In the wake of recent political developments in Egypt, almost everyone and everything is being put under the microscope. Suspicion over alleged corruption is resulting in a crackdown on corporations, businessmen and ministers, making this the hottest topic of interest to the Egyptian public. A witch hunt of sorts is currently underway to bring ‘the corrupt’— for laws that were ignored and loopholes that were overlooked for decades — to justice. These investigations are at the top of Egypt’s agenda of action.

This altruistic initiative is being portrayed as a promise of a lifetime supply of bread to Egyptians. The public wants to see those who chose lucrative business over ethical business practices punished While expectations to punish the unethical might be well-placed, there are others within the business community whose business practices are now being questioned despite the fact that they abided by the law.

Business Today takes a closer look at business ethics versus good business, and whether those who played by the market rules — ethical or unethical — should take the fall.

Corruption in Egypt? Never,

The World Bank defines corruption as “the misuse of a public office for achieving private gain.” A broader definition of corruption includes a government official or body that accepts bribes or engages in blackmail for personal gain; when government representatives or private businesses offer bribes to overcome competition or gain profit outside the law; and most importantly, when nepotism and favoritism take place.

The latter was arguably the most prevalent form of corruption tied to government dealings with private businesses in Egypt.

Samir Youssef, professor of management and international business at the American University in Cairo says that “corruption in Egypt is not an individual practice, it’s institutional.”

Business Without Corruption: An Action Guide, a report published by the United States Agency for International Development in 2007, breaks down the different attitudes most commonly adopted by members of the business community when it comes to corrupt behavior.

According to the report, business owners generally adopt one of three different strategies when working within a corrupt market. The first of these is the passive non-resistance strategy where members of the business community often use statements such as “well, if there’s no other way, I suppose I’ll have to, [or] everyone else is doing it.” It may be illegal or unethical but it serves a noble purpose in principle. It is worth noting, that this strategy is adopted by the largest number of people.

The second strategy includes individuals who actively utilize corruption as a tool to increase their competitive advantage. This group usually includes large companies that have better chances of working with the government. The fact that they enjoy close ties with governments often helps in masking corruption.

The third strategy, which unfortunately is adopted by the smallest group of businesses, is to not engage in corruption at all. In fact, they strive to avoid corruption and try to comply with laws. The outcome of this strategy varies. While some companies are unsuccessful and go out of business, others manage to survive.

Ethical dilemma
“We have to distinguish between what is ethical and what is legal,” says Youssef. “One problem in countries like Egypt is that they are still in a transitional phase from a socialist economy to a free-market economy, and the laws are still being formulated.”

The multitude of business dealings under investigation in Egypt at the moment, are a true reflection of the nature of the current system. During such transitional phases, there are all kinds of loopholes in laws.

The land used for development by various construction and business projects carried out over the past few years can function as a perfect example. This land could have been offered either via an open bid in the market to encourage competition and yield highest revenues for the country or through direct order by the minister in charge to a specific individual or company.

“The [second] method may be considered unethical because the minister determines the price,” says Youssef. “This price is based on his understanding or on his connections with this person or deal. This can be considered harmful to society because society’s resources are being depleted in favor of a single person, businessman or business. Other members of society, including the rest of the population and future generations, will no longer have these valuable resources.”

In the case of Egypt, this is facilitated by bureaucracy; its sheer size and the extent of its control over resources, as well as the high level of self-interest create a fertile atmosphere for corruption.

“While there is currently considerable improvement in this bureaucracy, it still falls short of the requirements of a positive business environment as required by international bodies,” says Youssef.

Ethical issues up for consideration
With business emerging as one of the most important entities in modern societies — driving development, growth and capital — consumers, investors, suppliers, competitors, governments and society at large have become the real business stakeholders.

Youssef stresses that business profits need to be generated through real work, not through capitalizing on loopholes or opportunities that come via connections.

“This is called opportunism,” he says. “Or in economic terms, capitalizing on externalities.”

That is one of the main reasons why in developing economies, members of the business community are keen on keeping long-standing relationships with political regimes in power. By the same token, members of the political regimes often view members of the business community as a source of extra income and, therefore, are as keen to maintain these ties.

According to Transparency in Government Procurement, a report issued by the Center for International Private Enterprise (CIPE) about the Egyptian government, “public procurement (goods, services and work the government purchases) occupies a prominent place in corrupt practices in Egypt, as it involves services and goods worth billions of pounds. The private sector supplies such goods and carries out the service or work.”

The distorted nature of the relationship between the Egyptian government and the business community is clearly illustrated by the numbers. According to the CIPE report, government procurement represents big business in the country and personal relationships are among the main ways through which member of the business community secure a part of this business.

“[...] The total cost of tenders for products, services, equipment, appliances and materials required for government authorities and other affiliated agencies [exceeded] LE 27 billion of the public budget for the fiscal year 2009–2010,” stated the CIPE report. “The same applies to government investment projects, which government authorities allocate to the business community, [which amounted] to LE 36 billion in the public budget for the year 2009–2010.”

What came first?
In a market where business ethics are considered a myth, it’s hard to define where legal activities end and unethical business practices begin.

“We have to distinguish between the legal issue and the ethical issue,” says Youssef. “Legally, everything on paper will most likely be correct, and I’m […] sure that the government or the investigations will not be able to get anything on them.”

The challenge is that Egyptian law has thus far been unsuccessful in trying to bridge the gap between the legal and ethical realms. The law should include something about causing harm to society due to business practices, but the reality is, it doesn’t. Youssef argues that due to irresponsibility in the political system, irregularity in dispensing resources as well as negligence, transactions often look good on paper, when in reality they are harmful to society and the business community as a whole.

Case in point is the real estate market, which is currently under heavy scrutiny, with several corruption cases within the country still open. Prior to the revolution, this sector was one of the most successful and lucrative. However, as Ahmed Rashad, an engagement auditor with Ernst & Young who works directly with the real estate sector, points out, the problem was not with the companies but the way in which land was allocated to these projects. He argues that it is the previous minister who should be held accountable for selling land for unreasonable prices when compared to the actual fair market value.

 “From a legal perspective, the companies cannot be held accountable for buying land [at] low prices,” says Rashad. “From a company’s point of view, this is considered an opportunity, buying land at lower amounts than its actual value. [It’s] not the company’s fault, but rather the government’s.”

He says that some of the dealings currently being investigated, specifically land along the Cairo–Alexandria Desert Road, was originally sold as agricultural land. But some of the companies that acquired the land violated the initial contracts and re-sold the land to real estate companies that eventually turned the land into luxurious compounds.

“The contract amendments are monitored by the Ministry of Housing,” he says. “So from a legal perspective, the companies are not violating any laws, but if a company started developing a land originally sold for cultivation without amending or notifying the ministry, only then would it result in violating laws.”

Compassion trumps corruption
For those working in real estate, times are tough. Ismail Farid is the project director for residential development for Samcrete Development. He believes that the government is approaching these corruption cases in the wrong manner.

“I wouldn’t state that this was corruption to begin with,” he says. “Doing business in that manner was a byproduct of a corrupt business environment, and these companies operated in that manner because it was the only way to do business. These business people employ hundreds of thousands of families and are a big part of the economy whether we like it or not.”

Rather than hunting businessmen and women like criminals and creating nationwide panic and economic instability, Farid says the government should weigh its short- and long-term objectives and reach settlements with the companies. These settlements would allow businesses to pay back what the government believes they owe, while minimizing the current instability caused by investigating huge companies that are worth billions of pounds and contribute to the economy through taxes and job-creation.

“There is a line between business ethics and good business,” he says. “However, when the laws themselves are flawed and don’t protect the people, this line becomes more relative than definitive.”

This is where things get complicated. If the government tries to apply the law literally, it will find some shortcomings on their behalf as well.

“What makes it difficult is [that] corruption has really become a culture and a way of doing business,” Youssef says. “The values of this society have been somehow distorted because of the long association with bad practices and, as a result, corruption became part of [the] culture. It has become institutionalized.”

A gray verdict
With corruption so enshrined in the Egyptian system, it’s hard to point the finger of blame at any one party against the other. Some would argue that asking businesses to adopt ethical practices while those creating the rules of the game are not, might be a bit much, while others would say that ethics should be non-negotiable. If the promise of a new Egypt holds true, both arguments are now irrelevant. However, it remains to be seen if breaking the cycle of corruption will be easier said than done. bt