Friday,21 September, 2018
Current issue | Issue 1181, (23 - 29 January 2014)
Friday,21 September, 2018
Issue 1181, (23 - 29 January 2014)

Ahram Weekly

A revolution against cronyism

Corruption was a main trigger of the 25 January Revolution, with two new studies describing the true character of the former regime, writes Sherine Abdel-Razek

Al-Ahram Weekly

During the last years of ousted former president Hosni Mubarak’s hold on power, deep corruption was one of the facts of life that Egyptians had to cope with, along with increasing poverty and social discontent. According to a 2010 study, 46 per cent of Egyptians listed corruption as their main concern, even ahead of the lack of democracy and poor economic conditions.
The marriage between politics and business that characterised the Mubarak regime was a phenomenon that had started in the early 2000s. Many businessmen entered the political scene, and executives connected to Gamal Mubarak, the former president’s son, were parachuted onto the boards of established firms and banks.
“These firms took on the modernisation of the economy, spearheading the development of new sectors and the expansion of old ones, backed by state favours and international and Arab finance. The rising businessmen were not only well connected, but they also occupied important posts in government, the ruling party, parliament, and various influential boards and committees,” notes a study by Harvard professor Isaac Diwan on the business scene in Egypt at the time, called crony capitalism.
Another analysis of the features of the Mubarak regime’s business elite has been presented in a book entitled The Capitalism of the Bosses by Cairo University professor of economics Mahmoud Abdel-Latif.
In the book, Abdel-Latif says that the business sector was dominated by holding companies that had expanded the scope of their investments and were mainly dominated by family businesses that were over-dependent on bank credit as sources of finance and in most cases enjoyed a monopolistic position in their sectors.
The easier access to credit seen during the final years of the Mubarak regime could be partly explained by a trend among businessmen that started in the late 1990s that saw them either buying stakes in the banks or sitting on their boards. Abdel-Latif presents examples like the Arab International African Bank, which at the time was linked to the names of Mohamed Mansour and his brother Yassin together with their cousins Ahmed and Mohamed Al-Maghrabi.
According to Diwan, global studies of firms connected to the political elite in different countries, referred to as connected firms, have shown that they have higher leverage, pay lower taxes and have stronger market shares. Applying these ideas to a set of 116 listed Egyptian firms, out of which 22 were linked to three leading brokerage companies, indicates that they were connected to those in power, with their debt/equity ratio higher than those of firms lacking such connections by 1.1 per cent.
The 22 firms studied included local steel monopoly Ezz Steel and Palm Hills, whose major shareholder was former minister of housing Ahmed Al-Maghrabi. However, Diwan said in his study that there was no evidence that these companies had paid less taxes than their non-connected peers. On average companies in Egypt pay only 17 per cent of their income on taxes, compared to at least 29 per cent worldwide.  
Both Abdel-Latif and Diwan agree in their studies that the influential role businessmen had under the former regime was reflected in their favoured treatment, contradicting the idea of free competition. According to Abdel-Latif, strategic industries like steel and cement were oligopolies, meaning that the sectors were dominated by just a small number of companies.
In the case of the steel industry, only three, at the top of which was Ezz Steel, owned by Ahmed Ezz, secretary-general of Mubarak’s National Democratic Party and a close friend of his son Gamal, dominated 90 per cent of production.
In the cement sector, four foreign companies controlled between them 87 per cent of overall production capacity. The same trend could be seen in the auto market, leather production and even in non-banking financial services.  
Abdel-Latif’s study also found that the same trend applied in importing different commodities, especially in the case of the food industries where private companies monopolised 70 per cent of the import of sugar and confectioneries, 37 per cent of meat imports and 63 per cent of those of beverages. “This gives the few the privilege of controlling the market and directing the supply and demand of these commodities,” his report says.
An accelerated privatisation programme in the Mubarak years, together with a flux of foreign aid, created a new kind of corruption that related to consultant groups that swallowed huge chunks of aid money, estimated at up to 30 per cent.
In 1999, during a parliamentary session to discuss the commodity import programme, an important component of American aid to Egypt, it was revealed that a large number of companies owned by members of parliament and their relatives were involved in importing commodities.
The aid money was usually deposited in the banks, which selected certain importers to buy from American companies. By choosing the companies of the elites, the aid programme was used to benefit them, and businessmen’s exploitation of their connections during this period led to considerable diversification, as could be seen by the list of charges against them after the revolution.
These charges included land appropriation at unfair prices, financial fraud, unfair competition, unfair borrowing from state banks, unfair access to subsidised energy, unfair access to state procurement, conflicts of interest and receipt of bribes, illegal funding of political campaigns, and the manipulation of the financial markets for the benefit of insiders.
In an attempt to assess the value of connections on the larger, politically connected listed firms, Diwan tracked the performance of the shares of the 22 listed connected firms and of 94 non-connected firms.
By comparing the effect of the news of Mubarak’s death in 2004 and 2007 (later disavowed) and of the 25 January Revolution he found that the effect in the two first cases led to a loss of three to four per cent of share values, while news of the revolution in 2011 led to losses of 23 per cent.
This figure of 23 per cent, according to Diwan, is how much relations to ruling elites adds to company value.
However, the companies were not able to take advantage of their privileges in ways reflected in their returns, he says. Had the bank credit allocated to the connected firms been given to the non-connected ones, it would have yielded an additional 2.8 per cent per year and thus have created more jobs.
Furthermore, the return on assets on non-connected firms is higher than that for connected ones. “Connected firms obtain many advantages and this should increase their value. However, because politicians may care more about other skills than management skills (for example loyalty), these firms may end up badly managed,” the study says.
“They may also have to return politicians’ favours, for example by financing political patronage and political campaigns, and this would reduce their values.”
Many Mubarak regime-connected businessmen suffered travel bans or were imprisoned or convicted in absentia after the revolution. However, reconciliation efforts, initiated under ousted former president Mohamed Morsi’s rule and revisited during the last three months, have meant some crony capitalism icons returning to their businesses.

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