Transcript Corporate Governance and Corruption in the Arab World

Governance
Fighting corruption in The Arab Countries
AUB Lecture 23 October 2012
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Objectives
Create and promote awareness in Arab society:
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As to the dangers of corruption to public resources and interests
Expose its detrimental effects on societal cohesion, civil peace and
sustainable development.
Its adverse effects on national economy and resources
Promote the culture and practices of transparency and free exchange of
ideas, opinions and information as the basis for implementing good
governance, democracy and accountability.
Promote the practices of Integrity in the public and private sectors.
Promote the practice of Disclosure and the right of citizens to access
information
Expose deficiencies in public accounting systems.
Underline the importance of independent Judiciary and the Rule of Law
Procedures
 Collect, analyze and monitor information related to corruption in
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public life.
Organize conferences, Seminars, workshops and publish proceedings
Training sessions for Officials in the public sector.
Communicate with International Organizations
Networking: Academic and Business
Conduct studies on particular issues that affect and are effected by
corruption
Publish reports on the state of corruption in the Arab Countries
Scale of Corruption in the Arab
World
Corrupt Development or Development of Corruption
 1950 – 2000, studies indicate that the total revenues of Arab countries amounted to 3
trillion dollars
 1 Trillion spent on Arms supply and procurement.
 1 Trillion spent on Infrastructure: transport, irrigation, industry, services and Education.
 1 Trillion in payoffs to secure deals done in the above 2 sectors.
I.E. One third of the National Income!
The effects of this on the National economy:
 Every person could have received $200 per annum for every year of the 2nd half of the last
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century
If this payoff money was invested in the poorer Arab countries (Sudan), We could have created
total sufficiency in Agriculture and Food
We could have provided total requirement for water in the Arab region (Through source utilization
and distribution as well as desalination.)
Obliterate illiteracy from the region
Provide a University place for every person, and offer a job opportunity for graduates.
The Picture is not any better Today
Oil earnings increased hugely during the first decade of the 3rd
Millennium. The largest earners are oil rich Gulf States. Each $10
hike in the price of oil adds further $55 billion annually *.
Huge sum of money were spent between 2001 and 2012 on the
same three sectors:
 Military Expenditure
 Construction and Infra structure
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WHAT IS THE SHARE TO BRIBERY?
* Source: Davis Langdon- Middle East Property and Cost Industry Handbook 2009
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Military Expenditure 2001-2011
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Country
Total Expenditure
2001 -2011 (Million US $)
% GDP
Bahrain
6934
3.9
Egypt
50910
2.7
Iraq
23919
2.4
Jordan
11715
5.5
Kuwait
50462
4.9
Lebanon
14728
4.5
Oman*
47856
10.8
Qatar
11557
3.4
Saudi Arabia*
394477
9.3
Syria
24301
4.3
UAE
120818
7.0
Yemen
9921
4.7
TOTAL
Source –
767598
SIPRI. Data Base
The Infra- structure cost
2001 – 2011:
Wise spending or spent wealth?
 Construction (2009) –
- There are over 1,250 projects worth about One trillion dollars in
the UAE alone (1).
- Development projects in Dubai are worth more than $185 billion .
- which is more than King Abdulla Economic City in KSA worth
around $130 billion. The Construction Activity in KSA covering
more than 1000 projects is valued at more than $1.1 trillion.
 Post Conflict Construction (2):
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Iraq
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Lebanon
- Libya
- Syria
What characterizes these countries (and other Arab States)?
It is the concept of a “Failed State” as described by Noam Chomsky. Or
“Soft State” as defined by Jallal Amin.
Post Conflict Costs – Iraq
 The Wealth of Nations : Three Elements
 Human Resource Capital
 Social Overhead Capital
- Economic Capital: Infrastructure
- Social Capital : Health, Education, Institutions
 Natural resources and its reserves.
o Financing S.O.C – Borrowing or increasing oil production:
 Oil production Levels: 12mb/day @ 2020 or 6mb/day ($300bn or $150bn)
 Affected by Rentier Economy and Corruption
 Affected by disintegration of the state ( Kurdistan and Iraq)
 Lack of Good Governance and Transparency ( Governor of Central Bank)
See – Walid Khadouri : “Iraq: Oil and Economy in 2020”
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Al-Hayat 21/10/2012
Post Conflict Costs – Lebanon
 Again considering the three previous elements –
 However, the Human Resource Capital takes an important dimensions (1)
 Social Overhead Capital- How to finance Infrastructure (economic Capital)
How to finance Social Capital (2)
 Natural Resources and its reserves ? (3)
• How do we finance S.O.C ?
 Borrowing ? (4)
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The Right Perspective (1)
LEB
EGT
JOR
SYR
KSA
Q8
QTR
BAH UAE
OMN
Population (Mns)
4
82
6.2
19.8
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2.6
0.9
0.7
4.6
3.3
Employment (Mns)
1.5
22
1.6
5.5
6.6
2
0.6*
0.36*
3.0*
0.92
GDP (billion $)
42.2
404
28
87
565
130
57.7
24.5
167
61.6
GDP/Capita ($)
11300
5500
4900
4500
23200
39300
80900
32100
37300
24000
Value of Const (bl $)
0.972
17.37
1.06
2.61
32.75
3.00
2.77
0.956
10.71
1.42
Const as % of GDP
2.3%
4.3%
3.8%
3.0%
5.8%
2.3%
4.8%
3.9%
6.4%
2.3%
Statistics for 2007
Source: Langdon op. cit.
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The Right Perspective (2)
 The Arab Sovereign Wealth Funds
Rank
Country
Funds
Assets
(billions)
Origin
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UAE
ADIA/ADIC
812
Oil
4
Kuwait
KIA/KFAED
546
Oil
5
KSA
PIF/SAMA
538
Oil
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Qatar
QIA
115
Oil
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Libya
LIA
65
Oil
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Algeria
RRF
57
Oil
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Bahrain
MHC
9.1
Oil
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Oman
OIF
8.2
Oil
Total
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2150
The Right Perspective (3)
Individual Wealth in the Arab Countries (2011/2012):
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Country
No of Individuals
Wealth in bn. $
Saudi Arabia
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264.0*
Egypt
8
20.2*
Lebanon
6
13.8*
Kuwait
3
13.2*
UAE
4
21.1**
Palestine
2
8.9**
Qatar
3
10.47**
Bahrain
1
6.0**
TOTAL
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357.67
*Source: Forbes List of Arab billionaires .
www.forbes.com
** Source: www.arabianbusiness.com
Al Yamama Project – Political Corruption and corrupt
Governance
 In 1985 The Saudi government signed a contract with BAe (UK) for the
supply of military equipment, training and facilities, the most recent
acquisition (2006)was the supply of 60 Tornado Aircrafts.
 In 2005 BAe earned $40 billion over a period of 20 years and it is
estimated that another $43 billion will be earned in the coming few years.
 Accusation of Bribery to members of the Saudi royal family to the tune of
billions of dollars was made in the media. In UK, USA, and Europe.
 In 2010, BAe Systems pleaded guilty to a United States court, to charges of
false accounting and making misleading statements in connection with the
sales.
 Although the full extent of the deal has never been fully clarified, it has been
described as "the biggest [U.K.] sale ever, of anything to anyone“.
Source – Al Yamama Project : WIKIPIDIA
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Definition of Corruption
We define corruption as :
The illegal use and misuse of the two elements of Power in Society:
o Wealth
o Authority
• Simple corruption (bribing small official etc..)
important as it is but is secondary in our quest.
• It is the corruption that deprives the country of its resources.
• Hinders its development program
• Promotes unfair competition
• Impede good governance
• Threatens the independence of Judiciary
• Interferes with the democratic process – Parliamentary Election etc
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THAT IS WHY CORRUPTION IS OUR CONCERN
Democracy, Growth and Corruption
• Change is our aim.
The Society we seek must be free from hindrance to people rights:
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To Elect their representatives
To hold Governments to account
Free expression
To work and be productive
Equal opportunity
Equality in Citizenship and Nation-hood
 The most effective means to introduce societal change is through
Sustainable Development. However, this can only be achieved when
society is freed from Corruption.
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In order to combat corruption, we require a democratic system of
government.
Good Governance is a pertinent expression of Democracy.
The Tri-pod Analogy
The model used by AACO to express the above is a triangular
configuration
Democracy
Anti-Corruption
Development
E D U
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C
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Good Governance and Corporate
Governance
Definitions:
1. Good Governance- Is the government ability to:
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Ensure political transparency
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Provide Efficient and Effective public service
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Promote the well being of citizens
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Create formidable climate for stable economic growth
2. Transparency:
Is a state in which the objective of a policy ,its legal, institutional
and economic frameworks, policy decisions, data and information
related to monetary and financial policies and the accountability of
the executive branch are provided to the public.
3.
Corporate Governance
Is the set of processes, customs, policies, laws and institutions
affecting the way a corporation (or company) is directed,
administered or controlled.
Included in this: Stakeholders relationships and the Goals for which
the corporation is governed.
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Corporate Governance
Who are the Stakeholders in a corporation?
o The Shareholders
o The Management
o The Board of Directors ( or the Trustees)
Also
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o
o
o
o
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Labour (Employees)
Customers
Creditors (Banks etc..)
Suppliers
Regulators
Community at large
Principles of Corporate Governance
• Rights and equitable treatment of Shareholders
• Interests of other Stake holders
• Role and Responsibility of the Board of Directors
• Integrity and ethical Behavior
• Disclosure and transparency
Issues involving these principals:
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Internal Controls (Audit)
Independence of External Audit
Oversight (management risk & Financial Statements)
Compensations
Availability of resources (Directors)
Method of Board Members selection
Dividend Policy
Mechanisms and Controls
These are designed to reduce inefficiencies that arise from
moral hazard and adverse selection.
An independent third party must attests to the accuracy of
information provided by the Management to investors.
An ideal control system should regulate both motivation and Ability.
o Internal Controls
o External Controls
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Internal Corporate Controls
Internal Corporate Governance Controls and monitor
activities of the Corporation through internal
Mechanisms, and then take corrective action
to accomplish organizational goals.
Examples:
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Monitoring by the Board of Directors.
Internal Audit ( Internal Affairs)
Balance of power
Remuneration
External Corporate Controls
These are the Controls exercised by external stakeholders over
the Corporation:
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Competition
Debt covenants
Assessment of performance information (financial statements)
Government regulations
Managerial Labor Market
Media pressure
Takeovers
Archer Daniels Midland
 ADM is an American global food processing and
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commodities trading corporation.
Operates more than 270 plants worldwide, where
cereal grains and oilseeds are processed into
products used in food, beverage, nutraceutical,
industrial and animal feed markets worldwide.
Total revenues = $81 billion (2011)
Total assets = $42 billion
Employees = 30,000 people
Systemic Problems of Corporate Governance
What went wrong with ADM?
• Demand for Information –
The problem is the cost to small shareholder of processing
information.
• Monitoring Costs.
• Supply of accounting Information
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Role of the Accountant
• Corporate Governance can not function effectively without proper
Financial Accounting.
• Accountants and Auditors are the primary providers of financial
information to Capital Market participants.
• Area of Concern when (Independent) Auditors act also
as Management Consultant.
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Regulation
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•
Rules and Principles
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Enforcement
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Action Beyond Obligation
Codes and Guidelines
• What are Codes and Guidelines?
• Is Compliance mandatory?
• OECD Guideline:
“Principles of Corporate Governance”. 2004
• IMF:
“General Data Dissemination Standards (GDDS)” 2005
• UN
Intergovernmental Group of Experts on “International Standards
of Accounting and Reporting(ISAR)” produced voluntary “Guidelines
on Good Practices in Corporate Governance Disclosure”
• Basel 2 Accord
Banking Laws and Regulations 2004-2009
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Codes and Categories (cont.):
Benchmark Broad Categories
• Auditing
• Board of Directors and Management Structure and Process
• Corporate responsibility and Compliance
• Financial Transparency and Information Disclosure
• Ownership Structure and Exercise of Control Right
“Issue Management Tool: Strategic Challenges for business in the
use of Corporate responsibility codes, standards, and frameworks.”.
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The Phosphate Deal
 Jordan Phosphate Mining Company (JPMC) is a public share holding
company based in Jordan and owned largely by the Government
(MoF, Social Security) and external shareholders (KIA and Islamic
Dev Bank) . It is a monopoly which produces 7 millions tons of rock
a year with estimated reserves of 1 billion tons.
 Jordan Privatization Scheme – 2000
 Establishment of the Board of Privatization
- Appointment of Consultants 2005: HSBC, Law firms etc.
- The Consultants established procedures approved by C of M
- decision to draw competitors from International Markets
- Setting criteria for participants ; “Strategic benefits”
 Invitation in the International market place:
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- 13 participants submitted interest – 3 were disqualified *
Phosphate Deal - Infringements
 Breach No 1: Cancellation of the tender and direct negotiations
- A new participant is introduced “ The Sultanate of Brunei”. JG offers the Sultanate a
price of $4/share as special GIFT from one of the poorest countries in the world to one of
the richest.
- In 2006, the Council of M approves the sale of 37% of JPMC to Brunei.
 Breach No 2 : Selling Government Assets at discounted price
Government’s shares were sold at $4 per share while their price at Amman financial
Market was $7.24/share *.
 Breach No 3: Award of Concession and Monopoly to Buyer
JG guaranteed, in a Letter of Commitments” to the buyer as part of the deal to award
JPMC new rights and monopoly for phosphate exploration until the reserves are
consumed. And that no rights are to be given to any other person without the
consent of JPMC (2).
 Three Other Breaches: Strategic Partner – Companies Law –The Holding co.
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We can only operate in a free environment.
Democracy is important that is why we concentrate on good
governance. But Democracy is not a fast food package..
Democracy in our part of the World can only be applied through
and by democrats – In the west it’s a legacy and heritage.
To do that we need to Strengthen Civil Society Institutions in our
countries, they are the only viable vehicle in this course.
WE NEED BETTER UNDERSTANDING FROM THE WEST.
WE NEED TO AVOID DOUBLE STANDARD.
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Conclusions
•
Key Elements of Good Corporate Governance
• Elements of Success in this cause
 LEADERSHIP
 COOPERATION
 MUTUAL SUPPORT
 PARTNERSHIP
 ROAD MAP
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Texts:
1. ”Governance: An International Perspective.“
by Diane K. Denis and John McConnell -20082. “International Corporate Finance”
by Thomas Clarke - Rutledge , UK 2007
3. “ Principles of Corporate Governance –
OECD, Paris. 2004
Web Sites: Infrastructure costs - http://ppi.worldbank.org/index.aspx
Military Cost Data – http://www.sipri.org/
http://www.yourmiddleeast.com/
Construction cost data (M.E.) – www.davislangdon.com
“Property and Construction Cost data 2009-2010”
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