Subsidized bread is at the heart of a corruption problem, which the government tried to solve with a Smart card
CAIRO, Egypt (Reuters) — When Egyptian lawyer Ahmed Gad stepped out of a cafe on the outskirts of Cairo to take a call last October, a gunman on the back of a motorcycle trained a semi-automatic rifle on him and opened fire.
Three bullets ripped into Gad’s right side before his attackers sped off.
Gad, who survived, said the men were trying to silence him for his attempts to expose corruption in one of Egypt’s most important commodity markets: wheat.
Wheat can be a matter of life and death in Egypt. The country is the world’s biggest importer of the grain, in large part because Cairo runs a bread subsidy program that feeds tens of millions of poor Egyptians.
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Wheat shortages have triggered riots in the past, and when Egyptians rose up against autocrat Hosni Mubarak in 2011, one of their signature chants was “bread, freedom and social justice.”
The pressures have returned over the past few months as Egypt faces potential wheat shortages because of its strict ban on imports of wheat infected with ergot, a common fungus.
However, the hardest blight to eradicate has been corruption.
President Abdel Fattah al-Sisi has made ending corruption, including graft in the wheat industry, one of his government’s priorities.
In 2014, his government introduced a system of Smart cards designed to stop unscrupulous bakeries from selling government subsidized flour on the black market.
Cairo says the system has been a success, saving millions of dollars in bread subsidies, reducing imports and ending shortages that once prompted long queues outside bakeries across the country.
Supplies minister Khaled Hanafi told Egyptian reporters in late 2014 that 50 percent of the country’s flour supply was stolen. In December, he said the new system had saved more than $1 billion worth of flour.
However, industry officials, traders and bakers say the reforms have failed and even made abuse of the system worse.
Eight sources in the wheat industry said the Smart card system could be hacked, allowing bakers to falsify receipts and request far more subsidized flour than they officially sold.
Critics said that instead of reducing the amount of flour the state paid for, the Smart card system actually increased it. This triggered a wave of fraud higher up the supply chain that the sources say cost the country hundreds of millions of dollars last year.
Internal statistics produced by the supplies ministry suggest the problems with the Smart card system were considerable.
The data shows that consumption of state-subsidized flour increased early last year in 12 of the 19 provinces where the Smart card system had been introduced. Consumption of subsidized flour was 955,000 tonnes in February 2015, up from 750,000 tonnes the previous February.
The government concedes there were teething problems with the Smart card system, which temporarily drove up consumption. However, it said the problem was limited and had been resolved.
Whatever the case, the extra consumption early last year drained government grain reserves.
Ministry data shows that by May, wheat reserves had fallen to 435,000 tonnes, enough for about two weeks’ supply and far below the stock of three to four months normally held by the state.
Four traders said the government tried to paper over the shortage by declaring a bumper domestic harvest last year and then quietly filling the gap by buying extra imported wheat.
In fact, the traders and one former adviser to the supplies minister said the harvest was no bigger than normal.
It was not possible to verify the size of the harvest.
Nader Nour El-Din, a former adviser to the supplies minister and now a professor of agriculture at Cairo University, said it was inconceivable for the harvest to have been as big as the government said because the area seeded to wheat had not increased in size, production methods had not changed and fertilizer use had not increased.
The Egyptian government denied that it faced a wheat shortage.
Hanafi said in December that wheat levels were deliberately reduced in the first five months of 2015 to clear space in silos for the bumper crop the state was expecting.
“We never, (and) we are not facing at all, a shortage in the reserves,” he said.
“The opposite is true.”
The Smart card system was designed to end corruption.
The scheme provides each family with a plastic card that allows them to buy five small flat loaves of bread per family member a day. A family member must swipe their card through a machine every time they visit a bakery so that the supplies ministry can track exactly how much bread each bakery sells. The government then pays each bakery a subsidy per loaf.
The ministry had previously relied on bakeries to report how much bread they sold, but many bakeries overstated the amount and then sold the extra on the black market. The government has said the new system stopped that over-reporting.
However, four bakers, three wheat traders and a miller said the system was possible to cheat.
The Smart cards and the machine that reads them were produced by Smart, a private company based in Cairo. According to the traders and bakers, employees at Smart secretly produced cards that resemble the ordinary Smart card but act as a “master” that overrides the system. Swiping a master card through their machine allowed bakers to reset the system and then swipe ordinary Smart cards multiple times.
Smart employees sold the cheat devices to bakeries for several thousand dollars, according to rival bakers.
Hanafi acknowledged the smart card system had been compromised but described the problems as “very marginal and minor.” He said the ministry immediately investigated any suspicious increase in flour consumption.
“Of course, for any system for the interne t… there is a very minor percent of hacking,” Hanafi said.
“(However), if there is any increase not justified in the consumption, our people directly go and take care of it.”
