Contesting the Government

Seldom is the government held accountable for lapses in its common sense. But now, in a watershed court case, the Egyptian government is being held accountable for its unpredictable regulations concerning export and storage in the cotton sector. Dr. Mahmoud Wahba’s now defunct, American-based National Cotton Company (NCC) is being compensated ŁE 100 million for losses suffered in the 1995/96 cotton season, according to a Supreme Court legal opinion issued on November 15. Because the report prepared by the plaintiff was challenged by neither of the parties, the final verdict will probably be in favor of NCC.

The ruling can still be changed in a final verdict, to be delivered on January 21, according to Wahba’s lawyer, Iglal El Wakel. But the plaintiff – in this case Wahba – can use the November 15 opinion as part of an appeal if the verdict is not in his favor.

Wahba, who holds American citizenship, entered the cotton market in 1995 at the request of the prime minister, Atef Sidqi. While there was nothing unusual about the move, NCC, an affiliate of Champion Holding Company of Greenwich, Connecticut, was the first company formed after the issuing of a 1994 law aimed at the liberalization of the cotton trade. The law, which gave NCC an incentive to invest in Egypt, was designed not only to liberalize the cotton trade at home and abroad (by freeing up mechanisms of export and import) but also to set cotton prices according to global market forces – while encouraging the private sector to participate. "It was a foreign investment, with an American-Egyptian [business] agreement," Wahba said.

In practice, however, the law was undermined by administrative limitations on export and storage time, issued by the ministries of economy and of supply and trade. And this is the core of NCC’s case – these limits violated the industry’s liberalization law and caused huge losses not only to NCC, but other private companies as well. While the exploitation of loopholes in liberal-minded legislation has long been common practice, the case is an encouraging sign that the balance may be tipping more in the favor of private investors.

In the early 1990s, the government set export prices so high that nobody wanted to buy Egyptian cotton. As a result, governmental trading companies accumulated enormous stocks. When, in the 1993/94 season, the government sold them, prices plummeted. "By 1995, farmers were so gutted that they were selling at 180 cents/pound; sky high prices," says a source close to the cotton sector, requesting anonymity. "Private buyers bought what they could get a hold of. The government had hardly anything."

In the beginning of the 1995/96 season, the government allowed exports, and companies were all too happy to export at these prices. This, however, caused concern about government-run spinning mills, which rely on locally-produced cotton. They demanded a limit on exports since production was down that year and demand high. As a result, the minister of trade and supply issued an administrative decree limiting the variety of staples for export, and their quantity. "The limit was set to 19, 000 tons, which is nothing," said the source. "The Americans took over the [international] market."

There was also a limit on storage. Despite cotton’s exceptionally long shelf life (it can sit for up to a year with no damage to its value), it had to be sold in no more than 30 days from ginning. "So we had to sell it inside Egypt, because all the spinners are governmental," says Wahba. "Local spinners formed a group, which bought the prize for half [of the guaranteed minimum], at ŁE 315 per qantar (50 kg). The orders from Cargill and Donovan [a client of NCC’s, and one of the world’s largest cotton companies] were to export from Egypt at ŁE 700. We bought it for ŁE 550 but were forced to sell at ŁE 315."

Subsequently, NCC’s requests to export were denied. "They said they needed the cotton for domestic needs," Wahba says. "I understand this, but then you have to pay international prices. This is confiscation without compensation." The cotton industry insider, meanwhile, explained that, without the privatization of spinning mills, exports can’t increase because the mills need local cotton. "The problem with the mills is not that they’re losing money," he says. "It’s that the measures the government is taking to protect the mills are damaging the whole sector, consumers and farmers by preventing them from producing the varieties that are most exportable."

NCC was a major player in the field: in 1995, it represented 20 percent of the ginning trade. "There was a reason for being big," Wahba says. Basically, "you couldn’t compete in the world market if you were small. We wanted to leave an impact on the world market," he says. This kind of confidence, combined with the fact that Wahba held a foreign passport, was enough to earn him a high profile in the pages of the government press, which crowned him "The Cotton King."

But there were more difficulties in store for NCC. "At one point, I wasn’t able to pay my bank loans [because of lawyer’s fees for the case], Wahba complains. "All of a sudden, the company loan became the ‘Wahba loan.’ We resolved it with the bank in 1998, but every time they drag me in when there’s talk about people who can’t pay their loans," he says. His most recent press appearance was in the context of last year’s ‘loan deputies’ case.

The favorable verdict, therefore, is small compensation for Wahba, who is currently the owner of Alphastar International, a satellite TV provider, and SkyCrossing, which specializes in satellite Internet. "I happen to believe this is good for Egypt," he said. "Now you have the Supreme Court protecting private property and foreign investment. This ruling would open the way for more investments." And the cotton-sector source agreed. "The verdict is a signal to the people: the government should be accountable," he said.

Wahba has been active in promoting US investment in Egypt; he founded the Egyptian American Business Association in 1991, which is based in New York. He has also established several companies in the United States, and has acted as a consultant to the United Nations. Foreign investors "now know that this is a country of laws. As a foreign investor, you have a friend not only in the leadership, but also in the courts," he says. Essentially, Wahba sees contesting the law as a necessary step in a country undergoing a transition from a socialist economy to a liberal market.

And Wahba is not alone in contesting the government. According to The Financial Times of December 12, British-owned Wena Hotels was awarded $20 million in damages for the misappropriation of two of its hotels. The verdict was delivered by the Washington-based International Center for Settlement of Investment Disputes (ICSID), which is an affiliate of the World Bank.

Although Wahba believes that the court will enforce the paying of compensation, it is another issue as to when and how the government will cough up.

Despite numerous attempts by Business Monthly to contact the government agencies involved, no one could be reached for comment on the issue.

us-based cotton investors sue government

mahmoud wahba has a grievance. the government of egypt enticed him into the cotton-trading business promising a free market. instead, he found he could only sell to one buyer, at a fixed price and at a fixed time. at least one egyptian court has recognized the validity of that grievance, but getting the government to pay up has proven to be another matter entirely.

so the us-based former cotton trader, along with other american investors, has sued the egyptian government at the international center for settlement of investment disputes (icsid), an affiliate of the world bank tribunal. the plaintiffs are asking for $100 million for expropriation of their interests in the egyptian cotton market.

the charge is the same as in an earlier lawsuit, in which wahba attempted to use the egyptian court system to get compensation from the state. he sued the government in 1996 in the name of his now defunct national cotton company (ncc), and in november 2000, one of the judges at egypt’s state council – the court charged with ruling on administrative affairs – delivered a favorable ruling.

however, wahba’s $30 million claim – a limit on compensation set by the supreme court – was never paid into his bank account. “the case went back on the back burner,” wahba said by phone from the united states. “legally there’s nothing i can do” with a case judged in an egyptian court.
he has therefore resorted to icsid, which has a good track record in obligating the losing parties in such lawsuits to actually pay compensation. and this time, freed of the constraints set by the egyptian court system, he has raised his claim to $100 million.

the washington-based icsid administers the arbitration of disputes between member states and foreign investors. wahba and his current business venture, champion trading company, registered in delaware and based in greenwich, conneticut, and a member of wahba’s family are the main claimants in the case, filed august 8. all the investors involved in the lawsuit are “american citizens, protected by an investment agreement between egypt and the us,” wahba said.

like the earlier suit, wahba’s case at icsid centers around the losses he incurred during the 1995/96 cotton season. wahba, who holds american citizenship, entered the cotton market at the urging of the prime minister at the time, atef sidqi. but even before that, he had been active in promoting us investment in egypt, founding the egyptian american business association in new york in 1991.

wahba’s ncc was the first company formed after the issuing of a 1994 law aimed at liberalizing the cotton trade. under the law, the government was supposed to set cotton prices according to global market forces in order to encourage the private sector to participate.
us-owned ncc was the largest private cotton-trading and ginning venture in egypt, capturing about 18 percent of egypt’s annual cotton crop (valued at $250 million), leasing 17 cotton gins and employing around 5,000 workers, according to wahba. but what at first appeared to be an attractive investment climate, with protectionist structures being dismantled, turned into a web of administrative decrees, he said.

he says that liberalized trade laws were undermined in practice by administrative limitations on export and storage time, issued by the ministries of economy and supply & trade. “my evidence is that the ministry of economy imposed a fixed price to buy cotton from farmers; we couldn’t store cotton [for more than 30 days]; and we couldn’t export it,” wahba explained.
because cotton traders were forbidden to export, they had to sell to the only domestic buyer – the government – at a lower price. this caused huge losses not only to ncc, but to other private companies as well, wahba said.

ministry of foreign trade (formerly economy & foreign trade) officials spoke to business monthly but would not comment on wahba’s case. officials at the ministry of foreign affairs, which will have to deal with the icsid hearings, also refused to discuss the lawsuit.

when he had problems paying back his loans, “cotton king” wahba became a target of attacks in the egyptian press. “they turned us from a victim to the accused,” wahba said. “they claimed that i fled, but my family never lived in egypt. now i have no debt to anyone, and i still have investments in the country.”

on a more positive note, he sees prime minister atef ebeid’s comments on september 1 at a meeting of the alexandria cotton exporters association as a step in the right direction. according to al-akhbar, ebeid said he would make the cotton industry “totally free,” so that it could react to demand in the global markets.

the prime minister also said the government would recognize the rights of exporters and would provide customs exemptions on imported inputs for products that would be subsequently exported. he said that the government, furthermore, would answer for any illegal decrees enacted in the past.
“i’m not asking for anything different,” wahba said. “if you compensate the government firms [with subsidies], compensate us too.”

another cause for hope, wahba added, was the wena hotels compensation case, which the british-owned company won two years ago. wena – which had invested in hotels in luxor and cairo – won a suit against the egyptian government at the icsid, the same body where wahba has filed his new suit. “the tribunal awarded the hotel company over $20 million in damages, finding egypt in breach of its obligation to provide “fair and equitable treatment” and “full protection and security” to wena’s investments. additionally, the tribunal held that egypt’s actions amounted to a violation of its duty to provide “prompt, adequate and effective compensation “for expropriation of wena’s investments,” the tribunal’s report says.

wahba expects to get his verdict a year or two from now. “i hope that they will settle the case with me rather than continue in other courts,” he said. meanwhile, he still encourages private investment in egypt. “i see hope that past mistakes can be corrected.”

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