PROGRESS WITH CUSTOMS AND TRADE REFORM IN EGYPT

UNCLAS SECTION 01 OF 06 CAIRO 008937

SIPDIS

AIDAC

FOR ANE/MEA, DMCCLOUD, LYN DUNN, EGAT/EG, SHADLEY

E.O. 12958: N/A
TAGS: EG EWWT ECON EAID ETRD
SUBJECT: PROGRESS WITH CUSTOMS AND TRADE REFORM IN EGYPT

SUMMARY


1. This report outlines the major reforms undertaken by the
GOE in the customs and trade areas since the appointment of
the new Cabinet in July 2004, highlighting USAID's support
for the process. It updates and expands on Cairo 00367
dated January 15, 2004 on customs reform.


2. Under the leadership of a dynamic new Minister of
Finance and Customs Commissioner, a variety of reforms have
been implemented aimed at transforming the Egyptian Customs
Authority (ECA) into a trade facilitation agency and away
from its traditional roles of controlling trade and
manipulating regulations to maximize revenue collection.
The main reforms have included: a) simplifying customs
procedures to accelerate clearance of goods, b) a new
organizational structure that is more efficient and
decentralized, c) Model Customs Centers acting as one-stop
shops, d) development of an Accounts Management System using
post-entry compliance techniques for repeated transactions
with large trusted importers, and e) reducing the average
level and dispersion of tariff rates to cut down Customs
valuation disputes.


3. ECA is also working closely with other inspection
agencies, particularly with the General Organization for
Export and Import Control (GOEIC),to coordinate the use of
improved risk management in order to reduce the excessive
number of tests and inspections.


4. Over the past two years the Ministry of Foreign Trade
and Industry (MOFTI),under the leadership of the new
Minister, has engaged in a systematic effort to reform its
trade regime. Reforms have included the revision of the
export and import regulations to reduce non-tariff barriers,
improved compliance with the WTO Agreements, and
international accreditation for some of its laboratories.


5. The World Bank's "Doing Business in 2005" report singled
out Egypt for the significance of its customs reforms,
emphasizing in particular Egypt's streamlining of customs
procedures and trade documents. Moreover, Egypt's non-
petroleum trade increased by 30 percent in FY 2004-05 over
the previous year.


6. USAID has played a leading role in providing technical
assistance to support trade reforms and in coordinating
efforts with other donors such as the EU, the IMF, and Euro-
Customs. END SUMMARY



A. CUSTOMS REFORM MEASURES

CORPORATE CULTURE SHIFT


7. Led by the new Commissioner, the ECA has been
undergoing a corporate culture shift that emphasizes
facilitating trade as opposed to regulating or taxing it.
In a USAID sponsored workshop held in July 2005, ECA
managers expressed their understanding of the shift of focus
towards client satisfaction and away from an adversarial
attitude towards the trade community.


8. ECA has made a concerted effort, supported by USAID, to
reach out to and learn from its customers. In late 2004 ECA
sponsored a symposium with major importers, brokers and
shipping lines out of Alexandria to get their views on
consistency in valuation, automated capacities at customs,
and consistency in the application of customs procedures.


9. In May 2005, ECA opened the dialogue further by
organizing a Risk Management Workshop that represented the
first meeting to be attended by the trade community,
customs, and other control agencies. This led to creation
of an Advisory Committee on Trade Facilitation in Alexandria
(ACTFA),which has been used by ECA to consult on a
continuing basis with core representatives of the trade
community about policies and procedures that are being
proposed. ACTFA provides the trade community with a forum
to advise ECA and GOEIC on their issues, experiences and
concerns. Additional Advisory Committees on Trade
Facilitation are planned for each region and for key ports,
with ACTFs to be established in Port Said and Ain El Sokhna
by the end of November 2005.


10. At the 2005 Risk Management workshop, private
importers, brokers, and shipping agencies expressed their
appreciation for the many steps that were taken by ECA to
simplify procedures and reduce release times. They were
less satisfied with the performance of the other control
agencies.

EGYPTIAN CUSTOMS' REORGANIZATION

11. In mid-2005, the Minister of Finance requested support
from USAID to design a comprehensive organizational re-
alignment for the ECA, including organizational structure,
human capital, technology, customs processes and performance
measures. A new, flatter, organizational structure was
developed and approved by the Minister in September. The
structure reduces the reporting levels in the organization,
significantly decreases the number of direct reports to
senior management, eliminates the high levels of redundancy,
and introduces regional customs offices. The transition to
the new organization, which is expected to occur over the
next two years, involves: executive assessments; reducing
staff levels from the current over 17,000 to a more
reasonable 9,000 in four phases, with the first to be rolled
out through a targeted early retirement offering; and
increasing downward delegations of authority and
empowerment. USAID's technical assistance will support ECA
during the transition to give them the benefit of best
practices in change management.


12. A new management team has just been selected by the
Commissioner based on the assessment approach recommended by
USAID consultants. This new team of executives reflects the
Commissioner's determination to assemble a dynamic and
progressive group of managers that will be empowered and
clearly accountable with mandate statements built into their
letter of offer.

TRAINING OF CUSTOMS OFFICERS AND MANAGERS


13. Between January 2004 and November 2005, USAID funded
study tours for Egyptian Customs officers on risk management
systems, performance monitoring, and modern customs
management practices. As a result, the reformers now have a
broader awareness of the importance of risk management
systems. USAID also provided computer and English language
training to medium level management. Technical training in
valuation, risk management, and post-entry is planned to
start by the end of 2005. The EU's customs reform project
also is allocating sizeable funds for technical and middle
management training, in addition to several twinning
programs with major European customs organizations.


MIGRATING FROM MULTIPLE CUSTOMS COMPLEXES TO A LIMITED
NUMBER OF MODERN CUSTOMS CENTERS


14. The ECA began in 2005 to establish Modern Customs
Centers (MCCs),which are designed to be single points of
interaction for ECA and stakeholders. USAID is assisting
the ECA to reduce the number of customs complexes in each of
the ports of entry which now carry-out commodity specific
customs procedures. Instead, MCCs will amalgamate
procedures and provide a one-stop-shop level of service.
MCCs are currently operating in Alexandria and Suez, and the
objective is to have 10 to 15 MCC's operating by mid- 2007.


15. USAID is supporting further improvement of the MCC's by
including other border agencies, particularly GOEIC, so that
traders can deal with these agencies at a single location.
In Alexandria, this has led to more joint examinations
between customs and GOEIC, thereby reducing the previous
practice of separate examinations of containers. ECA
release times at the MCCs are quicker than for other ECA
operations. However, an exact comparison is difficult at
present due to differences in how average release times are
measured in MCCs and elsewhere. FYI: Release times at the
Alexandria MCC are measured by the elapsed time between an
importer's customs declaration being accepted and the
issuance of a tariff invoice. At MCCs, any Customs
inspection of an import shipment occurs after issuance of
the tariff invoice. Using this definition, customs release
times at the Alexndria MCC average less than one day. The
most rigorous study to date of customs release times in
Egyptian ports was carried out by a USAID contractor in 2004
and determined an average release time in January 2004 for
all ports of approximately 8.3 days from registration with
Customs thru any Customs inspection to the final issuance of
the tariff invoice. The same study determined that overall
port clearance times (including time in port prior to
customs registration, time in Customs, and time with other
port inspection agencies such as GOEIC, Ministry of Health,
etc.) was approximately 22.3 days from unloading to leaving
the port. USAID is currently working with ECA and others to
come up with more standardized and reliable measures of
clearance times through Customs and ports overall. END FYI

ACCOUNT MANAGEMENT SYSTEM (AMS) FOR LARGE IMPORTERS


16. ECA recently inaugurated an Account Management System
that will enhance services to Egypt's largest importers. As
the name implies, the AMS establishes company-level accounts
with dedicated AMS account managers. Importers that qualify
for the AMS by virtue of their size and track record of
prior compliance with import requirements benefit from more
personalized service and streamlines procedures and
inspections. Post-clearance audits will be used to ensure
continued compliance with import requirements.


17. The AMS began operating in November 2005 with 30
company accounts. The initial phase will concentrate on non-
food imports to avoid problems with inspections by
Ministries of Health and Agriculture until an agreement is
reached with these two entities. The ultimate goal is for
the AMS to serve the 500 top importers that account for 80%
of Egyptian imports.

REVISED CUSTOMS LAW


18. In June 2005, ten articles of the Customs Law were
revised to address pressing topics such as penalties and the
code of conduct for customs officials. More revisions of
the Customs Law are expected to be drafted and placed before
Parliament in the first quarter of 2006.


RISK MANAGEMENT FOR IMPROVED EFFICIENCY, TRADE COMPLIANCE
AND RESOURCE ALLOCATION


19. Trade inspections at the Egyptian border have long been
recognized as being costly, time consuming, and duplicative.
Currently, the level of green channel releases, which are
characterized by minimal inspections, averages only about
10% for customs, GOEIC and other control agencies. Tighter
targeting of inspections has the potential to greatly
streamline import procedures for compliant importers and let
border agencies focus their enforcement efforts where they
are most needed. Implementing such risk management
techniques has now become a top priority for the Minister of
Finance and the ECA Commissioner. In September, with USAID
support, the heads of ECA and GOEIC signed a declaration
setting a target of 70% release without examination for non-
agricultural goods entering the Port of Alexandria.
Achieving this target will require that Egyptian boarder
agencies both enhance and coordinate their risk management
systems.

PERFORMANCE MONITORING


20. USAID consultants are enabling ECA to collect and
analyze performance measures that are essential for making
informed decisions on staffing, training, compliance and
stakeholder outreach. Such performance measures include
data on import volumes and values, release times, appeals,
complaints, valuation method and inspection levels. A
manual process is currently being put in place to capture
these core customs performance measures, and USAID will
assist in automating the manual process.

GOOD DONOR COORDINATION FOR CUSTOMS REFORM


21. USAID is the largest donor working on customs reform,
and has the lead in helping the GOE develop strategic
management capacity and streamlined procedures. At the same
time, USAID is working to ensure that its efforts are
coordinated with those of other donors such as the IMF, the
EU, and Euro-Customs. The EU is supporting customs reform
with a cash transfer program and with a six-million euro
project that focuses on training and IT related to risk
management. The IMF provides independent reviews to the GOE
and donors on the process and content of technical
assistance. Euro-Customs will provide training in different
areas as well as support the establishment of a National
Customs Training Institute.

REFORMING THE TRADE REGIME


22. Along with the customs reforms described above, the GOE
has embarked upon a concerted effort to streamline a range
of laws and regulations that affect firms engaged in
international trade. Key reforms are described below.


23. As was widely reported, significant tariff reforms took
place in September, 2004 when the new Cabinet revised the
Egyptian tariff code, reducing the number of tariff bands
from 27 to six and lowering the weighted average tariff from
14.6% to 9%. In addition, tariff surcharges ranging from
one to three percent were eliminated. Of particular note,
the tariff reform eliminated the significant specific
tariffs on garments and replaced them with ad valorem rates
that are within Egypt's bound rates from the Uruguay Round.


24. Steps were also taken during 2004 to review Egypt's
conformity with the WTO Sanitary and Phyto-Sanitary (SPS)
Agreement and to begin to bring Egypt's process for
developing new SPS regulations into conformity with its
international obligations. A review mechanism was put in
place in 2005 to generate notifications to the WTO of key
SPS activity and making the process of adopting new
regulations more transparent. This mechanism is now
functioning as demonstrated by the recent notification to
the WTO of an emergency measure related to the importation
of live birds.


25. More broadly, the Egyptian Organization for Standards
(EOS) clarified the way in which new mandatory domestic
standards will be adopted and implemented, adding
transparency to the system while promoting greater harmony
with international standards. USAID technical assistance is
working with EOS to address remaining issues, particularly
as they relate to shelf life standards for food items.


26. With USAID's help, a GOEIC laboratory received
international accreditation by the American Association for
Lab Accreditation in 2004 to address quality assurance and
control issues for 12 test methods relating to grain, food,
and ceramic imports. As a result, these labs are better
able to provide internationally recognized certificates of
conformity for exported and imported goods. More
importantly, the training and procedures that were needed to
obtain accreditation have resulted in better and more
accurate testing by the laboratory. GOEIC has also
modernized its laboratories in the Dekheila Port to improve
testing, reduce disputes, and facilitate trade. USAID has
also supported the establishment of a GOEIC training center
and a trade service center.


27. The GOE continues to invest its own resources in more
modern and efficient port infrastructure, and is also
encouraging private investment. Alexandria Port, which
handles around 60% of Egypt's imports, is currently
undergoing major renovations and developments under the
leadership of the new Port Chairman who was the previous
Port Chairman for Damietta. Major infrastructure
developments were made in Damietta Port, which is now fully
automated, as is the Ain El-Sokhna private port. A new
private port was inaugurated last October in East Port Said,
catering mainly to container traffic, with an important
focus on international transit shipments. Finally, a new
modern port will be built between the Alexandria and
Dekhelia ports.

NEW IMPORT AND EXPORT REGULATIONS


28. The Ministry of Foreign Trade and Industry, again with
USAID assistance, has issued a new set of regulations for
imports and exports that has made the regulatory regime more
transparent while liberalizing trade in a number of areas.
The changes include:

--Establishing provisions to enforce intellectual property
rights at the border;
--Granting service industries the same preferences in
procedures as apply to manufacturing industries;
--Eliminating local inspection if: (a) goods are already
tested in internationally accredited labs in other
countries; (b) goods carry international quality marks; and
(c) trademarked goods are produced by manufacturers with
verifiable quality control systems;
--Capping inspection fees at LE 10,000 per consignment, thus
limiting the impact of high inspection fees on a per item
basis for cases like shoes;
--Clarifying the process for registering as an exporter.

PURSUING TRADE AGREEMENTS


29. Throughout the past two years, Egypt has actively
pursued multilateral, regional, and bilateral trade
agreements to facilitate trade. In early 2004, Egypt
entered into the Aghadir Agreement with Morocco, Tunisia,
Jordan, and Egypt to establish the basis for a free trade
area in support of the EU Neighborhood Policy. At the end
of 2004, Egypt and Israel, with support from the United
States, entered into an agreement to implement Qualifying
Industrial Zones in Egypt. Companies located in those zones
are able to export duty-free to the United States if they
meet minimum Egyptian and Israeli content requirements. In
2005, Egypt also signed an FTA with Turkey.


30. On a regional basis, Egypt is actively participating in
the Euro-Mediterranean Process and the European Neighborhood
Policy, both of which extend policy engagement well beyond
trade and investment.


31. The Government of Egypt is also actively involved in
discussions with the United States pursuant to the Trade and
Investment Framework Agreement (TIFA). Through these
discussions, the two governments are seeking to resolve a
number of technical issues relating to trade that will
facilitate the initiation of formal negotiations for a Free
Trade Agreement.

32. The Ministry of Foreign Trade and Industry recently
embarked on a concerted effort to increase public awareness
and understanding of the implications and benefits of free
trade for Egypt. This has involved a series of weekly press
briefings for the media -- often conducted by the Minister
himself -- concerning WTO issues to be addressed at the
upcoming Hong Kong Ministerial Meeting and their potential
implications for Egypt. In addition, a conference organized
jointly by the Ministry, USAID, and the EU was held for the
benefit of the Egyptian private sector. International
experts and GOE officials discussed the Doha development
agenda and Egyptian negotiating positions for key issues to
be discussed in Hong Kong.


DONOR COORDINATION


33. The Ministry of Foreign Trade and Industry has received
significant assistance from a range of donors on issues
related to trade reform and trade facilitation. The USAID-
sponsored Assistance for Trade Reform (ATR) project provides
trade capacity building assistance to the Ministry through a
mix of traditional technical assistance, mentoring and on-
the-job training, formal training, and institutional
development support. In addition, the Ministry also
receives assistance from the EU, UNIDO, and the Canadian,
German, British, and Japanese governments.


34. As with customs reform, USAID and its contractors have
taken the lead in ensuring coordination among the support
activities in the Ministry. The leadership of the various
projects meet monthly to discuss their activities and to
address any overlaps that may be developing. Formal
meetings are held every other month with the Minister and
his key staff and the donors to ensure that the donor
efforts are directed in accordance with the Minister's
desires.

FUTURE USAID ASSISTANCE


35. In October 2005, USAID put in place its main technical
assistance vehicle for the coming four years, Technical
Assistance in Policy Reform II project (TAPR II). This
program includes funds to continue to support customs, trade
policy and trade facilitation reforms into the future. TAPR
II will provide assistance to the ECA in a number of key
areas: a) further refining the customs procedures and
rolling them out in all ports, b) implementing the new
organizational structure and helping the ECA identify staff
requirements, c) and adopting international standards for IT
(software and hardware) solutions to improve services.
USAID is also planning to assist Egypt in its planned
accession to the World Customs Organization's Kyoto
Convention in early 2006.


36. Outside the Customs arena, TAPR II will provide
assistance in the areas of WTO compliance, laboratory
accreditation, standards, trade policy, port services, and
trade facilitation.



CONCLUSIONS


37. Customs and trade reforms in the last year and half
reflect serious efforts by the GOE to facilitate trade and
improve the performance of its control agencies. More
coordination between the different border agencies,
especially ECA and GOEIC, is becoming a high priority with a
focus on common goals and consistent procedures, e.g.,
inspections and risk management.


38. To achieve greater integration with the international
economy, the GOE is engaging in additional bilateral and
multilateral trade agreements and working on achieving full
compliance with WTO regulations.


39. Expected future trade reforms by the GOE include: 1)
full automation of customs procedures, 2) fuller application
of risk management principles by ECA and GOEIC to achieve
the agreed upon goal of 70% of the goods passing through the
green channel, 3) continued ramping up of the AMS for large
importers, 4) implementation of the new ECA organization, 5)
dissemination of the new simplified customs procedures, 6)
introduction of additional improvements to the Import and
Export Regulations, 7) pursuit of the FTA with the US, and
8) improved regulations related to inspection and standards.


40. With the current mix of reform oriented policy makers
in both the customs and trade areas, and the solid reform
foundation established over the past eighteen months, the
prospect for continued improvements in the Egyptian trade
regime looks bright. The major challenges confronting
policy makers are the successful reorganization of ECA and
the achievement of enhanced coordination and consistency of
goals between the different trade agencies operating on
Egypt's border. RICCIARDONE