Food Policy 36 (2011) 694–704

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Food Policy

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Delisting from EU HACCP certification: Analysis of the Philippine seafoodprocessing industry

Catherine Ragasa a,⇑, Suzanne Thornsbury b, Richard Bernsten c

a International Food Policy Research Institute (IFPRI), 2033 K Street, NW, Washington, DC 20006, USAb Department of Agricultural, Food and Resource Economics, 211B Agriculture Hall, Michigan State University, East Lansing, MI 48824, USAc Department of Agricultural, Food and Resource Economics, 211E Agriculture Hall, Michigan State University, East Lansing, MI 48824, USA

a r t i c l e i n f o

Article history:Received 9 March 2010Received in revised form 20 January 2011Accepted 27 June 2011Available online 26 July 2011

Keywords:HACCPFood safetyBenefit-cost analysisCertification system sustainabilitySeafood industry

0306-9192/$ - see front matter � 2011 Elsevier Ltd. Adoi:10.1016/j.foodpol.2011.06.009

⇑ Corresponding author. Tel.: +1 202 862 4613, faxE-mail addresses: c.ragasa@cgiar.org (C. Ragasa)

Thornsbury), bernsten@anr.msu.edu (R. Bernsten).

a b s t r a c t

This paper employs firm level benefit-cost and supply chain analyses to explore the reasons why a major-ity of Philippine seafood processing firms discontinued EU HACCP between 2004 and 2005. Results indi-cate that only 38% of firms remained certified, as they gained significantly from retention of EU markets,gained access to US markets, captured new buyers, and reduced product wastage. However, 62% of theinitially certified firms abandoned certification, as they did not realize most of the anticipated benefitsfrom certification and continuing certification was not economically viable. Delisting by some processorsled to profit losses among their raw fish and input suppliers amounting to $4–6 million per year, repre-senting approximately 6–9% of the value of Philippine seafood exports to the EU and mainly affectingsmall aquaculture fish suppliers.

� 2011 Elsevier Ltd. All rights reserved.

1 A total of 96 firms were certified in 2004 and only 36 firms were certified in 2005.In selected years, 22 firms were certified in 2007 and 33 firms were certified as of

Introduction

Hazard Analysis and Critical Control Points (HACCP) is an inter-nationally accepted system of food safety management and isincreasing recognized as a critical element of food industry com-petitiveness. Some literature indicates that adoption of HACCPhas been limited, and food producers and processors have notembraced it with the anticipated enthusiasm (Ehiri et al., 1995;Panisello et al., 1999; Taylor, 2001; Panisello and Quantick, 2001;Taylor and Taylor, 2004; Herath and Henson, 2005, 2006). Thereis considerable variability in cost estimates for HACCP [(i.e.$0.0026 per pound of meat, poultry and fish (FDA, 1994; FSIS,1996); $0.02–0.20 per pound of meat (Hooker et al., 2002);$0.03–0.44 per pound of meat (Antle, 2000); $0.30 per pound ofshrimp (Cato and Lima dos Santos, 2000)], depending on the con-ditions of the country, assumptions used, and cost components in-cluded. Only a few studies have measured HACCP benefitsempirically (Nganje, 1999; Maldonado et al., 2005; Henson et al.,1999). Even fewer studies have addressed firm behavior and eco-nomic incentives from HACCP certification. There remains a dearthof research on the sustainability of HACCP given its multi-yearinvestment nature and annual or bi-annual renewal process.

ll rights reserved.

: +1 202 467 4439., thornsbu@anr.msu.edu (S.

Firm-level ex post analysis of HACCP adoption in the Philippineseafood industry, where 62% of EU HACCP certified seafood firms(60 out of 96 firms) were delisted from the program between2004 and 2005,1 provides a basis for assessing sustainability ofHACCP. Some firms applied for renewal but were denied accredita-tion, while other firms chose not to renew their certification basedon market or other factors. This raises questions about underlyingdrivers of delisting or de-certification and implications for accessto export markets, where certification is required.

HACCP affects market access and profitability and is a supplyshifter to individual firms and an industry. Initially, a firm will real-ize increased costs of production to accommodate requiredchanges and investments. Cost-cutting incentives (such as lowerborder rejection or detention rates; reduced production wastage;and/or improved product shelf-life) may be realized (Nganje andMazzocco, 2000) but firms are not always directly compensatedthrough price increases in the case of potential output pricerigidities.2 The direction of change in quantity of production

February 2010 [Bureau of Fisheries and Aquatic Resources (BFAR) website].2 Since Philippine firms are price-takers in the world seafood market, prices are not

expected to rise without an increase in demand due to improved confidence ofconsumers in the safety of seafood products as a result of greater adherenceworldwide to food safety standards. For example, Nganje et al. (1995) found nosignificant increase in price received after HACCP implementation by small firms inthe US meat industry.

C. Ragasa et al. / Food Policy 36 (2011) 694–704 695

(whether a net increase or net decrease) remains ambiguous,depending on aggregate cost effects and induced changes in demandand buyer willingness-to-pay. Net firm effects will also depend onthe availability of alternative markets and ease of shifting supplyto these markets. While the EU and US currently require HACCP sys-tems, other countries still do not. This paper attempts to understandfirm profit maximizing behavior and choice of output quantity andlevel of food safety, proxied by standards or certification requiredby different buyers. Our results indicate a strong economic rationalefor HACCP de-certification decisions by many firms in the Philippineseafood industry.

Materials and methods

This paper focuses on firm-level adoption of the EU HACCP sys-tem, its linkages to other certification systems (e.g., US HACCP),and the impact of adoption on prices received, output quantities,and costs based on a 2005 survey of seafood processors in thePhilippines. Firms included were initially certified between 1998and 2005. Decertification happened between 2004 and 2005 with60% of the 96 certified firms discontinuing their certification. Ofthe total 96 firms which were EU HACCP certified in 2004, 41 firms(43% response rate) agreed to participate in face-to-faceinterviews, using a semi-structured questionnaire.3 Respondentsincluded 26 firms that remained certified (72% response rate in thiscategory) and 15 de-certified firms (25% response rate), all with1–6 years of experience with EU HACCP systems prior to 2005.4

Among respondents, firm size varied widely: four cottage firms,nine very small firms, five small firms, 14 medium firms, and ninelarge firms (Table 1).5 By product, the largest category of respon-dents were frozen tuna processors (16 firms) followed by milkfish(5), shrimp (7), and canned tuna (6). By plant location, the largestnumber of respondents were based in Metro Manila (12 firms) andGeneral Santos City (13), followed by Davao City (6), Zamboanga City(4), Cebu City (3), and other Luzon provinces (3) (Fig. 1). T-tests indi-cate no significant statistical differences between certified and de-certified firms in terms of firm size, product form, and plant location.

Benefit-cost analysis (BCA) is used to understand the economicrationale for the decision to continue (or not) certification. HereBCA follows the ‘‘with and without project’’ approach suggestedby Gittinger (1982), Campbell and Brown (2003), and Boardmanet al. (2006), rather than the ‘‘before and after project’’ method.6

Realized net firm-level benefit of HACCP adoption is the sum ofrealized profit change associated with adjustments in sales; changein price; price gains from capturing higher than existing lower-price markets; and change in costs due to HACCP adoption (includ-ing HACCP costs and cost-saving effects), less the hypotheticallymissed profit change in the event of non-adoption. Addinginformation on future price, output and cost expectations, we mod-

3 Survey instruments are available from the corresponding author upon request.4 While we do not know the exact distribution of the whole population, sample

representativeness was validated with known characteristics of the population (e.g.product form and plant location). Mean comparison tests show that the populationand sample firms are statistically similar in means (Table 1). Moreover, BFAR experts’knowledge was also solicited on other observed characteristics of the population (e.g.operation size and export volume to EU and US). Expert opinion suggests that oursample is representative.

5 Firm size is based on the Philippine Department of Trade and Industry’s (DTI)classification: cottage firms are those with less than 10 full-time equivalentemployees, small firms have 11–100 employees, medium firms have 101–300employees, and large firms have 300 or more employees. Due to high heterogeneityobserved among small firms, ‘‘small firms’’ were further divided into (i) very smallfirms, with fewer than 33 employees (average of the small firms groups) and (ii) smallfirms, with 33–99 employees.

6 This approach is appropriate since changes in the relevant variables are expectedeven without the project. In the case of HACCP certification, if firms are ‘‘without’’certification, they lose the market requiring such certification, which is different fromthe ‘‘before project’’ scenario.

el expected net benefits to help explain the firm’s choice to con-tinue or discontinue EU HACCP certification. Costs and benefitsare analyzed and presented as the averages of firms in each sizegroup.

Cost categories, drawn primarily from Nganje (1999), Maldona-do et al. (2005), Colatore and Caswell (1998, 2000), were adjustedto fit the specific context of the Philippine seafood-processingindustry and used to classify responses. Firm executives (or theirrepresentatives) were specifically asked about changes that haveoccurred or would occur that they attributed mainly to EU HACCPadoption, including the impact of adoption on sales to the US andother markets. To evaluate less-easily-quantified costs, respon-dents were asked to assess additional difficulties and to comparerealized and expected outcomes.

To evaluate benefits, firm executives were asked to use a Likertscale to rate 11 pre-determined benefit categories (adopted fromMaldonado et al., 2005; Henson et al., 1999); to provide quantita-tive information on actual changes in (i) price of outputs7; (ii) pricedifferentials between markets; (iii) output quantity; (iv) borderrejection rate; and (v) in-plant production wastage; and to antici-pate expected price and quantity changes associated with HACCPadoption over the next 5 years. Social desirability bias (respon-dents have incentives to portray themselves in a more favorablelight or exaggerate their problems) was minimized by emphasizingthe study motivations and pre-testing the questionnaire with fiverespondents. Two detailed discussion sessions were conductedwith a HACCP inspector and a government official to cross-checkresponses and better inform the results.

A supply-chain perspective is subsequently introduced to bettercapture costs and benefits across the entire fisheries sector. Asidefrom the processors, other firms in the supply chain are affectedby certification and de-certification decisions of respondents. Inthe absence of a direct method for appropriating the loss of profits(i.e., value-added) from raw fish suppliers, input suppliers andtraders affected by the drop in the de-certified firm’s EU exports,input–output data from national accounts is utilized to esti-mate the economy-wide loss. In national accounts, value-added(i.e., the difference between revenue and cost of inputs) representsthe contribution from land, labor and capital factors of productionin raising the value of a product and thus the income received bythe owner of these factors. Loss of profit or value added for thewhole value chain from the decertification decision of processorsillustrates a potential role for cost sharing and compensationmeasures along the value chain.

Results and discussion

Benefits of certification

Results indicate statistically significant8 differences betweencertified and de-certified firms in a majority of realized benefit cat-egories (increased product sales and increased ability to retain exist-ing customers, enter new markets, attract new customers, reducedproduct wastage, increased product shelf-life, improved staff moti-vation and increased output price after HACCP adoption) (Fig. 2a).Neither group of firms felt HACCP adoption reduced production cost.Both groups reported realized benefits from reduced microbialcounts.

7 For example, respondents were asked ‘‘were you able to negotiate a higher priceafter HACCP compliance?’’ to determine benefits related to price change. If theresponse was ‘‘yes’’, a follow up question was asked about the percentage change:1–3%, 4–6%, 7–9%, 10–12%, 13–15%, or other.

8 The test of difference in means was performed using a mean comparison test(t-test) utilizing both Satterthwaite’s and Welch’s formulas, which is appropriate fortwo sample comparison with different sample size and possible unequal variances.

Table 1Distribution of respondents by product form, plant location, firm size and market, Philippines, 2005.

Categories Certified De-certified Total

Pop. Sample Pop. Sample Pop. Sample

Product form [2.56]*,a [2.53]a [2.61]b [2.93]b [2.72]c [2.61]c

Frozen tuna 10** 9 19 7 29 16Milkfish 4 4 9 1 13 5Shrimp 8 4 10 3 18 7Canned tuna 7 5 2 1 9 6Octopus 2 2 8 2 10 4Others 5 2 12 1 17 3

Location [3.10]d [2.53]d [3.29]e [2.73]e [3.15]f [2.62]f

Metro Manila and other Luzon 15 12 17 3 32 15General Santos City 9 7 15 6 24 13Zamboanga City 5 3 10 1 15 4Davao City 5 3 7 3 12 6Cebu City 2 1 11 2 13 3

Size [3.38] [3.60] [3.44]Cottage 3 0 3Very small 5 3 8Small 5 2 7Medium 5 8 13Large 8 2 10

Share of export to EU [35]g [2]g [23]76–100% 7 0 751–75% 1 0 125–50% 4 0 41–25% 6 5 110% 8 10 18

Share of export to US [44]h [80]h [58]76–100% 9 12 2151–75% 4 0 425–50% 2 1 31–25% 2 1 30% 9 1 10

Share of export to Japan [11] [10] [11]76–100% 2 1 351–75% 1 0 125–50% 0 1 11–25% 3 2 50% 20 11 31

Share of sales to other markets [9] [7] [8]76–100% 1 1 251–75% 0 0 025–50% 1 0 11–25% 9 2 110% 15 12 27Total 41 26 49 15 90 41

Note:a The means are not statistically different between the population and sample certified firms.b The means are not statistically different between the population and sample decertified firms.c The means are not statistically different between the population and sample firms.d The means are not statistically different between the population and sample certified firms.e The means are not statistically different between the population and sample decertified firms.f The means are not statistically different between the population and sample firms.g The means are statistically different between certified and de-certified firms.h The means are statistically different between certified and de-certified firms. Source: Authors’ interviews.

* Figures in brackets are the means. For categorical variables (i.e., product form, location, and size), the means are computed based on numerical codes per category.** Figures are the frequency. For data related to items a–g, the level of significance is less than 0.01.

696 C. Ragasa et al. / Food Policy 36 (2011) 694–704

Most of the certified firms report that their expected benefitsfrom HACCP certification were realized, and a few of them even re-ported higher actual benefits than they initially expected (gainingaccess to new export markets, attracting new customers, andincreasing motivation of production staff) (Table 2). In contrast,44% of de-certified firms experienced lower actual benefits thanthey initially expected in many benefit categories (i.e., productprice, motivation of staff, and product wastage,). While expecta-tions of new markets and new customers may have provided anincentive to initially adopt HACCP, failure to expand markets andattract additional customers may have induced some firms to dis-

continue certification. Differences in the realization of a majority ofexpected benefits between certified and de-certified firms (i.e., in-creased motivation of staff, product wastage, increased ability toattract new customers and new overseas markets, increased prod-uct sales, and reduced microbial counts) are statistically significant(Table 2). There is no significant difference between certified andde-certified firms in terms of the gap between actual and expectedchanges in production costs, product prices, motivation of supervi-sors, product shelf-life, and ability to retain existing customers.

Similar patterns were observed when firms were asked to quan-tify realized changes in product price, sales, rejection rates, and

Fig. 1. Geographical distribution of respondents, Philippines, 2005. Note: Stars represent the regions, where data were collected. Map Source: http://www.pbs.org/frontlineworld/stories/philippines/map.html.

9 A total of 26 responses were collected from certified firms, but seven of thesefirms were only certified in 2005. Thus, it is not possible to report on costs andbenefits actually realized. Therefore sections on realized costs and benefits areapplicable to only those 19 firms certified by 2004, while sections on expectedchanges by certified firms include response from all 26 firms.

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product wastage (Table 3). All certified and de-certified firms indi-cated no price increase was realized as a result of HACCP certifica-tion. This is consistent with findings of existing literature (Nganje,1999; Nganje et al., 1995; Nganje and Mazzocco, 2000). Moreover,no firm anticipated price increases in the near future. According tothe respondents, buyers feel that sanitary requirements are a nec-essary part of the production process and that compliance costsshould be borne by firms, rather than buyers. Buyers also empha-sized output price rigidity in their own markets, which limited theability to offer higher prices to suppliers. In terms of price differen-tial between EU and other markets, certified firms received aUS$1.20–1.40/kg higher average output price from EU than othermarkets; while de-certified firms received a US$1.00–1.10/kg high-er price (Table 3). The mean price differentials are statistically sig-nificant, which indicates a stronger incentive to continue EUHACCP certification for certified than de-certified firms.

In terms of realized changes in sales, while many certified firmsreport increases, no de-certified firm reported an increase in sales

to EU and other markets while they were certified. While the meanpercentage increase in sales to export and other markets is not sig-nificantly different between certified and de-certified firms (Table3), the difference is significant when measured as a share of actualproduction and export values (shown later as net benefits [NB] inTable 5).

Seven of 19 certified firms9 (37%) increased their EU sales 2–10%with HACCP certification, while others reported no increase (Table3). Many certified firms were able to enter the EU market for the firsttime and received higher prices (an average price differential of$1.35/kg or 32% higher) than previously received from their existingmarkets. Five of 19 certified firms (26%) were able to increase their

(a) Benefits

4.8

4.6

4.0

3.8

4.0

4.0

4.5

4.5

4.5

2.5

2.5

4.8

4.1

3.4

3.3

3.3

3.3

2.9

2.8

2.8

2.2

1.2

Reduced production costs

Increased product prices***

Increased motivation of supervisory staff***

Increased motivation of production staff***

Increased product shelf-life***

Reduced product wastage***

Increased ability to attract new customers***

Increased ability to access new overseas markets***

Increased product sales***

Reduced product microbial counts*

Increased ability to retain existing customers***

Likert scale: 1=high impact from realized benefit . . . 5=benefit not realized

Certified De-certified

(b) Difficulties

3.1

3.2

3.4

1.6

1.9

2.0

2.4

2.3

2.6

2.0

1.9

1.6

1.5

4.0

3.9

3.8

3.5

3.4

3.4

3.3

3.3

2.7

2.5

2.5

2.3

2.0

0.0 1.0 2.0 3.0 4.0 5.0

0.0 1.0 2.0 3.0 4.0 5.0

Reduced flexibility of production staff***

Reduced flexibility of production process***

Reduced flexibility to introduce new products***

Recouping costs of implementing HACCP***

Other investments are considered more important***

Current controls are considered sufficient***

Reliable raw material supplier***

Difficulties of getting advice***

Training/motivation of staff

Reduced staff time available for other tasks***

Overwhelmed by changes required***

Difficulties in obtaining budgetary resources***

Internal budgetary constraints***

Likert scale: 1=high level of difficulty . . . 5=low level of difficulty

Certified De-certified

Fig. 2. Average rank scores of responses about realized benefits and difficulties from HACCP adoption, Philippines, 2005. Note: ⁄ The means are statistically significantbetween certified and de-certified firms at 0.10 level of significance; ⁄⁄ at 0.05 level of significance; ⁄⁄⁄ at 0.01 level of significance. The test of difference in means wasperformed using a mean comparison test (t-test) of unequal variances using both Satterthwaite’s and Welch’s formulas. Source: Author’s interviews with 41 respondents.

698 C. Ragasa et al. / Food Policy 36 (2011) 694–704

sales to domestic and other export markets by 2–10% and others re-ported no increase (Table 3). Both certified and de-certified firmsindicated that EU certification did not facilitate increased exportsto the US.

Similar patterns are observed when firm executives wereasked about expected changes in sales – many certified firms re-ported expected increases while no de-certified firm expected anincrease. While there is no statistical significant difference in themean percentage increase in expected EU sales between certifiedand de-certified firms (Table 3), these differences again becomesignificant when measured as net benefits. Twelve of the 26 cer-tified firms (46%) expected a 5–10% increase in EU sales over thenext 5 years – mainly to new buyers whose purchases were facil-itated by HACCP certification – and the remaining 14 firms didnot anticipate changes in their sales (2.1% average increase acrossall certified firms). Seven of the 26 firms (27%) expected a 5–10%increase in sales to the US and eight expected a 5-% increase insales to existing and/or new buyers in other markets (1.5% aver-age increase across all firms). Interestingly, no large firm expected

to increase sales to the US or the EU, while firms in the other sizecategories anticipated increasing sales to these markets. Firmsacross all size categories anticipated increasing sales to othermarkets.

Regardless of certification status, over two-thirds of the respon-dents reported no difference in load rejection rates after adoptingHACCP. However, three (two certified and one de-certified firm)experienced a 1–4% increase in their rejection rate due to morestringent product testing required. A similar number of firms(one certified and three de-certified) experienced 1–4% decreasesin rejection rates after HACCP adoption.

Benefits from reducing product wastage had differential im-pacts by size of certified firm – larger firms reported cost savings,while none of the smaller firms (cottage, very-small and smallfirms) reported cost savings (Table 3). Two large firms and twomedium firms reported having experienced about a one-halfpercent (0.5%) cost savings, due to reduction in product wastage(from both lower product microbial counts and lower spoilage ofraw materials and processed products) and consolidation of

Table 2Distribution of respondents based on the comparison between actual and expected benefits of HACCP adoption, Philippines, 2005. Source: Author’s interviews.

Benefits category Certified (N = 19) De-certified (N = 15) P-valuea

Lower Higher Same Lower Higher Same

o Reduced production costs – – 19b – – 15b NAc,d

o Increased product prices 15 – 4 5 – 10 0.14o Increased motivation of supervisory staff – – 19 3 – 12 0.08***

o Increased motivation of production staff – 4 15 4 – 11 0.01*

o Increased product shelf-life – – 19 – – 15 NAo Reduced product wastage – – 19 10 – 5 0.00*

o Increased ability to attract new customers – 4 15 – – 15 0.00*

o Increased ability to access new overseas markets – 2 17 – – 15 0.00*

o Increased product sales – – 19 – – 15 0.00*

o Reduced product microbial counts – – 19 5 – 10 0.02**

o Increased ability to retain existing customers – – 19 – – 15 NA

Note:a The respondents’ expectations were assigned ordered values (1 = lower, 0 = the same; 1 = higher). The figures presented are the p-values from the mean comparison test

performed. The test of difference in means was performed using two-sample t-test of unequal variances using both Satterthwaite’s and Welch’s formulas.b Figures are the number of respondents. Dash (–) means zero.c No difference.d NA = Not applicable.

* The means are statistically significant between certified and de-certified firms at 0.10 level of significance.** The means are statistically significant between certified and de-certified firms at 0.05 level of significance.*** The means are statistically significant between certified and de-certified firms at 0.01 level of significance.

Table 3Summary of mean benefits of EU HACCP adoption realized by certified and de-certified Philippine seafood processing firms, 2005 (in percent).

Category/variable Certified (N = 26) De-certified (N = 15)

C (3)a VS (5) S (5) M (5) L (8) VS (3) S (2) M (8) L (2)

o Change in output price received – – – – – – – – –o Price differential (EU-other markets) (US$/kg) 1.3b 1.2c 1.4d 1.4e 1.3f 1.0c 1.1d 1.0e 1.1f

o Realized change in export sales to EU (%) 3.3 5.0 5.0 2.5 0.3 – – – –o Realized change in export sales to US (%) – – – – – – – – –o Realized change in sales to other markets (%) 1.7 1.3 1.7 5.0 0.3 – – – –o Expected change in export sales to EU (%) 1.7 5.0 4.0 1.0 – – – – –o Expected change in export sales to US (%) 1.7 1.0 5.0 1.0 – – – – –o Expected change in sales to other markets (%) 1.7 2.0 2.0 2.0 0.6 – – – –o Cost savings from lower product wastage (%) – – – 0.5 0.5 – – – –o Loss in export sales to EU due to non-adoption (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0o Loss in export sales to US due to non-adoption of EU HACCP (%) 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0o Loss in sales to other markets due to non-adoption of EU HACCP (%) – – – – 1.2 – – – –

Note:a C = Cottage; VS = Very-small; S = Small; M = Medium; and L = Large. Figures in parentheses are the number of respondents per firm size group.b Figures are the average for each firm size group and are expressed in percentages. Dash (–) means zero.c The means statistically different between certified and de-certified firms (very-small) at 0.01 level of significance.d The means statistically different between certified and de-certified firms (small) at 0.01 level of significance.e The means statistically different between certified and de-certified firms (medium) at 0.01 level of significance.f The means statistically different between certified and de-certified firms (large) at 0.01 level of significance. For the remaining benefit categories (other than price

differentials), there is no statistical difference between certified and de-certified firms. The test of difference in means was performed using a mean comparison test (t-test) ofunequal variances using both Satterthwaite’s and Welch’s formulas). Source: Authors’ interviews.

C. Ragasa et al. / Food Policy 36 (2011) 694–704 699

processes—all of which were a result of the HACCP process stan-dard. While four large firms reported that they reduced productwastage, they could not estimate the percentage of the reduction.All de-certified firms reported no cost savings from lower productwastage when they were still under HACCP systems. Overall, thereis no statistical difference in the mean percentage reduction inproduct wastage between certified and de-certified firms andacross firm size groups (Table 3); but the differences becomesignificant when these percentages are applied later to actualproduction values (Table 5).

10 Straight line depreciation is calculated by dividing acquisition price of the plantand equipment by their total productive years (average of nine years), assuming zerosalvage value. In terms of other start-up costs, most firms indicated they would re-train their HACCP team and review HACCP plans extensively after 3 years. This isconsistent with the EU inspection schedule in the Philippines that occurs every threeyears.

Costs of certification

Reported costs associated with HACCP systems averaged$46,000 for fixed and non-recurring costs and $19,000 for recurringexpenses. Within a size group, there were no statistical differencesreported in the cost of adopting HACCP between certified andde-certified firms; however, certification costs were significantly

different by firm size (Table 4). Assuming straight line depreciationof capital investments, annual HACCP costs were 1.6% of annualoutput value and 5% of annual output quantity.10 Very-small firmshad the highest cost per unit, followed by small firms, cottage firms,medium firms and large firms (Fig. 3).

Regarding difficulties of continued adoption, both certifiedand de-certified firms cited budget constraints as their greatestchallenge (Fig. 2b). Many firms in both categories mentionedconcerns regarding the overwhelming number of changes re-quired to adopt HACCP and the time needed to understandand adjust to these changes. Staff time available to carry outother tasks was a major concern for both certified and de-certi-

Table 4Average total cost of HACCP systems by Philippine seafood processing firms by size category, 2005 (in US$ 000). Source: Author’s interviews.

Cost category Cottage* Very-small Small Medium Large

NRa R NR R NR R NR R NR R

Totalb 1.7* 1.9 13.1 4 32.4 7.3 51.3 13.4 89.3 53.1Plant and equipment cost (actual) 1.3 0.1 10.1 0.3 28.3 0.8 46.6 0.3 81.6 8.2

Other start-up HACCP costsConsultant’s costs – – 1.6 – 1.8 – 1.1 2.7 0.4 6.2HACCP training costs 0.1 – 0.6 – 0.7 – 1.9 – 3.5 –Staff time in HACCP plan design 0.3 – 0.8 – 1.6 – 1.6 – 3.8 –

Total operating costs – 1.8 – 3.7 – 6.5 – 10.5 – 38.7Additional lab test costs – 0.9 – 0.8 – 1.1 – 1.1 – 4.2Additional manpower hired – – – 0.7 – 0.7 – 0.2 – 17.1Additional materials and utilities – – – – – 1.7 – 1.0 – 2.5

Total additional GMP – 0.9 – 2.3 – 3.0 – 8.1 – 14.9GMP personnel training – 0.2 – 0.6 – 0.7 – 2.0 – 3.6GMP personnel expenses – 0.2 – 0.6 – 0.8 – 2.0 – 3.6GMP cleaning – 0.4 – 0.6 – 0.7 – 2.0 – 3.8GMP pest control – 0.2 – 0.6 – 0.7 – 2.0 – 3.8

Interest + depreciationc – 0.4 – 3.0 – 8.0 – 12.0 – 21.0

Note: Figure were converted using a PhP 55/US$ 1 exchange rate, which is the average in years 2002–2005. Dash means zero.* Figures are the average for each firm size group. These averages are the average across certified and de-certified firms. Statistical tests suggest no significant differencebetween certified and de-certified firms in any cost category so only average figures are presented here. Differences across size groups are significant at the 0.01 level. The testof difference in means was performed using a mean comparison test (t-test) of unequal variances using both Satterthwaite’s and Welch’s formulas.

a NR = Non-recurring, fixed costs; R = Recurring, yearly costs.b Does not include interest and depreciation costs.c Since capital investments are included in the non-recurring and recurring costs, interest and depreciation cost are not included in the total costs. However, in computing

for variable costs and assuming that all the capital investments are loaned, these costs would be included.

Table 5Mean net benefits from HACCP certification by certified and de-certified Philippine seafood processing firms, 2005 (in US$ 000). Source: Author’s interviews.

Certified firms (N = 26) De-certified firms (N = 15)*

C (3)** VS (5) S (5) M (5) L (8) VS (3) S (2) M (8) L (2)

Contribution from increased export sales to EU 0.0 0.0d 0.0e 0.0f 0.0g –d –e –f –g

Contribution from increased export sales to US – – – – – – – – –Contribution from increased export sales to other markets 0.0 0.0d 0.0e 0.2f 1.4g –d –e –f –g

Export loss from EU due to non-adoption �2.0 �4.5d �17.2e �17.4f �256.8g �0.1d �1.5e �2.2f �6.2g

Export loss from US due to non-adoption – �2.0d �4.0e �9.7f �108.1g �0.9d �3.3e �8.0f �20.7g

Sales loss from others markets due to non-adoptiona – – – – �7.4g – – – –g

Contribution from price difference between newly captured markets andexisting onesb

0.0 0.0d 0.0e 0.0f 0.0g –d –e –f –g

Operating costsc 1.9 4.0d 7.3e 13.4f 53.1g 4.0d 7.3e 13.4f 53.1g

Cost of capital amortization and interest ratec 0.4 3.1d 7.8e 12.3f 21.4g 3.1d 7.8e 12.3f 21.4g

Reduction on product wastage – – – 18.1f 67.2g – – –f –g

Annual realized NB (in US$000) �0.3 �2.5d 6.2e 19.6f 366.5g �6.1d �10.2e �15.5f �47.6g

% to output [�0.6]***

[�0.8] [0.2] [0.5] [1.2] [�2.0] [�0.3] [�0.4] [�0.2]

NPV of expected NB (9 years) �1.7 �13.1d 34.4e 105.5f 2175.1g �32.6d �54.7e �82.4f �254.1g

% to output [�0.5] [�0.7] [0.2] [0.4] [1.2] [�1.7] [�0.2] [�0.4] [�0.1]

* No cottage de-certified firm; Figures represent the periods de-certified firms were certified.** Figures in parentheses represent the number of respondents for each firm size group.*** Figures in italics and in square brackets are in percent pertaining to the ratio of the NB to the total value of output. Dash means zero. Figure = 0.0 means the figures isgreater than zero but less US$ 100.

a This corresponds to the loss of exports of canned tuna in other markets due to non-adoption. The loss of canned tuna exports in the EU and US markets are alreadycaptured in the overall export losses in these markets due to HACCP non-adoption.

b Only a portion of the total increase in benefits comes from capturing new higher-price markets. The price differential is applied only to this portion of the increase inbenefits and not the total sales.

c Figures are based on Table 3. Interest is computed assuming that all the start up costs will be loaned, using an 11.5-% rate. In addition to the above computation,estimation was made, where costs of capital amortization and interest rate were assumed to accrue regardless of whether the firm continued or discontinued with HACCPcertification. Thus, these costs also showed up as cost under de-certification, which implies a canceling-out effect of these cost items as certification-related costs and de-certification-related costs.

d The means statistically different between certified and de-certified firms (very-small) at 0.01 level of significance.e The means statistically different between certified and de-certified firms (small) at 0.01 level of significance.f The means statistically different between certified and de-certified firms (medium) at 0.01 level of significance.g The means statistically different between certified and de-certified firms (large) at 0.01 level of significance. The test of difference in means was performed using a mean

comparison test (t-test) of unequal variances using both Satterthwaite’s and Welch’s formulas.

700 C. Ragasa et al. / Food Policy 36 (2011) 694–704

fied firms. Both groups of firms cited accessing reliable rawmaterial that would pass laboratory testing as required byHACCP system and accessing technical advice as difficulties.

Finally, some certified and de-certified firms mentioned thedifficulty of motivating employees to comply with HACCP stan-dards and monitoring compliance.

0

1

2

3

4

5

6

7

8

9

10

firms)Total (41 firms) Cottage (3 firms) Very-small (8 Small (7 firms) Medium (13

firms)Large (10 firms)

US

cent

s

HACCP cost (US centsper kg)

HACCP cost (US centsper-dollar of output)

Fig. 3. Annual HACCP cost per unit and value of output, in selected regions in the Philippines, 2005. Note: Figures are the average for each firm size group. Source: Author’sinterviews.

11 This was confirmed by Ching Baltazar, chief inspector of BFAR, who said thatthere is no agreement between the Philippines and the US regarding who shouldcertify firms. It is the responsibility of the importer to assure their suppliers haveHACCP system in place (personal communication, September 1, 2005).

C. Ragasa et al. / Food Policy 36 (2011) 694–704 701

While results showed similar patterns for certified and de-certified firms, average Likert scale scores for the de-certified firmswere lower for every factor, indicating that they perceived greaterdifficulties (Fig. 2b). Statistical testing confirmed significant differ-ences between the two groups in all difficulty categories, excepttraining and motivation of staff. The biggest difference was inperception on recouping costs, sufficiency of current food controls,and relative importance of other investments.

De-certified firms felt that the EU HACCP standards were toostrict, focusing largely on physical plant specifications rather thancore principles of cleanliness and hygiene. Many de-certified firmsreported that HACCP requirements were becoming stricter eachyear and that it was becoming more difficult to comply. While theyagreed that HACCP is a more thorough system of ensuring foodsafety than basic standards, such as Good Manufacturing Practices(GMP), some of the de-certified firms and even some HACCPinspectors reported a lack of adequate sequencing and that EUHACCP certification was done abruptly, focusing on speed ratherthan ensuring that the process was done correctly. As a result,firms made renovations, but failed to address fundamental prob-lems of pest control, hygiene and employee motivation. This sug-gests a need for both private and public sectors to identify newapproaches and proper sequencing to better manage food safetywithin the plant and across the food chain.

Costs of de-certification

Thirty-three percent of the de-certified firms (5 of 15) exportedto EU markets prior to de-certification; three firms exported 5%,one firm exported 20%, and another firm exported 10% of total sales(Table 1). Only one of these firms was able to shift a portion of itsoutput to other markets, but at a much lower price. For de-certifiedfirms exporting to the EU, the value of a 5–20% loss in annual salesranged from $80,000 to $350,000 per firm. As two-thirds of thede-certified firms did not export to the EU prior to decertification,they experienced no losses from a decline in EU exports. However,averaging these losses across all 15 de-certified firms gives anaverage loss of 3.0% of total exports. Given that the de-certifiedfirms reported $9.4 million in average annual exports prior todecertification, a 3.0% loss in sales equals $282,000 or a $6,000–15,000 loss in net profit per firm (assuming a 2–5% profit marginas reported by firms interviewed).

The certified firms were slightly more optimistic about alterna-tive markets. When asked about their export prospects without EUHACCP certification, over 50% indicated that they would be able tosell some products, but that the prices would be 20–40% lower and

their total sales would be lower. In addition to price adjustment,firms indicated that they would incur additional search costs tofind new buyers. For example, two firms mentioned that it wouldcost $2,000–$5,000 for them to participate in food exhibitionsand fairs in order to market their product and find potential buy-ers. Most firms believed it would be very difficult to find new buy-ers without HACCP certification.

One of the biggest differences between certified and de-certifiedfirms is their share of EU and US exports. Certified firms’ averageshare of exports to the EU (35%) is statistically different from thatof de-certified firms (2%). In contrast, the average share of exportsto the US was higher (and again statistically significant) fordecertified firms (80%), compared to certified firms (44%). All 15de-certified firms reported no spillover effects – their US exportswere not affected by EU HACCP de-certification, since separatedocumentation was required and they had little incentive to main-tain EU HACCP certification.11 For the certified firms, adopting theEU HACCP certification enabled them to comply with US HACCPrequirements. For instance, four firms with no or very low EU ex-ports still obtained EU HACCP certification and were able to maintainexisting US markets. As a result, the EU’s efforts to implementenhanced food safety controls may have contributed to improve sys-tem-wide efficiency and reduced costs of meeting the requirementsof other export markets.

Net benefits

For all firm size groups (except cottage firms) annual realizednet benefits are statistically different between certified and de-cer-tified firms (Table 5). For de-certified firms across all firm sizes, thenet present value of expected benefits from EU HACCP certificationwas negative with weighted-average expected net loss equal to0.4% of total production value (net loss ranges from 0.2% to 2.0%of total output value per year). Annual recurring HACCP expenseswere higher than the EU and US export value these firms lost.Without increases in output quantity, prices, or cost savings, de-certified firms found EU HACCP certification financially difficultto maintain. Very-small de-certified firms incurred the highestnet losses (2.0%).

For certified firms, EU HACCP certification generated aweighted-average expected net gain (annual realized net benefits)

12 In 2008, 30% of Philippine seafood exports were shipped to the US, 24% to Japan,and 12% to the EU.

13 The Philippine Input–Output (IO) analysis, used on national accounts, containsinformation on total inputs used by the industry per stage or factor of production,however, the latest available IO matrix is for 1995. Due to the lack of more recentdata, we extrapolate the proportion of input to total output values in 1995(66%)–2008.

14 Recall that 34% of seafood output value is NVA.15 These are the only two variables that could possibly provide positive net benefits

to de-certified firms.16 Estimated by FAFST (2004) to be 3% of the total value of output This category was

not used in the initial estimation, but was used as a scenario in the sensitivityanalysis, because of the FAFST (2004) estimates were based on a very small number offirms. Only seven firms were interviewed and of these firms, only two were seafoodprocessing firms.

702 C. Ragasa et al. / Food Policy 36 (2011) 694–704

of 0.8% of production value. Across small, medium and large firms,net benefit from EU HACCP adoption averaged 0.2% to 1.2% of out-put value. Positive net benefits were primarily generated by largecost savings from reductions in product wastage, and their abilityto maintain sales in existing EU and US export markets. Large firmsexperienced the highest net benefit from HACCP adoption, equal toapproximately $366,500 in additional annual net profits or 1.2% oftotal annual production value. Certified cottage and very-smallfirms experienced losses of 0.6–0.8% of output value per year. De-spite these losses, the decision of some cottage and very-smallfirms to maintain certification indicates they likely received otherbenefits not captured in the quantifiable estimates or anticipatedfuture benefits.

Results indicate a strong economic rationale for certified firmsto maintain EU HACCP certification, since their compliance costswere much lower than the financial benefits derived. Gains accruefrom both ability to maintain access to the EU market, whichwould be lost without certification, and use of the EU HACCP cer-tification to comply with US requirements. Results also indicate astrong economic rationale for de-certified firms’ decision to discon-tinue EU HACCP certification. Many of these firms became certifiedin anticipation of gaining access to EU markets. However, theseexpectations did not materialize and compliance requirements be-came stricter and more expensive to achieve. Even for de-certifiedfirms with a small initial share of sales to the EU, discontinuing cer-tification was still financially beneficial (even after assuming fullcapital amortization and interest cost from the initial HACCPinvestments), since their access to US and other non-EU marketswas not affected by EU HACCP certification status.

Supply chain assessment

EU HACCP certification status of Philippine processing firms im-pacts on other players in the seafood value chain. HACCP approvalrequires procedures and strategies to ensure the safety of rawmaterials and other inputs. While processing firms have theresponsibility to ensure safety of their inputs, they may haveincentives to pass HACCP-related costs to their input suppliers,depending on market structure. In addition, fluctuating sales tiedto market access affected by certification and de-certification deci-sions will have impacts across the value chain.

Processing firms were asked how their certification decisionsaffected input suppliers. Respondents from tuna processors andother firms that rely on capture fishery suppliers reported rapidupward adjustments in price paid to suppliers, but little downwardprice response to supply changes. In these cases, processing firmsreported that they covered all certification costs. Many fishingcompanies, who were content with targeting their large and exist-ing alternative markets, had little incentive to adopt EU HACCP sys-tem. Non-compliance of fishing vessels continues to pressureprocessing firms seeking inputs from a limited number ofHACCP-compliant sources. Talks continue between the govern-ment and fishing companies to arrive at a partnership agreementfor covering certification expenses.

With respect to aquaculture, processing firms indicated thattheir suppliers were much more affected by their certification sta-tus. In most cases, fish farmers had to change their production sys-tems in order to comply with stricter processor requirements.These input suppliers were typically small firms for whom the po-tential loss of buyer contracts stimulated them to improve produc-tion processes, strengthen control over contaminants, and in someinstances, comply with Best Aquaculture Practices. When proces-sor de-certification occurred, raw fish producers were likewise af-fected. Interviews with three de-certified suppliers of raw fishconfirmed loss of an important market for their product. In somecases, these suppliers were able to divert raw fish to other domes-

tic buyers or importers, but at a much lower price. Interviews withfive aquaculture farmers suggest that smaller aquaculture farmerswere less likely to successfully identify alternative markets andthus more vulnerable to loss resulting from their buyersdecertification.

While only a limited number of other firms along the seafoodsupply chain were interviewed, the impact of de-certification onthe whole seafood industry can be approximated using data onthe industry’s value-added and the economy-wide input–outputanalysis from national accounts. The gross value of Philippine sea-food output was $2.5 billion in 2008, including 23% from exports.12

The value-added for the whole fisheries industry, computed as totalvalue of production minus total value of inputs in each stage or fac-tor of production (66% of gross output value),13 totaled $801 millionin 2008.

The gross value loss to the de-certified firms was estimated(above) to be 3.0% of the total value of exports (see Section 3.3),or $282,000 per firm on average. Due to the representativenessof these 15 sample firms, we extrapolate the total value of exportloss by multiplying the estimated per-firm gross value loss of$282,000 across all 60 firms de-certified in 2005 resulting in a totalloss from de-certification of approximately $17 million in gross va-lue of output, or $6 million loss in value-added.14 This loss in value-added was approximately 0.26% of gross seafood output value; 1.1%of seafood export value; and 9.0% of EU exports.

At an aggregate level, the values appear small, but at the firmlevel this can represent a major loss of revenue and source of live-lihood for the smaller producers, depending on the relative ease oftransferring, redistributing, and using factors of production acrossthe economy. In the Philippine context, de-certification of proces-sors puts greatest pressures on the small aquaculture producers,suggesting possible equity implications of decertification. Resultsalso indicate that while the de-certified firms themselves wouldbenefit from this action, other players in the industry stand to losefrom the de-certification decisions. This implies a need to assessthe potential for greater vertical coordination or cost-sharing; forexample between raw fish suppliers and processors, to ensureopportunities for continued access to lucrative markets, such asthe EU.

Sensitivity analysis

Different scenarios were used to identify the percentage changerequired in benefits and costs for de-certified firms to realize posi-tive gains from continued participation in HACCP. First, adjust-ments were made to account for reduced product wastage andincreased output prices.15 For de-certified firms, either a 2.5-% in-crease in the output price level or a 1-% reduction in product wastageresulted in positive net benefits to EU HACCP certification. Second, aseparate scenario, which included the costs avoided from decreasesin either retention or refusal of exports at the importing country’sborder,16 indicated a positive net benefit for de-certified firms (about

C. Ragasa et al. / Food Policy 36 (2011) 694–704 703

0.2% of value-added) to maintain certification. These results implythat initiatives to increase price levels of ‘‘safer’’ foods and enhanceHACCP-induced efficiency within the plant will reduce productwastage and potentially decrease border rejection rates, leading tocost savings and ensuring greater sustainability of HACCP adoption.These results also indicate that additional research is needed to fur-ther investigate the effect of HACCP certification on border rejectionrates since firm responses were mixed. Moreover, the results suggestthat small reductions in rejection rates can lead to significant costsavings and financial benefits, implying a need for both the publicand private sector to further investigate effective and innovativeways to reduce border rejection rates.

At the supply chain level, we explore the implications of adopt-ing the 1995 input–output analysis in national accounts by recal-culating value-added based on projections of export price, inputprice, and HACCP cost increases after 1995 (1996–2006). Weadopted a lower bound of 3% (decrease in average per-unit seafoodexport value from 1996–2006), representing a possible decrease inthe value-added as percentage of total value of production overtime, and an upper bound of 0.1% (increase in per-unit seafood ex-port value to EU from 1996–2006), representing a possible increasein the value-added as percentage of total value of production overtime. For the sensitivity analysis, we assume a 6-percent increasein input prices (representing the average inflation rate in thePhilippines in 1996–2006) and an additional 1.5-% as the averagecost for meeting the HACCP requirement. Results from the sensitiv-ity analyses show similar results – a new range between $4.4million to $5.1 million loss in value-added by the whole industrydue to EU HACCP de-certification, compared to the originalestimate of $6 million, which represents 0.2% of total seafoodproduction; 0.75% of total exports; or 6.0% of EU exports.

Conclusion

This paper analyzes firm-level response to the presence or ab-sence of economic incentives from EU HACCP certification withimplications for the sustainability of food safety systems in adeveloping country. Using the Philippine seafood industry, wepresent evidence regarding costs and benefits from continued ordiscontinued EU HACCP certification.

Results indicate statistically significant differences betweencertified and de-certified firms for a majority of realized benefitand difficulty of adoption categories. While both certified andde-certified firms reported that output prices in existing marketsdid not increase after certification and while realized changes inborder rejection rates were mixed, a majority of the certified firmsdid report increases in sales – mainly as a result of their capturingnew markets – and reduction in product wastage. Some certifiedfirms were able to enter the EU and US markets and take advantageof higher prices, but these benefits were not realized by de-certi-fied firms. Many firms, especially de-certified processors, reporteddifficulties in procuring high quality and safe raw materials and incontrolling the flow of inputs. De-certified firms reported that dueto budget constraints and fear of not being able to recoup increas-ing costs of compliance, they discontinued certification.

One of the biggest differences between certified and de-certifiedfirms is the share of EU and US exports: certified firms’ averageshare of exports to the EU (35%) is statistically different from thatof de-certified firms (2%), while certified firms’ average share ofexports to the US (44%) is statistically different than that ofde-certified firms (80%). This suggests that the decision not to con-tinue with certification is extent of the EU market that would beloss and the size of the alternative lucrative markets.

For all firm size groups and for all benefit categories, net bene-fits are statistically different between certified and de-certifiedfirms. For de-certified firms across all firm sizes, the net present

value of EU HACCP certification was negative with weighted-aver-age of the expected net loss equal to 0.4% of total production value.For certified firms, EU HACCP certification generated a weighted-average expected net gain of 0.8% of production value. Results indi-cate a strong economic rationale for certified firms to maintain EUHACCP certification, since their compliance costs were much lowerthan the financial benefits derived. Gains accrue from both theirability to maintain access to the EU market, which would be lostwithout certification, and use of EU HACCP certification to complywith US requirements. Results also indicate a strong economicrationale for de-certified firms’ decision to discontinue EU HACCPcertification. Many of these firms became certified in anticipationof gaining access to EU markets, but these expectations did notmaterialize and compliance requirements became stricter andmore expensive to achieve. Even for de-certified firms with a smallinitial share of sales to the EU, discontinuing certification was stillfinancially beneficial, since their access to US and other non-EUmarkets was not affected by their EU HACCP certification status.

HACCP requirements have a greater impact on relativelysmaller firms, compared to larger firms due to their limited pro-duction size, which affects their capacity to cover the high capitalinvestment costs. However, our sample of cottage firms lost lessthan very-small firms; and small firms lost less than medium firms– indicating a possible advantage to the smallest firms in meetingHACCP certification requirements (e.g. where easier monitoring,supervision, and control over processes compensate or surpasseconomies of size captured by larger firms).

While many of the de-certified firms had economic motivationsto discontinue, losses do accrue to other sectors of the supplychain. The entire fisheries industry lost approximately $4–6 millionof net value added (0.8–1.1% of seafood exports and 6–9% of EU ex-ports). While these losses are very small at the industry level, atthe firm level they represent a loss of revenue and source of liveli-hoods; especially in the event of input market rigidities, and forsmaller players, who do not have the resources and flexibility toreach other markets and sectors. Results indicate that small aqua-culture fisheries were more impacted by the de-certification, dueto their loss of lucrative EU markets. This may create pressure forvertical coordination or cost-sharing among the players involvedto take advantage of profitable opportunities or to avoid losingmarket access. Distributional impacts have not been explored bythis study, but are an area for future research.

Acknowledgments

The authors are grateful for research funding from the MichiganState University Graduate School and Institute of InternationalAgriculture; and support from the Philippine Institute for Develop-ment Studies.

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