Money, power and law-twisting: The makings of the real Ezz empire

Salma El-Wardani , Saturday 7 May 2011

The case of Ezz Steel is the classic example of how political power meshed with monopolistic business strategies to create personal empires amid a shaky national economy

Ahmed Ezz

Ten years ago, as the main thrust of Egyptian society and the legal sphere was moving towards amending the constitution to make it more democratic and just, the collective brain of the regime’s inner circle was working in the opposite direction: twisting laws to fit the interests of the inner few — the oligarchs who had both wealth and political influence.

Steel magnate Ahmed Ezz, who is facing trial Today, Saturday, on charges of illegal profiteering and misuse of public funds, along with dozens of businessmen and officials considered to be close to the ousted regime, perfectly represents the marriage of wealth, party politics and undue power. Ezz became one of the first symbols that the Egyptian people decided to bring down after the January 25 Revolution.

On the night of 28 January, the headquarters of Ezz Steel in the Mohandeseen district was destroyed, along with other government headquarters and police stations, symbolising the downfall of the old regime.

The rise

"At the time he came to buy Alexandria National Iron and Steel Company (now Al-Ezz Al-Dekheila Steel Company) we had never heard of Ahmed Ezz," said Ali Helmy, former chairman of the National Iron and Steel Company.

"The first time I met Ezz was in 1999 when Atef Ebeid, minister of the public enterprise sector at that time, invited managers of steel companies for a business dinner at a small factory in Sadat City producing galvanised iron," recounted Helmy. "We were introduced to Ezz, a young engineer and owner of the factory."

A few months later, continues Helmy, Ezz has already bought three million shares, accounting for LE456 million ($76.7 mln), of the Alexandria National Iron and Steel Company, and after a few months, he was appointed chairman of the company: first base for what would later become a great empire.

Ezz was born in 1959 to a family that was wealthy but not overly rich. After having graduated from the Faculty of Engineering at Cairo University in the mid-1980s, he worked as a percussionist in one of the most famous music bands at that time, Moudy and Hussein. At the time, Ezz had shown no interest in business until in 1995 his father, a steel trader, bought him a small plot of land in Sadat City and helped him build a steel factory.

His friendship with Gamal Hosni Mubarak, son of Egypt’s then president, helped to make his fortune, culminating in the buying of a huge amount of shares in Gamal’s 1998 Future Generation Foundation (FGF), a non-profit organisation that provided courses for young people to prepare them for entry to the workforce.

Several leading figures in Egypt‘s private sector, including Ahmed El-Maghrabi, former minister of tourism, and Rachid Mohamed Rachid, former minister of trade and industry were involved, and both now face trial.

From that point on, Ezz accompanied Gamal to all meetings and despite being a newcomer to politics, gradually became a familiar political face.

In 1999, the Alexandria National Iron and Steel Company faced a financial crisis due to dumped steel imports from Ukraine and other Eastern European countries coming into Egypt. Ezz quickly offered to buy shares in the troubled joint stock company. "For some reason, the biggest figures in the government helped Ezz finalise this deal," said Helmy.

According to a 2007 report on Strategic Economic Trends by Al-Ahram Centre for Political and Strategic Studies, In 1999, Ezz bought some 540,000 shares in less than a month. Ezz had seized more than three million shares of the company, accounting for 27.9 per cent of total shares.

The take loans/buy shares strategy

By the late 1990s, Ezz started his acquisition move in the steel market, through a strategy of taking loans from the biggest banks to buy shares in steel companies.

In 1999, Ezz was appointed chairman of the National Iron and Steel Company, despite the fact that he hadn’t paid back the loans he had taken from Egypt’s major banks, according to the same report.

"The National Bank of Egypt and Bank of Cairo (Egypt’s largest public banks) favoured Ezz because of his relationship with Gamal Mubarak and helped him get the loans, while denying credit to viable businesspeople who lacked the right political pedigree; they had for instance refused to issue loans for the same company bought by Ezz (Alexandria National Iron and Steel Company) a few months earlier to help it get out of its devastating financial crisis," said Helmy.

"Ezz’s strategy from that time on was to take loans from Egyptians banks, buy shares and take a greater role in the steel market, but the thing is, he never gave a loan back. He would pay older loans by getting new loans," elaborates Helmy.

According to Mahmoud Al-Askalany, the spokesman of "Mowatenun Ded El-Ghalaa" (Citizens Against Increasing Prices), in 2006 Ezz was provided with loans that exceeded LE4 million (approx. $ 673,000) at a time in which his working capital had not exceed LE1 million ($168,265).

Al-Askalany’s movement started back in 2008 and has since raised many allegations against Ahmed Ezz, dubbing him in 2010 "The Consumer’s Number One Enemy".

Several popular trials coordinated by Citizens Against Increasing Prices against Ahmed Ezz claimed that the market has been left in the hands of one strategic steel producer who is blamed for current persistent increase in steel prices, accusing him of manipulating the market to serve his own interests.

According to the 2007 Al-Ahram report, claims of an increase in raw material prices as the reason behind the increase in steel prices were highly exaggerated. The report states that the cost of transportation does not exceed LE60 per ton ($10), while packaging and cutting only cost LE25 ($4.2) per ton. Accordingly, steel end prices should go down to LE1500 ($ 252) to LE2000 ($336.5) per ton in order to reduce the exaggerated profit margin achieved by Ahmed Ezz and other important market players.

Only one month before the revolution, Ezz Steel’s price of rebar, used to reinforce concrete, reached LE4,000 ($640) per ton.

"Other facilities favouring Ahmed Ezz include subsidised energy, seaport and a gas line costing LE160 million ($26.9 million)," added Al-Askalany.

The private Ezz Steel versus the public El-Dekheila company

Back to the Ezz growth story, having seized some 27 per cent of Alexandria National Iron and Steel Company, whose name changed to Al-Ezz Al-Dekheila Steel Company Alexandria SAE, a subsidiary of Ezz Steel, Ahmed Ezz started a new strategy of manipulating market operations and transactions of Al-Ezz Al-Dekheila Steel Company to the best interest of Ezz Steel, the privately owned branch of his empire.

Compared to Ezz Steel, in which public banks own less than two per cent of the company’s capital, public money accounts for 40 per cent of Al-Ezz Al-Dekheila’s total capital.

‘In 2001, when Ahmed Ezz was appointed as chairman for Al-Ezz Al-Dekheila, he reduced the company’s steel production, resulting in an excess of 54,000 tons of pellets. This excess in raw materials was bought by Ahmed Ezz to be used in the production process at Ezz Steel," Al-Askalany said.

Additionally, some small steel producers filed complaints to the Ministry of Trade and Industry against Ahmed Ezz for selling Al-Ezz Al-Dekheila pellets to them at higher than market prices.

According to the file raised last month by Citizens Against Increasing Prices against steel magnate Ahmed Ezz, comparing the sales of both companies reveals the fact that sales increased by eight per cent in Al-Ezz Al-Dekheila from LE7.8 billion ($1.3 billion) in 2001 to LE8.1 billion ($1.36 billion) in 2006, while Ezz Steel increased by 520 per cent, from LE3.1 million ($521,000) to LE11.6 billion ($1.95 billion) in 2006.

"In 2003, the value of Ezz Steel was just 11 per cent of Al-Ezz Al-Dekheila. By 2008, the former had increased in value at the expense of the latter, reaching 232 per cent of Al-Ezz Al-Dekheila," according to the file.

In addition, "Al-Ezz Al-Dekheila was incurring losses, but Ezz Steel managed to change from massive losses in 2002 to recover 57 per cent of its capital in the year 2004 and 242 per cent of its capital in 2007."

Privately owned Ezz Steel, according to the same file, managed to accumulate massive profits of LE7.456 billion ($1.3 billion)  from 2004 to 2008, after huge losses made by the same company in the period from 2002 to 2003.

"I believe all chairmen of Al-Ezz Al-Dekheila and the representatives of public money inside the same companies from 2000 until the present day should be put on trial," said Reda Eissa, economy expert and chairman of the Economic Studies Unit at Citizens Against Increasing Prices.

"They are all responsible for sucking the blood of Egyptians over the last five years, and for their negligence and laxity in saving the interest of the publicly owned company in exchange for generous financial rewards and bribes from Ezz and other government officials," he adds.

The rise of the new guard and the new market

In theory, what helped Ezz to grow and monopolise the steel production map was the business-friendly environment prevailing since the late 1990s at the behest of the IMF. In practice, however, this environment led to the emergence of a virulent form of crony capitalism.

Ezz, a close ally of Gamal Mubarak, took on a more active role in public life, becoming vice chairman of a National Trade Federation and secretary of the Organisational Affairs Committee of the ruling National Democratic Party (NDP), as well as becoming a member of parliament in 2000.

"By 2000, Gamal Mubarak was becoming active in his father's party and looking to inject it with fresh blood," according to Hemly, "and Ezz was the man! A young smart businessman, with a fresh vision of administration, different to the usual white-collar mentality.’

By 2002, when Gamal Mubarak was appointed chairman of the National Democratic Party’s Policy Committee, the government’s most powerful body, Ezz became a key political figure.

According to a September 2010 report by the Carnegie Endowment, entitled "Gamal Mubarak and the Discord in Egypt's Ruling Elite", the new guard of businessmen affiliated with Gamal had seen a remarkable rise inside the NDP from 2000 and had dominated the cabinet since 2004 under the leadership of Prime Minister Ahmed Nazif, and supported by the presence of Gamal Mubarak, Ahmed Ezz and Secretary for Information Ali Hilal Al-Dessouki.

According to the report, this new guard has been responsible for the fragile economic state of Egypt for the last 10 years. "While the old guard’s motivation within this power game is transparent, the new guard stands for an economic course that benefits the business elite and restricts the role of the state within the economy," reads the Carnegie report.

"Among the prominent examples of businessmen close to the National Democratic Party who have accumulated vast wealth due to economic reforms," the report reveals "are steel magnate Ahmed Ezz, ceramics businessman Muhammad Abul Einein, and the tycoons Mohamed Mansour, Ahmed El-Maghrabi and Hisham Talaat Mustafa," a businessman who is now serving a 15-year prison term for involvement in the murder of his ex-lover, a Lebanese pop star.

By 2006, Ezz owned over 60 per cent of the country’s steel and iron production, according to Al-Ahram’s 2007 report.

The ‘legal’ corruption

"Despite the fatal charges against Ahmed Ezz, I believe he will be judged not guilty," Al-Askalany said. "That’s because he committed all his crimes in accordance with law; that is, laws which were formulated, amended and created to save his and other members of the elite’s interests," he added.

In 2005, due to opposition voices inside parliament and in the media for combating corruption and monopoly, specifically in the steel industry, which is characterised by a lack of effective anti-trust laws, Law No 3 of 2005 on the Protection of Competition and the Prohibition of Monopolistic Practices was drafted.

Theoretically, under that law, activities hindering economic activities or causing market abuse are prohibited. This includes arrangements between competitors creating barriers of entry to the market, arrangements between a company and its supplier that restricts the access of competitors to the supply of raw materials, and the abuse of market dominance and/or illegal use of control by large companies.

The makings of the anti-trust law

Examining the process of legislation and the law’s final draft helps to explain its parameters and loopholes.

Ahmed Ezz was himself involved in the creation of Law No 3 of 2005 as a member of the committee for legislation in this matter, representing a clear case of conflict of interest and abuse of power, given his position as the chairman of Planning and Budget Committee.

According to ‘"Steel market in Egypt: A case of power abuse,” a 2009 publication by the AUC Press, the original form of the law when it was going through parliament included a penalty stated at a minimum of LE100,000 ($16,826) and a maximum of LE50 million ($8.4 million), or 10 per cent from sales revenue, whichever is higher.

It also included Article 26 which states that the first wrongdoer to report the act will be exempted from 50-75 per cent of the penalty imposed in Article 2. This measure, to encourage investors to report monopolistic practices, is known as the "leniency" or "first to the door" policy in France, Germany, Japan, Australia and other countries. It aims to increase transparency and early detection of monopolistic practices in the market.

However, Article 26 was removed from the final draft of the law. "In fact, cancelling Article 26, as requested by Ahmed Ezz in the Egyptian People’s Assembly, is a move that makes us question the legitimacy of the law itself," the study reads. "There is an issue here of a conflict of interest between private enterprise and state legislation, a business tycoon and a suspect of monopolistic business activity, yet directly involved in legislating anti-trust laws."

In addition, the penalties were dramatically reduced in the final draft. The punishment was restricted to a minimum of LE30,000 ($5 million)and a maximum of LE10 million ($1.7 million) . Moreover, the sales revenue percentage penalty was totally removed.

"This clearly highlights the effect of Ahmed Ezz’s involvement in the drafting process and the extent to which the final draft of Law No 3 of 2005 diverted from the People’s Assembly and Shura Council mandates," concludes the report.

Toothless watchdogs

The Egyptian Law on Protection of Competition and Prohibition of Monopolistic Practices established the Anti-trust and Competition Protection Commission (ACPC) to monitor the application of the law and report cases of monopoly in any sector.

However, when the ACPC was first created, it was criticised by opposition politicians in parliament for its limited power. For instance, the ability to review company records while setting prices of basic products or necessities remains in the hands of the cabinet.

Since its establishment, the ACPC’s role was limited to developing a database on economic activity in the country and examining any entities or practices that violate the law.

The Egyptian Competition Authority (ECA) was also established under Law No 3 of 2005 as a public body with responsibility for receiving notification of acquisition of assets, property rights, and establishment of unions or mergers, and to prepare a database about the economic activities of the concerned parties, and to undertake research and studies on anti-competitive practices.

The ECA has also been heavily criticised for having its hands tied and lacking autonomy because of its affiliation to the Ministry of Commerce and Industry.

Since its creation, it has investigated many cases, the most prominent concerning the cement and steel industry. In the first case, 20 cement industry executives were found guilty of price-fixing in August 2008 and each was punished with a LE10 million fine ($1.7 million) and another LE10 million ($1.7 milllion)  for the implicated companies. In the steel case, however, the court ruled in 2009 after a two-year investigation that Ahmed Ezz’s Steel Group was not engaged in any anti-competitive or monopolistic practices, a conclusion that shocked many observers.

On February 9, Ezz Steel issued a statement refuting what it described as "unsubstantiated allegations quoted in the press about Ezz Steel enjoying a monopoly". The statement claimed that the company was just a leading producer, and that it operates in a free market and competes fairly with other Egyptian steel producers and foreign importers, "facilitated by the absence of any customs tariff or trade barriers".

Most importantly, the statement lauded the Egyptian Competition Authority’s finding that there has been no abuse of a dominant position by Ezz Steel, nor any breach by the company of the competition law. Analysts now fear the same argument might prevail in the current investigations against Ahmed Ezz, who shouldn’t be portrayed solely as an example of how a political figure and a businessman became corrupt, but rather as a story of a fragile economic system that has for 20 years been based on corruption, favouritism and crony capitalism.

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