The Largest Grain Hub in the Middle East Will Be in Egypt – the Minister of Supply Hanafy

Interview with Dr. Khaled Hanafy, Minister of Supply and Interior Trade, Egypt

What are the most difficult or biggest challenges you face as a Minister of Supply?

The main challenges that we face in the government, and that I face as a Minister of Supply and Interior Trade, derive from the first words that Egyptians pronounced in the Revolution in January 2011: bread. Bread in Egypt is a great story – people under a certain level of income, which is the majority of Egyptians, used to suffer from getting their bread. They used to queue and crowd to get bread (which is their right). That’s why when they went out for Revolution they mentioned bread as a first word, and they meant it literally. For more than 40-50 years, in Egyptian dramas and every government, they tried to tackle the bread story. That’s why, once I came to office, this was my first challenge. I understood that bread is not just the bread that is sold in the bakeries, there is a long journey through a supply chain for this loaf of bread. We tried to solve the problem of bread, from the last part of the chain and then traced and tracked all the links from the origin to the bakery.

This is a good story because we promised that we were going to solve the problem and we did; now there is no queuing, people get their bread whenever they want from wherever they want. They can buy bread, save points from not overbuying bread, and get free goods tied to the bread. This story has the principles of economics and business, we managed the subsidy file in a very scientific way. We passed the point of subsidy from subsidizing the input (wheat or flour) to subsidizing the beneficiary (consumer). When we did so, we liberalized all the steps of handling and dealing with the production of bread – starting from the wheat or flour. In the past, the system was to give flour to the bakeries for free to meet a certain quota, and compute the cost of production in order to let them sell the bread at a lower price far under the market price. The typical textbook is black market smuggling – to the extent that more than 50-60% of the flour used to be smuggled. This was equivalent to EGP 12 billion annually. We returned this, liberalized it, and made the bakeries sell the bread at a market price and make profits.

There is no room for smuggling anymore: the consumers get a certain quota per month (150 loaves per person) and they can get the bread from wherever they want through a ‘smart card.’ Thankfully for information technology, we developed a very sophisticated system to offer this to consumers. By doing so, we got rid of the flour smuggling problem; but, the other problem was the over demand and over use of bread. Because bread is a very low-priced product, consumers used to demand more than they needed, and would throw it away or feed the birds. To discourage this, we began a point system. If you have a certain allowance of bread and don’t consume the whole amount, then you save and get points that can be exchanged for free goods. This made consumers ration their consumption of bread dramatically. More than 90% of Egyptians now save and get free goods the following month, and the amount of free goods average EGP 6 billion. Families redeem saved points at specific grocery stores (25,000 stores) for different items of foods.

Parallel to this, we made a revolutionary change to the food subsidy system; again, we allowed the consumers to have the same cards and have a purchasing power. Instead of like in the past where we tied food to consumers or beneficiaries, and they paid a certain amount (which encouraged smuggling, black markets, and poor product qualities), we inverted the cycle. Consumers have the purchasing power to go to the grocery stores and choose their own products. We call this ‘economic democracy’ because consumers used to be obliged to only choose and pay for a certain quantity of items at one grocery store. We removed all of this. Then we went to the second word in the Revolution, freedom. This economic freedom and economic democracy gave them the right to choose the political leaders, but also what they eat and what they want for their families and households. Now, with the power in their hands, they have the freedom to choose where, what, and how much. Consumers have more power over sellers, and now sellers compete in attracting consumers, instead of consumers being tied to one seller like in the past. Those grocery stores have now started to give higher customer service to attract consumers. This made consumers get what they want, ration consumption, and improve welfare. From a public finance perspective this is an improvement in welfare.

The other side of the story from the business point of view is very interesting as well. Some expressions that we use in our business life, aside from the poor people and people that deserve subsidies, are financial inclusion, formalization, and information. Financial inclusion was something that people did not believe that we could do in Egypt, to include those types of shops in small villages and slums scattered over the 27 governorates to be dealing with the bank system – 50,000 outlets under our umbrella now work in this banking system. They are obliged to have a bank account because all of the financial transactions (tens of billions of Egyptian pounds, but a static of EGP 37 billion) are handled through the banking system. This appeared to be impossible, because when we talked about financial inclusion in a country like Egypt, we used to say ‘Let’s start the big companies and well-known multinationals,’ and not the small shops located in slums or villages. Formalization is something very important to Egypt and investors, and we converted all of those from the informal sector to be included under a formal sector. Number three is important also, and with it, I can tell you information about consumption patterns for more than 80 million Egyptians (90% of the population). For the first time in Egypt, we can store and analyze this information for data mining or consumption patterns.

These are the main ingredients and prerequisites for having business at a higher level, so when investors come to Egypt, it is easy to have the big multinationals with bank accounts. Before it was not possible to imagine those small companies – the consumers – now we can manage their retail business, investments in the food industry, fast-moving consumer goods, and household consumption. We can talk about developing internal trade in the country while managing this information. Also, we are welcoming information technology and financial companies to invest here and convert this purchasing power into a supply chain. When a consumer buys a loaf of bread from a bakery located in Upper Egypt, there are signals that go to a certain silo, freight truck, maritime transporter, or market in Chicago. We can create credit, financial tools, and benefits that help the poor and businesses. When I came to my office and presented this idea, this appeared like an abstract idea from a professor of a university, so it was the most important thing that nobody believed we could do. We give another message to Egyptians and others that we are going to work by science, and not just practice, because science will help us develop.

You solved your challenge, but what is next?

I mentioned that this was the first challenge or step, the part of the chain. On the other side of the spectrum, we have a mega project: the Damietta project, a grain logistics hub. It is related to the poor Egyptian who buys a loaf of bread from a village in Delta or Upper Egypt. In order to guarantee the stability of what we are doing, we have to invest for the future. We are in the process of creating the first and largest grain hub in the region, with a static capacity of more than 7.5 million tons of grains and other crops. The food industry contains clusters of different types of industries, and the Damietta project will have state of the art silos, domes, conveyors, and factories.

The idea is that we are going to capitalize on our weak points and convert them to points of strength; for example, Egypt is the largest importer of wheat, but this means that we can have a say in the market. We are going to capitalize on points like this. Egypt has a dense population, more than 90 million people, which is a burden, but also means a large market. Egypt imports more than 95% of our oil, we can market this for oil extraction or soya cashing. That is what we are doing; we have to benefit from our location, geography, special advantages, conditions, and logistical characteristics (multi-motor transportation systems). Also, we have different trade agreements that make the production in Egypt accessible to more than 1.6 billion citizens because we have Egyptian-EU partnership (European), GAFTA (Arab world) and COMESA (East and South Africa). If you look at the map, then you are going to discover that this place is in the middle of this region.

What stage are you in for developing the Damietta center?

We have finished the logistical and technical studies, and engaged with different investors, so we are progressing and preparing for the infrastructure. This project is based on something very important, not building or structure, but networking and strategic alliances. Having allies and partners in the grain houses, maritime transporters, logistic companies, food producers, and neighboring countries. We are now successfully making these ties, and of course there are challenges, and opposition to this, because any new idea people question why. We faced the same challenges before introducing the bread and food subsidy systems, and anywhere in the world (whenever you have something unfamiliar) people are not very comfortable because it is different from the norm. One of the industries that we are interested in is the soya bean crashing; the advantages would be around 2 million tons of oil and 4 million tons of animal feed from the by-product of 9 million tons of soya beans. More than 10 million Egyptians fast for a long period of time or don’t eat meat, so the soya can be introduced and produced as a protein supplement. We can serve this to vegetarians in the Gulf, or brand this in another industry similar to fructose. I believe that there is a great potential for this country in development, so we need to move fast in projects like this.

What is your main priority or most important demand for this project?

This project is based on networking, so money is the least important thing in this project. We need to continue creating strategic alliances and have allies that believe in this concept. This is a win-win concept and against the dead-weight loss. We are dealing with Africa as a source of imports and we need to have a cash crop center here (for cocoa, coffee beans, and tea) and create a commodity exchange. We need to ally with everyone, everywhere for a strategic alliance for the benefit of everyone; by our geography, location, and population size, there is a potential demand for this.

If you had a magic stick for the next 2-3 years, what would be your vision or dream?

The Damietta project will definitely take two years, and we are about to finish another national project in a few months. This government started one year ago, and we are about to finish 25 large-scale silos scattered across Egypt in the next 8-9 months. We have a mega project that will be finished in one month that will replace the traditional primitive system of storing domestically produced wheat, with a state-of-the-art modern system in 105 locations to better receive, store, and collect wheat. We have a holding company that oversees 43 companies for food processing, and are making great developments with this. What we need to do in Egypt, aside from this, is to have a map for internal trade development, have growth pools scattered over Egypt to modernize internal trade, and logistical areas for fresh foods. We work in developing people and changing culture. What we did with the bread and food subsidy systems made a great change in the culture – the person who buys bread now gets a receipt, which doesn’t seem strange for someone in Europe or America. Now consumers think and choose through political and economic freedom and democracy.