contributes towards resource use inefficiencies in the sector. As indicated in the Agricultural Strategy for the 1 990s, the introduction of water saving irrigation technologies and a system of demand management of the country's water resources, using price incentives, is the optimum approach for ensuring a more efficient use of water in the agricultural sector. This would require the introduction of water charges. However, the Government is reluctant to levy such charges at present, on account of social and political considerations. In this context, it is important to note that once sugar crop prices are deregulated and private investment in sugar factories becomes possible, the absence of using the price mechanism for water resources' demand management could give rise to a situation in which private investment leads to an undesirable expansion of the sugar cane area. Clearly, the preferred policy approach for addressing this issue from an economic perspective would be the introductiort of water charges at the sectoral level, and not address the issue from the perspective of the sugar subsector alone. However, since the Government has indicated its reluctance to introduce such charges, second-best alternatives which could be considered for taking into account the value of water, would be a tax on land grown with cane or a tax on cane itself. It is important to note that since neither of these taxes are based on the volume of water actually used, they do not contribute to improved on-farm water management. However, in a liberalized environrment, such taxes could become necessary to avoid incentives for private investment in sugarcane expansion. Of the two alternatives, a tax on output cane would be the preferred second-best - 32 - alternative, since a tax on land would contribute towards a substitution effect increasing the consumption of water relative to land. Based on the analysis done, the tax on cane for incremental water usage (as compared to the other crops) would need to be about LE 19 per ton of cane. However, at current prices, this tax would make cane growing unprofitable in most governorates. Consequently, it would need to be phased in over several years in line with expected world market price increases. Another alternative which could be considered in the absence of water charges would be a system of reduced protection of sugar through lower import tariffs. Management of the Milling Industry 5.10 Complete government ownership of the milling industry, combined with centralized decision making, results in limited competition in the market for milling capital, contributes to inefficiencies in management, distortions in capacity utilization and is restrictive in financing new technologies and the adoption of new management ideas and systems. Clearly, the preferred approach is to implement a program of privatization, where the operations of the free market would ensure greater resource use efficiency. Competition induces firms to invest and produce at a high level of efficiency; and accordingly requires efforts aimed at cutting waste, restructuring operations if necessary, promoting technological improvements and pursuing the development of new markets. The introduction of such an environment is clearly a challenge for the Government, and will require a move towards getting the production units to operate as commercially autonomous units. If efficiency gains are to be pursued, there is need to implement a program of decentralization in decision making in the sugar milling industry, and in that context, to introduce commercial accountability at the level of the production unit. In addition, sugar factories should be allowed to operate as profit centers and market their output independently; this measure would prepare the ground for privatization of individual sugar factories. 5.11 A program of privatization of the public enterprise sector has been embarked upon by the govermnent, though actual progress has so far been slow. While divesting the public sector of its role in the sugar processing sector would indeed be desirable, it is recognized that the government already has a significant program of privatization, and that the sugar companies do not form part of the present core program for privatization. Nevertheless, it is important that sugar factories be allowed to operate and market their output independently, so as to contribute towards their commercialization and to prepare for privatization. A program of divesting the controls presently exercised by the SIIC to the individual factories would require the restructuring of the sugar mills into separate entities. The management of the SIC is presently undertaking a study to review its present organization and management approach, primarily with a view to carrying out a program of rationalization and decentralization. The underlying thrust of the program should be to: decentralize commercial decision making to the level of the factories with a view to emphasizing its role as an independent and commercially oriented unit, and to promote profitability and the more efficient use of financial resources at the factory level. Steps which need to be considered in this context would include: - Discontinue access to concessionary sources of investment funds for sugar mills' rehabilitation or repair activities; - Decentralization of commercial decisions to the level of sugar factories should take place, under which the factories would be allowed to independently market their output; in addition, the factories would become responsible for procurement of needed inputs, staffing and overall financial management; - Restructure the sugar factories as joint stock companies, if necessary with the SIIC initially being the sole owner, in order to minimize uncertainty; however, the objective - 33 - would to allow the factories to operate independently, including raising of finance for new investments or rehabilitations and the preparation of separate accounts; - Presently, the SIIC is only subjected to an audit from the Central Audit Organization; in order to move in the direction of greater commercial accountability, the accounts of SIIC and the factories should be prepared in accordance with internationally accepted accounting standards and principles, and audited by qualified private firms of auditors; - Initiate a program of privatizing the mills, with a view to bringing new investors and operating/management methods into the sugar subsector of Egypt. Existing mills should be offered for sale to private sector interests involved in the sugar industry (farmers, mill employees, and other private sector parties involved in the sector). In those cases where mills exercise monopsony power, privatization should proceed with safeguards for sugarcane farmers by, for example, giving the farmers the first option to buy shares, or having an appropriate regulatory framework. This issue will have to be studied more closely when proceeding with actual privatization. Implementation of measures aimed at decentralizing commercial decision making, including marketing, to the factory level would require complementary initiatives aimed at strengthening factory level management within the critical areas of financial management, stock controls, marketing, as well as monitoring and evaluation. Management contracts could also be entered into for selected factories, in order to facilitate the transition and to introduce more modern methods of factory management. - 34 - APPENDIX I ARAB REPUBLIC OF EGYPT SUGAR SUBSECTOR STUDY SUGAR CROPS PRODUCTION AND MILLING A. Suzar Crops Production Climate 1. Sugar cane contributes about 90 percent of the total sugar produced in the country (see Annex 1) and is concentrated in Middle and Upper Egypt. Although sugarcane grows well in both regions, daytime maxima (36 to 37 degrees celcius) during the sunmuer months are above ideal conditions for gowth and sugar accumulations. Daytime maxima are far less extreme from November to March, and are associated with distinctly cool (at Aswan) or even cold (at Luxor) night minima; these temperatures can be expected to encourage excellent ripening of sugar cane for approximately four months (December to March), but rapidly rising temperatures will enforce the cessation of harvest by late April. Sugar beet, which contributes the remaining 10 percent of all sugar produced, is mainly concentrated in the Delta. The low night temperatures in Middle Egypt make that area suitable for sugar beet, but only for a relatively short milling season (harvesting should be completed by mid-April). In the Delta, temperatures are much more moderate, with less seasonal variation than in Middle and Upper Egypt. These are reasonably well suited to sugar-beet as a winter crop; however, summer mean day temperatures in excess of 25°C from June to September are high for the accumulation of sugar. All areas are arid, with the Delta area receiving less than 33 mm, almost entirely in the winter; Middle and Upper Egypt are even more arid, with a maximum rainfall of 0.5 mm only in winter. Sugarcane 2. Sugar cane is cultivated in a four or five year cycle with two planting seasons; in spring (February to April) or in the autumn (mid September to mid November). As a general practice, there is one plant cane crop, followed by three to four ratoons. The autumn is the preferred planting season, with the plant crop harvested after about 14-16 months; the main advantage is that it gives the farmer a chance to grow a profitable winter crop interplanted with cane. However, there are some advantages with spring planting, particularly in terms of lower water consumption, harvesting the plant crop after 12 or 13 months. Research is actively evaluating this option, with a view to considering it as a general recommendation. Ratoon crops are usually harvested at 12 months until yields of the third or fourth ratoon drops below 32 t/fed (due to soil compaction, deteriorating aeration, salt accumulation, etc). As the preparation for re-planting is expensive, most countries retain their ratoons until they become unprofitable; the ratooning ability of new varieties and cultural practices for ratoons needs further study, and the best techniques may need to be encouraged through the extension services. The current practice of using 6 tons per feddan (14 t/ha) of planting material is excessive, compared to the 4-8 t/ha generally uEed for hand planted cane in other countries, and needs to be re-evaluated. 3. After sugar cane is harvested, the tops are collected and either kept as valuable livestock feed or sold to neighboring land owners. Sometimes field laborers receive an allotment of cane tops instead of money for their work. - 3s - 4. Cane is primarily harvested without using a knife or cutting device; cane is 'cut' at the base by breaking the stalk at ground level with the help of a small and narrow hoe. Subsequently the tops are removed by hand breaking at the point of least resistance (the breaking point). The breaking point method results in a lower percent cane tops (expressed in terms of millable cane), which is much less than normally expected when cane is cut by knife or machine (around 10% as compared to normal values which usually range between 15-20% percent gross cane). 5. Two sets of yield data are recorded in Annex 3: The MALR data are derived from plot sampling, whilst the SIIC data are based on deliveries to factories, weighed at the weigh-bridges. The latter average only 94% of the former, but the variation ranges from positive to negative. Much of the discrepancy can be attributed to sampling error affecting the MALR data, though there will be a consistent bias due to imperfect harvesting and losses during cleaning. It has also been stated that there is some under-reporting by the mills, but this cannot be verified. In conformity with international norms, this report adopts the factory weigh-bridge data. 6. The 10-year average sugar cane yields of 38 ton per feddan (or about 90 t/ha) are excellent in comparison to the results obtained under similar conditions elsewhere in the world. For example, smallholders in Pakistan average only about 35 tlha (with the more saline area in the Sind achieving lower values), whilst plantation culture in the Sudan averages around 60 t/ha; the potential under high levels of management can be estimated from Iran, Ethiopia and Peru which used to average at least 120 t/ha. Replacement of the main current variety (54C9, grown on 92% of the total area) should lead to improvements. There are five new promising Egyptian varieties which are being multiplied and may replace as much as 50 percent of the current variety over the next 5 years. Variety F153, has a sucrose content of 13.5 percent, one percent higher than the current variety; variety Giza 75/368 is an early variety; variety Giza 74/96 is high yielding ; and variety Giza 85/37 is drought resistant. 7. The "breaking point" harvesting technique introduces at least two immature intemodes which will slightly increase cane yields, but will marginally reduce factory recovery, because of low purities. Of greater potential significance is salinity in the soil which will affect the composition of the juice, directly reducing purity. The extremely high levels of fertilization with N will also have adverse effects on sugar contents and purities, except where this effect is over-ridden by low temperatures. Low purities will reduce sugar recoveries and increase molasses and mud yields. Observed molasses yield in cane was 4-4.5 percent (comparable data in other countries indicates potential levels to aim at of between 3-3.5 percent); similarly the observed values of mud in cane was about 4.5 percent (normally levels would be around 3-3.5 percent). However, in this climate, the main control on cane quality will be exercised by temperatures (see para. 1 above), and average sugar recovery will be strongly influenced by the degree to which the harvest season overlaps the hot months. Overall sugar recoveries as a percent of cane are similar to or better than those obtained by other countries with arid ecological conditions, though the sucrose % cane values of 12-13 percent could be improved to imnprovement, to about 14-15 percent. Ripening is also induced by withholding irrigation water; the fibre percent in cane of 12-14 percent indicate that this drying off is not excessive, and this fibre content is fully sufficient to provide fuel for the factory as well as produce some surplus for the production of by-products. The level of extraneous matter of 2% is very good. Sugar Beet 8. Although sugar beet has been grown in Egypt since the mid-sixties on demonstration plots, it only became an important commercial crop after the opening of the beet sugar factory in the Delta in 1982. Sugar beet is cultivated mainly in the Delta during the winter, with a planting season which starts from mid-August till mid-October; it has a 180 - 200 day crop growing period; and it is harvested from - 36 - April to the end of July, giving about 110 days of milling season. Beets are grown in a three year crop rotation, which is very important to prevent the deterioration of the crop due to build up of diseases and pests. 9. Beet yields have shown wide variations both under farner's conditions as well as in trials. Yields appear to have stabilized at a higher level over the last three seasons, and the yield adopted here is that reported by the Delta Sugar Company (DSC) for that period: 18 tons/feddan (43 t/ha). Again, there is a significant discrepancy between the DSC and MALR data, with the latter averaging 11 % higher; this again is likely to be due to sampling error compounded by, in this case, differences incurred by the precision of topping. Depending on varieties, planting dates, cultural practices and water input, yields of over 25 tons/feddan have been observed. Under experimental conditions certain varieties show a potential yield of at least 35 tons/feddan. Clearly, there is potential to significantly increase commercial sugar beet yields. 10. Planting time and the number of plants per feddan are important factors that determine the final yield of a sugar crop. Farmers in the Delta have generally adopted a planting density of 25,000 to 30,000 plants per feddan. It is now recommended that this density should be increased to 35000 or even 45000 plants per feddan, by adopting a closer spacing between plants without affecting the root yield per plant and the sugar content. Presently, sucrose in beets is quite high (16-18 percent), and compares favorably with levels achieved in Europe; it should result in sugar production per feddan which is equal to or higher than from a feddan of sugar cane, once beet yields of 25-30 tons per feddan are reached. 11. At the moment beet seed is imported from several countries in Europe. Due to manual labor involved in growing beets, the varieties imported are of the multi-germ type. The aim of the Government is to produce Egyptian bred beet varieties; however this would involve a high economic cost, particularly since flowering is difficult and therefore needs to be induced. The possibility of seed multiplication under license should however be pursued. 12. Potential for Wider Beet Cultivation. The potential for additional sugar-beet cultivation in the Delta area is self-evident; total production is however constrained by limited processing capacity, and by the competition between beet and other high value winter crops. Demonstration plots show that sugar- beet can also be grown successfully in Middle-Egypt (where yields of 35 t/feddan, with similar sugar contents to those obtained in the Delta have been obtained). However, high temperatures in this area (see Annex 2) would pose a serious constraint as high critical temperatures of over 36°C for long periods of time would inhibit proper beet formation, increase fiber content, and in some cases increase starch formation. The sugar beet crop in Middle-Egypt can therefore only be grown during the cool winter months (planting would be delayed until temperatures moderated) and the potential harvest season is likely to be short (less than 60 days starting early March). Additional research may need to be carried out to determine temperature tolerance of sugar beets grown in the upper Nile region, but it would appear that integration of beet processing into a sugar-cane factory would be possible only if the cane deliveries were curtailed at the time when beet was being processed, as the harvest times are the same. 13. Under the prevailing pricing structure farmers in Middle and Upper Egypt would be reluctant to change from cane to beet production, given that cane also requires less intensive farm management. Prices paid for cane and beet are given in Annex 3. Sugar beets are more prone to insect and fungus attacks thus requiring a higher use of pesticides than sugar cane which practically does not need any pesticides under Egyptian conditions. Furthermore, the three year crop rotation practiced for sugar beets means that the total area for beets is substantially higher than for cane (mono-cropping) for a given amount of raw material required. Transport cost for beets would therefore be higher due to the increased - 37 - distances involved. However, sugar beet cultivation would lend itself better to a more diversified type of agriculture in rotation with other crops. Sugar Crops Inputs 14. Irrigation. Sugar cane is cultivated in Upper Egypt where daytime temperatures approach or exceed 40°C during the main growing period of the crop, May to September. The average daily evapotranspiration during this period varies between 9.9 and 13 mm/day; annual evapotranspiration averages 8.6 mm/day. Sugar cane occupies the land for the whole year. It is, therefore, a heavy user of irrigation water. Average water consumption is around 12,000 m3 per feddan per year, though much higher levels of water consumption have reportedly been observed. In contrast sugar beet - a winter crop in an environment with much lower temperatures and evapotranspiration - has a much lower water requirement of 3000-4000 m3 per feddan for its cropping season of around 190 days. 15. There is potential (as with other crops) for more efficient use of irrigation water for both cane and beet, through better scheduling and irnproved on-farm water management. The low water use efficiency is a result of several factors, including poor scheduling of water, which is not always clearly tied with needs at the growing stage of the plant. In order to minimize the water used by sugar cane crop without reducing cane yields while avoiding salinity buildup, the efficiency of three irrigation techniques was evaluated by the Komombo sugar factory's research station for four years to compare these irrigation methods with the existing method of inundation irrigation. The results showed: The improved surface irrigation, in Table I which the land was fine levelled using laser technology and irrigation water Irrigation Water Used Cane Produced Water Efficiency was delivered through lined channels, Technique (r/fedlyr) (tons/fed.) (W/ton cane) and the drip irrigation consumed around 9,000 m3/year (as compared Inundation 13,500 46.6 290 I nroved to 13,500 m3 for traditional surface 8,900 48.3 184 inundation). Water efficiency values Sprinkler around 180 m/ton cane, as lOOX ET 13,750 43.8 34 were around 180 m /ton cane, as 75X ET 10,700 36.9 290 compared to 290 m3/ton cane for the Drip traditional system. Sprinkler Surface 9,210 51.6 179 irrigation was not successful due to the high evaporation rates during the summer season, May to September (11.5 mm/day); a significant amount of water was lost before reaching the roots. 16. Fertilizers. Fertilizer use by sugar crop farmers is high. For sugar cane, about 16 m3/feddan of organic manure is added to the soil during the preparation of the land; if organic manure is not available it is substituted by 0.5 to 1.0 ton of 15 percent super phosphate. During the growing period, the existing practice by farmers is to use an average of around 300 Kg nitrogen per feddan divided into three application treatments: the first 50 Kg nitrogen is added 20 days after planting or after the second irrigation cycle; the second treatment of 100 Kg nitrogen is applied after the fourth irrigation cycle and the last treatment of 135 to 150 Kg nitrogen is added after the eighth or the ninth irrigation cycle. In comparison, the recommended application is 232 Kg nitrogen per feddan divided into two applications. Research experiments in Upper Egypt showed that 155-200 Kg nitrogen per feddan is sufficient to produce high yield and quality of sugar cane; even these levels, however, are very high in comparison to arnounts used in other countries (typically 100 to 150 Kg N/ha), and are likely to adversely affect quality during the warmer periods of the harvest season. For sugar beets in the Delta, the - 38 - recommended practice is to use 80 kg nitrogen per feddan, applied in two applications: the first immnediately after the thinning, and the second one month later. In practice farmers use more, about 100 kg of nitrogen per feddan. However, field experiments in Kafr El-Sheikh found that applications of 60 kg nitrogen per feddan is sufficient for optimum root, top and sugar yields. 17. The current practice of using high levels of fast releasing Ammonium Nitrate, as N-fertilizer, poses serious environmental concerns. Researchers have shown that nitrogen concentration in drainage water was more than three folds higher when compared with irrigation water, indicating significant leaching losses of nitrogen fertilizers. This is an area which research is actively pursuing and preliminary work with slower releasing urea fertilizers are encouraging for both beet and cane production. B. Sugar Millin! 18. All eight cane sugar mills operated by SIIC are located in Upper and Middle Egypt. All are operating at a level of efficiency comparable to most other sugar producing countries. The capacities range between 4,500 to 12,000 tons of cane per day; the dates of establishment, seasonal capacity and the level of capacity utilization are summarized in the table below. Typically, the cane is brought for crushing to the factories by an efficiently operating rail system. The process used in cane sugar milling is similar to that used elsewhere: i.e. cane preparation and milling done with at least two sets Age and Capacity of Cane Sugar Mills of knives prior to crushing in 17 or 18 roller mill tandems (many mnills have duplicated tandems); Factory Date Seasonal Capacity juice is clarified using a continuous sulfitation Estb. Capacity Utiln. technique which is unique to Egypt; evaporators 'ooo t X with the normal quadruple and quintuple effect Cane are used; and a three strike boiling system Armant 1869 1,300 89 produces (high quality) plantation white W. Haffrrdi 1896 1,800 85 consumption sugar from "A" strike. The Abu Ourqas 1904 700 80 Komomb~o 1912 1,700 95 factories are largely self sufficient in steam and Edfu 1962 1,200 90 power generation by burning bagasse with a Kous 1968 1,600 95 Dishna 1977 1,000 80 complement of fuel oil. Egypt is following Guirga 1987 1,100 48 international trends by increasing the share of sugar that is refined to a level of 99.6 percent pol in the existing sugar factories rather than relying on subsequent processing in separate sugar refineries. 19. The measures of overall mill performance in Egypt are generally good and compare favorably with industry averages around the world. The mills operate on three shifts a day, and annual crushing days are around 160 per season. Based on the available informnation, average milling extraction rates are estimated at around 95 percent and the overall extraction rates are between 82 to 84 percent; this overall extraction of 78% should be readily susceptible to some improvement. While the present mill reduced extraction is reasonably good at 95 percent, an increase to a level of 96 percent would be possible by improving cane preparation through the use of heavy duty shredders and cane knives. Each one percent improvement in reduced extraction would mean a better recovery of about 0.8 to 1.0 kg of sugar per ton of cane. The time lost to stoppages (about 3 percent) is indeed creditable, and is the result of a well organized cane supply system (using a rail transportation network for hauling most of the cane) which supports continuous mill operation during the season, and to a well motivated and trained staff who have accumulated considerable experience over the years. Furthermore, time lost generally from stoppages for periodic maintenance, descaling and cleaning is mininized, as there are stand-by units available for critical equipment, which allows maintenance and cleaning to be carried out without stopping the processing. During the 1992/93 season, an estimated 8.44 million tons of cane were crushed, resulting - 39 - in average level of capacity utilization of 87 percent; total sugar production of 909,000 tons resulted in a ratio of 9.3 tons of cane per ton of sugar (i.e. 10.76 sugar recovered % cane). Sucrose recovery seems to have increased slightly in recent years (see Annex 4) from 10.22 to 10.43 % for the 5-year averages 1984-88 and 1989-93. 20. Final molasses contains the soluble impurities that could not be precipitated out during clarification, reducing sugars, and the residual sucrose that cannot be profitably separated from the impurities. It is sold as a valuable by-product for the manufacture of alcohol, yeast, cattle feed, etc. The quantity of molasses produced as expressed in millable cane is 4 to 4.5% cane - a rather high figure by international standards, possibly caused by salinity and high reducing sugars caused by high N fertilization - and contains 32-35% sucrose. 21. The filter mud (around 4.5% on cane, again high by international standards) contains all of the impurities that can be precipitated during clarification (notably nitrogen-rich proteins and phosphate), filtered out on fine bagasse; it is, and is used as a valuable fertilizer. 22. Energy Efficiency. In order to maintain the milling efficiency at current levels, the quantity of imbibition water used is higher than normally added to the milling process (35 to 40 percent of cane, rather than the normal value of 30 percent). This puts high pressure and strain on the last mnill and also results in a higher than usual moisture content in the bagasse (52 to 53 percent instead of the more usual 45 to 48 percent). Consequently, more water is added to the mixed juice which needs to be evaporated, and in turn increases the steam demand. Wet bagasse is more difficult to bum due to its higher moisture content, reducing its fuel value, and causing pollution through the emission of unburnt particles; it often requires the addition of fuel oil to the boiler to improve combustion, thus increasing costs. Presently the factories are designed for a complete combustion of all bagasse produced, to meet only the steam and power requirement of each factory. This system requires relatively little control of low pressure steam production in the boilers, thereby reducing the need for supervision, but does not make full use of the value of bagasse burnt in the boilers. There are several methods available to increase the thermal efficiency, including reduction in steam consumption, reducing the exhaust steam demand, and increasing the boiler pressures and temperatures. Adding surface to the heaters of the evaporators would reduce steam consumption from 500 kg per ton of cane to approximately 380 kg per ton; this practice is common in the beet industry. As a second measure for increasing thermal efficiency, the boiler pressures could be increased to 45-48 bar and temperature increased to 420°C. This would allow the factory to increase electricity production from a given quantity of steam produced. This change, however, requires replacement of existing boilers and could only be implemented when the existing boilers become due for replacement. In the more immediate future, it would be appropriate to install bagasse storage ficilities at the factories. 23. Bagasse is the residue of sugar cane crushing and juice extraction. It contains all the fibers from the cane (cellulose) and around 50 percent moisture with some residual sugar and other soluble solids. The quantity of bagasse produced is 25-35 percent expressed in terms of millable cane. Cane itself has about 12-14 percent fiber (dry weight basis). Bagasse is a very valuable and important product as it is often the only fuel used for the factory operations. Currently in other cane producing countries an effort is made to produce as much as possible extra bagasse for, inter alia, the generation of electricity for sale to the national grid; for the production of pulp and paper products; for board manufacturing; and for animal feed products. The fuel value of bagasse is becoming more and more important. As a bulky and moist material, bagasse is difficult to handle, store and transport. 24. Manpower. On average, the total number of employees in each mill is about 1700, of which about 25 percent are seasonal employees used during the crushing season. When compared to factories - 40 - in other countries of similar capacity, the level of staff is high; generally, the newer sugar factories, with the higher levels of automation aimed at better performance levels, do not employ more than 500 people. However, while there is potential for reducing the number of employees at the factories, from a purely economic perspective, the low share of labor costs in the total cost of producing sugar in Egypt results in a situation where the economic viability of sugar production is not highly sensitive to reduced labor costs at the mill. 25. Average cane sugar production costs in Egypt fall within the middle rank as compared to the sugar producing countries (in a study' carried out in 1986, Egypt was ranked 20 in a group of 60 sugar producing countries for which production costs were estimated, in terms of the average sugar production cost of US$301 per ton for the six year period 1979/80 to 1984/85). Based on the available information on financial costs, the production costs of cane sugar (99.6 percent pol) produced in 1993, up to the point of sale to wholesalers, are estimated at LE 1,150 per ton (US$343 per ton, or US$0.16 per lb), net of the value of by-products. 26. Beet Sugar Processing. The beet sugar factory in Kafr el Sheikh operates efficiently by international standards. It has now reached its production capacity of 6500 tons of beet per day. The factory was initially designed for the production of a higher sugar quality than that demanded by the Egyptian market. Therefore, it is excessively equipped for the sugar quality currently produced. After sugar beets are sliced and passed through a diffuser, sugar free beet pulp leaves the diffuser with 92% moisture, it is pressed to reduce the moisture content to 75-80% and is subsequently dried. Dry pulp is pressed into pellets and exported as a valuable cattle feed. The quality of dried pulp expressed in terms of whole beets is 6% on beet with a 10-15% moisture content. Beet molasses has a higher sucrose content than that from cane due to a higher level of impurities. Its production and use is the same as for cane molasses. The quantity produced is 4.5-5% on beet and its chemical composition is 48-50% sucrose, 32-34% non-sucrose and 18% water. At the moment, filter cake from the factory is not utilized even though it could be used in the manufacturing of bricks. Beet filter cake is comparable to cane filter press mud, but it contains more calcium carbonate (lime) and is deemed to be unsuitable for use on the alkaline soils of the Delta. The quantity produced is 7 percent on beet. 1/ By LmndelL Mills Coo odlty Studies Ltd. - 41 - ANNEX I ARAB REPUBLIC OF EGYPT SUGAR SUBSECTOR STUDY Annual Sugar Production 1973-1993 (Tons) Cane Sugar Beet Sugar Total Tons 1973 555.318 _ 555.318 1974 544.891 _ 544.891 1975 521.994 5 521.994 1976 600.216 _ 600.216 1977 618.812 _ 618.812 1978 593.138 _ - 593.138 1979 622.683 _ 622.683 1980 618.321 _ 618.321 1981 614.547 _ 614.547 1982 681.897 16.937 698.834 1983 697.302 22.075 719.377 1984 657.256 59.158 716.414 1985 748.668 80.764 829.432 1986 798.346 83.282 881.628 1987 834.848 91.054 925.902 1988 823.856 67.529 891.385 1989 805.386 65.643 871.029 1990 829.244 65.855 895.099 1991 891.470 91.309 982.779 1992 896.270 95.181 991.451 1993 909.008 95.751 1,004.759 - 42 - ANNEX 2 Min Temps: Alexandria, Luxor. Aswan 25 - - -- -- 20 115 5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Doc Max Temps: Alexandria, Luxor, Aswan 45 40 - ,-"Aswan L uxw 35 £30 25 _ 20 15 . , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Doc Mean Monthly T1mpatures for Lower, Middle and Upper Egypt Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Lower 12.37 12.79 16.33 18.50 22.40 25.45 26.43 26.27 24.63 22.23 18.93 14.60 Egypt Middle 12.30 13.78 16.73 20.93 24.85 27.05 27.75 27.60 25.50 23.15 18.83 14.23 Egypt Upper 14.33 16.40 19.40 24.30 28.23 30.23 30.27 30.67 28.30 25.53 20.67 16.17 Egypt - 43 - ANNEX 3 ARAB REPUBLIC OF EGYPT SUGAR SUBSECTOR STUDY BEET AND CANE PRICES PAID TO FARMERS (LE/TON) Sugarbeet Sugarcane SugarbeetL' Paid Pricec 1978 9.200 1979 10.000 1980 13.000 1981 16.000 _ _ 1981182 17.3303' 23.000 24.139 1982/83 18.200 23.000 24.884 1983/84 20.200 23.000 25.919 1984/85 24.200 23.000 26.209 1985/86 27.500 23.000 27.409 1986/87 30.500 23.000 28.157 1987/88 34.000 26.250 29.910 1988/89 38.000 30.500 34.890 1989/90 50.500 55.000 67.610 1990/91 58.000 55.000 61.390 1991/92 66.000 55.000 74.800 1992/93 72.500 55.000 67.968 At 16 percent pol. 21 Acmal average price paid, based on sucrose content. Up to 1992, cane price was based on sucrose content, at 10.3 percent pol.; thereafter, unified price. Sumwary Suaistic of the Sugr Subs.ctor 19312 19.4 logs lose 1337 1336 Is" It" | 31 1392 1093 Total Ca.w Are 243.007 244,384 250.004 261.657 267,691 275,251 274,431 263,190 266.933 270,763 271,000 Cww Ar", Delrod to M (fed 196,052 190,687 192033 199459 203,356 209,609 215,530 217,212 214,683 221,441 221,953 Caw Yield, MALR tld) 33.7 37.4 38.7 41.4 40.3 40.7 40.6 42.2 43.5 43.2 Cone Yised. Delered 4tAda 35.9 34.8 37.8 39.1 40.0 37.9 37.5 36.3 39.9 39.4 38.0 Cwne Ccuhed tE 7,030,117 *,832.622 7,259,661 7,79a.360 8,124,287 7,947,137 8.079.273 7.874,669 8.369,567 8,730.721 8,444,266 Suga Produced fram Can It) 697.302 657.2s7 748.668 798,346 834.848 823,856 805.386 829,244 891,470 896,270 909,008 SUgar Rlowery Can 9.92% 9.91% 10.31% 10.24% 10.28% 10.37% 9.97% 10.53% 10.65% 10.27% 10.76% Sup production wl dnbn 501b,250 466,570 556.635 598,887 631,492 614,247 589,856 612,032 676.787 674,829 687,055 Total Set Area (fed 17,862 35,420 40,622 37,469 41,921 41,616 39,705 34,080 49,29s 38,463 39,950 Seat Arm. Dofoed to F"tory lfe,227 30,794 39,864 34,068 39.071 37,471 34,437 30,620 45,724 36,905 39,941 Bt Yield, MALR tled) 13.8 15.2 14.2 16.2 17.3 17.4 17.2 16.9 22.4 19.3 19.9 8ee YWed, Dlverd Od) 12.e 14.2 14.6 16.5 18.0 14.6 13.7 14.1 18.4 18.0 18.0 ee SSced ht 229.670 436,973 681.332 562.619 823.774 545.330 471.145 433,119 839,331 662,913 719,212 Suga Produced from Bt It 22,075 69,158 80.764 83,282 91.054 67.529 65,643 65,855 91,309 95.181 95,752 Sular PeCOVry Seft 9.62% 13.54% 13.89% 14.81% 14.60% 12.36% 13.93% 15.20% 10.88% 14.36% 13.31% Sug Production pr f .ddart nO 3,848 28,364 40,900 49.224 51,983 30,058 31.206 35.235 45.585 58,276 55,811 Tatl Sugar Praud It) 719,377 716,415 8 829.432 881.628 925,902 891,385 871,029 895.099 982,779 991,451 1,004,760 PuiA Sector bnports ft) 654,000 713,000 572,000 552,000 283.000 232,000 400.000 423.000 Privael Sactar ano It) 177,000 143,000 159,000 228,000 376,000 636,000 254,000 163,000 Toatdi Wm It) 831,000 856,000 731,000 780.000 659.000 868,000 654,000 586,000 468,300 513,000 502,300 SeCf Sufkiec,y 48.4% 45.6% 53.2% 63.1% 568.4% 50.7% 57.1% 60.4% 67.7% 65.9% 66.7% Productien + In rt It 1,550.377 1.672.415 1,560,432 1,6616,28 1,584.902 1,759.385 1,525.029 1,481.099 1,451,079 1,504,451 1,507,060 PopatAon (000) 44,185 45,343 46.511 47,683 48,859 50,041 51,229 52,426 53,631 54,842 56,080 ConauritptlonCoplta It/a) 35.1_ 34.7 33.6_ 34.8 32.4 35.2 29.8 28.3 27.1 27.4 26.9 A sec.O _ ali own 4~~~~~~~~~IIE 5 ARAB REPUBLIC OF EGYPT SUGAR SUBSECTOR STUDY Extract from Laboratory Re2orts for Four Sugar Mills SUGAR FACTORY KOUS GUIRGA NAG ERMANT HAMADI Bagasse Sucrose percent 2.31 1.70 2.39 2.39 Humidity percent 61.70 51.90 52.40 51.00 Fiber percent 45.05 45.80 44.28 44.90 Loss percent 0.73 0.52 0.72 0.75 Quantity percent cane 31.59 30.70 30.28 31.60 M1il reduced extration _ Cane Surcose percent cane 13.56 12.22 12.47 13.44 Cane purity 82.90 88.82 82.30 83.80 Mgxed juice Brix 14.50 14.76 14.47 14.19 Purity 82.90 81.80 82.30 83.80 Brix 63.00 64.40 60.00 63.50 Molsses Brix 89.66 82.17 88.94 88.50 Purity 38.72 35.69 36.93 36.50 Quantity percent cane 3.98 4.60 4.46 4.36 Sugar balance peret cane Sugar in cane Sugar in bags 13.56 12.22 12.47 13.44 Sugar loss in bagasse 10.74 10.21 10.10 11.16 Sugar loss to molasses 0.72 0.53 0.72 0.75 Sugar loss to mud 1.80 1.35 1.46 1.14 Undetermined losses 0.07 0.07 0.06 0.07 0.23 0.06 0.05 0.05 Water consumption from Nile 10,000 m3/h 6000.00 10,000 m3/h 8000 m&ih Temperature in/out 10-42C 19.42 C 19-45C 19-45C - 46 - APPENDIX II ARAB REPUBLIC OF EGYPT SUGAR SUBSECTOR STUDY The Economiics of Sugar Production 1 Key Analysis Issues 1. The analysis of the competitiveness of domestic sugar production as well as the transfers and welfare losses implicit in the current system of distortions is based on a comparison of the economic costs of domestic production with the economic costs of sugar imports. Three key issues that influence these calculations are discussed in this section in detail since they involve conceptual problems and considerable uncertainty in the estimation of the relevant parameters: the cost of capital of the sugar factories, the cost of irrigation water, and the future sugar import price. 1.1 Investment Options and the Cost of Capital 2. The investrnent costs of the sugar factories constitute a very significant share of the total production costs of sugar. A large share of the investment costs is sunk in the existing sugar factories, and only a small part of these investment costs could be recovered if sugar production was shut down. Therefore, a critical question for the evaluation of domestic sugar production is whether the costs of sunk capital should be included in the calculation of economnic production costs. Strictly speaking, the opportunity cost of capital of sugar production at the current level consists only of the salvage value of existing factories and the cost of future capital investments required to mnaintain the factories' operation level. At an increased production level, however, the opportunity cost of capital would have to be based on the fXll cost of capital of new factories. Hence, the long-run marginal cost curve has a d&scontinuity at the current production level. 3. The costs of capital used in the evaluation of investment/divestment and operation decisions depends on the specific policy option analyzed. In section 5.1, investrnent decisions for new factories are analyzed based on the full cost of capital. The decision to continue the operation of an existing factory, on the other hand, is evaluated based on the incremental cost of capital of this factory (salvage value plus future investmnent costs required to continue operation), hence, excluding sunk costs. 4. The purpose of comparative advantage analysis is not to evaluate specific investment options but to answer the question whether domestic resources are efficiently employed in the domestic production of sugar. The analysis of comparative advantages is, therefore, based on production costs including the full costs of capital. Ex-ante efficient investment requires that investors can expect to receive returns after their investment is sunk. Comparative advantage analysis that did not take into account the full costs of capital would under-represent the resources employed in the sugar sector and misrepresent Egypt's comparative advantage. Sensitivity analysis is provided to show the effects of alternative assumptions. 5. Unfortunately, complete financial information for SIIC, including data on historic investment costs in the sugar industry are not available. Therefdre, there remains some uncertainty about the domestic sugar production costs, particularly the costs of capital. Limited information on financial - 47 - depreciation and capital charges provided by DSC and SIIC, reflects some concessionary funding available to the sugar companies and does not allow conclusions about the full economic cost of capital. The full costs of capital for the comparative advantage analysis and the evaluation of investments in new factories are, therefore, calculated from a model of a new cane mnill and sugar beet factory, respectively (see Attachment 4). The investment costs of a hypothetical sugar factory have been estimated on the basis of recent sugar mill investments in Egypt; as well as recent feasibility studies completed for new beet sugar factories. The stream of expenditures for the initial investment and necessary replacement and rehabilitation over fifty years is then annualized at a discount rate of 10 percent. The annualized cost of capital is divided by the output capacity of the hypothetical factory to obtain the cost of capital per ton of sugar. The economic cost of capital includes replacement costs and, thus, includes depreciation. SiTnilar models are calculated, excluding sunk costs but including salvage value, for the evaluation of the continued operation and rehabilitation of existing factories and the addition of a beet line to a cane factory. 1.2 The Cost of Water 6. The Agriculture Sector Strategy identifies irrigation water as the key constraint on future growth of the agriculture sector.' With a net water consumption (crop consumption and evaporation losses) of 12,000m3 per feddan and year in Upper Egypt, sugar cane is the highest water consuming crop in Egypt. The country-wide average water consumption per year (usually including two crops) is 5,300n3 per feddan. Water consumption of sugar beet (around 3,000m3/feddan), on the other hand, exceeds water requirements for competing crops only by a small margin. Farmners bear the cost of on- farm water management, and in particular the cost of pumping water from the irrigation canals to the field level. On the other hand, farmers do not pay for the services of the irrigation system or the irrigation water itself. There are no formal water markets in Egypt, and informal water trade at a local level can be observed only in rare instances. Because of the high water consumnption of sugar cane, the estimation of the shadow price of irrigation water has considerable importance. 7. The first component of the social cost of water delivered to the farm irncludes the operation and maintenance expenditures as well as capital expenditures for future replacements of structures. These current and future operation, maintenance, and investment costs are cornsidered a tradable input to agricultural production. The USAID cormnissioned Water Cost Recovery Study2 estimates the cost of the irrigation system at the budgeted level of system maintenance at LE 17 per thousand m3, excluding the sunk costs of the irrigation system (all costs inflated to end-of-1993 prices). There are some concerns whether the budgeted level of operation and maintenance costs for the irrigation system are adequate. However, there are no reliable estimates available on the desirable level of expenses. Therefore, LE 17 per thousand rn3 is used in this study as a conservative estimate of the social cost of the irrigation services. 8. The second component of the social cost of water delivered to the farm is the opportunity cost of irrigation water. The irrigation water itself and the investment costs sunk in the existing irrigation and drainage infrastructure lead to economic rents. Since the quanity of water delivered by the system is strictly limited, irrigation water has an opportunity cost. The opportunity costs of water and the existing infrastructure are the narginal benefits from water in its best alternative use, measured as residual returns to water after subtracting all production costs including the curreat and future costs of the irrigation J/ Wortd Ba*. 1992. Arob Reoublic of Eanxt: An AnricuLture Strategv for the O1990. washington DC. v/ Irrigation Suport Project for Asia and the Middle East. JaruIry 1992. Irriaetimn Umtar Cost Recovery in EaDt? Determination of Irripation Water Costs. - 48 - system's operation and maintenance. The opportunity cost of water itself and the already existing irrigation and drainage infrastructure are considered a domestic resource cost. 9. With inadequate data availability, the quantification of the opportunity cost of water poses significant problems, and at present there is no single approach that is fully satisfactory. Therefore, several approaches for determining the opportunity costs of water are reviewed here. The best alternative use of water in the short-run would be cropping pattern changes toward higher water consuming crops elsewhere in the system. A linear programming model following this approach was used in the Agriculture Sector Strategy and indicates a short-run opportunity cost of water of LE 42 per thousand m3 if vegetable cultivation is assumed to be constrained by marketing opportunities and not by water availability. If, on the other hand, increased water availability would lead to increased vegetable cultivation, the opportunity cost of water could rise up to LE 200 per thousand m3. For determining the long-run opportunity costs of water, the use of water in improved cropping patterns can be compared with horizontal expansion of the irrigation system. The World Bank's Land Reclamation Sub-sector Review3 estimates that the threshold for a generic land reclamation project to be profitable would be a water price between LE 166 and LE 91 per thousand mnl, depending on the assumed discount rate. Since benefits are measured net of systems investment costs, this is a pure opportunity cost to be added to systems investment and operations costs. 10. Table 1 summarizes the different estimates for the costs of Table 1 Summary of Estimates for the O&M water. Since it was concluded that and Oppornmity Costs of Water vegetable cultivation is not constrained by water availability but Category Cost LE/K M by marketing opportunities, the OpertUon and Maintenance Cost- estimated returns to water in land reclamation are higher than those in - USAID Cost Recovery Study 17 improved cropping patterns. Thus, Used this study 17 the long-run opportunity cost of water Opportunity Cost of Water is based on the return to water in landc reclamation. In this report an - Cropping Pattem Changes (without vegetable 42 expansion) 200 opportunity cost of water of LE 100 * LUnd Rcbmation (10 percent discount ate) 166 per thousand mi is used as a poit - Land Reclamation (12 prment dicount rate) 91 estimate close to the lower bound for expected returns to water in land Used In this study 100 reclamation. Recognizing that at present, there is no strong foundation for any reliable point estimate for the opportunity costs of water, the discussion in this report is supplemented by sensitivity analysis. 1.3 The Internationl Sugar Price 11. In order to assess the economic competitiveness of domestic sugar production, the costs of domestic production have to be compared with the costs of sugar inports. There is no doubt that world market sugar prices are influenced by international market distortions, such as subsidies in several major sugar producing and consuming countries. The assessment of these distortions and possible future changes is one of the factors entering the forecast of future world market sugar prices. However, the / World Sank. 1990. Arab Repubilc of EavDt: Lard Rectwrtfon Sbsector Rewti. Washfngton, DC. - 49 - relevant comparison for domestic sugar production costs from an economic point of view is the current or forecast world market price of sugar, and not the production cost in other countries. The economic value of domestic production for Egypt is equivalent to the resources saved by not importing sugar. These costs are determined by world market prices. 12. Historically, the W rdMre ua rc world market for sugar has been World Market Sugar Prce characterized by market Raw Sugar ISA fob Caribbean (constant 1994-$) distortions and trade restrictions ,t in many countries. In several 3.500 countries, including the EU and 3.000 the US, domestic production is protected by producer support 2,500- prices significantly higher than world market prices. Sugar 2000 imports to the US operate under a quota system with preferential prices. The EU sells significant I,0 - amount of sugar below production costs on the world SW market and, at the sarne timne, imports sugar at preferential 1957 1N1 196 9 1s1973 ig7n 1951 196510 199UI3 1907 2001 200S quotas from the ACP countries Alter 1993 d Bank o h 70% pibbl"r . under the Lom6-Convention. Cuba, the world's largest sugar Figure 1 exporter used to supply the market of the former Soviet Union at highly favorable prices. Most countries have protected their domestic sugar market against the world market. Less than 20 percent of kbWI sugar production is traded. Twenty years ago, 60 percent of world trade took place under quotas, bilateral or private long- term contracts. This share has declined to 25 percent. The 'world market price of sar was therefore the price at which only a relatively small amount of residual trade occurred. Since th free market is a residual market, small changes in production or consumption can induce large price chnges, and the sugar price is historically one of the most volatile commodity prices. Figure 1 shows the historic path of the most widely referenced sugar world market price (ISA raw sugar, fob Caribbean). This is the reference price for sugar used throughout the report. 13. The evaluation of the competitiveness of domestic sugar production is based on the sugar import price prevailing in January 1994. The January 1994 import price for refined sugar equivalent in quality to domestically produced sugar (99.6 percent pol) is $300 (cif Egyptian port). For comparison, the January-1994 import price for higher quality EC2' refined sugar (99.8 percent pol) is $325 (cif Egyptian port). Only small amounts (ca. 50,000tla) of this quality sugar are imnported for use in confectionery and other food processing. The current import price for 99.6 percent pol sugar ($300 per ton) is also used as a benchmnark for the analysis of efficiency and transfers in the current situaLion. Historically, the Egyptian import price is about $75/t above the ISA raw sugar reference price, refecting transport costs and the refining premium. The current price is fully in line with historical sugar prices (the 10, 5, 2, and 1 year averages of the monthly ISA reference price plus $75/t are $263, $310, $299, $281, $285, and $296, all in constant 19944$), except for the three short periods of enxtmely high sugar prices. - 50 - 14. The analysis of World Market Sugar Price future investment plans and operation options for the Months from 1957-1993 Egyptian sugar industry is No of Months based on the World Bank's 250 forecast for the ISA reference price adjusted by the 200 historical difference of $75/t for quality adjustmnents and 150 transport costs. The World Bank forecast implies a 18 and 30 percent increase of lo' sugar prices over December 1993 levels for the years s0 2000 and 2005, respectively. Figure 1 shows the forecast o sugar price path and the 70 4P 1P percent probability interval 4 F estimated by the World Bank. Sugar Price (19944/It), Raw Sugar ISA fob Caribbean The historical volatility of the sugar price forms the basis Figure 2 for the Government's concerns against using current world market sugar prices as the benchmark for domestic production. However, the sugar price volatility should be kept in perspective. Figure 2 shows the frequency distribution of monthly sugar prices over the last 37 years, in 1994-$S. Since 1957, the sugar price was out of line with current levels only during three short periods of extremely high prices. It exceeded $1400 in only nine months within 37 years. With the increasing depth of the international sugar market, following among others the dissolution of the former Soviet Union and the conclusion of the recent GArT agreement, it is expected that future prices will be less volatile. 2 The Competitiveness of Domestic Sugar Production 2.1 The Costs of Domestic Production and Imports 15. A sugar factory and the farmland supplying it with raw material form a closely linked unit; high capital costs make it unlikely that a sugar factory would be optimally operated below its capacity. Therefore, the sugar factory is selected as the unit of analysis for the construction of a sugar supply curve and calculation of comparative advantage as well as welfare and transfer effects. The first step in analyzing protection and competitiveness of domestic sugar production is the determination of the economic costs of domestic production at the farm as well as the factory level. Crop budgets for cane and beet have been compiled from MALR, SIIC and DSC data as well as observations and farm interviews during field visits (see Attachment 2). The crop budgets contain quantity information where available as well as private and social prices for inputs and outputs. 16. Sugar cane is planted in the fall. The plant crop is harvested in the winter, about 16 months after planting, followed by three ratoon crops typically harvested in twelve month intervals. In order to make returns from cane comparable to other crops, costs and revenues over the four and a half year planting cycle of cane, are annualized at a 10 percent discount rate. The plant crop of sugar cane occupies the land for sixteen months. During the first winter after planting, cane is inter-cropped, typically with beans. The returns to inter-cropped beans during the first winter after planting are - 51 cornparable to returns to a regular bean crop. In order to account for the benefits from inter-cropped beans, the crop budget calculates the opportunity cost of land for cane on the basis of only twelve months for the plant crop as well as the ratoon crops. 17. Financial prices of sugar crops for the 1993/94 cropping season are used. In addition cane tops are evaluated at LE 100/feddan, the price typically paid for tops as fodder on the informal mnarket, often implicit in wage labor arrangements. While beet tops could theoretically be used as fodder as well, this is not current practice in Egypt, and no value is assessed. The social price of sugar crops is determined by deducting from import parity prices the actual domestic processing costs (see Table 3). The social prices of farm inputs are determined by adjusting domestic market prices for distortions. The social cost of seedcane is derived from the social cost of growing cane. Costs of machinery use and on- farm irrigation are adjusted to reflect the social opportunity cost of fuel which is still sold below its opportunity value. The social price of labor is set equal to the wage rate (conversion factor 1.0) since agricultural labor markets appear to clear and operate largely free of government interventions. The large drop in real agricultural wages over the last seven years is believed to reflect the limited altemative employment opportunities and has led to a significant decline in the on-farm costs of growing cane. 18. Irrigation water quantities are based on the net water consumption of different crops. This information is taken from data of the Ministry of Public Works and Water Resources for Upper Egypt, Middle Egypt, and the Delta, respectively. The private opportunity cost of land is the private return to land in its best alternative use. Therefore, financial returns to land are calculated from MALR yield and production cost data on a govemorate level for the main alternative crops in the sugar growing governorates (see Attachment 3). For each govemorate, the private opportunity cost of land for a winter crop (sugar beet) is detemined by weighing the financial returns of the main alternative winter crops (wheat, beans, and berseem) by their relative share in the cropping pattern. Note that Egypt imports large amounts of wheat and maize. Additional wheat and maize supply could therefore easily be absorbed by the domestic market at prevailing prices. On the other hand, additional vegetable supply would likely depress domestic prices, and the higher returns to lands cultivated with vegetables would overstate the opportunity cost of land for non-mnarginal changes in cropping patterns. For the opportunity cost of land for a full year (sugar cane), the financial return to the main sunmner crop (maize) is added. For the social opportunity cost of land, financial returns for alternative crops have to be adjusted for distortions, and in particular the absence of water pricing. The social opportunity cost of land is obtained by subtracting from the private opportunity cost the economic cost of the irrigation system and the irrigation water needed for the alternative crops. 19. There is a significant gap between cane yields reported by the MALR and the SIIC (43t versus 38t per feddan). Parts of this discrepancy can be attributed to the fact that the MALR data are generated from plot sampling, whilst the SIIC data are based on cane deliveries; also, there are some indications of under-reporting of cane crushed by the cane factories, but these reports cannot be. If cane crushed was, indeed, under-reported, the actual cane yields would be higher and the sugar extraction rate lower than those used in this report. While such under-reporting would distort the picture of relative efficiency of farm vis-a-vis factory operations, it would not affect the calculation of economic costs of sugar production which is ultimately based on the land area used for cane production, for which available data is believed to be reliable. 20. Complete information on the production costs for all sugar factories was not available for the preparation of this report. Processing costs are based on the information for individual factories where these are available. Country-average processing costs are used where factory-level data is not available (see Attachment 5). Processing by-products (molasses and beet pulp) are evaluated at export prices. in some factories, bagasse is sold or used in non-sugar related SIIC activities. The processing costs are - 52 - Table 2 Summary of Domestic Production Costs per Ton of Refined Sugar Factory/Crop Cane Beet Yield (tMed) 38.0 18.2 Net Recovery 10.5% 13.3% Capacity Utlaation 87% 100% Land Value (LEfled) 1153 485 807 543 Water for Cane/Beot (m3/fed) 11851 3000 Sugar Production (KT) 909 96 On Farm TID Cots PC SC PC SC Seeds T 31 33 I1 11 SCC Servios D 9 9 8 8 Fertlizer T 85 85 40 40 Pesicides T 0 0 6 6 Machine (Hired) T 73 82 52 59 Aniral D 4 4 0 0 Water, Irr/drain T 0 50 0 21 Other T 57 57 23 23 Water, opp cost D 0 295 0 124 Labor D 126 126 131 131 Opportuntty Cost of Land D 288 121 333 224 Farm Profts 40 0 5 0 Farm By Products -D 26 26 0 0 Total Sugar Crop Costs I 687 838 609 647 Other Materials T 74 74 108 136 Labor Costs D 60 60 50 50 Other Manufacturing D 35 35 142 142 Cther Costs D 20 20 0 0 Total Manufacturing Costs 189 189 300 328 Processing By Products T 92 92 274 274 Cost before cap/nancing 7B4 934 635 701 Compeny Overhead D 40 40 64 64 Depreciation T 80 80 100 100 Cost of Caplbl D 302 357 324 344 C`DmPany Profft 50 0 71 0 Cos (wholesa level) 1249 1412 1194 1209 Protecton and Competitiveness (Wholesale leve) Total Doffesbc Resources 859 1043 1052 1087 Tobtl Tradable Resources 308 369 e6 122 Total Costs 1167 1412 1116 1209 Suger Value 1249 1088 1194 108U Value Added 941 719 1128 966 Domestic Resource Cost 1.45 1.13 Nominal Protecton Coefficient 1.15 1.10 Effectiv Protection Coeffcnt 1.31 1.17 Efective Subsidy Coefficient 1.57 1.20 Derivation of Retail Prces Sls Tax 56 56 56 56 Sales prie company 1305 1468 1250 1265 Conpwany to consuner cost 285 285 285 285 Excess Margins 60 0 115 0 Real Price 1650 1753 1650 1550 1- Tridables; 0D Dornestrc Resources; PC - Private Corst; SC - ocial Costs. Al costs In LE per ton of refned sugar, pries as of mission time (Jenuary 1994) for the 1993/94 crop year. Source. MALR, SIIC, DSC data and rmnion estimtes. taken from factories which use all bagasse internally, and therefore, do not include the cost of fuels that wo3uld substitute for bagasse outside of the sugar factory. Hence, the analysis values bagasse implicitly - 53 - at its fuel equivalent. The frill cost of capital of a new factory is calculated from a model (see Attachment 4) as discussed in section 2.1. This cost of capital is adjusted for the actual rate of capacity utilization at the individual factories. 21. The costs of domestic production of one ton of refined sugar from cane and beet are summarized as country averages in Table 2. Economic production costs per ton of refined sugar are LE 1412 for cane and LE 1209 for beet. At full capacity utilization, production costs from cane would be LE 1345/t. In the cost summaries, economic depreciation is set equal to financial depreciation. The economic cost of capital calculations include depreciation. Therefore, the sum of econonic depreciation and capital in Table 2 equals the economic cost of capital as calculated in Attachment 4 and adjusted for capacity utilization. The differences in total production costs between factories result from differences in sugar crop yields, sugar recovery rates, factory capacity utilization as well as geographic differences in land values and crop water requirements. 22. The analysis of Sugar Price Forecast competitiveness is based on the comparison of production Import Party Pnce (constant 1994-LE, wholesale level) and import cost at the Import Parity Price (LEft) wholesale level. For 2,000 reference, Table 2 also contains the derivation of 1,5, ....... retail prices. Based on recent data, costs between the wholesale and the retail level 1 _000 are LE 285/t, including the cost of bagging, transport and 500 distribution and retail margins. The wholesale and retail market appears to be 0 , . . . 1994 195 1 1997 1998 9 2000 2001 200 2 2003 2004 2005 competitive, and domestic Year market prices have moved Pes Fo Lwawer Bound Upper Sound Equaized Farsing Prie along with fluctuation in the ......... ......... world market price during the Figure 3 last year. At the current level of tariff protection there are some excess margins for domestic sugar production which accrue to traders in case of cane sugar (since SlC output prices are regulated) and to DSC in case of beet sugar (since DSC private sector sales are unregulated). Strictly speaking, the sales tax of LE 561t is a financial transfer to the government. This tax is in line with general taxation in the economy and no distortion particular to the sugar sector. Thus, economic costs have not been adjusted for the sales tax. This has no effect on the calculation of competitiveness which is based on the wholesale level, before taxes. 23. US-Dollar import prices are converted to domestic import parity prices at the wholesale level by adjusting for local handling and transport costs (see Table 3). The resulting economic cost of imported sugar at the wholesale level is LE 1088/t. The financial cost, including import tariffs is LE 1365/t. For the evaluation of future competitiveness of domestic sugar production, the World Bank forecast of the ISA reference price is used, including its 70 percent probability band (shown in Figure 3). Table 3 contains the conversion of these price forecasts into import parity prices for refined sugar of the quality produced in Egypt. The point estimate for the year 2000 is LE 1202/t with a 70 percent probability band from LE 818 to LE 1715/t. To simplify the following analysis, an equalized forecast - 54 - Table 3 Calculation of Import Parity Prices Forecast SC PC SC Point Lower Upper 1994 1994 2000 2000 2000 World Market Raw S/t 225 225 259 145 412 + Quslity, Transport S/t 75 75 75 75 75 Adjustrywnt CIF AJexandria St 300 300 334 220 487 CIF Alexandna LE/t 1008 1008 1122 738 1635 * Port Charge and Handling LEAt 59 59 59 59 59 lmporter Charge LEA 15 15 15 15 15 * Tranap Port-Wholesale LE/t 6 6 6 6 6 + Tartf LEA 222 0 0 0 0 Price of Imports at Market LEt 1310 1088 1202 818 1715 4 Sales Tax LE/t 56 0 0 0 0 Vakeof 50kgbags LEA 1365 1088 1202 818 1715 fwhobeub bevel)U~757 5 57 Begging, Overhead LEl 75 75 75 75 75 Retal Margin LEA 210 210 210 210 210 Retail Prioe LEtt 1650 1373 1487 1103 2000 Pric of lrmpora at Market LEA 1088 1202 818 1715 - Procshing Costs LEA 666 666 666 666 + By Products LEA 92 92 92 92 Conoentration 0.105 0.105 0.105 0.105 Economic Famgate Prim LEAt 54 66 26 120 Cane Beat Prioe of Imports at Market LEA 1088 1202 813 1715 - Proeusaig Coats LEA 836 836 836 836 * By Product LEA 274 274 274 274 Concentration 0.133 0.133 0.133 0.133 Economic Farmgate Price LEA 75 34 153 Beet PC - asbCh SC - Socia Costs World rnarkt price forecasts from World Bank forecasts for raw sugar, fob Caribbean, in constant 1994-S. price is also calculated. The equalized forecast price is the constant price that (at a 10 percent discount rate) has the same present value as the actual forecast price time series for the next 30 years. Assuming constant production levels, use of this equalized forecast price yields the same result as use of the actual forecast price time series. The equalized forecast price at the factory level is LE 1213/t. 2.2 Domestic Resource Cost 24. The analysis of the competitiveness of sugar production from sugar cane and sugar beet is based on the comparison of economic production costs in Egypt with the import parity price. The purpose of this analysis is to assess whether domestic resources are currently efficiently employed in the domestic production of sugar. The analysis is based on the full cost of domestic production, including the full cost of capital. This analysis does not evaluate actual investmnent or divestment options. Such options need to be evaluated with standard cash flow analysis, taking into account that part of the capital investment costs are sunk and could not be recovered if one or several sugar factories were to shut down (see section 4.1). 25. The 1994 import parity price of refined sugar of the quality produced in Egypt is LE 1088/t at the factory level. The economic costs of producing one ton of refined sugar from sugar cane in Egypt are estimed to be about LE 1412, varying between factories from LE 1313-1837/t. The equivtlent - 55 - economic production costs of sugar from sugar beet are LE 1209. Therefore, at current world market prices anl current levels of operation, the domestic production costs of sugar from sugar beet exceed the costs of imports by approximately LE 130/t or 11 percent. Hence, domestic sugar production from sugar beet is marginally uncompetitive, and Egypt incurs a minor loss by producing sugar from sugar beet domestically. On the other hand, the costs of domestic sugar production from cane exceed import prices by about LE 3201t or 30 percent. Hence, the domestic production of sugar from sugar cane is uncompctitive, and the current level of sugar production from cane causes a significant net loss to the Egyptian economy. See Figure 4 for a comparison of econonmic production and import costs. 26. The domestic Financial and Economic Costs of Sugar measure of comparative Domestically Produced/Imported (wholesale level) advantage defined as the ratio La of economic cost of domestic , W resources used in production 1,310 and the economic value 12t added. A DRC below one , mZO indicates comparative ..* '- advantages of domestic production. Including the eaX full cost of capital, the DRCs kA' for domestic sugar production o are 1.45 for cane and 1. 13 40 for beet. These figures indicate the lack of 20 competitiveness of sugar production from cane and the C- >mn) SW (Fn) X4wft(ft) C.(E-n) 8"(mfl) kpmt() marginal situation of sugar cm rq F w M production from beet under prevailing conditions. DRCs Figure 4 presented in this report include the farm as well as the factory level. Caution must be applied when comparing these DRCs with others calculated for the farm level only (for example in Attachment 2 or in the Agriculture Sector Strategy). Aggregated for the sector, total economic value added is about LE 753 million annually. However, the domestic resource cost for creating this value added is about LE 1060 million. 27. Tlere is considerable uncertainty about several variables entering the calculation of competitiveness of domestic sugar production. Sensitivity analysis has been done for some of these variables in order to test the robustness of this report's conclusions. Figure 5 shows the sensitivity of DRCs to different assumptions about the economic cost of capital for sugar production, the assumed import parity price for sugar, and the assumed opportunity cost of water for cane and for beet, respectively. The numerical sensitivity analysis is contained in Attachment 6. Sugar production from cane would be competitive only at a cost of capital (including depreciation) below LE 100/t. Beet production is competitive at a cost of capital below LE 325/t. Based on this, it can be concluded that sugar production from cane is uncompetitive for any reasonable estimate of the fuH cost of capital. On the other hand, the analysis confirms the marginal position of sugar production from beet. The switching value does not lie far outside a reasonable margin of error for the costs of capital estimates. 28. The initial analysis includes the opportunity cost of water as a component of economic domestic production costs. Since there are no markets for irrigation water, the opportunity value of water - 56 - DRC Sensitivity Analysis I DRCs and Cost of Capital DRCs and Internatlonal Sugar Price ORC DtC LI ~~~~~~~~~~~~~~~~~12 Ii~~~~~~~~~~~~~~~~~~~i IA lb Ii~~~~~~~~~~~~~~~~~~I Ii~~~~~~~~l Si * *U*" lb am m db dIS l ie I_ ON U0 twe am at aM am C-tof cpim mm baaport farty Prk. (LMIq t C Beat Cam - *.- _ .-- DRCs and Opportunity Cost of Water CRC a.' ~ ~ .. IL I. A I.J I Bet Cans Figure 5 cannot be observed in market prices but is estimated based on possible improvements in country wide croppi::g patterns and potential expansions of the irrigation system. There is some uncertainty about the precision of these estimates. The analysis, however, shows that even with the most extreme (and unrealistic) asumption that the opportunity costs of water were zero, the domestic production of sugar from cane would still be uncompetitive. Also, domestic production costs from cane are higher than those for beet even with an opportunity cost of water of zero. As the assumed opportunity cost of water is increased, the relative cost advantage of producing sugar from sugar beet increases, and the competitiveness of sugar production from cane decreases rapidly. Since water consumption of beet does - 57 - DRC Sensitivity Analysis 11 DRCs and Crop Water Use DRCs and Sugar Crop Yields DRC DRC 1.7 2 o5 1.6 u 400 8000 120D0 la=0 20D00 tO 14 18 22 2X 30 34 38 42 46 50 Crop Water Uses (rnVed) Sugar Crop Yields (tMed) Beet Csne Beet Cane 1.. 1. Figure 6 not significantly exceed the water consumption of the average cropping pattem, the DRC for beet is not sensitive to the assumed opportunity cost of water. 29. Cornpetitiveness is a dynarnuc coneet and can change over time. Three aspects of dynarnic competitiveness are considered here: sugar price changes, crop water requirernent decreases, and sugar crop yield increases. DRCs are obviously sensitive to the assumed irnport parity price of sugar. Even though recent changes in the international trade regime are likely to reduce the volatility of sugar prices, there is considerable uncertainty about future sugar world market prices. As long as the fimprt parity price is below the domestic production reosts (LE 1412 and LE 1209 for cane and beet, respectively), domestic production is uncompetitive. Based on the World Bank price forecasts for the year 2000, world rnarket prices for sugar would inerease in real terrns by about 18 percent, to an import parity price of LE 1202. At this forecast world market price for sugar, domestic sugar production from cane would still be uncompetitive (DRC 1.26), while domestic production from beet would be marginally uncompetitive (DRC 1.00, see also Figure .). 30. rnere are potential savings in domestic production costs that could increase the competitiveness of domestic sugar production in the future. Potential cost savings at the factory level would include reducing caLpital requiremnents. At the farm level, imnproved on-farm management practices could reduce water consumption for sugar cane from 12,000 to 8-10,000 m3/fed. It is said that water requiremen0s for beet could possibly be lowe0ed from 3,000 to 2,000 m3/fed. Tere is sigaificant uncertainty about these potential water savings and the required investent costs. In any case, it is unlikely that these water uvings can be realized without iarplementing pt merhanism by which fbrmers faete the full opportunity cost of irrigation water. The analysis shows that even if these uvings were realized, sugar production from cane would sts be uncompetitive (DRC 1.29 at 8,000mr/feddsn weter - 58 - consumption). See Figure 6 for a diagram of DRC sensitivity. The vertical lines represent the base case assumptions for beet and cane. 31. Even though sugar production from sugar beet is at present marginally uncompetitive, there is significant potential for increasing the average yield of sugar beet. These yield improvements would significantly increase the competitiveness of domestic sugar production from beet. Sugar beet yields of 28t/feddan are believed to be feasible and would result in a DRC of 0.90. Some yield increases are also possible for sugar cane, however, even yields of 50t/feddan would not lead to a comparative advantage for sugar production from cane (DRC 1.15). It should be noted that the analysis of changes in yields and water requirements are based on the assumption that all other variables, including water requirements and yields of other crops, remain constant. Strictly speaking, increases in yields and decreases in water consumption improve the comparative position of sugar crops only if these improvements go beyond similar improvements achieved for competing crops. 3 Incentives and Remaining Distortions 32. Even though this report shows that Egypt has no comparative advantage in the production of sugar, domestically produced sugar can financially compete with import of sugar. There are two reasons for this. First, significant resources were invested in the industry when the sector was still completely government controlled and private sector imports were restricted. Since a large part of the infrastructure investment is sunk and depreciated, the financial costs of capital are below the economic costs of capital. Second, several distortions of the sugar sector remain in effect, including free irrigation water and access to concessionary financing. Some of these distortions reduce the financial cost of domestic sugar production. 33. The distortion of domestic incentives is suunarized by the protection and subsidy coefficients in Table 4. The nominal protection coefficient measures the ratio between the financial sugar price paid to the sugar companies and the import parity price of sugar. The nominal protection coefficient is 1.15 for cane sugar and 1.10 for beet sugar. The effective protection coefficient takes into account distorted incentives in the prices of outputs as well as traded inputs (financial value added divided by economic value added). For cane factories the effective protection coefficient ranges from 1.28-1.5 1; for sugar beet it is 1.17. Finally, the effective subsidy coefficient takes into account all price distortions including those for domestic resources, such as irrigation water (financial value added plus net subsidy for domestic resources divided by economic value addod). The effective subsidy coefficient ranges from 1.51 to 1.67 for cane factories, and is 1.20 for beet. 34. Through the government's comprehensive reform program, many distortions within the previously pervasive government control of the sugar subsector have already been removed. However, several mujor issues remain as potential barriers to efficient resource utilization in the sugar subsector. These potential distortions are the absence of a mechanism that would lead farmers to consider the value of the irrigation services and irrigation water; the absence of full incentives for the sugar companies to minimizng their costs; access of sugar companies to concessionary financing (the extent of this is not fully known); the protection of domestic production through import tariffs; and the sugar consumption rations provided by the Ministry of Supply (MOS). T'he remaining energy subsidies have a relatively minor effect on the subsector even though they provide disincentives for efficient bagasse use by the sugar factories. 35. Farmers do not bear the investment and maintenance costs of the country's extensive irrigation system. The absence of caarges for the services of the irrigation system is an implicit subsidy from government budgets to farmers. Following the recently completed Irrigation Cost Recovery Study, - 59 - Table 4 this subsidy would amount to about LE 46 million annually Cane Beet for sugar cane and sugar beet FV EV(LEAt FV(LEt EV(LE/t) alone. Irrigation water itself (LE/t) __) has an opportunity value that Total Domestic Resources 859 1043 1052 1087 exceeds the cost of the Total Tradable Resources 308 369 66 122 | irrigation system. Since Total Costs 1167 1412 1118 1209 Sugar Value 1249 1088 1194 1088 there exist no markets for Value Added 941 719 1128 966 irrigation water, farmers do Domestic Resource Cost 1.45 1.13 not take into account the Nominal Protection Coefficient 1.15 1.10 opportunity value of the Effective Protection Coefficient 1.31 1.17 irrigation water used. As a Effective Subsidy Coefficient 1.57 1.20 result, farmers have no FV - Financial Values, EV - Economic Values incentive to economize on the use of water by either switching from sugar cane to relatively low water consuming crops or producing a given crop with a reduced quantity of irrigation water. A share of the value of water that is foregone in other potential uses (land reclamation, or improved cropping patterns) is transferred as a rent to sugar farmers. The remaining share accrues as a welfare loss to the economy. The options regarding improved water use efficiency are discussed in section 4.4. 36. The price at which the sugar producers (SUC and DSC) sell sugar to the Ministry of Supply is determined on the basis of production costs. This pricing mechanism reduces the incentives for efficier.t resource use within the sugar companies and for reducing production costs. The hypothetical cost savings that could be achieved under increased market discipline are difficult to quantify. Based on the assessment of operation parameters, day-to-day operations of the sugar factories appear to be cost- effective. However, there is concern that the capital investments of SIIC are relatively high. If uneconomic investmnents, such as premature plant rehabilitations, are indeed undertaken by the sugar companies, this would divert investment funds from more productive uses elsewhere in the economy. Access to concessionary capital would also generate incentives for excessive investments. Due to insufficient data, no attempt is made to quantify the potential costs of this effect. 37. Currently, domestic sugar production is protected by a 20 percent import tariff. At world market price levels of 1992/93, this import tariff is required for the domestic industry to compete financially with imported sugar. The import tariff protects domestic producers but increases the cost of sugar to domestic consumers and reduces the incentives for cost savings in the domestic sugar industry. The recently concluded Uruguay round of the GATT agreement effectively sets the prevailing impcrt tariff of 20 percent as a ceiling for the tariff in the future. It is the govermment's intenticn to stabilize domestic prices by varying the import tariff within the band of 0 and 20 percent. In view of recent increases in the world market sugar price, a significant reduction of the 20 percent tariff is currently under consideration. The options regarding trade and pricing policy are discussed in section 4.5. 38. The subsidized sugar rations of the Ministry of Supply transfer significant resources from government budgets to sugar consumers. Since this subsidy is largely untargeted, it has limnited effectiveness as an instrument of social welfare policy. It absorbs budgetary funds that could otherwise be used for more effective support to those individuals in need. Moreover, subsidized consumer rations may have led to inefficiently high sugar consumption in the past. However, at the reduced ration level that is in effect now, it is believed that all ration consumption is inframarginal, and the ration system does not increase consumption levels. - 60 - 4 Policy Issues and Recommendations 4.1 Evaluation of Investment and Divestment Choices 39. The following analysis of policy options is based on the same basic data on domestic production costs and import costs that were calculated for DRC analysis. However, some important differences apply. First, benefits of domestic sugar production are based on future, not current, sugar prices. Second, a significant part of the capital investment in the sugar industry is sunk and could not be recovered if Egypt stopped producing sugar from sugar cane immediately. The sunk cost component must therefore be excluded from the cost of capital for the evaluation of policy choices that do not include investment in new factories. A complete cost-benefit analysis of specific investment or divestment options is beyond the scope of this report. However, some preliminary analysis is done to shows the likely outcome of cost-benefit studies for certain generic investment and divestment options. 40. The benefits of Desirability of Investment and Operation (Cane) domestic sugar production are CotfCail LQ the forecast import parity Cost of Capital (LE/t) price. Currently, the investmen loperation equalized forecast price is undesirable LE 1213/t. The costs of 400 ____ ___ _ _____ domestic production are L LE 975/t from cane and 30 ImporPeritye 10aE 300 p ~~~~~~~~~~Equmhzad Fma st 12 3LE LE 765/t from beet plus the / F orctsfor2OO2 LE cost of capital for the - --- PVo----;----- -------- investment or operation 2 option to be evaluated~. Ifte............ ..... .. . . ............. ........... ............... option to be evaluated. If the.. .- . .-.- . - .- .- costs of domestic production 10 _o exceed the forecast price, / r investme ntoperation investment or continued 0 desirable operation is undesirable, and 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 170 18001900 2000 vice versa. Costs and Benefits: Sugar Import Parity Price (LE/t) benefits for the various Costs-Benert New Cane Mill Existng Cane MID Rehabiltiaon investment and operation ....... .. options are compared m Figure 7 Figure 7 for cane and in Figure 8 for beet. These two figures allow the evaluation of investment and operation options under the simultaneous influence of the three key variables: international sugar price, cost of capital, and opportunity cost of water. Horizontal lines in these figures refer to the costs of capital for different options. Vertical lines represent different sugar prices (benefits). The thick diagonal line (costs equal benefits) separates desirable from undesirable investmnent and operation scenarios. Investment and operation options to the left of the diagonal line are undesirable, those to the right desixable. The shaded area around the diagonal line represents the uncertainty about the opportunity cost of water. The left edge of the shaded area is applicable for a lower bound on the opportunity cost of water of LE 45 per thousand m3. The right edge of the shaded area is applicable for an upper bound on the opporunity cost of water of LE 150 per thousand m3. 41. Attachment 4 shows the derivation of the costs of capital per ton of sugar from the costs for various investment and operation options. The costs of capital for a new factory are estimated at LE 370/t for cane and LE 444/t for beet. The costs of capital for an already existing new factory (cost of future rehabilitations plus salvage value) are estimated at LE 155/t for cane and LE 164/t for beet. Finally, - 61 - the costs of capital for a Desirability of Investment and Operation (Beet) inajor rehabilitation of a cane Cost of Capital (LE/t) mill (including future sto rehabilitations and salvage _oo value) are LE 213/t. -___ .__ .___- .___ 400 investmen Uoperatior 42. The results for undesirable the five considered mport Parlty Price 1994 1088LE 300~~~~~~~; Equalized Foecst 1213LE investment and operation Forecats tor2000 1202LE options are sunmmarized in (70% pmbaWIfty 8151715LE) Table 5. At the equalized 20 _ -_ ----------------------------- forecast price, continued [ operation of existing cane and 100 i e r beet factories is desirable. d investme Voperation The rehabilitation of existing , I desirable sugar cane factories also 600 700 800 900 1000 1100 1200 1300 1400 ISM 1600 1700 1800 190 2000 appears desirable. This Benefits: Sugar Import Parity Price (LElt) result, however, is tentative Costs-Beneorts New Beet Factory Existing Beet Factory Additon ofa Beet Lh since the net benefits from a ..... sugar cane factory lie within Figre 8 the margin of error of this analysis. Investments in new beet factories are marginally desirable at the equalized forecast price. Note that the expected beet yield increases are not considered in this option which could therefore become significantly more attractive in the future. Finally, investment in a new cane factory is undesirable. 43. This analysis shows that investment and operation is Table 5 Summary of Investment and Operation Options desirable in any scenario with a cost of capital below LE 238/t for LEA New Existing Rehabilit New Existing cane or below LE 448/t for beet. Cane Cane ate. of Beet Beet If the cost of capital sunk in the Factory Factory Cane Factory Factory extensie indutrial_nfrastuctureFactory _______ extensive industrial infrastructure Production costs 975 975 975 765 765 for producing sugar domestically Costs of Capbl 370 155 213 444 164 is excluded from production Total Costs 1345 1130 1188 1209 929 costs, sugar production in Benefits 1213 1213 1213 1213 1213 existing factories is economic Destabilitsy 133 83 25 ? 284 from cane as well as beet. Therefore, the continued utilization of existing production facilities for sugar from beet and cane can be justified even from a pure econormic efficiency point of view. The broad based analysis done for this report indicates that rehabilitations of existing cane factories and investment in new beet factories would both be desirable. Therefore, under current economic conditions, the existing cane factories could be economically operated in perpetuity and no phase-out of sugar cane would be recommended. Nevertheless, any plans for major plant rehabilitation or new facilities should be subjected to a detailed economic cost benefit analysis. Finally, the expansion of cane and the investment in new cane factories is clearly undesirable. 44. Based on the results of field trials, sugar beet could be produced in parts of Middle Egypt. Attachmnent 5 contains a column HBeet/Qenpa in which the economic production cost of a hypothetical - 62 - beet factory in Qena governorate are estimated. Economic production costs for a new beet factory are estimated at LE 1205. It would be desirable to gain large-scale field experience with sugar beet in Upper Egypt by installing an independent sugar beet factory at a relatively small plant size or, subject to the positive findings of a detailed feasibility study, an add-on beet line to an existing cane factory and growing sugar beet on lands that are currently not cultivated with sugar cane. Once positive experience will have been gathered there, the government may consider a policy of replacing sugar cane factories which are due for rehabilitation with sugar beet processing facilities. 4.2 Farm Factory Interactions and Sugar Crop Pricing 45. The interactions between sugar cane farmers and sugar mills are complex. Farmers and mills make significant investments into their relationship and are highly dependent on each other. The sugar industry makes a long-term investment in factories and relies on timely supply of cane from nearby lands. Sugar cane farmers plant cane in the expectation that they can sell cane to their mill at an acceptable price for a planting cycle of at least four years. Since timing between cane harvest and crushing is critical for sugar recovery, the harvest of cane in the command area of a mill needs to be scheduled according to the transport and crushing capacity of the mill. On the other hand, the optimal time of harvest is also determined by the sugar content of cane which varies with time as the cane plant matures. As a result, one can observe a high degree of integration between the farmers' and the mill's operations. 46. From the technical point of view, there is a similar integration of growers and factory in the case of sugar beet. Planting and harvesting dates are determined by the beet factory. Farmers, however, do not depend on the sugar factory to the same degree as cane farmers because sugar beet farmers conmit themselves to growing sugar beet only for one cropping season. Sugar beet occupies the land only for half a year and cannot be planted again for three years on the same land. Therefore, the share of sugar beet in all crops can never exceed one sixth, and sugar beet farmers are much more diversified than sugar cane farmers and are less vulnerable to changes in the price of sugar crops. 47. Due to the complexities of farmer-factory The Sugar Crop Market interactions and the commitment Crop Pnce both sides make to their relationship, the procurement of F aW4w*a sugar crops is different from Dc typical market transactions, such as the sale of wheat or maize, S where a large number of farmers Do 4 m offer a homogenous good to a Pd large number of traders or consumers. The fixed investment costs of a sugar factory and Pa.nt Capacity significant plant-level economies of scale are judged to far outweigh the rising marginal cost of sugar crop supply in a factory Crop Quantity Q command area. Hence, a sugar Sugar Crp Supply factory would never be optimally operated below its capacity. The market for sugar crops in the Figure 9 command area of a factory is - 63 - shown in Figure 9. Farmers supply sugar crops according to their rising marginal production costs. At price S, farmers supply the factory up to its capacity, Q. An existing factory demands sugar crops at its capacity level, Q, up to the sugar crop price, D,, at which revenues would cover variable production costs. For a new factory with capacity Q, investment would only be made if the factory can expect to procure sugar crops of quantity Q at a price below D., the price at which revenues would cover the full production costs. 48. The peculiar nature of the sugar crop market has implications for the role of the regulated sugar crop price that can be shown in Figure 9 which depicts a situation with D, > S > D.. If the sugar crop price was below S, the factory would operate inefficiently below capacity. At a sugar crop price above D,, the factory would close. At any sugar crop price between S and D,, the factory would operate -fficiently at its capacity, and the quantity of sugar crops grown would be determined by the limited amount of contracts available and not by the price. Variations of the sugar crop price between S and D, would have no efficiency implications but lead to a resource transfers to farmers with delivery contracts. If tsie sugar crop price was determined by the market and factories were maximizing profits, existing factories would continue operation if D, was greater than S. Private investment in sugar factories could be expected if D. was greater than S. In either case, factories would offer farmers price S for their sugar crops. If the sugar crop price was continued to be regulated, private investment can only be expected if regulators were able to assure investors that crop prices would not be increased above D,. 49. Currently, uniformn country-wide sugar crop prices are determined based on the average returns to alternative cropping patterns. With the exception of Minia governorate, comparative analysis of returns to different cropping patterns shows that farmers receive some excess return to their land (see Attachmnent 3); hence, regulated sugar crop prices are slightly above S. Farmers are obviously willing to grow sufficient sugar crops to supply the factories close to capacity. The exception is Girga. The problems of capacity under-utilization at Girga, however, are attributed to past management problems and start-up delays rather than insufficient cane prices. Field visits have confirmed that sugar farmers are in general satisfied with sugar prices at their 1994 levels. Even though the split of sugar revenues between farmers and factories in Egypt is biased toward the factory, if compared to other countries, current prices are overall satisfactory from the farmers' perspective. The low management intensity of cane further increases farmers' appreciation of cane. The concerns about insufficient sugar crop prices appear, therefore, unfounded. Due to the lack of water pricing, financial prices of cane are 20 percent below economic production costs, and financial prices of beet are 6 percent below economic production costs. On the other hand, current financial sugar crop prices are 45 percent and 16 percent above the economic values of cane and beet, respectively (see calculations in Table 3). 50. Farmers are paid on the basis of weight of cane regardless of sugar coptent. The resulting incentive to grow cane with high weight but low sugar content is limited by the close supervision of farmers by the mnills. Nevertheless, the existing payment system has the potential for creating adverse incentives which could be avoided if farmers were given more control over their operations and paid according to the value of their product, that is the sugar content. For example, excessive irrigation of cane tends to increase tonnage without increasing the recoverable sugar. Since irrigation quantities are not controlled by the mill, and farmers do not pay for irrigation water, there is an additional incentive for farmers to over-irrigate. Another pricing issue meriting attention is the country-wide uniform cane price. Due to the lower yields of alternative crops, the opportunity cost of land is lower in the South. As a result, cane growers in the Southern Governorates receive excess returns to their crops. This constitutes an income transfer without welfare losses since cane quantities are restricted by the availability of delivery contracts. For sugar beet, farmers are paid according to sugar content and receive a bonus for early planting. - 64 - 4.3 Farm Income Analysis 51. The cropping patterns in the command area of cane mills are dominated by cane. In some parts, up to eighty percent of the land is planted to cane. Within the commnand area of the cane sugar factories, agricultural life is dominated by the production of sugar cane, and a reduction in cane areas would lead to significant disruptions in the social and economic patterns of the affected areas. Since the sugar industry is an important provider of income and employment in the traditionally poorer south of the country, there are strong socio-economic reasons for maintaining existing sugar production facilities in Upper Egypt. The efforts of the government to maintain and possibly increase sugar production have to be seen in the framework of the social disruption that a reduction in sugar production is likely to cause in the affected regions. Some over-staffing is apparent in the sugar factories. However, factory labor costs constitute a very small share of sugar production costs. Therefore, increases in competitiveness from the possible reduction of factory labor are insignificant and are unlikely to justify the involved costs of social disruption. 52. In order to analyze the importance of sugar cane for the income of cane growing farmers, farm income analysis is presented for representative fanns in three governorates. urrent representative cropping patterns for a median sized farm (3.2 feddan) are shown in Attachment 7 for Aswan, Qena, and Minia. The financial returns to land, capital and farm management shown in this table are based on governorate wide yields for the respective crops. A typical farm would grow sugar cane on 50 percent of the farm land, receiving 60 percent of income from cane in Aswan and 40-45 percent in the other governorates. The effects of dropping cane from the cropping patterns depends on the assumptions about alternative crops and cropping intensity effects. If a modest reduction in summer cropping intensity and no increase in the area grown with vegetables is assumed, farm incomes would suffer major reductions in Aswan (-25 percent). The income drop in Qena would be 8 percent. No significant income change would occur in Minia. For the aggregate cropping patterns in the sugar crop growing governorates and the size distribution of cane growing farms in Aswan, see Attachment 1. 53. Cane is a simple crop for farmers to grow and requires significantly less farm management efforts than vegetables or the other field crops traditionally grown in Egypt. The farm income analysis ignores the preferences of farmers for cane based on this crop's low management requirements. The strong preference of farmers to grow cane can be explained to a large degree by the limited demands on farm management as opposed to merely financial incentives. Many sugar cane farmers would have only limited experience with other crops and may not easily adapt to the cultivation of crops other than cane. Cane farmners who switch to more diversified cropping patterns and lack experience in growing other crops, would be likely to experience significant adjustment costs if sugar cane production was to be reduced. Even though cane requires low management intensity, it is a relatively labor intensive crop. The reduction in cane areas could, thus, result in some reduction of rural employment. 4.4 Water Use Effidency 54. One of the major policy issues motivating the present study is the high water consumption of sugar cane. While this report cannot deal with the issue of water pricing in a comprehensive manner, a few issues of particular relevance to the sugar subsector are nevertheless discussed. The absence of a water pricing mechanism creates welfare losses, arising from inefficient cropping pattern choices as well as inefficient on-farm water management. Under the current system of regulated sugar crop procurement prices and government owned sugar factories, the area cropped with cane is determined by the number and size of operating sugar factories. Under the current regime, the introduction of a water pricing mechanism would lead to higher crop procurement prices and have no effect on the cropping patterns. Changes in cropping patterns would, therefore, have to be brought about by closing existing sugar - 65 - factories. On the other hand, once sugar crop procurement prices are deregulated and private investment in sugar factories becomes possible, the lack of water pricing could give rise to a situation in which private investment leads to the undesirable expansion of the sugar cane area due to the absence of water pricing. 55. With regard to on-farm water management, inefficiencies arise in the current situation since farmers have very limited incentives to reduce the irrigation water to economically efficient levels. Farmers have little incentive to assure that laser levelling provided by the Sugar Crops Council meets achievable quality standards. No incentives exists for other water saving investments such as sprinkler or possibly drip irrigation systems. 56. An efficient system of water pricing would lead to farmners facing the full opportunity cost of water. Ideally, water markets should be developed in which water is allocated based on tradable water rights. Water rights could initially be distributed free of charge in accordance with current water usage patterns. If these water rights were made tradable, farmers could sell them to alternative water users such as new land settlers. As a result, farmers would be faced with the opportunity cost of water without having their income reduced. The resulting cropping pattern decisions as well as on-farm water management decisions would be efficient. 57. Obstacles to the introduction of an efficient water pricing scheme are the political, social, and cultural resistance toward any water pricing mechanism and the lack of volumetric water measurement devices at the farm level. In face of these obstacles, attention is directed at alternative second-best mechanisms for improved water use efficiency. The options considered include mandatory on-farm management investments, water management by the sugar mills, and taxes on sugar cane land or sugar cane itself. More detailed study is required before one or several of the mentioned approaches would be implemented. 58. In the past, the Government has focussed on technological improvements for better water management rather than economic incentives. Direct technological improvements are likely to be better than no action but are unlikely to be cost effective measures for improved water management compared to economic incentives. Farmers are closely supervised by sugar mills and water volumes are more easily measured at the mesqa level. An alternative option for water pricing would be to charge mills for the incremental irrigation water used for growing cane in their command area. Mills would then have an incentive to supervise farmers' irrigation practices, invest in improved on-farm water management, or devise a local mechanism for measuring and charging for water use by farmers. Problems with this approach include the treatment of water used for crops other than cane in the command area. This approach would eliminate inefficient incentives for sugar cane expansion once the subsector is fully liberalized and provide limited incentives for on-farm water management improvements. 59. A simple alternative to water pricing is a tax on land grown with cane or a tax on cane itself. Neither one of these taxes would depend on the actual water volume used. Therefore, they would not provide an incentive for improved on-farm water management. On the other hand, such taxes could become necessary to avoid inefficient incentives for private investment in sugar cane expansion once the sector is fully liberalized. A tax on land, a complementary input to water, would result in some substitution effect increasing consumption of water relative to land. Therefore, a tax on the output cane would be preferable as a second-best altemative to water pricing. If water costs (irrigation system plus opportunity costs) are assumed to be LE 1 17/mn3, the tax on cane for incremental water usage would have to be about LE 19 per ton of cane. At current sugar prices, this tax would make cane growing unprofitable in most governorates. It should therefore be phased in over several years in line with the expected world market sugar price increase. - 66 - 5 Trade Regime and Sugar Price Stabilization 60. For the liberalization prograrn of the sugar sector to succeed, it is important that the Government create a climate supportive of private sector involvement. Such a supportive climate requires loremost stability and predictability of government policies in the sector and the abstention from discretionary interventions such as those exemplified by the recent discussion about renewed procurement of domestic sugar production for open market sales by the Ministry of Supply. The necessary creation of a stable institutional environment includes clear and transparent Government policies with respect to domestic pricing and trade regime in case of changes in the world market price of sugar. This section explores a few of the choices the Government has to make with respect to trade policies, the long-term issue of sugar self sufficiency and the issue of short-term sugar price stabilization. 6I. The Government views the current level of 20 percent tariff on sugar imports (plus 2 percent additional import charges) as a ceiling and intends to vary the import duty between 0 and 20 percent according to prevailing world market prices in order to stabilize domestic sugar prices. If international sugar prices were to fall significantly below the current level, the afforded 20 percent tariff would be insufficient to protect the domestic industry. It is the Government's view that a significant sugar price drop would only be possible in case of dumping by major exporters which would give Egypt recourse to countervailing measures under GATT. The government is currently evaluating the option to lower or drop the import tariff on raw sugar only. Dropping raw sugar import tariffs completely would increase the price gap between imported refined sugar and imported raw sugar from the current $40/t to about $85/t. SEC estimates that a price gap of $60-70/t is required to mnake domestic refining of imported raw sugar profitable. From the limited information available, it appears that domestic refining of imported sugar is acceptable if it m1akes use of idle domestic production capacity at the Hawamdeia plant. The danger of differential tariffs would be that it could encourage additional investment in refining capacity which should be undertaken only if it can be justified by an economic cost-benefit analysis. 62. Self sufficiency for sugar remains an important objective of the government in its policies toward the subsector ir order to protect the domestic market from fluctuations of the international sugar price in the long-run. Based on the analysis in section 4.1, the expansion of domestic sugar production from sugar beet can be justified on economic grounds under currently forecast world market sugar prices. T'his assessment, however, may change with time if sugar price forecasts were revised downward. In that case, a policy of sugar self sufficiency would impose a net cost on the economy. 63. The volatility of the sugar price per-se provides no satisfying justification for a policy of sugar self sufficiency. One may consider an extreme example in which the international sugar price would temporarily rise to LE 2500/t, significantly above the upper bound of the price forecast for the year 2000 of LE 1715/t (see Figure 3). The net cost of such a price increase to the Egyptian economy would be about LE 360 million per year or 0.3 percent of GDP. There is no reason to believe that changes in sugar prices are correlated with other prices that negatively effect the Egyptian economy. Therefore, it can be corcluded that the aReregate risk of sugar price fluctuations to the Egyptian economy is limited and would not justify a policy of sugar self sufficiency, unless domestic production was competitive. The evaluation of sugar expansion projects should, therefore, be based on the expected value of the forecast sugar price. 64. The aggregate risk of sugar price fluctuations to the Egyptian economy is judged to be acceptable. The adjustments of domestic production and consumption resulting from long-term changes in the international sugar price are economically desirable. Nevertheless, the governnent may consider unacceptable the disagreggate risks, specifically the transfers between consumers and domestic producers, resulting from short-terrn sugar price changes. If the government wants to consider price stabilization - 67 - rneasures, such as buffer stocks, import subsidies, and producer taxes (in case of high world market prices), it should draw from the experiences in other countries. These experiences, however, suggests that price stabilization measures often carry a large cost and rarely operate effectively. Often they go hand-in-hand with measures of protection which increase the level of domestic prices and impose a heavy cost on domestic consumers. Price stabilization is revenue neutral in the long run only if long-term prices are correctly forecast. The following analysis focusses on providing a franework for addressing the issue of price stabilization rather than making specific recomnmendations. 65. In the short-tern, sugar supply from domestic Effect of Sugar Price Increases on Consumers production is almost (retail level) completely inelastic while LElt supply from imports is 3,500 assumed to be perfectly ,Budgetary Gci of elastic. As long as Egypt is 3,000 cen Stabluizabon a sugar importer, and 2,500 \ - marginal supply comes from ll|Foee Consumer imports, icessin 2,000 Foregones would translate into 1,500 r ; Trarefer from oonsrjimem to consumers to equivalent increases in domesic produoers foreign produoes: domestic prices, creating 1,C000 l lp windfall profits in the 500 Domestic Producion _ Imports doinestic sugar industry. T Figure 10 illustrates the effect 0 . . I I ... ., , of an international price 0 200 400 600 800 1000 1200 1400 1600 1800 2000 increase. The reduction in KT sugar consumption would Demand Current Import Price Hypothetical Import Price reduce consumer surplus. I - Foreign producers receive Figure 10 additional payments for Egypt's reduced import quantity. However, the largest transfer occurs from domestic consumers to domestic producers. 66. Government interventions to stabilize (rather than protect) the domestic market would reduce the adjustment costs of short-term income transfers between domestic producers and consumers that could result from a fully open trade regime. The transfers and costs of international price increases with and without price stabilization are summarized in Attachment 8. The effects of a one-year increase in import prices to LE 2500/t (or equivalent to $555/t cif, which is above even the upper bound of the 70 percent probability forecast) without stabilization would be a reduction of consumption to 1330 KT, and a cost to consumers of LE 1213 million of which LE 82 million are welfare losses, LE 277 million are transfers to foreign producers, and LE 854 million are transfers to domestic producers. At the individual level, the average consumer would lose LE 20.6 per year, or 1 percent of income. A consumer at the poverty line (LE 500, with 20kg per capita sugar consumption) would lose LE 14.4 per year, or 3 percent of income (see Figure 10 for this scenario). 67. Price stabilization isolates the domestic market to some degree from international price fluctuations In a buffer stock regime, governments would purchase world market sugar in times of low prices and sell it in the domestic market at high prices. This, of course, requires significant budgetary resources and a correct forecast of long-term prices. Since buffer stock operations are profitable if they - 68 - have price stabilizing effects, a good argument can be made to leave them to the private sector. Alternatively, a variable import levy can serve as a price stabilization measure. Imports would be taxed at times of low sugar prices (as it is the case with the current import tariff of 20 percent) and subsidized at the time of high world market prices. The budgetary costs of price stabilization in a period of high prices are shown in Figure 10 as the rectangle of current import quantity (which would not change under price stabilization at the current level) by the price change. Price stabilization at LE 1650/t would cause budgetary costs of LE 427 million which are all transferred to foreign producers. This cost would amount to 0.4 percent of GDP, 2.3 percent of imports, or 1.3 percent of current government expenditures (all national account data 1990 inflated to end-of-1993 prices). 68. Figure 1o1 The Effect of International Sugar Price Increases different levels of million LE international sugar price 2,500 increases without price stabilization with the 2,000 budgetary costs of price stabilization. (To 150 _ simplify the graph, tariffs A are assumed constant in 1.000 LE terms.) Without price 10 stabilization, there are B transfers to foreign 5s_ producers which increase at firSt, but drop later as the higher sugar price 1650 180 2050 2250 2450 2650 2850 3050 -educes consumption and LEn import levels. The U Transfer to Foreign Producers * Loss of Consumer Surplus foregone consumer [ Transfer to Domestic Producers Budgetary Cost of Stabilization surplus increases as the F sugar price increases. Figure 11 Transfers to foreign producers and lost consumer surplus are a net cost of price increases to the Egyptian economy. In addition consumers transfer resources to domestic producers. The budgetary cost of price stabilization is shown as a straight line in Figure I 1. This transfer to foreign producers is a net cost to Egypt. The net cost of price stabilization is higher than the net cost without price stabilization since price stabilization prevents the efficient adjustment of consumption levels. 69. Figure 11 shows the trade-off relevant for evaluating price stabilization. On the one hand, price stabilization prevents a very large, and probably undesirable, temporary transfer of resources from domestic consumers to domestic producers (shown as length A). On the other hand, price stabilization increases the net cost of an international sugar price increase (shown as length B) because it prevents the adjustment of consumption levels according to the increased price. An alternative option would be a regime of partial price stabilization in which the government would tax windfall profits arising to the industry in high-price periods and using these revenues for import subsidization. In low-price periods, import tariffs would be used to subsidize domestic production (this is the current situation). More important than the mentioned efficiency costs of price stabilization are the possible costs of any price stabilization scheme arising from incorrect sugar price forecasts, misuse of the scheme for protection and other "political economy costs" for which there is ample evidence in the experience of other countries. For these reasons, this report does not endorse the implementation of a price stabilization scheme. - 69 - Nonetheless, the discussion outlines the effects of international sugar price level changes and highlights the need for the government to consider these effects in due time and develop a policy regime for dealing with them that is predictable for the private sector. 70. All domestic sugar production is currently controlled by SIIC, which also owns a controlling share of DSC. SIIC's sugar output prices are regulated on a cost-basis. Currently, private traders and DSC profit from a situation in which tariff protection is somewhat excessive. The regulation of sugar prices should be removed since free sugar imports would discipline the market power of STC. Under liberalized sugar output prices, SIIC would absorb the excess trade margins. There is no effect to consumers since retail prices are determined by import prices. Price liberalization would create economic incentives for cost minimization in the sugar companies that currently do not exist. In the long-run, potential market power of SIIC could become a problem if a competitive domestic industry has not developed until some future time at which the expansion of sugar beet could lead to a situation close to self sufficiency. Summary of Recommendations 71. The key recommendations of this report are aimed at creating an environment that is more supportive of private sector involvement in the sugar subsector and reduce the inefficiencies that arise due to the remaining distortions in the subsector: - Subject to more detailed economic cost-benefit analyses, investments in new beet factories as well as the continued operation of existing cane and beet factories are justified on economic grounds. The rehabilitation of existing cane factories is marginally desirable. Therefore, under current conditions, the continuation of sugar production from cane at the current level is acceptable, and no phase out of sugar cane would be recommended at this time. On the other hand, investments in new sugar cane factories and the expansion of sugar cane is clearly undesirable. - Sugar factories should be allowed to operate and market their output independently. This measure would prepare the ground for later privatization of individual sugar factories. In the meantime, the current pricing of sugar on a cost-basis should be abandoned in order to increase the incentives for cost savings in the sugar companies. In the current situation, competition with free imports is sufficient to restrict the market power of domestic producers. - Private sector involvement in the sugar subsector requires a stable and predictable institutional enviromnent. The government should consider its options and commit itself to a long-term policy regime with respect to trade and domestic pricing. Discretionary interventions need to be avoided. - The Govermnent should consider liberalizing sugar crop prices. As long as sugar crop prices are still regulated, the introduction of sugar content-based and regionally differentiated cane prices should be considered. If sugar factories are privatized, regulators must abstain from opportunistic sugar crop price reductions. - Remaining subsidies encourage inefficient irrigation levels at the farm level and inefficient use of bagasse at the sugar cane mills. These subsidies should be removed. Sugar factories should have to bear the full opportunity cost of capital for their investments even if the government receives concessionary financing for sugar projects. - 70 - Farmners should bear the cost of the irrigation system and face the opportunity cost of irrigation water. In the long-run, a cost recovery mechanism for systems costs and a market for tradable irrigation water rights should be introduced. In the medium term, a tax on cane sales, equivalent in value to the opportunity cost of incremental water used for cane, should be phased in. This tax would prevent the inefficient expansion of the sugar cane areas in case of rising sugar prices. The MOS consumer rations is a rather ineffective instrument of social policy. It should be phased out and replaced by more targeted social assistance programs. - 71 - APPENDIX II Attachment T Cropping Patterns and Land Holding Size Cropping Panerns 1992 (leddan) Feddan Aswan % Quena % Sohaag % Menra % Kair ei She, % TotalArea 128131 100.0% 321386 100 0% 3116113 100.0% 380061 100.0% 405s437 100.0 Barseam 10166 7.9% 19169 6.0% 28681 9.1% 98235 25.8% 156967 38.7 Wheat 22784 17.8% 107551 33.5% 156412 49.5% 115001 30.3% 157523 38.9 Barley 3063 2.4% 485 0.2% 2354 0.7% 522 0.1% 8945 2.2 8Etns 1749 1.4% 7842 2.4% 23777 7.5% 101285 26.6% 22659 5.e Lentils 17 0.0% 1971 0.6% 1 0.0% 211 0.1% 1320 0.3 Fenugreek 148 0.1% 944 0.3% 328 0.1% 2282 0.6% 2 0.0 Chickpeas 36 0.0% 112 0.0% 49 0.0% 322 0.1% 0 0.0 Lupine 371 0.3% 312 0. % 404 0. 1% 699 0.2% 0 0.0 Flax 0 0.0% 0 0.0% - 0.0% 0 0.0% 9369 2.3 Onion 949 0 7% 635 0.2% 1564 0.5% 1664 0.4% 287 0.1 Garlic 275 02% 295 0.1% 456 0.1% 7648 2.0% 31 0.0 Sugarbeet 0 0.0% 16 0.0% 116 0.0% 63 0.0% 28538 7.0 Potatoes 0 0.0% 0 0.0% 0.0% 911 2 4% 67 0.0 Tomatoes 5869 4.6% 25071 7.8% - 0.0% 4812 1.2% 7664 1.9 Vegetable 4603 3.6% 4009 1.2% 6167 2.0% 1043 0.3% 3221 0.8 Others 24 0.0% 99 0.0% 11141 3.5% 11019 2.9% 1 0.0 Toal Wnter Crops 61120 39.9% 168512 52.4% 231450 73.2% 354309 93.2% 396564 97.8 Maize 10490 8.2% 53700 16.7% 106449 33.7% 185379 48.8% 33476 8.3 Corn 3652 2.9% 26383 6.2% 113382 35.9% 2851 0.8% 0 0.0 Rice 0 0.0% 0 0.0% 0 0.0% 0 0.0% 267312 65.9 Peanut 383 0.3% 741 0.2% 2074 0.7% 5U72 1.4% 0 0.0 Sesame 6184 4.0% 12295 3.8% 2478 0.8% 6959 t.8% 112 0.0 Soyabeens 0 0.0% 5 0.0% 1679 0.5% 43128 11.3% sa 0.0 Potatoes 0 0.0% 0 0.0% - 0.0% 3632 1.0% 328 0.1. Tomatoes 793 0.8% 358 0.1% - 0.0% 3354 0.9% 8S03 2.0 Vegetable 7005 5.5% 5158 1.6% 8a08 2.8% 3044 0.8% 16784 4.1 Others 7659 6.0% 8299 2.6% 3615 1.1% 9314 2.5% 12110 3.0 Total Summor Crops 35466 27.7% 106851 33.2% 238485 75.4% 263133 69.2% 376802 93.4 Maize 9935 7.8% 30551 9.S% 3349 1.1% 44634 11.7% 4707 1.2 Tomato 978 0.8% 9400 2.9% 0 0.0% 848 0.2% 1434 0.4 Vegetable llS 0.9% 1703 0.5% 1267 0.4% 621 0.2% 181S 0.4 Other 2294 1.8% 3753 1.2% 3474 1.1% 8oos 2.1% 247 0.1 0.0% 0.0 Total Nii Crops 16134 11.8% 45407 14.1% 6090 2.6% 67693 15.2% 8203 2.0 Conton 0 0.0% 0 0.0% 0 0.0% 70249 18.5% 108467 26.3 Cane 61384 47.9% 151142 49.2% 14106 41S% 30372 8.0% 400 0.1 Berseem 86 0.1% 0 0.0% 0 0.0% 13341 3.5% 88547 21.8 TotalAllCrops 167481 130.7% 492412 153.2% 492133 155.7% 804275 211.8% 985209 243.0-M Note: Percentages refer to total land area and not to total crops. Source: MALR Set of HoldIngs ol Cane Farmers in Aanwn Governorale Land Holding Size Average Ho Number at Cane Land i Average Ca Share oGL d (leddan) Sze (ledda Farmers (leddan) Farmer (fed under Cane 1-2 1.5 3422 1667 0.49 0.33 2-3 2.6 8763 us2 1.04 0.41 3-4 3.6 13S51 16626 1.38 0.39 4-5 4.5 3302 6990 2.12 0.47 6-e 6.5 2008 634e 2.66 0.48 6-7 6.5 2225 769 3.45 0.53 7-10 8.5 9as 5186 6.37 0.63 10-IS 12.5 587 5073 8.64 0.59 15-20 17.5 204 2437 1.95 0.68 20-30 26 157 2466 15.71 0.63 30-60 40 90 2097 23.30 0.58 50-100 as 28 729 26.04 0.40 100. 250 26 4182 160.8s 0.64 Source MALR Sugar Crop Budgets UGACANE (Country Aveage) SUGLAA BEET (Kaft .I Sheikh) 0 "PP SP o -P a-Rt -R2 -Ri -PV_-_P VN-RE PV-A2 PV-R3 Ann n SV-P BsvyI SV-F2 SV-R3 Ann SV PP SP a PV SV VALUE OF PF0OUCTioN Uman Crop 72.6 U4 St.t 40.3 3e.8 38.1 2672 2020 2610 2617 276 1IO6 2183 2101 1967 2060 61 70 18.2 1474 1274 By Producle 100 100 100 100 t00 too 100 100 100 100 0 0 TOTAL VALUE 2772 3020 2910 2717 2f68 2090 223 2201 2067 2160 1474 1274 COST f INPUTS Seeds t 73 76 6 0 0 o 436 0 0 0 126 466 0 0 0 131 27 27 SCC Sf rviv e 37 40 39 36 38 37 40 30 36 38 16 is FortlUz*r 340 340 340 S40 340 340 340 340 340 340 97 97 POBticid 0 0 0 0 0 0 0 0 0 0 16 is MAhne Ohiked) 292 292 m 292 292 S30 330 330 330 330 126 142 AnImal 17 17 17 It 17 17 17 17 17 17 0 0 Water Irrudruln n3 0.00 0.017 11863 11863 11863 11863 0 0 0 0 0 202 202 202 202 202 0.00 0.017 3000 0 61 Other (on-farm Irn) 230 230 230 230 230 230 230 230 230 230 68 66 Watr. Opp owt tnS 0.00 0.10 11863 11863 11663 11663 0 0 0 0 0 1186 1186 1186 1186 1186 0.00 0.10 3000 0 300 Labor P-O" 6.30 6.30 124 84 64 54 667 446 446 446 600 667 446 446 446 6S 5.30630 60 318 318 COSTS THOtT LAND 200e 1386 1363 1360 1648 3466 278m 2787 2786 2979 "66 1024 opportC"elof Lan bad lt62 489 1 1 1 1 1167 1167 1167 1167 1167 460 489 469 469 489 607 643 1 807 643 TOTAL COST 3166 2652 2620 2616 2706 3944 3278 3277 3274 3468 1463 1667 Excess Ptdht -303 498 300 199 162 -1U47 -996 -1076 -1217 -1306 11 -293 0CC 10.00 Cost of Dom.de Reaurcem 18 1660 1866 1666 1715 2386 217? 2176 2172 2236 1126 1161 Cost of Tradd Pdaoueu 1297 6 S62 8*2 987 1660 1101 1101 1101 1233 320 406 Val Add d 1671 929 1136 668 Reum tob ta 0.08 0.29 D_ i S A.mP mse Cost 2.41 1.34 Nw,iba Pn, noda oofIIant 1.32 1.16 Effetin Potwdoe Coafflabnt 2.01 1.31 ENc" SubIy CoefficIent _ 3.29 1.66 PP - Pulvste Pros; SP - Sood Pro: 0Q- auaint P - Plant Crop; R - Ralon Crop: PV - PthaV4tutt; B - Sodl Vlue; Ana - Annu4lzad. 6oure:ALR dt aid tun eS rt > tT rt 0' 0 N - 73 - APPENDIX I Attachment 7T Yields, Returns, and OpDortunity Cost of Land by Covernorate .Mhral Yields (ArdabfFeddan) 19S7 g9Sa 1983 1990 1991 1992 1993 IR` ee*Cne Waler Cost F Ne. Rev E N,Re | As-an 7.09 6.39 7.99 9.38 12.37 13 07 13 09 to 38 245.70 553 33 308 .3 Ouena 9.43 9.97 11.17 13.12 10.94 14.64 14 91 12.24 245.70 687.31 44I.61 Sohag IM.So 12.81 13.54 13.t0 12,28 14.42 13.86 24S 70 80307 657.37 Me.na 12 47 13.63 12.82 16.29 14.75 16.52 16.72 15.24 214.11 902 44 688.33 Kiat *I Sheikh 12.43 13.00 13.26 16.31 166 0 17.09 17.11 15.67 1l6.03 932.87 746.84 Country 13.22 1331 13.85 14 SS 13.49 14 72 ¶' 72 865.00 gewseem Yields (tlFeddan) 1987 1966 1989 1990 1991 1992 1993 Relere,lce Water Cost F Net Re, E Net Rev AIWan 25.98 24.81 25.04 26 32 21.96 20.07 22.51 25.33 468.00 588 75 120.75 Quena 19.09 19.47 21.00 19.39 20.88 24.26 23 93 21.64 '68.00 747.26 279.26 Sohag 7.56 22.83 15.36 19.50 17.42 ta.12 16.63 468t.00 519.00 47.00 Artenia 24.47 28.38 26.76 29.78 29.93 15.97 15.82 27.49 417.69 433.49 15.60 Katr *t Shdeth 18.59 18.56 19.71 20.88 23.21 23.63 23.77 21.69 356.65 723.32 366.47 Countfy 22.94 27.37 26.37 26 85 28.59 27.85 27.68 683 00 Bean Yields (ArdablFeddatr) 1987 1988 1989 1990 1991 1992 1993 Reearence Water Cost F Not Rev E Net Re" Aswan 3.86 3.89 4.00 4.37 4.17 3.49 4.00 3.99 187.20 261.41 74.21 Ovena 6.82 5,87 6.62 7.58 7.53 6.83 7.16 6.84 187.20 580.64 393.44 Schag 7.40 7.03 8.90 6 99 7.13 5.99 7.55 187.20 659.92 472.72 Muenul 7.42 7.12 8.38 8.87 7.03 0.86 6.97 6.38 170.82 529.71 358.89 Katr at Sheikh 5.69 6.20 6.75 6 75 5.63 5.63 6.99 6.05 157.95 492.95 336.00 Country 7.29 6.45 7.97 798 7.41 5.36 7.10 7.10 610.00 Summer Maize Yields (Ardab/F*ddan) 1967 1986 1989 1990 1991 1992 Reference WaterCost F Net Rev E Not Rev As.ra 9.83 10.04 12.16 13.87 10.16 12.54 13.35 386.10 369.62 3.72 Ouens 11.63 11.91 13.86 16 79 16.75 15.93 16.77 3t6.10 643.69 167.59 Sohag 12.66 15.00 15.02 1500 15.96 16.30 17.54 366.10 560.59 174.49 Mornr. 17.29 17.36 18.63 19.35 19.40 20.79 22.05 342.70 765.60 402.90 KaIr .1 Sh*eih 15.1t 15.54 16.84 17.13 17.67 17.70 19.53 315.90 624.61 306.61 Country 14.27 14.90 14.66 17 40 18.78 19.20 19.20 693.00 Sugar Cate Yields (VFeddan) 1967 1966 1989 1990 1981 1992 Reference F Not FRev Ausarn 41.57 42.37 39.88 42 19 45.39 45.27 39.78 1421.21 Ouena 40.4 40.S8 41.06 42.21 42.65 42.47 37.32 1302.38 Sohag 37.66 41.83 42.73 43.30 Menia 41.91 41.16 41.00 *3.16 44.90 43.49 38.22 1345.65 Katr *I Sheith 29.19 29.99 31.88 33 o0 33.48 33,48 29.42 920.77 Country 40.33 40.74 40.61 '2 16 43.55 43.24 38.00 1349.00 Sugar Beet Yields (VFeddan) 1987 19868 1989 1990 1991 1992 1993 Reference F Not Rev Kafr el Shekh 17.41 17.72 17.60 1i 26 22.65 20.17 20.63 18.20 636.20 Fayoum 1340 15.12 15.10 16.22 14.17 603.87 Sohag 20 4' 17.03 20.54 17.95 821.59 Now Lande 1.41 14.85 12.72 519.t6 Counwry 17.25 17.44 17.25 e '6Be 22.44 20.13 20.82 18.20 670.00 RPnlet Vetue of Land _ ^inte, WntnIr . Summer Berseem Beeal 8ns FNR ENR FNR ENR Aswall 10164 22784 1749 549 32 241 44 931.14 245.16 Ouena 19169 107651 7842 66863 4I567 123t.32 673.26 Slhog 28781 156412 23777 747 1l 477 44 1307.89 651.93 Meni 98235 115001 101266 e3s 94 372.19 1401.54 77s.09 Katr *I Sheikh 166967 157523 22869 605 74 642.07 1430.25 8so.e81! Source: MALR PReerence yielde are 1lect country wide yield available adjusld oto IN*-yw nar,,erage devatOin in governorate - 74 - APPENDIX II Attachment 4 Calculation of Cost of Capital from Investment Models for Sugar Factories New Cans Factory Now Cane Factory New Beet Factory New Beet Factory New Beet Line | RehatdOtation pro investment pcst invesimenrt pro investment post investment in Cane Factory jof Carto Factory Discount Ra3t2e 35 Salvage Vaue (MLE) 66 72 66 Invostrnent Costs(M LE) 128 0 356 0 167 155 Capacity (KT) 120 120 100 100 100 130 Reptacement S yrs 0.030 0.006 0.010 0.037 Replacement 10 yrs 0.243 0.104 0.091 0.213 Replacerrment I yre 0.235 0.230 0. 8S 0.33t Replacertmnt20yrs 0.327 0.250 0164 0.240 Replacement 25yrs 0 165 0.3e0 0 550 0.176 CestofCapital(LEAt) 370 155 44" 184 204 213 (inciuding deprecilion) year KLEII 0 2.73 0.50 3.58 0.72 7.67 1.70 1 0.00 0.00 0.00 0.00 3.00 0.00 2 000 0.00 0.00 0.00 0.00 0.00 3 0.00 0.00 0.00 0.00 0 0 0o00 A 0 00 0.08 0.00 0.02 0.00 0.00 5 O.G8 0.00 0.02 0.00 C.02 0.04 6 0.00 0.00 0.00 0.00 0.00 0.00 7 0.00 0.00 0.00 0.00 0.00 0.00 6 0.00 0.00 0.00 0.00 CZO0 0,00 9 0.00 0.75 0.00 0.39 0 00 0.00 10 0.75 0.00 0.39 0.00 017 030 11 0.00 0.00 0.00 0.00 0.00 0.00 1Z 0.00 0.00 0.00 0.00 0.00 0.00 13 0.00 0.00 0.00 0.00 0.30 0.00 14 0.00 0.72 0.00 0.54 0.00 0.00 is 0.72 0.00 0.84 0.00 0.33 0.44 to 0.00 0.00 0.00 0.00 0.00 0.00 17 0.00 0.00 0.00 0.00 0.00 0.00 1i 0.00 0.00 0.00 0.00 0.00 0.00 19 0.00 1.64 0.00 1.40 0.00 0.00 20 1.64 0.00 1.40 0.00 0.44 O.U 21 0.00 0.00 0.00 0.00 0.00 0.00 22 0.00 0.00 0.00 0.00 0.00 0.00 23 0.00 0.00 0.00 0.00 0.00 0.00 24 0.00 0.53 0.00 1.38 0.00 0.00 25 0.5.3 0.00 1.38 0.00 0.94 0.25 25 0.00 0.00 0.00 0.00 0.00 0.00 27 0 00 0.00 0.00 0.00 Co00 0.00 25 0.00 000 0.00 0.00 c.oo 0.00 29 0.00 1.39 0.00 1.22 0.00 0.00 30 ¶ 39 0.00 1.22 0.00 :ae 0.70 31 0 00 0.00 0.00 0.00 00 0.00 12 0.00 0.00 0.00 0. O 0 00 0.00 33 0.00 0.00 0.00 0.00 0.00 0.00 34 0 00 0.06 0.00 0.02 0.00 0.00 35 0.08 0.00 0.02 0.00 0.02 0.04 36 0.00 0.00 0.00 0.00 0.00 0.00 37 0.00 0.00 0.00 0.00 0.00 0.00 38 0.00 0.00 0.00 0.00 0.00 000 39 0.00 1.64 0.00 1.40 0.00 000 40 1.64 0.00 1.40 0.00 0.44 0 68 4 1 0.00 0.00 0.00 0.00 0.00 0.00 42 0.00 0.00 0.00 0.00 0.00 000 43 0.00 0.00 0.00 0.00 0.00 0.00 4.4 3.00 0.72 0.00 0.4 0.00 0.00 45 0.72 0.00 0.64 0.00 0.33 0.44 46 0.00 0.00 0.00 0.00 C.00 0.00 47 0.00 0.00 0.00 0.00 0.00 0.00 48 0.00 0.00 0.00 0.00 0.00 0.00 49 0.00 0.53 0.00 1.38 0.00 0.00 S0 0.53 0.00 1.38 0.00 0.94 0.25 Production Cost for One Ton of Refined Sugar in Existing and Planned Sugar Factories F cloty/Clop Crv n Goal Abu Cutuqas/ti Naga Hamadej Wlhna/Cuona Kou hOusna Armant/una Edfu1hswan Kom Omboths Gerpa1Sohag BeettOutne Hypo Beet Hypo Cans YbId (Viled) 3e. o $.2 a8.0 37.4 37.4 37.4 3e e 38.6 3e s 37. 18Ie2 2e 0 42.0 Ma lPamry 10.6% 13.3% 10-41 10S6 10.4% 10.6% 11t21 10.4% % 10.4% 104 3.30 13.3% to5% C Lp clty U011"Atton e7% 100% W0S 166 60% ss% e9% 90% rD5% 48% 100% 100% 100% Land Vlu (LE/led) 1167 409 807 643 1404 m 1234 S74 123.4 674 1234 674 1234 574 940 240 940 24e 1306 662 691 417 691 417 1234 674 W s.^ lot C nelBEba (mlilld) 1 te63 3000 973e 12000 12M0 12000 12000 12000 12000 12000 4000 4000 12000 sugw Ptoduction (Kn 909 se 6rR 13e as lei 12e 114 171 U On Faim Tl PC SC PC SC PC SC PC SC PC SC PC SC PC SC PC SC PC sC PC SC PC SC PC SC PC SC Ses.at 31 33 1 31 43 32 33 32 34 32 33 29 30 31 33 31 33 32 34 11 1 7 28 30 srCC senrice a 0 a * 9 9 la 10 10 10 10 10 9 0 10 10 10 10 10 10 a a 6 a C 9 Fb'tUzat T 86 86 40 40 06 86 7 87 87 ay 7 BY 78 To 6 es 86 86 87 67 40 40 2e 2e 77 77 Pos Icdeo T a 0 a a O a O * * * * a a * O O o o O * a a 4 4 o o Uschhnz (H1nd) T 3 62 62 Ul 73 *2 74 4 is 66 r4 U4 e7 76 73 82 73 02 76 u4 62 69 34 3e sea 75 AAnrt D 4 4 * o 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 o o o o 4 4 waist, lr/dran T a So o 21 a 41 o U2 o 62 a 52 o 47 o 61 o 61 o 62 o 25 o la o 48 Othel T 67 67 23 23 67 67 so so so 60 fie 69 63 63 67 67 67 67 soh 69 LS 23 26 16 62 62 Waleto Opp eos D 0 29e a 124 o 243 0 30e o 30n o 30e ° 278 0 300 a 300 0 307 o ICA o 1107 o 212 Labol D 12 2e 12 31 131 12e 12e 129 129 130 130 129 129 l10 Ila 120 12e 12a 120 129 129 131 131 es 86 11s 115 Oppoilunley Cos lofltLd D 2eo 122 333 224 3so 104 314 14e 317 148 314 14e 2u4 132 235 61 235 el 334 167 286 172 os5 112 280 130 Fuwm Pioltsu 39 o S o -12 0 6 0 e o e o 31 o 102 o 102 a _7 o 21 o 237 o as o Farm t3y P,oduCa - 20 2e o o 20 2e5 2e 20 28 26 20 2 24 24 2c 26 26 26 26 26 o o o o 26 26 Total Sugau Crop Costs 088 e38 609 e47 697 - 4e 690 e53 es7 892 690 8e3 647 797 697 74 697 754 697 rr07 609 643 609 42T- 690 7r14 OthatUxisit T 74 74 10o 138 77 77 77 77 77 77 se 6e so bO 77 77 77 77 Ila 116 ioa 138 108 135 68 66 Labor Cos to D eo o 60 s 00 60 so so so so so so w so so 60 oo e0 s 0 0 6 o 60 so so 60 60 60 6a - Olhol Uanulacturng D 36 36 142 142 36 36 36 36 35 36 36 36 36 36 35 as as a6 36 35 142 142 142 142 35 35 Olhei Costs D 20 20 o o 2 20 2 10 20 20 20 20 20 20 20 20 20 20 20 20 20 o a o o 20 20I TOWal. n-ulcludng Cool log 1es 300 320 192 i92 i92 192 192 172 el lai 16b 165 192 192 192 192 2ai 231 a00 328 300 328 181 181 Piocssing By PfodUctf - n2 n2 274 274- 92 v2 n2 92 n9 n 92 92 n2 92 n2 92 n2 9 D2 92 92 274 274 274 274 92 02 Costb.1fecap/lnstn Ong 7u4 s3 035 701 797 948 790 sa3 7st n92 779 972 720 570 797 U84 797 e84 e3B IU4G 635 u97 636 697 779 873 Cvomp anyofhead D 40 40 04 04 40 40 40 40 40 40 40 40 40 40 40 -~40 40- 40 40 40 64 e4 04 64 40 40 D procdalim T *0 so 100 1oo e3 ea e3 e3 e3 e3 e3 3 so eo 03 6a rs3 oa 304 30a4 100 too 10o 100 63 6a Cost of Cpltw D 302 3s7 324 344 32 3n 301 32 320 399 2es 326 287 330 254 34e 2es 32s S33 467 319 344 319 344 258 307 Company PrfitsU 60 0 71 o 29 o 6`4 a 29 0 Sy 0 122 o u4 o 79 0 -404 0 77 o 77 o 110 o Cost(.hobessi k.0 1249 1412 1194 Me0 1249 1460 1249 1459 1249 1494 1249 1402 1249 t32a 1249 1335 1249 1313 1249 Mys I1194 1206 1194 120S 1249 183U Polectlon and Cornp ts.no" (who|bt -lavl TotvJDom s0cc PAouic4e 660 10-43 -1062 10e7 s3e 1104- Sol 100e sio 112e i61s 1060 831 1004 78 970 773 s6e 1140 1213 mw 107e eso 912 7zn 065 TotalTradal bR sOUtOCe 30e 39 Soe 122 294 347 300 3e3 302 WSe 2 9 362 2e6 322 29s 3s7 2ss 367 uo0 U4 Oa 129 30 7 1 261 317 Tol Cstsc b18 1e412 111e 1209 1232 1460 1187 1450 1212 1404 1144 1402 109e 132e 103 133s 1068 1313 1720 1867 1097 1205 Sol se3 106a 1203 Sugi VAluS 12449 IS&$ 1194 Joel 1249 lOD0 1249 10oe 1249 108 1 249 1086 1249 1068 124 108oo 1249 10oe 1249 1068 11s4 1089 1194 1080 1249 loao VailwoAdded 941 719 1128 9ee 956S 741 949 _725 [947 72 ONo 734]_9u 76a 954 731 964 731 MO9 444 1090 9S9 1104 1017 gse 771 Dom4srb Fie4ou1o9 C4St 1.46 t t3 1.49 t 61 tbe 143 1.31 1t34 1.31 2.73 1.12 o 90 1.25 Noe nA Proetion Costrcbn1 1.16 t.10 1,16 1 16 I IS 1.16 1 16 1 16 1.16 1.IS I 10 I lo 1.16 EtrbtN Prolot Co hfitcbt 1.31 I. 17 1.29 1.31 1.31 1.30 1.2e 1.30 1.30 1.61 1 14 1.14 I 28 Ellocilv Stubsidy Co*hibnt 1t.6 1.20 1.61 1.eo 1.01 1.67 1 61 1.60 1.60 t e7 1.22 1.20 16 D rbzlon of Pawl Pdloo 6Suil Tax so 6 t 6 alS tA t70-v10 14St t260 12e6 Conp"tooonsumw rtl 2ts 265 2rt 2e6 Exce tiAWeh so 0 Ila FhlR itrk 1e1160 176t 1ttS0 B166 PC - Plo&& 0oot SCe Dci Cost T. - rbn esR uo t (D H - 76 - APPENDIX II Attachment e DRC and Economic Cost of Production - Sensitivity Analysis S.w V..* Bel C.Me waie, Coti I e 1 C.'. B.. t C.A. CItiol C..OW 81 C.A 8.., Cn-. LI/I DAC DAC LDJmo LE/t LEtl DRC DFC LE/I LOll LED - DflC LRC go0 1.3t7 1.955 0.000 I I 78 1259 1.0o3 1.236 765 97.4 0.665 C 2 6s0 1.312 1.794 0.00o 10so 1271 1.094 1.254 25 790 1004 0.811 o.6.A l0ow 1. 1.64 0.015 1162 1232 1.06. 1.270 so £s5 1024 0.717 0.924 so0 1.171 t.st2 0.0DM t18S 1294 1.100 1.200 75 0 1063 0.743 0. 965 1100 1.111 1.4z27 0.030 117 ? 105 1.103 1.202 100 Gas 1093 0.766 1.007 11s0 1.057 1-.34 0.0C= 1190 1216 1.105 1.318 125 890 1122 0.716 1.0.4. 200 1.0018 1.255 0.w5 1 192 1221 1.108 I.A4 *sc 915 IlS2 0.821 1.039 12s0 0.594 1.164 0.053 1194 :lug 1.110 1.250 175 940 111 0.8,47 1.0 130 o. s t.120 0.060 ¶l117 1Y1 1.112 1.288 200 S5" 1211 0.672 1.171 1280 0.88 1.06 0.04.6 II" 16 1 2 1.11S 1.352 225 990 1241 0.9" ¶.212 140 0.860 1.012 0.076 1201 W174 1.117 1.298 250 loIs 1270 0.924 1 25 1450 0.818 0.96 0.0ou 1204 12as 1.120 1.41A 275 10O0 1200 0.9sO 1.295 1soo 0.7n 0.922 0.090 120e 1287 1.122 .430 300 1065 1029 0.876 1.224 is50 0.711 0.882 0.091 1208 j140 1.124 I "a 32S 1090 1259 1.002 1.377 6o0 0.728M 0..47 0.105 1210 1420 1.127 1.442 35C i1ls 1288 1.029 I 418 16s5 0.711 0.814 0.11 1213 1421 1.129 1.475 71 1140 1418 1.034 14 ". 1700 0.649 0.794 0.120 1215 l.A3 1t1a2 1.494 oc0 ids 1.4A4 1.079 1 1.s0 1750 0.948 0.755 0.128 1217 14s5 1. 14 I.510 425 1190 1A77 1.105 I.542 ism 0.840 0.729 8.135 1220 14. 1.124 1.521 45 1216S 1507 1.131 .S.8s 1880 0.2 0.704 8.lt4 Im 1a77 1.128 I.542 4.75 1240 15s.2 1.167 1.924 1100 0.6111 0.U 0.1 0 1224 1446 1.141 1.555 00 1265 1Sad 1.183 1. u5 Y.W189 Best CASn b.e C... Water Co-..nmP Bell C4. Bot, Ce. U" LEAt LEAt OJ DRC n e31d LEIA Lt ORC DfC 1.0 1740 o IN - 1.7 1.194 I 1a 04 106 0.976 0.972 12 18A. mS Laid 4.408 1000 1112 ¶096 1.025 1.010 14 140 2864 I.4. 10.4.0 2D00 1181 1126 1.075 1.044 1s 12n 201 1.=m 6.124 3000 1201 1154 1.125 1.087 is 1216 2272 1.12I 4.413 4C00 1257 118 1.l171 1.126 20 11s8 2161 1.04A 23.48 s000 t1t 1212 1.D 1.144 22 l0o7 2061 1.008 2.212 6010 1284 1261 1.281 1.26 24 1052 1917 0.965 2s38 7000 1402 1271 1.28 1.247 2s 0l1l 11a2 0.529 2.25O 80ooo 1451 120 -1.190 1.25 28 682 1722 0.887 2.041 low0 148'M 132 1.8 1.2 30 S"4 1l4 0.870 1. 73 10000 1"?7 1t5 10 1.27 32 *t0 1578 0.947 1.737 11000 188f 1257 1.86 1.414 24 gt6 Isis 0.827 1.Q 12000 16"4 141 1.414 1. 26 gas 1441 0.806 1.32 13000 l=2 14.4 1.878 1.601 26 672 1412 0.794 t. A2 14o0 1741 1476 1.724 .54.8 40 8s4 127o 0.760 1.254 I5000 1799 104 1.715 M1. 42 642 1251 0.787 1.224 s000 1r37 1lS3 1.857 1. 35 8n 1288 0.756 12 I2 17o00 1s8s 1882 1.616 1.141 48 all 1263 0.744 1._Ms 16000 tau I6as 1.912 1.727 46 Go807 122 0.° 7 1.1t6 19000 1942 1621 2044 1.774 8 7t7 1205 0.721 1. I 4 20000 2021 law0 2.112 1. 12 - 77 - Farm Income Analysis APPENDIX II Attachment 7 F.r Meoo1. Acuan (3.2 tender ,trn CaaeO Firm MOdel AStri (3.2 2 88ddw n thout Cala. | Net Fito No Rol Wmntr Summer % Led toeddadr Net Ret i Return Wnter Summtn. % L1 d lddn Noret Rov % Return Sugar Ca. I 5 1.5 44% 1421 2132 57.4% 0 0 0% 5421 0 0.0 Wheat 0.9 0 14 5% *53 498 11.4 2.1 0 30.8% 5S3 li5 41.8 bneam 0.4 0 d.5% u8 23 0.3 0.4 0 10.5% S 3S3 12 IL Boma, 0.2 0 3.2% 271 54 5.5 0.3 0 5.3% 271 A1 2. Malls 0 1.3 2.0% 349 S0a 13.6 0 2.3 40.4% 389 8" 95 3 Vegeteul.. 0.2 0.2 S.5% 720 208 7.11 0.2 0.2 7.0% 720 2S8 10.4 To-tal a 2 0 100.0% 3712 loc. 0* 02 2 S 100.0% 27rs7 0 0 Return per I4dd4 n i t5h1r 11Ca0 Retuat por hddan wthout te Inme chtng Per teddat -2m2 InceCnt S,nt ng Perm -tt34 -25. Farm rModel Queue 1a t.l2 14dd tn Cane) Farm Modl Ouhna (3 2 fd4an -thout C*ne) Winlt S.ummer % Lard 184dn Nat Ftt l Return Wnter Summer % Land 14dd40 Net Ret ¾ Ieturn Sug r Camte 1.5 1.5 44% t1302 1953 42.7% 0 0 0.0% 1302 0 0.0 Wheat I 0 1S. I% S47 4 1 5.0 2.1 0 3.01% O 7 14463 343 sereem 0.2 0 3.2% 747 148 3.3a 0. a C .8% 747 374 8. ibom 0.2 0 3.2% S" 120 2.8 0.3 a 8.3% S"9 180 *.3 Me.tz 0 1.3 21.0% 543 708 15.4 0 2.3 40.4% 843 1248 2B. V.98194*1 03 0.2 2 0 191 20.9 0.3 0.2 8.% 1911 984 22.7 Total 0 2 3 100.0% 4571 1000 3.2 2.5 100.0% 4200 100.0 Return per tallow hdd n cans, 1428 PRturn per tetddtan orditl Cant 1313 Income 8111998 per 0dd0t1 -118 lome Oetig epentr .m370 -m It Fwm Model Mnts, (3.2 h*ddn orth iCane) Farm Mlodol M nle (3.2 .dd4m *1 1r,Ut Ca4t) [~~~~~~~~~~~~~~~~~~~~e Pat Nol tV Rhe v Winter Summer % Land hddCn Net Ret % Retum Water Summer % LaLnd ldden Net Ret ¾ Potum SugmCsane 1.S l.S 44.4% 1340 2018 4584 0 0 0.0% 1345 0 O. X Wiht 0.0 9 O .7% 902 S41 12.3 1.7 a 2.8% 002 153I 38=.3 Seree.m5 . 0 9.7% 4*1 280 L% 0.7 0 123% = 303 70 beans 0. 0 8. I % 535 24 8.1% 0.8 a 140% 536 425 8. 1 Metai 0 1.4 22.8% 74S 107l 244 0 2.4 42.1% 785 1836 42.3 VegetaSteS 0 0.1 1.0% 2411 241 8.5 a 0.1 f.8% 2411 241 8. tottl 3.2 3 100.0% 439 100.0* 3.2 2. 100.0% 4342 100.0 Return pSr l1dd.a ithu owe. 1374 ReAtum per 4ddar, theom eutie 127 In-me htnge petr 184441-I hicome Shnpe per l1dgm -57 Farm Model Ouea (3.2C 1044.544 n Cael Fat Model Ou lna (32 t.1dda44 wthr Cane and Bea1) PogReo Not Ravi %Rtr WInwr Summwer _ Land f.4d1 Not Ret ¾ Retum water Summr ¾ Land mtddan Net Rtet tr Sugo Cane .8 1.5 44.4% 102 193 42.*n 1.1 1.1 38S% 1302 132 31.2 v.1188 1 a 16.1% Ur 067 15.e I 0 1.L% so? It :4. SBO tIM 0.2 0 3.2% 747 14£ 3.ao 0.2 0 3.2% 7r7 "O 3a Ibetne 0.2 0 3.2% we9 520 2." 0.2 0 2.2% w9 120 2._ Mavze 0 1.3 21.0% 583 704 15.4 1.7 7.4% 843 on I Veplablee 0.3 0.2 1% l9ll 904 20. 8.3 0.2 8.1% lll 154 S0 0ug r llo 1 O O 0 0.0% £21 0 0. 0.4 0 8.9% 121 332 7.1 e 3.2 a 3 00.0% l71 100. 3.2 3 500.0% 468 100-. ewturn pr beddan Sith tme t425 Illttm ptb ftddm n teut Garld I gt opeelnIYCemtof eut 1U 13 3t a . * 3S 0an Prleno-Welad Lose -180 -137 -48 -4 Paslay subsidies (~Fl*mn " j* 63 57 48 G 0ff PrIsM Wel A Le -13 -02 2Z 2 A %j % TMl i 02 01 : Ut -21 < tt t To Produsrm -00 -014i -100 -t0 -Et7 To Trader m - _. To Goseurmest - 4 2 -1 t t t i Frnm Mod a e 723 a i ° .4t7 Fr9DS Cee/4rrw SWr9i -k; % tr nr__utr ______W_r____J -1U -t39 Utd o I ?1 .86* Wet~~~,s Lasses 1121 12777777 5dr6e8. =e 31 120 12 e ....s. : TeSucm Loe"" 324 2 2 z2S%N..... 3s% FngDon. CoeMumer aurphu i7 48s *'and Tortal Transter and Losse 1 7~~ o .- ". -, ....,._ - 86 -- Attachment IlIpol Sub..d,.. FR..,0.d. 32% Imcon Tarilf Page 3 of 4 F.c.tory/Crco C an*. B..t I mpons Ye-s_ 35.0 1A.2 Net RFcc.-.ry 10.5% 13.3% CaDac'ry Uti( 8e8.% 100.0% Lard Ve.t 1153 485 807 543 yw.ir 1or Can.18b.. 11510 3000 On Frrm PC SC PC SC PC SC S.e.1 33 33 I 1 1 1 225 225 World Market Faw (S) SCC Svic.J 9 S a a 75 75 . Quailly. Transport Adjustmeni (1) F.ruilzer as aS 40 40 300 300 CIF Alexandri (S1 p-sctICA."0 0 a t tto1 100o CIFAtexvdna Macl,. (Hlred1 82 t2 5 so 59 S Porn Charge and Handling Anlrlau 4 4 0 0 15 15 *lmporlsrChatge Waltr lrr/dr;un So 50 21 21 a o *Trnup Pon-Vrt-olesale O'lher 57 57 23 23 324 0. Tarwtt Waler. GpP cool 295 295 124 124 Labor 128 128 131 131 Land 121 121 224 224 F,rn Proatle 0 0 a 0 Farm Ay Products 26 2t 0 0 ro{l SUSqg Crop Coeta 83t 838 847 847 Other Mattrialt 74 74 138 130 LAo" Costs 60 so 50 50 Other MUvutacturng 35 35 142 142 Other Costs 20 20 0 0 TotaA As utacturlng Cools 18g 189 325 325 Processing By Products 92 82 274 274 Coot before caPift,anc.i;g S34 934 701 701 CoMPany OVernead 40 40 t4 84 Deprecianon t0 80 100 100 Coit of Capitaf 357 357 34 3 4 Company Prolts 0 0 0 0 Cost ex company 1412 1412 1209 1209 1412 10tt Coast (tanr.leary) 1412 1412 1209 1208 Sales Ta Sa 5t Se 56 se 58 Sale pricecompany 1488 14.S6 1285 1265 1484 1144 Comrpny U OonsumWtf Posts 285 2t6 2t5 2t6 2t5 2t5 Exs UrrMwglns 0 0 203 0 0 0 P tSelPrti 1753 1753 1753 1S50 I75 1429 lo9 DlitfIsuOon Cots 135 135 |UoS ubsIdY 1047 844 moS SSo P 500 500 DDemand Eihe8tty Tb.1 Baa* Demand (KT) 1507 Base PrIc 0KT) 1160 Demand ft realil Prto- 0(T) 14t0 Donmnd Al Import Prco 174 Can Bee r lrmon T Chvnps ActuaL Supply Guant... (KT) 909 as 475 148 4 27 Elklenl Supply OQ nUlte (KT) 0 0 1574 1S74 0 M*8 ProcurementOuwnbty(T) 515 62 CT7 0 LEJS MLE LEt MLE LEt t 4L LE t!4 Toow srrwmsnt -1047 -539 -444 -42 324 1164 -431 6 Toul MaS -1047 -5 -644 42 76 J 5 To Consoumen -723 -372 -723 -45 _411T -0 To Produoerm -324 -167 -121 -7 -44 m- Fwrm Inpune Ctllgazon Sytim) 0 0 a0 0 .. - 36 Factry Subsidibe (FIinnoe. Fuel) 0 0 a 0 - 5 Tariff Rrrnue. 324 tU 364 43 Tota Producen 0 O 0 0 - 4- 4 Total Fwrrn 0 0 C 8 C 9 I47 Famrn lpuyo(nl,gaton Syelm) 0 a 0 0 o . 46 Opportutly Coi of Water 0 a 0 a 0 142 Ott Prldng-Welfer Loee 0 a 0 0 5 0 ToualFaclarwee 0 0 0 0 Facr Subeldlue (FInance Ful) 0 0 0 0 01ff PrIcIng-Welife Loa 4 0 0 0 otal Consumer, 3S9 248 3 34 -324 -114 11 0 44 To Pnoducoe -324 -128 -121 -4 To Tradem 0 a -203 -7 P _ t ToGovwemmmet Trrff) -=24 -14 -164 I -4: From MoS 723 372 723 46 41r 0 Foregone Consrtesr 3Surplus ______ 1 Poteeda Aitamtalna Witt U Ltre 0 0 0 0 0 14; Trader 0 0 0 0 -2S Totw Wetr. eot-m - 2SS 121 t2 - 32 7 Production Losses 324 296 121 12 1 Forgone Consurnew turplus 1 s Grand otal: Trinst,re and Lose.e 0 -0 -0 -0 Change denotn dltllmnoe oompared to cJrreni sntuatlon. - 87 - ln,ori Twriff Reduced from 22% re 1s 'r At t achment F.croryfC,co Cans Beet Imson Page 4 of 4 Yaold 38.0 11.2 No RPercoary 10.5% $3.l% Capacry Utll 86.8% t00.0% Land Val.re 1153 *8t5 607 5`13 Watter to, C*xr,l41B 11651 3000 On Fwrnm PC fiC PC SC PC SC Seed 31 33 It225 225 World Market Fraw (S) SCC Sorries 9 a 6 7S 76 * OuallY. Transport Adjunmnt (S) FnllrUzr as 85 40 40 300 300 CIF Alexndr1a (M PetodeOOs 0 a 1009 1008 a Uachm.* (roed) 73 82 U3 S9 * PortCgtv andHendllsg Animal 4 4 0 O 1S 18 . n'proflrCharge Water. Lrrldraum a s0 0 21 8 6 . Trmnsp Porl-Who.sais, Other a7 57 23 23 181 0* Tartl W(atr. eps ost 0 296 0 124 Labor 128 120 131 131 Land 288 121 3t 224 Fwam Profit 40 0 * 0 fwm by Products 2e 26 a 0 Totw Sufgm Crop Costs _ 7____ U 01 447 Other Materials 74 74 1W 138 Labor Costa 80 s0 s0 s0 Oltt.r MaIuttunrng 3S 3S 142 142 Othw Costs 20 20 0 0 otal manulactrung Costs leg I8O 300 328 Proesmi;g By Producto 82 82 274 274 cost befor.e astinancig 784 934 835 701 Company Overhead 40 4o 44 6 Oeprecation 0 80 100 100 Cost of Capital 302 3S7 324 344 Company Prottle s0 0 71 0 1 ioa sex company 1240 1412 1194 1208 1248 10U8 coste (farmrtma'y) 1188 1412 111t 120 0 9 Sie Tax e 6 sa so so Salre prioe smpsan 1306 14,51 1250 12tl 130S 1144 Compray to eonsumor ros 285 288 28t 28t 215 288 ErseeMalrsrgneO 0 55 0 0 a Mli 1590 1753 180 880 15tt 1429 MoS stbrtrbUon Co4en 138 135 MUd SxrbOfY 6U ae64 iloS Sale Pile 800 & Orend Elaticity -0 0 me Demnwd OmT) 1607 Iame Pric IT) law DOend at PrlAl Pitrs xOM 1524 Demand rat trnPon i 1574 cans all Itmpo"s 1TO &C j Actual SupplY Quanttse OCT) 07 8 Be 1t9 .1524 .tT7 Etmcst Suppty uantftte T) O S 1574 I1S74 . 0 moS Procurement unlny OM) 5 15 a .7 02 L~f31I CtK LE/t ML!E L F t MLE 1 Toa rnlerIm r .t4 -4 48 47 lei .84 77-ilis TotalwM3 484 -46U 2 -1 . .42Z 14: To Contumersw -7m2 -72 -3 -4.41 To Produorw -161 -83 -10e -7 ;.4 ;.:@ Farm Inputs (frrgaion System) -37 _4 -12 .1 45 ; .: Fars Sub.eldWs (Finance, Ful) -a3 -7 -54 .4 ; Tariff R"enuse 161 t4 - U 'U Total usersoo 90 62 77Ii 7 TotWFwnter . 4 63. 4, 01? Farm input (Irrigaton SytIem) 37 U4 12 1 - Opporsunnt Cot oWf lf 163 139 31 3 b 01ff PicinrgWsllar. Love -150 -127 _44 -.4 W44 ToPt Fe - -h 48 71 7 - ; d Factry SubIdli (Finanoe Fuel 63 17 44 6 U 0 Dm ricd ngWetfe Loes -13 -12 23 2 ;; R 4 .iNICorenier. . "1i12-.0* 31tt -84t 31 z To Producnrm -161 -e3 -106 -4 -47 a TPTraders C O . -2 -4 . Tooqemrnmienr(TrI -161 .42 F,en M,rU 723 372 73 48 4At 0 Foregons, Consufme Surplus _ _ _ _ Fe"nsW Ajiam.h Waler User -153 -139 -31 .4 J. IAa - Tfrader.,- 0 a 2 0 e . : TeslhUI zler. 4 -: - ~ .. 121. 12 J 1O -3 Production La"" 824 0 5 121 12 SOS 4 Fosgone Cansumer Surpls5s _ Crrand Total: Trntmr snd eLae 0 0 - 0 r3 isnekee eereSnse oemo nrd t current shuaOSn. MAP SECTION IBRD 25764 . ED(TE~AANEAN SEA ARAB REPUBLIC OF EGYPT SUGAR FACTORY LOCATIONS 344,416.7969 --d - K.,~ ) - zf O*m-hut ~~~~2 > ( i t c . O IX 2000 10 30C KlL,AE ERS M A R S A M A T R U H s 7, 00 2D -ES - 2' ( < * < , t ~~~~~~~~~~~~~~Shb- .1 K.. 5 A -A A CANE SUGAR FACTORIES ( 'E5PESS _ ^. . 01 G Z A i I S I NAI 0,0,960 7.2 O - I *1aFyo; F | SUEZ ,, C S I N A 0 E,7. I N SOU L A ,.. ESIU _962 S..,. -- I 16 0 60615~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..... , < rs 10ELSAU D I 96, 15G 176S _______ 0~~~~~~~~~~~~~~~~~~~I NA, -MWO79 S Au u I~~~~~~~~~~~~~~( 11UIRGA 98 / EL vlNYA * \ C - /, A R A B I A AEURGOO 979 W E S T E R N 3-.v! * SUGAR REFINERY (HAWAMLAA) J __' ,U t CbfQoffi > N _ BEET SUGAR FACTORY C 'e QENA GOVERNORATES WITH SUGAR CROPS D E S E T T '. - *. E L B A H R E L A H M A A SOHAG* E L W A D I E L G E D I D G ,.900 <:) < , ' RED 66~~~~~~~~~~~~~~~~~~~~~~~~~a H=mmdiCN' NA" * , SEA SDKNAb SEA S CULTIVATED AREAS CANALS II A A m X C60 51 i5 ___________________________________________________________ WADIS~~~~~~~~~~~~~~~WADI - -dd9n_2 OF' ( t)mlu . . rD T E _ ' ' PHYSiCAL FEATURES A- 01 (D~~~~6~ EN E8~ NATIONAL CAPITAL 41 B EL SHEI- & AEWAl*h.IA.+ 866ob 5 0 TOWNS AND VIUAGES . ° 7 oKa @ D>-q,, Sokm D5 / 79_"T6 . - GOVERNORATE BOUNDARIES \\I 6, N H6RBI86h RacE3 U. K , = - f i * A z s ' t > N - INTERNATIONAL BOUNDARIES EE9ERv \gR S56,o 6J Z.gflIO;*2/ ' t A l aRizXJ? ffy A 7 ;4.1614 . >4 / O TOU | 22-'. e' - 2 j. ~~~~~~S U ,-D A N 161768 1994