Smarter subsidies?

It’s hot and hectic behind the scenes at Tafwiq Shalaby’s bakery in Port Said’s Osman Ben Affan district. Giant vats of dough are wheeled to machines and conveyer belts that extrude, slice, roll and cook, popping out 6,000 perfectly uniform, dinner-plate sized loaves of piping-hot flat bread per hour.

Outside, the situation is much calmer, with a steady stream of customers flowing in and out of the courtyard. One woman steps out of a double-parked car and hands over a plastic card to a bakery employee behind a desk, which holds little more than a small blue credit-card reader perched on top of a mud brick.

She orders her bread and the machine spits out a ticket showing the number of loaves ordered, the amount she owes and the remaining bread credits in her account. She then takes the ticket to the distribution window, hands over 5 piasters per loaf, takes her bread, jumps back in her car and continues on her way.

From beginning to end, the process takes about 15 seconds and is simple enough that young children can — and frequently do — breeze through it.

Shalaby’s bakery is among the first outlets in Egypt to sell subsidized bread via electronic ration cards. The smart card program first launched in the Suez Canal cities of Port Said, Ismailia and Suez in January 2013, and has been gradually phased in since then. Shalaby says that for the last two months, only people who hold these smart cards are entitled to subsidized bread.

Citing “great success” in the canal cities, the Ministry of Supply says it plans to expand the program nationwide. The Cairo suburbs of Maadi, Helwan, Tora, Tibeen and New Cairo were scheduled to switch to the smart card system at the end of May, although the date has since been pushed to July. Damietta, Daqahlia, Sharqiya and Luxor are next on the list, with the aim of reaching all provinces “during the next few months.”

For decades, Egypt’s government has provided citizens with cheap bread by giving bakeries subsidized flour, which the bakers are required to bake into 5 piaster loaves and sell up to 20 loaves at a time to anyone willing to wait in line. It is far from a perfect diet, but this balady bread, supplemented with fava beans and other cheap pulses, has been critical in feeding Egypt’s population.

However, the subsidized bread supply chain is wasteful — estimates on waste and theft within the system range from 30 to 50 percent. With lax oversight, corrupt bakers are able to resell government flour on the black market, an enterprise that involves both more profit and less work than baking and selling 20 loaves of bread for a pound.

Enterprising consumers, meanwhile, resell the bread to those who don’t have the time or inclination to wait in line, while bigger traders amass bread in bulk to sell as animal feed, since bread is cheaper than raw bran. Even household consumers are responsible for waste, either because bread is so cheap it’s easy to over-buy, or because the flour in the bread is so adulterated that many loaves are simply inedible.

The new program aims to overcome these problems by switching from subsidizing sacks of flour to subsidizing the finished loaves of bread, all while tracking production and sales electronically.

The pilot project in Port Said seems to prove that, in ideal circumstances, a smart card system can result in better service for most customers. But it also proves that in the absence of institutional change, a technological solution is not enough to eliminate corruption.

The weakness of the program lies in the fact that it is administered by the same bakers, inspectors and officials that often profited handsomely from corrupt practices under the old system, and who will doubtless be looking for ways to maintain their flows of illicit funds.

A smarter system?

In Port Said, instead of selling flour for LE8 per 50 kg sack, the government now sells it for LE155. Bread is still sold to the consumer at 5 piasters a loaf, but the government reimburses bakers for each loaf they sell. It provides a subsidy of 30.5 piasters per loaf for bakeries powered by natural gas, and 31 piasters for those using diesel. The total cost of each loaf, around 36 piasters, is in line with local market prices for bread, and takes into account expenses as well as a profit margin for bakers.

“For the current situation, it’s a fair rate,” says Shalaby.

Smart cards are allocated by household, with each family member entitled to 150 loaves a month and a maximum purchase per family of 100 loaves per day. If a family does not consume its full allowance, they are awarded 10 piasters credit for every loaf, which can be put toward purchases of commodities like oil and sugar at government outlets.

At Shalaby’s bakery, in a relatively quiet residential area, the system appears to be working smoothly.

“When the subsidy was on sacks of flour, bakers were limited to certain rations at certain times. Now, with flour at market rate, I can produce as much as I like at the times that I like,” he says. With 25 years of experience, Shalaby explains that he knows when and how much his customers like to buy, and the new system allows him to calibrate his production to meet demand.

“It eliminated the breadlines,” he says.

The short lines and longer hours that the bakery sells bread also mean that customers can more easily shop around to choose the bakery they prefer, forcing bakeries to produce a better product in order to compete.

The payment system is working well too, according to Shalaby. The card readers automatically send data about bread sales to the government, each baker has an account at Blom Bank and the subsidy is transferred over electronically.

“It’s perfectly smooth. We haven’t had any problems,” Shalaby says.

But machine malfunctions pose a major threat to his business, he concedes. Produced by Cairo-based Smart, the machines have to be sent to the capital for repairs, a process that can take three weeks. Each bakery is provided with two readers free of charge, but if they both go down at once, the bakery can’t function.

“I offered to buy a third one, but the authorities said they are not available,” he says. “We are demanding a maintenance center for the machines in each city.”

Relations with customers have improved without the stress of long lines and bread shortages, Shalaby adds, “eliminating lines and crowds eliminates fights and problems.”

Working the system

Awad Helaly, head of the local bakers union, vice-president of the chamber of commerce and operator of a bakery in the center of a busy market, tells a different story.

“The system started and was applied without taking into account the people who can’t benefit from it,” he says.

Eligibility for participating in the smart card program is based on residence and cards are allocated by household. Many people are left out, including students and laborers who live away from their official familial residence, people in transit or people who lack official documents to prove their identities. To compensate, the government has promised to issue temporary residence passes, and has agreed to let bakers sell 1,000 loaves a month to people without smart cards.

But Helaly says the changes are too slow and too small.

“You have a simple laborer, and he is transformed overnight from being able to buy 20 loaves of bread for a pound to being able to only get three loaves of bread for a pound,” he says. “This is a person who can’t eat. What are you expecting him to do? He will explode at the person in front of him.”

Since switching to the new system, Helaly says two of his employees have been seriously injured by knife-wielding customers outraged over not being able to buy subsidized bread. One was stabbed in the kidney, another lost a finger.

With the program set to expand to Cairo and other cities with large numbers of students, migrants and undocumented residents, Helaly’s experience could bode ill for transitions to come.

Still, Helaly says that in many ways comparisons between Cairo and Port Said are unrealistic.

“Since the days of Nasser, Port Said has been known for having the best quality of bread. And the ration of bread per person is high compared to other cities,” Helaly says. The fluffy, plate-sized loaves for sale in Port Said are notably larger and better quality than their counterparts in the capital.

“Why would you come to a place that has no problems and start a new system?” he asks.

Helaly also challenges the Ministry of Supply’s claims that the new system has reduced flour use in Port Said by as much as 40 percent. Surrounded by rice growing regions, Port Saidis were already consuming less bread than their compatriots upriver, which has skewed the ministry’s calculations.

Helaly is also unhappy about the way flour is sold, a complaint Shalaby echoes.

“Bakers are obliged to take flour from certain mills that is either made by the Ministry of Supply or their contractors. Even if the flour is poor quality, we are obligated to use it,” says Shalaby.

Under the new program, the ministry makes bakers pay LE155 for a sack of coarse flour made by extracting 82 percent of the grain. In the open market, the same sum will by a sack of more refined, 76 percent flour, which produces a lighter and more desirable product.

“You have made the flour for market rate, so let us get high quality flour,” Shalaby argues.

Both bakers also agree that the new system has failed to curtail corruption, one of the stated aims of introducing an electronic system. No longer able to make a profit by selling subsidized flour on the black market, corrupt bakers and officials have simply had to become more creative.

The prime opportunity for graft is in the 30.5 piaster subsidy provided by the government for each loaf of bread a bakery sells. If a baker can find a way of tricking the system into believing he has sold more bread than he actually has, each imaginary, digital loaf nets 30 piasters of pure profit.

The easiest way for bakers to accomplish this is to take advantage of customers who do not use their full allowance of bread — for example, a family of family of five that is entitled to 750 loaves of bread a month but only consumes 300.

The “point” system entitles such a family to 10 piasters of credit for each loaf of bread they don’t consume, a total of LE45 a month. For many families, this is barely worth the trouble of getting the credit redeemed since these commodities, available only through certain shops, are notoriously low quality and scarce. To the baker, however, those 450 loaves represent LE140 in potential reimbursements from the government. In a way, bakers make more profit by not selling bread.

“Some bakers just take the ration card and give out bread completely for free. So, the customer takes 300 loaves of bread for free, while the baker charges the government for the remaining 450 loaves and sells the flour on the black market,” claims Shalaby.

With just a few such deals, bakers can easily clear thousands a month in illicit income.

As the new system expands to cover more territory, it also cements a dual pricing system that creates another price gap that can be exploited for profit: People with smart cards can get bread for 5 piasters, everybody else has to pay 35. This creates a potential source of profit for those who are able to obtain more bread than they need, either through fraud or simply by not consuming their full allowance. They can resell it for less than free market price, but more than what they paid.

The same networks that illicitly sold bread in the past stand to make an even greater profit if subsidized bread becomes a scarcer resource.

Isabel Esterman 

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