By Eric Knecht and Maha El Dahan
CAIRO (Reuters) - Wheat shipments to Egypt, the world's largest buyer, are being disrupted by a dispute involving government inspectors angered by a ban on the expenses-paid foreign trips they once enjoyed to approve cargoes at their ports of origin.
Those trips, funded by exporters, have been canceled as part of Egypt's efforts to streamline imports worth more than $1 billion a year. Traders say the new system has backfired as inspectors are now rejecting cargoes at Egyptian ports on arbitrary and unpredictable grounds.
There is more to the problem than erratic policies and red tape, according to interviews with grains traders, agriculture quarantine inspectors, government officials, and a review of inspection documents.
According to these sources, difficulties for importers are rather the result of a tug-of-war over the right to inspect cargoes abroad, where until recently government quarantine inspectors enjoyed fully-funded trips, dinners and shopping at the expense of supply companies looking to secure safe passage for their wheat.
By applying higher standards to grains upon arrival, inspectors are driving up costs in a bid to undermine inspection companies that replaced them abroad, traders said.
Six inspectors who Reuters spoke to denied they are trying to get their foreign trips reinstated and said they are simply upholding quality standards.
Suppliers say uncertainty is prompting them to add premiums of up to $500,000 per cargo to hedge against risks. With Egypt expecting to buy around 7 million tonnes of wheat in the fiscal year that began in July, these premiums add millions of dollars to the government's food subsidy bill.
The bread supply chain has ground to a halt on several occasions as traders have boycotted tenders. Subsidized bread is a staple for millions of poor Egyptians and the country's leaders are always keen to keep supplies flowing for fear of unrest.
Wheat traders say the only way out of the problem is for the government bodies involved to sit down and thrash out standards all sides can agree on.
'A BREAKFAST PROBLEM'
Getting cargoes passed under the old system often came down to keeping government inspectors comfortable, traders said.
When a $6 million wheat cargo at a port in Ukraine suddenly stopped loading two years ago, its agent found Egyptian inspectors had halted the process because their hotel would not give them a late breakfast, traders said. The delay cost the supply company $8,000 in port fees.
"As soon as we arranged for the hotel to give them a later breakfast, everything went smoothly and the shipment was passed. It wasn't a wheat problem. It was a breakfast problem," said a Cairo-based trader responsible for the cargo who asked to remain anonymous.
Six other traders described the system in similar terms, saying shopping for electronics and clothes, expensive dinners, and hotel room upgrades were the cost of keeping their grains moving out of ports from Odessa to Dunkirk.
One trader said the money paid to inspectors could equal their annual salary.
"You're talking about four to five people, and you have to take care of them from A to Z, meaning you are taking them shopping and you are paying," said Med Star for Trading President Hesham Soliman.
Soliman said the delegations grew more expensive. "They began needing more pocket money, the hotels have to be certain hotels, the tickets, the visa," he said.
Traders said they would spend about $30,000 on the inspectors, which also typically included a $3,500 pocket money payment per person, according to invoices seen by Reuters.
Agricultural quarantine inspectors who Reuters spoke to on condition of anonymity have quoted the same figures for the trips but say the old system was still cheaper for Egypt.
"I can't deny that I benefited, but the country benefited more. Look how much they're spending now," one inspector said, referring to the high risk premiums traders now put on cargoes offered to Egypt.
Traders say the system was a relatively cheap way to win approval for their wheat abroad, which protected a cargo from being rejected at Egyptian ports, something that could mean big losses, or even bankruptcy for smaller firms.
"If they're making it sound like we were spending too much, you have the figures, compare the numbers. They're spending a lot more now on the inspections," the inspector said.
The old arrangement unraveled in late 2015, when a French wheat cargo was rejected in Egypt for containing traces of the common grain fungus ergot despite being approved by government inspectors abroad.
As other shipments were rejected and import rules appeared to be tightening, some traders said they no longer found the traveling inspectors a bet worth taking.
"We got to a point where we couldn't deal with this. You have a fixed cost and you still have no guarantee that the shipment will enter the country," said Soliman.
A group of traders, including Soliman, persuaded the government to ban traveling delegations, which Egypt did in a prime ministerial decree in late 2016 that handed inspections abroad to private companies and made the agriculture quarantine inspectors subject to the oversight of a trade ministry authority.
In an interview at the offices of the General Organization for Export and Import Control (GOEIC), Ismail Gaber, who heads the agency that now has the final word on wheat inspections, told Reuters the travel regime had raised suspicions of corruption that he would rather keep civil servants away from.
"There is of course the issue of corruption, I want to take my employee away from this suspicion. I don't want the supplier and the employee to have the same self-interest," he said.
"If he takes someone with him abroad, the supplier says 'I've already taken him with me ... you gave me a government employee and you inspected there so you can't find a problem with it here (in Egypt) after all of this'," Gaber said.
But having lost their travel benefits, the inspectors are making their presence felt.
Since January, when the new inspection regime came online, inspectors in Egypt have subjected nearly all shipments to costly processes before being approved at Egyptian ports, which add tens of thousands of dollars in costs.
In June, a group of inspectors won a court case that argued that the new system illegally granted their mandate to GOEIC, which the inspectors said was ill-equipped to protect the country from harmful grain contaminants.
The government has appealed and ignored a court order to restore the old inspection regime, including traveling delegations.
The inspectors, who are still checking cargoes under the new inspection regime, say they are just trying to stop bad wheat getting into Egypt and deny they are trying to get their overseas trips back.
One inspector said checks were now tougher at Egyptian ports because importers were sending poor-quality grains.
Traders however said two big state grain purchases halted for containing poppy seeds demonstrated that inspectors were seeking new ways to show that inspection companies abroad are not up to the task.
As a result, traders hiked prices or stayed away from a recent state tender.
The only way out of the impasse, traders say, is for government agencies to agree on consistent rules. "Without that, we are just waiting for the next victim," said one.
(For graphic click: http://fingfx.thomsonreuters.com/gfx/rngs/EGYPT-WHEAT-IMPORTS/010050KX1C9/EGYPT-WHEAT-IMPORTS-01.jpg)
(Reporting by Eric Knecht and Maha El Dahan; Additional reporting by Arwa Gaballa in Cairo and Polina Devitt in Moscow; Editing by Giles Elgood)