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Corrupt gas contracts cost Egypt ten billion dollars, says report
Courtesy: EIPR
 

With blackouts, energy shortages and oil debts making headlines, a new report from the Egyptian Initiative for Personal Rights (EIPR) looks back at how past energy deals have contributed to Egypt’s current financial woes.

According to the report, poor negotiation and corruption cost Egypt US$10 billion in lost revenue between 2005 and 2011. “The sums we are talking about are huge,” said co-author Mika Minio-Paluello. “$10 billion is more than twice Egypt’s annual health budget. That’s a lot of money in six years.”

The losses stem from export contracts signed during the Mubarak regime, which locked Egypt into selling its natural gas at below-market prices. EIPR calculates that under-pricing cost Egypt over $6 billion in gas sales to Spain, $3.8 billion in sales to Jordan, and in excess of $200 million in gas sales to Israel.

“In effect, Egypt was subsidizing Spanish, Jordanian and Israeli industries, private companies, as well as transferring significant wealth that should belong to the Egyptian people to private interests,” said Minio-Paluello.

At a March 12 panel discussion, the report’s authors explained that a culture of secrecy, and a lack of accountability and public debate created the conditions that allowed these contracts to be signed.

Although state entities like the Ministry of Petroleum and the Egyptian General Petroleum Corporation were mandated to negotiate in the interests of the Egyptian people, secrecy created ample room for graft and kickbacks, and allowed well-connected businessmen to manipulate contracts for their own benefit.

For example, report co-author Amr Adly explained, middlemen and brokers in contracts with Jordan, Israel and Spain reaped huge profits. Eastern Mediterranean Gas, partly owned by tycoon Hussein Salem, paid Egypt less than $3 per MMBTU of gas, then resold it to Israel for around $4.5 per MMBTU, pocketing profit that could have gone to the national budget.

Even when out-and-out corruption and profiteering wasn’t involved, the lack of accountability or public debate weakened negotiators’ bargaining positions. Operating in secret, government negotiators were unable to mobilize public opinion as a pressure tactic.

A numbers game

The opacity of gas negotiations also makes it difficult for researchers to pinpoint exactly how much money the country lost out on.

Information about gas pricing and sales volume is not available to the public, even though these contracts involve government agencies and publicly owned natural resources. In some cases, even the existence of particular contracts is shrouded in secrecy, explained co-author Amr Adly.

Without no public data on gas exports, researchers were forced to rely on information disclosed in court proceedings, which only gave snapshots of volume and pricing over time.

Determining a fair market value for natural gas is also tricky, because unlike oil, there is no single global price for the commodity. Gas is expensive to ship over long distances, and the high up-front cost of extraction and processing means that sales are often tied up in long-term contracts.

“You can’t just look in a newspaper and say, okay, the price for gas is this,” said Minio-Paluello. Instead, he explained, the report compared the price Egypt was known to charge for natural gas to sale prices in East Asia, as well as to European pipeline prices.

“The losses could’ve been greater. They could’ve been more than $10 billion, or they could be a bit less, they could be $7 billion or $8 billion,” said Minio-Paluello. “What’s clear is that under pricing caused losses of many, many billions.”

Egypt didn’t just lose out on billions of dollars that should have gone to the national budget.

“The impacts from dodgy contracts, bad contracts, they’re not just about revenue,” said Minio-Paluello. “A bad contract can also mean significant impacts for the local community.”

Poorly negotiated contracts can fail to protect citizens against environmental hazards, human rights abuses and unfair labor conditions, by allowing producers to escape liability altogether, or by setting penalties too low to be effective deterrents.

What Now?

The EIPR report only covers gas deals made before the 2011 revolution, but its authors say the problems outlined in the report have persisted despite multiple changes in government.

“The oil sector remains unaccountable, remains a black box,” said Minio-Paluello. “The structural problems have not changed.”

He pointed to proposed changes to Egypt’s investment law, which would block third-party challenges of contracts. These challenges, he said, are currently one of the only avenues by which independent researchers can learn about corruption. “The level of accountability that exists is being taken away, reducing what potential for oversight there is,” he said.

Egypt’s current energy crisis also threatens to place the country in a weak position for negotiations, as it looks to promote foreign investment in its oil and gas sector. Egypt is cash-poor and desperate for gas, and petro-companies have seized on the opportunity to push for greater flexibility in contracts, Minio-Paluello said.

“There’s a significant chance that in five years time, we could be having another panel here, I could hold up a similar report with a slightly different cover that could say oil contacts signed under Sisi, or whoever, have lost Egypt 5, 10, 15 billion in revenue.”

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