Report on HACCP

Лена

The World Bank Group

Kyiv, 2010

Implementing

Food Safety Management Systems

in Ukrainian Food Processing Enterprises

A Cost-Benefit Analysis

Final report

In partnership with Austrian Ministry of Finance

IFC Ukraine Food Safety Project

Implementing Food Safety Management Systems in Ukrainian Food Processing Enterprises.


2

Implementing

Food Safety Management Systems

in Ukrainian Food Processing

Enterprises


Final report

Kyiv, 2010



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Contents

Executive Summary ...................................................... 4

1. Lessons learned from international experience ....... 7

2. Firm-level analytical model .................................... 8

Assessment of Prerequisite Program Costs ............. 9

Costs associated with HACCP development and

implementation ...................................................... 10

Recurring (operational) HACCP costs .................. 10

Benefits .................................................................. 10

3. Conclusions ............................................................. 11

Recommendations for Policymakers ..................... 11

References ................................................................... 15



4

Executive Summary

Introducing international food safety systems is often considered a necessary step in

developing the agricultural sector and food processing industries. Food safety management

systems based on Hazard Analysis & Critical Control Points (HACCP) 1

open up new

international markets for high value-added food products and increase efficiency of domestic

markets.

Recognizing the positive impact of food safety enhancements in other developing markets,

IFC launched the Ukraine Food Safety Project to implement HACCP principles at several pilot

enterprises in Ukraine and facilitate implementation of HACCP in Ukrainian food processing

industries overall.

The goal of the project is to increase competitiveness of Ukrainian food producers by

improving their food safety management systems. One of the necessary steps in this direction is

the provision of key decision-makers with hard evidence of cost efficiency of the standard

implementation. This cost and benefit analysis of HACCP implementation serves this purpose.

The study of costs and benefits associated with the HACCP implementation in food

processing companies was commissioned to Kyiv School of Economics2. This report presents

results of this preliminary study in three priority industries - dairy, meat and bakery.

This study was initiated with the aim to address the critical lack of knowledge of economic

aspects of food safety among owners and directors in food industry in Ukraine. Moreover,

because of insufficient understanding of cost and benefits there are many myths around systems,

based on HACCP. In particular, in Ukraine there is a widely shared misperception of HACCP as

a expensive and complicated instrument, even though the Ukrainian Food Safety Law mandates

that each food enterprise must have HACCP system and/or any other food safety management

systems in place (though without specifying enforcement mechanisms for their implementation).

This is the first attempt to analyze economic aspects of HACCP in Ukraine; there is

practically no specific data available on the company level, as well as no reliable statistics on the

aggregated national level that would help to identify and assess food safety—related expenses and

subsequent gains for businesses.

Here are the main findings largely culled from international experience:

1. The costs associated with the implementation of food safety management systems

(traditionally based on HACCP principles) and operation include the following

three categories:

Cost of prerequisite programs (e.g. start up and recurring costs of new equipment,

building renovation);

HACCP design and implementation (e.g. costs of development of HACCP plan,

training of personnel, HACCP plan validation);

HACCP recurring/operational costs (e.g. cost of record keeping and verification of

HACCP plan, corrective actions).

1 HACCP (Hazard Analysis and Critical Control Points) – globally recognized food safety management

system build on risk-based approach and potential hazards analysis and prevention along the production

process. 2 Principal authors of the report are Denys Nizalov, Academic Director, Kyiv School of Economics, and

Vladimir Dubrovskyi Senior Economist and the Member of Supervisory Board, CASE Ukraine.



5

An average first year HACCP implementation cost typically depends on the

country, industry and the size of the food producer. In some cases the implementation of

HACCP may not always be cost-efficient in a short-term perspective. However long-

term benefits almost always outweigh installation, operational, and maintenance costs

of the system.

2. The HACCP related benefits include the following categories:

Increase in revenue (due to access to new markets);

Decrease in overall cost (due to better management, lower product wastage);

Increase in investment attractiveness (due to the above plus better risk management);

Other intangible benefits (increased personnel motivation, better communication).

The most important benefit associated with HACCP implementation is access to

new retail chains and supermarkets. Experts state that adoption of the HACCP may

double the sales to this segment of the market.

The benefits for meat industry are expected to be higher due to a better access to

international markets and lower for bakery since this industry is not associated with

unsafe food.

3. Implementation of modern food safety management systems requires that an

enterprise complies with basic sanitary and hygiene norms and practices – those

are called ‘prerequisite programs’.

They cover equipment, infrastructure in facilities, personal hygiene rules, water

and waste management etc3.

Prior to implementing the HACCP food safety management systems, it is key to

ensure that a company has all prerequisites in place.

The total costs of prerequisite programs may vary significantly: in some cases the

need for investments in infrastructure may be rather small – especially if production

facilities are newly constructed and appropriately designed. This cost could be minimal

if an enterprise already complies with the national standards and norms (existing

sanitary and veterinary regulations).

However, this cost may be much higher if major construction or building

remodeling, creation of stationary raw material collecting points, or advanced lab

equipment acquisition is necessary.

However, in practice, for companies it is cheaper to pay fines or use unofficial

ways of solving problems with controlling agencies than to comply with the existing

regulations.

4. Based on expert opinion, the expected cost of HACCP development and

implementation is around 50,000 - 70,000 Ukrainian hryvnyas ($6,000 - $8,000).

This cost may be larger if foreign consultants are involved. The expected first year

operational cost is around 50,000 Ukrainian hryvnyas ($6,250). The total cost is

3 See, for example, the Recommended International Code of Practice-General Principles of Food Hygiene.

Codex Alimentarius Commission http://www.codexalimentarius.net/web/more_info.jsp?id_sta=23



6

expected to be higher for meat processing industry and lower for bakery, as the latter

usually involves less food-related risks and hazards.

The operational costs tend to decrease over time by approximately ten percent after

the first year and, in some cases, by another five percent after the second year. This

decrease is associated with a decline in the number of the Critical Control Points and the

learning effect.

5. Pay-back period may usually takes from one to two years, as evidenced by

international practices of implementing the systems in the dairy industry.

In Ukraine there are cases of companies that experienced even shorter pay-back periods,

of about six months4.

Another important aspect of benefits associated with robust food safety

management system in place is the proven increase in revenues: anecdotal evidence

was found in Ukrainian processing companies that overall growth of sales can range

from 15 percent to 25 percent over a two-three years period5. As expert discussions

revealed, adoption of HACCP in the dairy industry in Ukraine may double the sales

to this segment of the market. Such improvement of business results is possible due

to enhanced cooperation with large retail chains domestically as well as because of

expansion to new international markets.

And of course, potential losses of products that a company may face (be it a

recalled batch/lot of products or termination of lucrative contract with a retailer)

because of food safety problems may be higher than the money the producer would

have to pay for implementation of the food safety management system in total.

To sum up,

The total cost of development and implementation of the food safety

management system largely depends on prerequisite conditions. The stronger

the food safety culture at the enterprise, the easier, cheaper and faster it will

take to build a full-fledged HACCP system.

Costs associated with development and implementation of the HACCP action

plan (incl. consultancy services, staff training, evaluation of HACCP plan)

as well as maintaining the HACCP system (costs of record keeping and

verification of HACCP plan, corrective actions) generally do not represent a

significant share in the cost structure of an enterprise.

Ukrainian enterprises are likely to pay less for development and pre-

implementation of food safety management systems as compared to

companies in such countries as the United States.

Investments in food safety systems usually have a short pay-back period: for

instance one to two years in the dairy industry, as evidenced by both

Ukrainian and international practices.

4 Galfrost case, see IFC brochure ―Upgrading food safety in your business: a Win-Win for your bottom line

and your customers‖ November 2010.

5 Zhitomir Sweets company, Drygalo.



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1. Lessons learned from international experience

Issue of costs and benefits of implementation the HACCP-based food safety management

systems at the company level became topical in 1990s-earlier 2000s6 in anticipation of or shortly

after the system became mandatory in most developed countries.

The primary reason to implement HACCP by business was the legal requirement of the

US and EU markets.

In US in 1995, the Food and Drug Administration (FDA) issued regulations (Procedures

for the Safe and Sanitary Processing and Importing of Fish and Fishery Products) that made

HACCP mandatory for fish and seafood products.

In 2001 FDA issued regulations for mandatory HACCP in juice processing and

packaging plants (HACCP Procedures for the Safe and Sanitary Processing and Importing of

Juice: Final Rule).

In 1998, the U.S. Department of Agriculture established HACCP for meat and poultry

processing plants. Most of these establishments were required to start using HACCP by January

1999; very small plants had until January 25, 2000 (The Final Rule on Pathogen Reduction and

Hazard Analysis and Critical Control Point (HACCP) Systems).

HACCP entered to regulations of Europe Community Countries with Council Directive

93/43/EEC on the Hygiene of Foodstuff in 1993, but implementation of self-control systems

based on HACCP principles in all industries has become mandatory in EU since 2004 after

adoption of EU Regulation 852/2004 on the Hygiene of Foodstuffs.

The largest cost item is related to the implementation of prerequisite programs

(renovation and redesign of production facilities, upgrade in management, sanitation and hygiene

practices).

There is a large variation in the cost of prerequisite programs (from $7,300 to more than

$250,000). This variation is related to initial levels of hygiene and sanitation conditions. It is

expected that stricter state controls are associated with lower additional costs for prerequisite

programs.

In contrast, the HACCP implementation and operations come at a relatively low cost. The

average design and implementation cost ranges from $5,500 to about $23,500. The annual

operational costs range from $6,000 to $30,000, which include monitoring, record keeping, and

review of records and the HACCP plan. The average total first year cost of HACCP

implementation ranges from about $50,000 to more than $270,000.

However, direct reported cost items severely underestimate the true cost of the HACCP

implementation. It was shown that each dollar of the reported costs is associated with the

additional increase by $1,1 in total production cost for the Philippine seafood producers. Such

unaccounted costs might be due to a loss in overall productivity, stops in production, etc (Ragasa,

2008).

The benefits may be divided into two main groups: quantitative (monetary) and

qualitative.

6 Please refer to References to find the list of sources used.

http://www.fda.gov/Food/FoodSafety/HazardAnalysisCriticalControlPointsHACCP/JuiceHACCP/ucm073594.htm

http://www.fda.gov/Food/FoodSafety/HazardAnalysisCriticalControlPointsHACCP/JuiceHACCP/ucm073594.htm



8

The firms which have adopted the HACCP usually demonstrate better technical

efficiency (Nganje and Mazzocco, 2000). However, this advantage could have existed before (so

the firms with better management appeared to be more prone to implement the HACCP).

The data on the Philippine seafood industry shows that the HACCP-certified firms were

able to access high-end markets (including the European Union) with higher prices (by $1.4 per

kilo) and to increase exports to different markets by more than four percent.

At the same time, HACCP is credited with reducing product wastage by about 0.2 percent

on average. There is also found a variation in the level of the benefits across firms of different

sizes in the Philippine seafood industry.

2. Firm-level analytical model

There were three priority industries identified for the cost-benefit analysis: dairy, meat

and bakery industries. Due to differences in the production process the meat industry is further

divided into meat production (primarily slaughter houses), meat processing, and poultry.

While considering all five sub-industries, primary attention was paid to the dairy industry

at the stage of model validation and expert assessment. Peculiarities (if any) of HACCP

implementation in meat processing and other sub-industries were considered in comparison with

the dairy industry. The focus on dairy is driven by the fact that the structure of costs and benefits

of the HACCP implementation is similar among all the sub-industries. This conclusion is based

on the reviewed literature for different industries and expert discussion.

However, the level of vulnerability to safety-related hazards is very different among the

sub-industries. Bakery is considered as low-risk industry because there are less food-born

diseases widely associated with bread than, for example, with milk. Slaughtering is normally not

a source of risk in Ukraine (unlike the US and some other countries).

Traditionally, dishes made of raw or semi-raw meat are not popular, and all meat is

subject to a thermal treatment. Instead, dairy products are especially risky in Ukraine due to the

poor quality and very complicated traceability of the raw materials, which, when coupled with the

lack of cold chain logistics and storage, leads to an extremely low shelf life compared with

European dairy products.

Identification of cost and benefit items associated with HACCP implementation in the

priority industries (construction of analytical model) is the first and one of the most important

steps in the cost-benefit analysis. This section of report presents the analytical model that has

been constructed based on the lessons learned from international experience. The model was then

validated during a workshop with experts (as described in the following section of this report).

The costs in general can be put into three main categories:

1. Introduction of pre-requisite programs (start-up costs, variable costs for new

equipment, renovation of premises)

2. Development and implementation of HACCP action plan (costs of developing

HACCP action plan, staff training, evaluation of HACCP plan)

3. Maintaining HACCP system (costs of record keeping and verification of HACCP

plan, corrective actions).

Together these categories include 26 most common cost items. More details on the cost

items together with their expert valuation are presented in the Annex.



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1. HACCP related benefits include the following categories: Increase in revenues

(access to new markets, expansion in retail chains)

2. Decrease in overall cost (better management, staff motivation and responsibility,

streamlined production process)

3. Increased product stability, shelf-life and product characteristics (lower wastage and

spoilage processing)

These categories can be reasonably assessed with monetary values (e.g. increase in volume of

sales).

Some of these benefits can be described as non-tangible, i.e. items that do not have clear

values or cannot be easily assessed in monetary terms. In most cases, however, the tangible

benefits would capture an overall firm-level effect of the HACCP implementation including the

effect of non-tangible benefits.

For example, an increase in product shelf-life and increase in stability of product

characteristics would be reflected in an increase in sales. For that reason, non-tangible benefits

are not considered separately in the model.

The assessment of individual cost items was conducted for a representative average size (70-

150 employees) dairy plant producing pasteurized milk. All comparisons between dairy and meat

processing industries were performed for plants of the same size7.

Assessment of Prerequisite Program Costs

Old Soviet and contemporary Ukrainian sanitary norms are quite stringent. Potentially, it

could be relatively simple and inexpensive to adopt the HACCP for a plant that already complies

with all the national norms. In particular, if production facilities were designed in a way that

minimizes cross-contamination. In that case, no major reconstruction is usually needed.

In addition, if a plant complies with General Manufacturing Principles (GMP‘s) and/or

General Hygiene Principles (GHP‘s), the costs of prerequisite programs may be relatively small.

In practice, most of the production facilities do not comply with existing norms. It is more

economical to pay a fine (or bribe) than to invest in proper quality control and management.

Similar to other countries, expenses for prerequisite programs is the largest cost item

associated with HACCP implementation. The expected total cost for these programs is around

250,000 Ukrainian hryvnyas ($31,250) for an average dairy processing company.

However, this cost may be much higher if major construction or building remodeling, creation

of stationary collecting points, or advanced lab equipment acquisition is necessary. Thus, the

costs of prerequisite programs in Ukraine are typically closer to those in developed countries (e.g.

the US) than in developing countries (e.g. Bangladesh, Philippines).

When comparing dairy and meat processing industries, local experts noted that most of the

cost items are similar in size and frequency between the two industries. Differences were

mentioned in the costs of construction, lab equipment, and cleaning/sanitation equipment, which

are more expensive for the meat processing enterprises. In other industries these costs are

expected to be lower.

7 To verify the structure of costs and benefits and to assess their monetary values, an expert workshop

was organized in April 2010. Results of the experts‘ assessments are summarized in Annex.



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Costs associated with HACCP development and implementation

Overall, HACCP development and implementation includes a set of low cost activities

including, for example, developing documentation, setting up the HACCP team and conducting

regular meetings, training staff. The expected cost of these activities is around 45-50,000

Ukrainian hryvnyas ($5,600-6,350). This cost may be larger if foreign consultants are involved.

The development cost is not expected to be different among other industries.

Recurring (operational) HACCP costs

Similar to development costs, operational costs are also low. The expected first year

operational cost is around 50,000 Ukrainian hryvnyas ($6,250) and is related primarily to the

number of Critical Control Points (CCPs) that are established according to the HACCP plan.

The operational costs tend to decrease over time by approximately ten percent after the first

year and, in some cases, by another five percent after the second year. This decrease is associated

with a decline in the number of the CCPs and the learning effect. Operational costs are expected

to be higher in the meat processing industry due to a larger number of people that have to be

trained.

The overall expected cost of HACCP implementation in Ukraine is similar to other

developing countries and usually is less than in more developed economies like the United States.

The largest component is the cost of prerequisite programs.

Benefits

The most important benefit associated with HACCP implementation is access to new retail

chains and supermarkets. An expert from the dairy industry states that the widespread adoption of

HACCP could double sales in this market segment. This benefit is stated as a primary reason for

adopting HACCP by domestic enterprises.

Also, experts have mentioned that there is an increasing pressure from the supermarkets

regarding adoption of HACCP by their suppliers. The chains of Metro and Fozzy have already

started demanding HACCP from their suppliers of dairy and meat products. Others are likely to

follow soon.

Increases in prices and profitability are often considered as another important motivation for

implementing HACCP. Regarding other benefits, they are less important for the dairy industry in

Ukraine. Access to international markets is thought to be not feasible for domestic dairy industry

due to a lack of quality raw milk. While for other industries the pull of export markets is among

the most important benefits.

Other benefits include decreased frequency of certification, lower insurance cost8,

improvement in control and overall management of production process. Liability for the damage

caused by food-borne diseases is not thought to be an important cost/benefit factor in Ukraine.

However, cost savings due to the early detection of unsafe (e.g. contaminated) products can be

substantial if compared to the late detection or reclaiming and re-processing.

8 Food safety standards that significantly exceed government requirements (e.g., IFS, BRC, ISO 22000) can

be a major discount factor when determining the premium price, terms and conditions for product liability

insurance.



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3. Conclusions

The study showed that the structure of costs and benefits of the HACCP implementation in

Ukrainian food processing industries is similar to the structure in other countries. The expected

cost of HACCP implementation in an average milk processing enterprise in Ukraine is around

350,000 Ukrainian hryvnyas ($ 43,750) during the first year, which is close to the lower part of

the range typically spent elsewhere in the world.

The relatively low cost of HACCP implementation in Ukraine is explained by more

stringent sanitary norms imposed by the government. As a result, it would be relatively simple

and inexpensive to adopt the HACCP for a plant that already complies with national norms.

Unfortunately in practice, most of the production facilities do not comply with existing norms. It

is perceived to be more economical to pay a fine (or bribe) than to invest in proper quality control

and management.

The most important benefit associated with HACCP implementation for the dairy industry

is the access to new retail chains and supermarkets. Other industries may also expect better access

to international markets, although much depends on reform of the food safety control system at

the national level.

A comparison of costs and benefits across dairy, meat and bakery shows that the structure

of costs is similar while the total cost may be higher for meat and lower for bakery. This

difference is related to the number of people to be trained and the scale of prerequisite programs.

The benefits are expected to be higher for the meat and lower for the bakery industry compared to

the dairy industry.

A reliable assessment of cost effectiveness of the HACCP implementation in Ukrainian

food processing industries would help managers to justify an adoption of this standard. However,

other stimuli for the HACCP adoption are also available.

Among them is dissemination of the information and an educational campaign among the

managers and owners of food retail companies. Higher awareness of retailers about the benefits of

HACCP would put pressure on food processing industries to implement this system. Over time,

the pressure will come to the level of food producers, which would lead to an overall

improvement of food safety in Ukraine and a better access for Ukrainian food products to

international markets.

Recommendations for Policymakers

1. The Government of Ukraine should develop a clear policy to encourage and support the

implementation of internationally recognized food safety management systems at all

Ukrainian food enterprises through various incentives, such as decreasing the frequency of

inspection visits to facilities with HACCP-based system and building consultation capacities of

control authorities to help to introduce best food safety solutions and practices.

2. Structural reform of the inspection system should be based on results of a public-private

dialogue with the food processing industry, consumers, and exporting countries, especially the

EU.

3. On the national level health statistics need more detailed breakdown of food-borne diseases

and more efforts to ensure better reporting and monitoring system of food safety issues.

That will help official control authorities to identify causes of food outbreaks and prevent them

through support and proactive implementation of food safety management systems in food

business operators.



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Annex

Experts were asked to provide an estimate of frequency and size of each cost item. Frequency

was measured using a percentage scale from one to 100. The size of cost items was assessed

using the following three-point scale:

(S) small – for items that would cost below 10,000 Ukrainian hryvnias ($1,250) per

year;

(M) medium – for items that would cost from 10,000 to 50,000 Ukrainian hryvnias

(from ($1,250 to $6,250) per year;

(B) big – for items that would cost more than 50,000 Ukrainian hryvnias ($6,250)

per year.

The expected cost is computed as a product of frequency and size of the cost items.

Table. Main cost articles and their quantitative estimates for a mid-size

Ukrainian enterprise

Cost items

Dairy Meat

Processing

(Specifics)

Comments Frequency Size

1. COST OF PREREQUISITE PROGRAMS

1.1. Analysis of gaps in quality

management and control 90% S

1.2. Construction and

remodeling cost

85%

0% - for new

facilities

B B (for

equipment)

e.g. walls,

ceilings, floor

drains

1.3. Additional actions to

improve GMP 90% M

1.4. Purchase and installation of

additional lab and

monitoring equipment

0 – for new foreign

owned;

90% - for the rest

S- M B - for

equipment

Lab testing

may be

outsourced.

In such case

no additional

cost is paid

1.5. Purchase and installation of

additional cleaning and

sanitation equipment

10% - for M and B

cost items;

100% - for small

changes, e.g. hand

washing equipment

S-M B (for equipment)

1.6. Additional Cleaning cost

per year (excluding

equipment)

100% S May be

outsourced

1.7. Cost of expelling or

extinction of animals and

pests

100% M



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Cost items Dairy Meat

Processing

(Specifics)


1.8. Changes to the Personnel

Hygiene Plan 70% S-M

Medical

checkups,

uniform

1.9. Additional control of

suppliers 90% M-B

Collecting

points – B

Transportati

on – B

Other - M

1.10. Additional Control of

allergens and GMO costs

1% - for domestic

markets;

100% - for

exporters

M

1.11. Additional control cost

for pesticides and other

residuals

15%

(for export 100%) M

1.12. Costs for inputs quality

improvement: steam, ice,

water, air

60% S; (B – if systems are redesigned)

1.13. Training for use of new

equipment and procedures 100% S

1.14. Quality lab certification 10% M

Expected prerequisite costs (if no major

equipment and remodeling, no collecting

points and new transportation, no export)

250,000 UAH

($31,250)


Processing

(Specifics)


2. HACCP DEVELOPMENT AND IMPLEMENTATION

2.1. HACCP plan design 100% S 1-2 employee

2.2. External consultants,

excluding certification

(cost)

90% S

.3. Initial training 100% S

5-10 persons

(operators,

supervisors),

cost: 10,000-

20,000 UAH

($1,250-$2,500)



14


Processing

(Specifics)


2.4. Managerial changes 75% S

E.g. hiring of

new personnel,

management

of the HACCP

related

activities

2.5. Validation cost 70% S 1 person

2.6. Test process and product

testing 10% M

Expected HACCP development and

implementation costs

45-50,000 UAH

($5,630-$6,250)


Processing

(Specifics)


3. RECURRING (OPERATIONAL) HACCP COSTS:

3.1. Recurring Training

(number of employees, time

and cost)

90% S

larger number of employees

have to be trained

3.2. Monitoring CCP and

record-keeping (time and cost) 100% S

3.3. Review cost of the HACCP

safety related records (time and

cost)

100% S

3.4. Corrective action costs for

safety related CCPs excluding

product destruction, e.g.

reprocessing

15% S

3.5. Managerial time 100% S

3.6. Annual Plan Review and

verification (number of

employees, time and cost)

100% S

Expected total recurring costs 50,000 UAH

($6,250)



15

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