ENVIRONMENT AND TRADE RELATIONSHIPS AFFECTING THE
TANNED LEATHER INDUSTRY IN CAIRO
POLICY BRIEF
Problematic
The competitiveness of Egyptian tanned leather suffers from industrial overcrowding, lack of water treatment facilities, and the use of antiquated technologies and production processes. This is worsened by the fact that tanneries continue to conduct “business-as-usual” despite the opening of the Egyptian economy to foreign competition and the elimination of barter agreements with former Soviet bloc countries and Arab countries that used to tolerate low quality imports. Should the Egyptian tanned leather industry wish to be competitive in the new world economy, producers will need to adjust their production methods to new environmental, health, and safety standards being imposed or preferred by foreign markets. However, to do so, they first need to come into compliance with Egyptian environmental regulations, particularly those involving wastewater effluent standards.
Economic Baseline
The tanning industry forms the backbone of the Egyptian leather industry, supplying raw material for the footwear and leather goods sectors. The tanning and finished leather industry combined constitutes the fifth largest industrial sector in Egypt, employing more than 250,000 people.
Of the approximately 300 tanneries in Egypt, at least 200 are classified as small businesses operating four drums or less. All but two are private-sector owned and nearly all are family-owned businesses. Egypt produces 125-130 million square feet of tanned leather annually. Production forecasts for the year 2000 remain constant since there is no foreseen increase in demand for Egyptian tanned leather.
Nevertheless, most tanneries have been operating at cost or at loss since the early 1990s. Structural adjustment policies reduced or eliminated subsidies on basic utilities, such as electricity. Access to favorable foreign exchange rates, which ran 40-50% below official exchange rates, also ended raising the cost of imported inputs, namely chemicals. Demand for tanned leather goods also fell domestically due to rising inflation and changing consumer tastes. As a result, capacity utilization decreased from nearly 100% to only to 50%. In order to stay in business, tanners sold their products on long-term credit, while borrowing in the short-term in order to meet expenses. This further added to production costs leaving little capital left to make investments in new equipment or environmentally friendly technologies.
Egyptian Exports of Tanned Leather
Five large producers constitute the tanned leather export sector. Export sales were previously achieved through the barter trade agreements. However, while barter agreements have ceased, tanners still do not actively engage in marketing efforts to attract foreign buyers since they rely on domestic sales and longstanding agreements with local buyers for business.
Italy is the main importer of Egyptian tanned leather, importing an average of L.E. 7 million (approximately US$2.11 million) of Egyptian tanned leather annually. Other importers include Greece, Cyprus, Jordan, and Libya. However, Libyan import levels are sensitive to change and fluctuate greatly. This illustrates the importance of having steady trading agreements with stable economies such as Italy.
Environmental Baseline
Egyptian cows and buffalo hides have excellent natural qualities. However, poor slaughterhouse processing practices reduce the quality of the hides. For instance, 40-50% of a raw hide is either discarded or put to a lower end use after being purchased by the tanner, significantly raising production costs. Furthermore, since meat processing is the primary source of income for slaughterhouses, hides are poorly conserved. Poor breeding practices and veterinarian care also contribute to the problem. Raw hide suppliers are split equally between public and private slaughterhouses, the latter of which are disorganized, small, and geographically scattered.
Most tanneries are located in a run down, densely populated section of Misr Al Kadima in southern Cairo, also know as the “Tanners’ District.” The district supplies 85% of Egyptian tanned leather. Drainage systems in the district have mostly collapsed leaving tanning effluent to run through the streets, although some tanners have built above ground channels that carry effluents to municipal sewers. Decayed infrastructure makes it difficult to establish individual treatment units or centralized units in the Tanners’ District. The only other notable tanning district is in Alexandria, although it is much smaller than the one in Cairo.
A third environmental problem facing the tanning industry is that poor environmental standards encourage the overuse of chemicals, which tends to make the level of residue in Egyptian tanned leather high. This prevents finished leather exporters from sometimes meeting the environmental health and safety requirements of foreign markets.
Compliance with Egyptian Environmental Regulations
Egyptian environmental enforcement is lenient compared to other countries, leading firms to believe that non-compliance is a viable option. However, in 1994, Egypt passed the Law of the Environment (Law 4 of 1994) and subsequent executive regulations in 1995 protecting land, air, and water resources and citing penalties for non-compliance with standards. This bolstered Law 93 of 1962, which addresses the discharge of effluents to the sewer systems and also cites penalties for non-compliance. However, given that no Egyptian tanneries have on-site waste treatment facilities, it can be safely said that the tanning industry is in violation of all applicable articles of these laws.
Law 4/94 granted a three-year grace period for compliance. While the grace period ended in March 1998, firms could petition for up to two additional years if they submitted an acceptable compliance action plan (CAP) demonstrating that they are undertaking serious efforts to comply with the law. CAPs are accepted and monitored by the Egyptian Environmental Affairs Agency (EEAA). The tanning industry petitioned the EEAA to allow it to submit a collective CAP, however, the request was denied. Tanneries are thus submitting individual CAPs with the assistance of the Egyptian Chamber of Leather, Tanning and Fur. Once submitted, the CAPs must be followed by serious efforts to achieve full compliance, or to at least demonstrate movement in that direction. The EEAA can close tanneries for failure to meet CAP procedures.
Relocating the Tanners’ District
For the past 40 years the Egyptian government’s alternative policy to enforcing environmental regulations in the Tanners’ District has been to try to relocate the tanneries to Badr City, located 50 km outside of Cairo. The policy was strengthened in 1995 when the government allocated land in Badr City for a new tannery district and pledged to provide the area with necessary infrastructure. Since Badr City is classified as a “new urban community,” tanners that move there would enjoy a ten-year tax holiday – although this is an incentive only for tanneries that are registered and profitable, i.e. paying taxes.
Despite these efforts, negotiations regarding the relocation are at an impasse for three reasons. First, infrastructure for the new district has yet to materialize. Second, tanners are reluctant to leave a central and convenient location to move to a remote area outside of Cairo that is far from employees, suppliers, and customers. Third, and most importantly, the current Tanners’ District occupies government-owned land for which the tanners pay no rent since they effectively “own” the land due to their length of stay there. Under the government’s plan, moving to Badr City would require tanners to purchase the new land, while giving up the current land and buildings without receiving compensation. This impasse is causing little to be done to improve conditions in Misr Al Kadima.
EU Regulations Affecting Egyptian Tanned Leather Exports
Article XX of the GATT/WTO allows countries to enact regulations for the protection of human health. Some European countries, such as Germany, have thus imposed content limits for certain chemicals in leather products such as azo dyes, which can be carcinogenic, and PCP (pentacholorophenol). The European Commission is now considering banning the use of all substance and items containing PCP.
Tannery owners and operators say they are unaware of bans on certain chemicals in export markets. However, even when made aware, the incentive to switch to less harmful alternatives remains weak because: (1) Egyptian environmental law is more focused on emissions than on production methods or processes and does not regulate substances banned in foreign markets; (2) switching to alternative chemicals entails additional costs; (3) tanners switching voluntarily to less hazardous alternatives are ‘penalized’ because they face higher production costs and may lose domestic market share; and (4) the few tanners who are exporting only use alternative inputs to make the leather ordered by foreign customers and continue to use the hazardous substances to make leather destined for the local market.
Findings of the Cost Structure of the Tanning Industry
The general cost structure of a typical small to medium sized tannery has raw hides represent 55-70% of total costs, chemicals, 10-15% of total costs, labor approximately 12% of total costs, energy approximately 3% of total costs, and taxes, maintenance, and service charges the remaining 20%. This corresponds with the general production cost structure of the industry in developing countries.
It is estimated that switching to the use of safe chemicals (i.e., chemicals that are not banned in foreign countries) could raise the cost of chemical inputs for each tannery by approximately 5%. Given that chemicals account for 10-15% of the total cost of production, this implies that the total costs would increase by 0.5-0.75%.
Recommendations
1. Compliance with domestic regulations is a first step in accepting the importance of adopting foreign environmental requirements to facilitate market access. Environmental enforcement and compliance should thus be strengthened to boost exports and to improve the health and safety for Egyptians.
· Enforcement should be pursued hand-in-hand with public awareness campaigns and training initiatives to provide private tannery owners with the information and instruments necessary to help them to achieve compliance.
· Legislation and tools for implementation should be adopted to protect consumers from the health risks of azo dyes and other hazardous chemicals.
2. Incentives may be needed to encourage the transfer of the tanneries to Badr City. Possible funding sources for such incentives can be sought through development assistance or a special fund sustained by the proceeds from current tannery sales.
3. A technical center should be established to provide tanners with training on advanced tanning techniques, to perform studies or pilot projects on ways to improve breeding and slaughterhouse practices, and to assist in the identification and development of cleaner production and material recovery opportunities. The center should operate on a cost recovery basis with tanners paying for services received.
· Funds and loan instruments aimed at providing financial assistance to tanneries seeking to make environmental investments should also be established.
4. The government should play an important role in promoting tanned leather exports. Although an export promotion center exists, more attention should be paid to advising potential exporters of foreign market opportunities, product standards, and potential barriers to trade opportunities emanating from environmental regulations.
· Tanneries must therefore become better informed about import regulations and quality requirements, and better-versed in international marketing techniques.
· Testing and monitoring facilities for the detection of banned substances in leather products should be established in order to avoid export problems.
5. The government should continue to pay close attention and remain actively involved in international negotiations on potential technical barriers to trade that could affect Egyptian exports and stymie Egyptian export growth. Inter-ministerial communication and coordination between those responsible for trade, environment, economy, and foreign policy would facilitate international negotiation and monitoring efforts. This would also assist Egypt to identify policies that are both environmentally and economically sustainable.
107
LES RELATIONS COMMERCE ET ENVIRONNEMENT AFFECTANT L’INDUSTRIE DU CUIR TANNÉ AU CAIRE
NOTE POLITIQUE
Problématique
La compétitivité de l’industrie égyptienne du tannage du cuir est négativement affectée par le surpeuplement industriel, le manque de facilités pour le traitement des eaux, et l’usage de technologies et de méthodes de production désuètes. Ceci est aggravé par le fait que les tanneries continuent de maintenir les mêmes approches commerciales malgré l’ouverture de l’économie égyptienne à la compétition étrangère, et malgré l’élimination des accords de troc avec l’ancien bloc soviétique et avec les pays arabes qui toléraient des importations de bas de gamme. Si l’industrie égyptienne du cuir tanné désire être compétitive dans la nouvelle économie mondiale, les producteurs devront adapter leurs méthodes de production aux nouveaux standards environnementaux, de santé et de sécurité imposés ou préférés par les marchés étrangers. Néanmoins, pour ce faire, elle doit d’abord se conformer aux réglementations égyptiennes sur l’environnement, et particulièrement à celles relatives aux standards d’effluents des eaux usées.
Point de référence économique
L’industrie du tannage constitue l’élément essentiel de l’industrie égyptienne du cuir, procurant des matières premières pour le secteur industriel de la chaussure et de la maroquinerie. Les industries du tannage et du finissage du cuir représentent, en commun, le cinquième secteur industriel égyptien, employant plus de 250.000 personnes.
En Égypte, cette industrie compte approximativement 300 tanneries dont 200 sont classifiées comme petites entreprises, opérant quatre foulons de tannage ou moins. Toutes, sauf deux d’entre elles, sont des entreprises privées, et presque toutes sont des entreprises familiales. L’Égypte produit 125-130 millions de pieds carrés de cuir tanné par année. Les prévisions pour l’an 2000 demeurent les mêmes puisqu’il n’y a pas d’augmentation prévue pour la demande du cuir égyptien.
Néanmoins, la plupart des tanneries opèrent au prix coûtant, ou à perte, depuis le début des années 1990s. Des politiques de redressement structurel ont réduit ou éliminé les subventions de l’état relatives aux services publics, telle l’électricité. L’accès aux taux favorables du cours de change, qui pouvait atteindre 40-50% de moins que le taux officiel, a aussi été éliminé, produisant une augmentation du coût des intrants étrangers, nommément, les produits chimiques. La demande de produits de cuir tanné a aussi diminué localement, en raison d’une hausse de l’inflation et d’un changement des goûts du consommateur. En conséquence, l’utilisation à capacité s’est réduite de 100% à seulement 50%. Pour maintenir leur commerce, les tanneurs ont vendu leurs produits à crédit à long terme, tout en faisant des emprunts à court terme, en vue de faire face à la dépense. Ceci a encore augmenté le coût de la production, laissant peu de capital à investir dans un nouvel outillage ou dans des technologies favorables à l’environnement.