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GovernanceFighting corruption in The Arab Countries

AUB Lecture 23 October 2012

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Objectives

Create and promote awareness in Arab society:

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

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Collect, analyze and monitor information related to corruption in public life.

Organize conferences, Seminars, workshops and publish proceedings

Training sessions for Officials in the public sector.Communicate with International OrganizationsNetworking: Academic and BusinessConduct studies on particular issues that affect and are

effected by corruptionPublish reports on the state of corruption in the Arab Countries

Procedures

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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 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.

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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

WHAT IS THE SHARE TO BRIBERY?

* Source: Davis Langdon- Middle East Property and Cost Industry Handbook 2009

The Picture is not any better Today

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

TOTALSource –

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):

- Iraq

- 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.

Source – Davis Langdon – op.cit7

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” Al-Hayat 21/10/2012

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Post Conflict Costs – LebanonAgain 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

Q 8 QTR

BAH

UAE

OMN

Population (Mns)

4 82 6.2 19.8 26 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

Statistics for 2007Source: Langdon op. cit.

2.3% 4.3% 3.8%

3.0%

5.8%

2.3% 4.8%

3.9%

6.4%

2.3%

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The Right Perspective (2)The Arab Sovereign Wealth Funds

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Rank

Country

Funds Assets (billions)

Origin

2 UAE ADIA/ADIC

812 Oil

4 Kuwait KIA/KFAED

546 Oil

5 KSA PIF/SAMA 538 Oil

9 Qatar QIA 115 Oil

12 Libya LIA 65 Oil

14 Algeria RRF 57 Oil

27 Bahrain MHC 9.1 Oil

28 Oman OIF 8.2 Oil

Total

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

8 264.0*

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 35 357.67*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 Wealtho 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

• THAT IS WHY CORRUPTION IS OUR CONCERN

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Democracy, Growth and Corruption

• Change is our aim.The Society we seek must be free from hindrance to people rights:

o To Elect their representativeso To hold Governments to account o Free expressiono To work and be productiveo Equal opportunityo 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.

In order to combat corruption, we require a democratic

system of government. Good Governance is a pertinent expression of Democracy.

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The Tri-pod AnalogyThe model used by AACO to express the above is a triangular

configuration

Democracy

Anti-Corruption Development

E D U C A T I O N

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Good Governance and Corporate Governance

Definitions: 1. Good Governance- Is the government ability to:o Ensure political transparencyo Provide Efficient and Effective public serviceo Promote the well being of citizenso 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 GovernanceIs 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 Shareholderso The Managemento The Board of Directors ( or the Trustees)

Also

o Labour (Employees)o Customerso Creditors (Banks etc..)o Supplierso Regulatorso Community at large

Principles of Corporate Governance

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• 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:

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

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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 Controlso External Controls

Internal Corporate Controls

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Internal Corporate Governance Controls and monitor activities of the Corporation through internal Mechanisms, and then take corrective action to accomplish organizational goals.

Examples:

• Monitoring by the Board of Directors.• Internal Audit ( Internal Affairs)• Balance of power• Remuneration

External Corporate Controls

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These are the Controls exercised by external stakeholders over the Corporation:

• Competition• Debt covenants• Assessment of performance information (financial statements)• Government regulations• Managerial Labor Market• Media pressure• Takeovers

Archer Daniels MidlandADM is an American global food processing

and 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 billionEmployees = 30,000 people

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Systemic Problems of Corporate Governance

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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

Role of the Accountant

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• 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.

Regulation

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• Rules and Principles

• Enforcement

• Action Beyond Obligation

Codes and Guidelines

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• 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

Codes and Categories (cont.):Benchmark Broad Categories

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• 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.”.

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:

- 13 participants submitted interest – 3 were disqualified *

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Phosphate Deal - Infringements

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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.

Conclusions

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• 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 -2008 -2. “International Corporate Finance”

by Thomas Clarke - Rutledge , UK 20073. “ 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”