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Did Hesham Geneina’s study exaggerate Egypt’s corruption?

Former chief auditor Hesham Geneina is facing trial after a controversial report about the extent of corruption in Egypt. Following the publication of the full Arabic report in Mada Masr, Wael Gamal reflects on the strengths and weaknesses of Geneina’s report.

Exaggeration is the main accusation leveled against the Central Auditing Authority and its former head Geneina. For this, Geneina is facing trial on charges of disseminating false news that could harm Egypt’s economy and disturb social peace and security.

The presidential fact-finding committee created to look into a study on corruption carried out by the CAA under Geneina’s leadership makes five primary criticisms: misleading and exaggerating; lack of credibility; deliberate omissions; misusing figures to present positive numbers and policies in a negative light; and misusing the word “corruption.” All of these criticisms lead to the same conclusion: The study presents an exaggerated estimate of the extent of corruption in Egypt.

In reality, even though the study suffers from methodological gaps and weaknesses, the precise opposite of these charges is true — the study is in fact too conservative in appraising the annual cost of corruption in Egypt.

What does the study state?

The CAA report, titled “A study on the analysis of the cost of corruption by application on some sectors in Egypt” and which Mada Masr exclusively published in full in June, sets its own parameters in an attempt to estimate the cost of corruption in Egypt. The first limitation is described by the study as spatial; the study limits itself to entities the authority is responsible for auditing. This necessarily excludes all aspects of corruption that do not legally fall under the authority’s remit.

The second limitation is described by the report as temporal: The study only includes CAA reports for the years 2012 to 2015. In fact, the study itself states that it does not attempt “a comprehensive inventory of the cost of corruption given restrictions on inspections in some sectors and the limited timeframe of the study.” It also clarifies that it did not account for environmental and social costs, or the opportunity cost of the maximum wage for government employees, when calculating the extent of corruption.

The study was not originally intended for publication — it seems obvious it is merely a collection of the CAA’s observations from its own previous reports, designed to be sent to the concerned authorities for discussion. Nor does it give a total figure for the cost of corruption (which is the aim that the study sets for itself). Nonetheless, the main focus of the discussion surrounding the study was on the estimated number of LE600 billion that Geneina mentioned in a statement to Youm7 newspaper last December. There are two main observations to be made here:

The first is that the report’s estimate, in fact, covers four years. Thus, what Geneina stated to the press implies that the average annual cost of corruption is only LE150 billion.

The second is that the study grapples with a much larger number than LE600 billion. Looking at just the New Urban Communities Authority, the study estimates the cost of corruption at LE876.66 billion. This means that Geneina’s publicly declared estimate is quite conservative. We of course don’t know the methodology by which Geneina reduced the estimate to only LE600 billion, and whether that was based on his exclusion of particular cases. The rationale for reducing his estimate to LE600 is not made clear: Was it a legal re-evaluation? Did Geneina receive responses from specific stakeholders? Or did he simply decide to take a conservative stance?

What is certain is that every case listed in the study is identified by more than just a single entity as each stakeholder is addressed. The study is primarily based on an inventory of violations already recorded in past reports, which are assembled to paint a general picture in order to call attention to the consequences of corruption that bleeds citizens’ wealth.

A narrow definition

The fact-finding committee’s report states that the study misuses the word “corruption” and “places it in contexts that are remote from those stipulated in national and international laws and conventions.” The committee also criticizes the study for confusing facts and procedures, and mixing issues that had already been resolved with those still pending settlement. It also poses other criticisms regarding the adoption of the definition of squandering public funds, which it perceives as very broad.

In fact, the study uses a very narrow definition of corruption, perhaps because of the restrictions indicated earlier. The accepted definition of corruption, in reality, is not restricted to what has already been proved in a court of law.

Attempts to quantify the extent of money laundering or tax evasion, for example, are factored into estimates of corruption even though they might not have been referred to court. Moreover, a significant portion of corrupt practices result from the law’s inability to realize their occurrence. As a result, the mission of the auditing body, and the press as well, is to call attention to the wider phenomenon of corruption in order to frame it and fight it by developing better laws.

According to Transparency International, the definition of corruption is “the abuse of entrusted power for private gain,” which is also the definition followed by the Organization for Economic Cooperation and Development (OECD). This definition, of course, requires procedural guidelines and specification, but in comparison to the CAA study, this international definition is very broad. In contrast to the criticism from the fact-finding committee, it is a definition that includes both private and public corruption as well as issues the law falls short in dealing with.

With all its limitations, and despite the accusations of exaggeration, Geneina’s study offers us a very conservative estimate according to the definitions stipulated in international laws and conventions.

Generally, restricting the definition of corruption to governmental employees — particularly the likes of low-ranking traffic officials — is in line with the approach taken by the World Bank, the International Monetary Fund and local interests aiming to minimize the state’s role.

Today you even see a government funded campaign against corruption in the media that focuses on accusing a government employee — who calls for more accuracy in procedures — of corruption and disrupting people’s interests.

The accusations against the technical capacity of the authority’s employees, might in fact be true if we take into account the state’s neglect of the legal and political understanding of the issue of corruption, the absence of the training and development required to deal with the successive complexities in corruption. They call attention not to an exaggeration of the estimate of corruption, but rather to auditing bodies’ lack of capacity to deal with forms of corruption that are becoming increasingly complex.

It bears repeating that this weakness, if it indeed exists, does not mean there is no need for regulatory agencies. It does not imply that the solution is to stop monitoring the practices of gamblers and stockbrokers in the stock market and elsewhere, as is being called for by some capitalist liberals who depict the Egyptian economy as a failed public-sector economy. Meanwhile, the private sector had replaced the public in controlling more than two thirds of GDP, not including the informal economy.

What’s unaccounted for?

To get an idea of what’s left out of the CAA’s account — which is to say the extent of corruption not outlined in Geneina’s study or the public discourse on corruption in Egypt — we can refer to a limited indicator represented in the Global Financial Integrity report on illicit financial outflows from Egypt, which estimates it at more than US$5 billion dollars in 2012. Egypt occupied an advanced position in comparison to other African countries. Here we do not refer to political corruption, misallocating subsidies in the budget, allocating bank loans to members of the Supreme Council or any other corrupt practices that are prevalent and rife in Egypt. We do not even refer to the hundreds of Egyptian companies that are registered in tax havens in order to smuggle their profit and avoid paying taxes, benefiting here from the government’s lack of attention to the issue.

If we take Geneina’s figure of LE150 billion per year against the average GDP in the years of the study, we find that the annual cost of corruption does not exceed 7.2 percent of the size of the overall economy. Of course, this is almost equal to the health and education budget in the current fiscal year 2016-2017, but when compared to figures from the European Union, it becomes obvious how conservative this number is as well.

In 2014, RAND research foundation estimated the cost of social, political and economic corruption in the EU at between 179 and 990 billion euros, the equivalent of 7.1 percent of the total EU GDP for that year. Of this estimate, RAND states that the corruption in procurements, tenders and general bids does not exceed 5 billion euros.

The estimate stated in the CAA study — despite its enormity in a country where the government constantly cites shortages of resources — is way below its true value. Otherwise, we would be claiming that the size of corruption in Egypt and the European Union is the same.

Observations on methodological issues

Among the criticisms directed at the study is the diverse nature of activities monitored as corruption. There is some merit to this critique, since the study does not offer clear guidelines for what is included and excluded from the report. In reality, though, it’s quite normal to find a wide variety of corrupt practices, especially across different sectors.

There is also the issue of time. When do we calculate the cost of a corrupt practice? And how do we calculate it? This is certainly a thorny problem — especially if we adopt the broad definition that takes into account, for example, environmental costs. In such cases a corrupt act might have taken place one year but its cost could be paid annually for generations to come.

In this framework, we use as an example the issue of exporting gas to Israel, a deal beset by suspicions that power was abused for private gain. According to a Egyptian Initiative for Personal Rights report by Amr Adly and Mika Minio-Paluello, Egypt’s losses resulting from contracted exports of gas to Israel, Spain and Jordan is estimated at US$10 billion between 2005 and 2010. This is the estimate of the direct losses, calculated by comparing the money Egypt’s gas brought in when compared to the cost of projects and global export prices during the same period. However, Egypt now faces a severe shortage of energy, and a country that once exported gas cheaply now has to buy gas on the global market. Here the cost of corruption, which was contracted years ago, is annually renewed and its effects will continue unless it is dealt with one way or another.

Here, we could refer to the CAA audit of the incidents of forgiving private debt without any public debate. The problem started years ago when loans from two public sector banks — Banque Misr and the National Bank of Egypt (NBE) — were given without collateral to dozens of businessmen. Reconciliation negotiations followed thereafter. Ultimately, between 2011 and 2014, the two banks canceled debt and accumulated interest estimated to stand at around LE58.7 billion for NBE and LE17.3 billion pounds for Banque Misr. The incident itself took place years ago but the reconciliation and the debt dismissal happened much later. This raises a dilemma in the timing of the calculation of the cost — one that requires methodological clarity and consistency.

Such a practice also reveals another kind of corruption: Bias in government policy. Imagine what would happen if someone called on the government to drop some of its loans to private banks, or to forgive the loans of struggling farmers. Now compare that to what happened secretly with dozens of businessmen whose debts to public banks were dropped.

Certainly, there should have been a clearer methodological and procedural study, but this does not eliminate the fact that any estimate of corruption is just that; an estimate. Particularly when using the broad, internationally recognized definition of corruption, any attempt to quantify its extent always involves making assumptions in order to produce an estimate.

It counts in favor of the study — with its advantages and disadvantages — and the courage of Geneina in defending it, that it at least exposed the tip of the iceberg, started a public discussion about corruption and exposed the falsity of the alleged war the state claims to be waging against it.