Pursuing Transparency in Sudan’s Oil Industry (1)

Sir Sidahmed

Sudan Democracy First Group (SDFG) was formed as an umbrella group of leading Sudanese independent and democratic civil society and media actors to serve as a civil society and think tank that conduct indigenous research, analysis and advocacy on human rights, development, peace and democratic transformation in Sudan.
SDFG launched the Sudan Transparency Initiative (STI) Project in March 2015 to investigate, analyze, document and disseminate credible and reliable information about the scope and scale of corrupting and lack of transparency in Sudan. The overarching objective of the project is to raise awareness, promote accountability and resistance and spur grassroots anticorruption movements in Sudan. One of the components of the project is to commission expert consultants to thoroughly research and report on corrupting and lack of transparency in specific key sectors. The banking system in Sudan sector receives considerable attention and controversy both in government circles as well as the public arena. This report is an attempt to shed light on the intricate and multifaceted structure and practices of this sector.

Introduction

The exploration and production of Sudan’s oil resources has assumed a high priority for consecutive regimes that have ruled the county since independence. Despite discovery and exploration by Nimeiri’s Regime (1969 – 1984), the Ingaz regime (1989 – present) has succeeded, against formidable internal and external challenges, in producing oil for local consumption and export. Success in the production of oil and its export gave the Ingaz regime a sense of ownership of all the operations in this field. The hostile national and international contexts that eventually led to boycotts and sanctions have pushed the regime to develop extreme measures to protect the oil industry – with the industry being a key lifeline for its survival. As such, the oil industry started and developed in an environment characterized by a lack of transparency and prone to corruption. The lack of transparency has raised suspicions and allegations of corruption that encompass all upstream and downstream operations of the oil industry. These have included issues of volume, reporting, reserves, entitlements of foreign companies, and allocations to producing states and distribution companies. Although Sudan lost two-thirds of its known oil reserves in 2011, following the secession of South Sudan, allegations of corruption and lack of transparency continue. It is of utmost importance for the current Ingaz regime and any other future government, to tackle the lack of transparency to dispel current and future accusations of corruption. In the meantime, the current government must take all accusations of corruption within the oil sector seriously through proper independent investigation and publishing of all information pertaining to these accusations and the oil sector in general. The implementation of the recommendations detailed at the end of this report will help to lay the foundation for transparency in Sudan in general and in the oil sector in particular.
Framework A lack of transparency and accountability is a fertile environment for corruption and waste. The general definition of corruption as a form of abuse of public office for private gains, which has been adopted by the World Bank, may not be sufficient. A wider definition that covers the “use of power for profit, preferment, or prestige, or for the benefit of a group or a class, in a way that constitutes a breach of law or of standards of high moral conduct” could be more appropriate.
As such, corruption extends beyond illicit personal gains to negatively affect economic growth, undermine public institutions, weaken the quality of services extended to the people and institutionalize a lack of accountability and transparency. Moreover, a lack of accountability and transparency become an integral part of the daily exercise of power, when the state apparatus is controlled and used to further facilitate gains by ruling parties and elites. The situation becomes more problematic when institutions, firms and individuals turn a blind eye, or receive incentives, through exchange of favors and interests, instead of fighting corruption through correct procedures and regulations. In such an environment, combating corruption and a lack of transparency requires a sustained and long-term process in order to address complex social, cultural, economic and political power relations for rule of law and accountability. With this understanding, corruption is a well-established phenomenon in Sudan. This is to the extent that two academic researchers from the University of Khartoum concluded, as early as the mid-1980s, that it constituted the “Fifth” factor of production and income generation in addition to profit, interest, wages and rent
They pointed out that, two decades earlier in the 1960s, there were only a few millionaires known by name, family, business and source of income. They explained the recent growing number of millionaires and their visible presence, to the emergence of groups of retired military or high ranking civil servants who use their networks of contacts in different ministries and the banking system, and familiarity with the rules and regulations, for personal benefit. These illicit practices include embezzlement of public funds; unjustifiable ownership of agricultural land based on nepotism (mainly in mechanized farms) and the preferential treatment in obtaining shares in commercial enterprises. Corrupt practices changed significantly with the ascendance of the Islamists to power in 1989, when resources, rent and eventually the state apparatus were used effectively and publicly to serve a narrow political agenda, reward supporters and neutralize or buy off opponents. In other words, corruption and a lack of transparency became tools for political management, shielded by the government authority against any form of accountability or demand for transparency.
The advent of the Islamists to the political scene dated back to 1977, at the time of what became known as the National Reconciliation (NR), whereby the May regime (1969-1985), led by Ja’far Nimeiri, managed to encourage the opposition, organized under the umbrella of the National Front (NF), to join the regime. Among the prominent members of the NF group was the Islamic Charter Front (ICF), the Sudanese branch of the Muslim Brotherhood. The ICF’s hidden agenda and rationale of joining the reconciliation was to build their party membership and economic and financial base. In short, their intention was to use the state organs to advance their political and business interests.
In the early 1970s, the May regime had embarked on a free market economic policy to attract foreign private investment, especially in agriculture. With the NR, the Islamists showed no interest in challenging Nimeiry’s control of the political scene; rather their focus was to gain control of the economy. Their influence, economically and politically, started to grow with the flow of petro-dollars into Sudan from wealthy Gulf countries. The reason behind the inflow of capital was a grand strategic government scheme that intended to make Sudan “the breadbasket of the Arab World.” One of the outcomes of this was that Sudan became the first country in the region to allow for an independent Islamic financing experiment. Thus Faisal Islamic Bank (FIB) was established in 1977 with a capital of 6 million Sudanese pounds. The Government of Sudan (GoS) gave preferential treatment to the FIB, with exemptions for example from capital and business profit taxes, control by the Central Bank and government regulations, and public auditing. All of these exemptions empowered the FIB and enabled it to register a 10 percent return on capital in its first year of operation, rising to 176 percent in the following year and to 226 percent, 325 percent and 384 percent consecutively up to 1983.
However, while these exemptions were intended to help the new Islamic financing experiment to grow and to invest in more sound, productive economic activities, FIB investment instead focused on trade, commerce and interest free loans for quick profits for its shareholders and fellow Islamists party members and sympathizers. One of the FIB’s main areas of activity was attracting a sizeable portion of Sudanese expatriate remittances. The Bank of Sudan estimated in the early 1980s that, out of US$1.4 billion remittances from Sudanese working abroad, only US$400 million were channeled through official means. The rest went through the black market, with a considerable percentage of this through Muslim Brotherhood-affiliated foreign currency exchange outlets financed and sponsored by the FIB.
Another example of economic institutions built by Islamists was the Islamic Development Corporation. It was established in 1983 with the intention of pursuing economic activities in various fields. According to its establishing principles, 40 percent of the shareholders were to be Sudanese and 60 percent were to be non-Sudanese Muslims from across the world.5 Similar to the FIB, the Corporation, was granted generous exemptions to enable it to invest in productive development sectors. However, similar to the FIB, the corporation directed most of its activities and investment for fast financial returns that generated quick profits for Islamist shareholders and sympathizers. Following the fall of Nimeiry in 1985, the Islamists created a new party, the National Islamic Front (NIF). The party members were politically cornered, being the last of the group of political parties that remained in support of the failing regime. However, using their financial power, they were able to launch an intensive media campaign aimed at tarnishing their opponents. This tactic was to a great extent successful; it enabled them to escape punishment and political isolation and, following the 1986 general elections, occupy the third position in parliament. Thus the party gained legitimacy and a remarkable margin to maneuver against its political opponents. When the NIF carried out its coup d’état in 1989, it had a clear strategy on how to control power at the various levels, through an aggressive state policy aptly termed “empowerment”, whereby non-NIF cadres and employees in the army, police and civil service were purged and replaced with committed party members, sympathizers or at least neutral figures. In the early 1990s, a leading NIF figure Ahmed Abdel Rahman, felt confident enough to tell a local newspaper; “political empowerment alone is not enough. It has to be supported by economic empowerment”.
The 1989 coup, officially named the National Salvation Revolution, or Ingaz in Arabic, represented a qualitative and quantitative shift from previous regimes’ records on exercise of power, transparency and corruption. The coup was masterminded and carried out by the NIF, who took a significant calculated risk by employing its civilian members to carry out the coup to ensure that the attempt succeeded and the new regime stabilized. One of the clear targets of the NIF was to control the oil sector, given its economic importance, enabling the state to efficiently perform its activities and to protect and secure the new regime in office. As such ‘pumping’ out the discovered oil became an urgent priority.

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