Corruption and the fall of an Empire

With recent high profile cases of corruption emerging in the Egyptian oil and gas industry; the idea of how corruption and its varying symptoms, including a lack of transparency, can effect the growth of this sector is something which undoubtedly needs to be tackled.  

The Merriam Webster’s Collegiate Dictionary of the English language explains that the root of the word corruption comes from the Latin word “rumpere” to break. Thus, it implies that something is broken, normally a code of conduct that is considered pure or correct. The connection with a Latin word appears appropriate because, according to some scholars, it was in the Roman Empire that corruption came to be identified as clearly inappropriate behavior and it was the Roman Empire that, other scholars argue, fell because of the corrosive impact of corruption. Corruption destroyed the moral fabric and the administrative structure of that powerful empire and eventually led to its collapse.
Vito Tanzi

In an edition of the Egyptian Center for Economic Studies’ (ECES) Distinguished Lecture Series, Professor Vito Tanzi, former Director of the Fiscal Affairs Department at the International Monetary Fund, stated the above words in a speech revolving around corruption and its effects on economic activity. Tanzi, in essence, discussed how corruption drives away investment, hinders development and essentially undermines the rule of law. The interesting aspect about the above words is not the mere existence of the phenomenon of corruption, but, rather, the power of this phenomenon that can bring down an empire.

Egypt is the Middle East’s most populated country; it has been described as one of the most strategic nations in the world, both economically and politically. As the old saying goes, “a chain is as strong as its weakest link,” so is the international economic-political structure as strong as its weakest link. Thus, one can assume that a problem in one of the world’s leading countries can spell misfortune for the world at large.

Corruption: How Egypt Ranks Internationally
A revival of Tanzi’s lecture seems timely with the recent release of the 2007 Corruption Perceptions Index (CPI), released on September 26th by Transparency International, the global coalition against corruption. The index primarily looks at the perceptions of public sector corruption in 180 countries and territories. It is a composite index that draws on 14 expert opinion surveys. Countries are scored on a scale from zero to ten with zero indicating high levels of perceived corruption and ten indicating low levels of perceived corruption.

In 2004, Egypt was ranked 77th on the index with a score of 3.2. In 2005, the country witnessed minute improvements coming in 70th place with a score of 3.4. During 2006, Egypt was once again in 70th place with a score of 3.3. It is, however, the 2007 index that presents a dire picture for the recent economic reforms that have taken place in the country, which was ranked 105th, one of the lowest ranks it has ever received, with a score of 2.9. This is still an improvement over the 1.1 score that Egypt received in the 1990’s, but improvements, much like beauty, are in the eye of the beholder. There is no reason why the booming economy of Egypt, which has witnessed several reforms in the past couple of years, should be dwindling in terms of corruption instead of improving. The 90s did not have the new and vibrant technocratic government that so many are singing the praises of; nor did it have the amount of international investment that we are seeing today, which is supposedly bringing money to the country, which should alleviate the poverty levels and raise wages, leaving the stuff of corruption, such as bribery, a thing of the past.  

There are several international documents that address the issue of corruption worldwide and attempt to combat it; among which is the African Union Convention on Preventing and Combating Corruption. The document in essence attempts to promote and strengthen development in Africa by preventing, detecting, punishing and eradicating corruption. The main principles of the convention include respect for democratic institutions, rule of law, popular participation, good governance, respect of human rights, transparency and accountability, promotion of social justice, and a condemnation of acts of corruption.

Corruption in the document is defined in specific details; for example, Article 4.1.A partially defines corruption as “the solicitation or acceptance, directly or indirectly, by a public official or any other person, of any goods of monetary value, or other benefit, such as a gift, favor, promise or advantage for himself or for another person or entity, in exchange for any act or omission in the performance of his or her public functions.” This section is then followed by eight other precise definitions of corruption, leaving little room for an excuse of vagueness or misunderstanding.

The interesting part about the convention is that even though Egypt claims to be a leader in the African continent and even though the convention cites the 1994 Cairo Agenda for Action Relaunching Africa’s Socio-economic Transformation as a document that must be kept in mind, Egypt is not a signatory to the convention. Even Somalia, whose corruption records are horrendous, ranking dead last on the 2007 Corruption Perceptions Index, with a ranking of 179 and a score of 1.4, and whose economy is in a dismal state, is a signatory to the convention.

Egypt is, however, a signatory to the United Nations Convention against Corruption, which is quite similar to the African Union’s convention, except a bit more precise and detailed, not only defining the act of corruption, but also the persons that can be held responsible for the act and outlining preventative anti-corruption policies and practices. The convention is beyond the scope of this journalistic endeavor, so suffice to say that it covers the recognition, prevention, and punishment of all aspects of both public and private corruption. However, the details surrounding much of the implementation of the above are left up to the country; in Egypt, the bodies delegated with the task of anti-corruption enforcement are the Administrative Control Agency (ACA) and the Illicit Gain Office (IGO). A possible reason as to why Egypt is a signatory to the UN convention and not to the African Union’s is that it is a bit more difficult to refrain from having a stance on an international legal document than it is on a regional document such as the African Union Convention on Preventing and Combating Corruption.  

The Egyptian Oil and Gas Industry: The Transparency Dilemma
In 2005, the International Monetary Fund released a Selected Issues paper for Egypt entitled Arab Republic of Egypt: Selected Issues. The fourth part of the paper discusses the oil and gas sector in the balance of payments. What is quite catching to the eye is the introduction of this section which lists two reasons as to why the sector plays a more prominent role in the country’s economy than what is depicted in the balance of payments data.

The first reason is that “crude oil exports are not recorded accurately. As a result, the oil trade balance consistently appears weaker than it should be.” This inaccuracy has misleadingly presented Egypt as a net importer of oil from 1998/99-2001/02. The second reason given to the distortion in the role of oil and gas in the balance of payments data is that “foreign direct investment in the oil and gas sector is also not recorded accurately.”

Now, while an obvious lack of transparency is discussed in the paper, the problem is not presented as corruption, but rather the utilization of an out-dated and inept mechanism of record-keeping. The paper states that the source of data used for the compilation of the country’s balance of payments is the International Transactions Reporting System (ITRS). The use of this system underestimates the inflows of Foreign Direct Investment (FDI), negates the sales of oil and petroleum products abroad by foreign companies, distorts financial transactions between the Egyptian General Petroleum Corporation (EGPC) and its foreign partners and does not separate exports of gas in the official balance of payments.

The paper concludes that “due to the deficiencies in the recording of oil and gas exports, export revenues appear to have been underestimated by more than US$1 billion per annum in recent years. Weaknesses in the recording of FDI inflows in the oil and gas sector have also led to under-recording, possibly by as much as US$3 billion per annum.”

Once again, while this report does not even hint towards corruption, one cannot deny that the imprecise recording of close to US$4 billion annually leaves a huge question mark in the minds of citizens and investors alike. After all, an investor’s worst enemy is uncertainty.

Another issue of significance is the lack of transparency in government procurement. In the 2007 National Trade Estimate Report on Foreign Trade Barriers, a report published annually by the Office of the United States Trade Representative (USTR), several improvements were reported on the part of Egypt: US goods trade surplus, US goods exports, and US imports from Egypt all significantly increased. However, a point of contention was found in government procurement.

It is a wide known fact that in the oil and gas industry, it is tenders and bids that regulate almost all activities. In 1998 a law governing government procurement was issued which stipulated that technical factors and not just price be taken into consideration in awarding any contract. And while the law grants certain rights to suppliers such as, “speedy return of their bid bonds and an explanation of why a competing supplier was awarded the bid,” the USTR report asserts that, however, “many concerns about transparency remain.”

Another area where transparency is sorely needed is the pricing scheme of gas in the country. Professor Robert Mabro, a former director of the Oxford Institute for Energy Studies spoke at an ECES Distinguished Lecture Series, regarding some of the crucial issues found in the Egyptian oil and gas industry.

In his speech Mabro states “there are EGPC supply contracts to Union Fenosa and Jordan. The prices are not published. It is said that the price to Union Fenosa is low. The highest number mentioned by observers of the Egyptian gas scene is $0.90 MBtu. Lower numbers, such as $0.65 MBtu are sometimes quoted. This is the price at the point of entry to the LNG plant. If these numbers are gross underestimates EGPC/EGAS would be wise to publish the true figures in order to set the record straight.”

What Mabro is exclaiming is the problem of a lack of transparency on a much grander level of international deals. In essence, the Union Fenosa deal might involve the sale of gas at a lower cost than its domestic replacement cost. In fact, among the suggestions given by Mabro in his speech is the re-opening and re-negotiating of deals that might unjustly cost the Egyptian government and thus the Egyptian people. However, the lack of transparency leaves little room for maneuver in these deals.

Recent Corruption Cases in the Egyptian Oil and Gas Industry
During the month of April of this year Egyptian General Petroleum Corporation (EGPC) members, businessmen and a member of the People’s Assembly (PAM) were accused of releasing information and reports, classified as top secret, to clients in return for money and gifts. The clients also received special facilitations in the international bids held by EGPC over the last five years and also acquired special areas for drilling and exploration. The accused included six officials from EGPC and seven businessmen, including former CEO of Alex Oil Company and a member of the People’s Assembly, Emad El-Gelda.

Unsurprisingly, public opinion was rocked by the incident. According to investigations, Emad El-Gelda gave Mohamed Dahy, the EGPC Vice President for Agreements and Explorations, a car worth approximately LE137,000.

In June, the court convicted 12 of the bribery charges and absolved one businessman that confessed. Six EGPC directors were suspended from employment and fined $233,000. The charges were not solely confined to bribery but also robbery. Apparently, half a million dollars were stolen from EGPC’s treasury through forged receipts and financial accounts of client companies.

The sentences ranged from three to ten years, with the Assistant to the Vice President of EGPC for Agreements and Explorations receiving the severest punishment of 10 years of penal servitude. The Assistant to EGPC’s General Manager for Gulf of Suez Evaluation, the EGPC Economic Analysis Manager and the EGPC General Manager for Exploration Supervision received seven years, while another defendant received five years and the remaining eight, among which was El-Gelda, were sentenced to three years.

Within the same year, other corruption cases included an investigation into the importation of foul gas valves, which caused gas leaks, by Petrogas Company. Also a charge of bribery was directed towards the head of the labs and chemical research at the Suez branch of the Al-Nasr Petroleum Company, for receiving LE2 million bribe from the Chairman of the Arab Office for Chemical Services and Rokin for Chemicals in order to obtain the pricing list of companies in a bid round.

Other corruption cases within the oil and gas industry that date back to 2004 were discussed in a report released by the Egyptian coalition opposition group (Kifaya) on July 4, 2007. The report discusses corruption in Egypt on several levels, which include case studies. The 249-page report, entitled “Corruption in Egypt: A Dark Cloud that does not Vanish,” a quote taken from Ibn Khaldun’s The Muqaddimah, addresses corruption cases in several of Egypt’s ministries including the Ministry of Antiquities, the Ministry of Agriculture, the Ministry of Finance, the Ministry of Culture and, of course, the Ministry of Petroleum.

The report mentions one of Egypt’s biggest corruption scandals of the year 2004, where the Attorney General referred 16 suspects to the criminal court. The top five defendants of the case were receiving monthly payments from other defendants since 1995 in return for circumventing the appropriate and legal procedures prescribed for their work and also for the facilitation of work and for leaking important and confidential information. Among the top defendants was Engineer Hosni Gaballah, who was caught red handed receiving a bribe from another defendant, Hamad Said Taha, the owner of a private oil company.

Eleven of the defendants admitted their guilt and were released on a LE20,000 bail. On June 10, 2004 sentencing was delivered to the 16 defendants. Hosni Gaballah, the Board Chairman of Gabal El-Zeit Company was sentenced to 29 years and a fine of LE300,000; Munir Abd El-Hameed Al-Awadi, Board Chairman of Qarun Oil Company was sentenced to 60 years and a fine of LE970,000; Ali Mohamed Mostafa Al-Sayed, a Security Official at an oil company was sentenced to 10 years and fined LE300,000; Ali Said Mahmoud Al-Sayyed, a Department Head at Badr Petroleum was sentenced to 5 years and fined LE70,000; Salah Abd El-Wahab Solaiman, an Engineer at Qarun was sentenced to 13 years and fined LE110,000; and Ali Ahmed Salah Sayyed, an employee in a petroleum services company was sentenced to five years. The rest of the defendants were absolved because they admitted to their guilt.

When Every Man Has His Price
The 2007 Corruption Perceptions Index brought attention to a common theme among the countries that were undertaken in the study: the poorer the country the greater the corruption. The Chair of Transparency International, Huguette Labelle, stated that “despite some gains, corruption remains an enormous drain on resources sorely needed for education, health and infrastructure.”

When one looks at the worn and at times non-existent streets of some of the urban areas and the smaller villages of Egypt; when a student at a public high school cannot answer questions that his counterparts in other developed countries consider elementary; and when water and electricity are at times a luxury and not a basic service provided to citizens, while others manage to steal millions from the country and while some are caught, some are not, this is when one can truly appreciate Labelle’s statement.

In short, what has been attempted in this piece is the unraveling of the much diagnosed and little treated problem of corruption. On the international level, Egypt ranks low in the eyes of global monitoring institutions when it comes to corruption. The country is signatory to one comprehensive UN convention and silent on the regional front as was seen with the African Union’s Convention on Preventing and Combating Corruption.

The handbooks of international investors such as the IMF report or the USTR report still speak of a lurking lack of transparency and the utilization of inefficient methods of record-keeping. A lack of transparency provides the best environment for corruption.

While several corruption cases have been cracked, such as the ones mentioned above, several others go unnoticed. And while the caught culprits of corruption are fined fees as a debt to society, these fees are usually a minute amount of what they initially stole.

With all the recent discoveries and the new technology available in the market, oil and gas production is increasing. With new economic reforms, investors are attracted to the stability and resourcefulness of the country. The oil and gas industry is booming, there is no reason for secrecy in an open market. 

In a report prepared by Mona El-Garf, Professor of Economics at Cairo University, in 2005, she mentions that in Egypt the procedures required for the initiation of any economic activity are 13, whereas in similar income countries the number is 9 and in best-practice countries the number is 5; bringing to mind the words of Gaius Cornelius Tacitus, a Roman senator and historian: “In a state where corruption abounds, laws must be very numerous.”

In short, corruption is a culture and not isolated incidents; it cannot be solved solely by decrees and laws, but by fundamental change. After all, what brought down Rome can bring down Egypt.

By Diana Elassy



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