US embassy cable - 05CAIRO8937

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