The expanding role of the Egyptian Military in the Economy

The military protects the land, but in Egypt it often owns that land as well. The nature and size of its economic activities are confidential, its revenues are untaxed, it employs low-paid conscripts and its imports are tariff-free. The production lines of military-linked factories include producing pasta, bottled water, chemicals, weapons and computers.

The military’s economic influence has long been criticised for its ambiguity and unaccountability. However, military-related projects attracted more attention, and criticism, after the toppling of former president Mohamed Morsi in a popular uprising backed by the military in 2013.

Since then, plans to kick-start the ailing economy, including two stimulus packages, many housing projects and the development of the Suez Canal Corridor have one common factor: they involve the military in one way or another.

The chaotic economic scene in which the state has lacked the means of finance and the private sector has been reluctant to step in to save the day and inject new money into an investment-starved economy have made the larger involvement of the military inevitable, according to analysts.

New infrastructure projects, part of a $4.9-billion economic stimulus package mostly funded by the UAE, have been assigned to military-affiliated enterprises. The Military Engineering Authority has also finalised a $40 billion deal to build one million housing units with the UAE-based Arabtec Company.

However, of all the new initiatives, said Samer Attallah, an assistant professor of economics at the American University in Cairo, the most significant is the Suez Canal Area Development Project, which includes excavating a parallel canal and building several industrial zones and logistics centres alongside it.

“This project is under the supervision and management of the Army Corps of Engineers and the Suez Canal Authority, which is headed by a retired member of the Supreme Council of the Armed Forces (SCAF),” he said.

In May 2014, the director of the Armed Forces Engineering Authority said that the military had executed 473 strategic and service projects in the past year and a half. The list of projects included roads, bridges and ports, the renovation of hospitals, schools and youth centres, the extension of water pipes and construction of desalination plants.

The Ministry of Defence and its affiliated bodies have finalised deals of more than LE7 billion in infrastructure projects for different ministries over the last 18 months, according to media reports and contracts published in the Official Gazette.

The military’s business deals not only occur at the national level but have also expanded to include partnerships with transnational corporations, according to a study published by the US Carnegie Institute.

The list includes companies like General Electric, Lockheed Martin, Mitsubishi and others. Beyond military equipment, these international ventures cover non-military products like television sets, jeeps, and tablet computers.

Gulf requests: The reason for the military’s intensive presence in the economy, according to Amr Adli, a political economist, stems from the high levels of uncertainty facing foreign or local investors after the 25 January Revolution, an over-dependence on Gulf aid, and private-sector hesitation to inject any new investment into the battered economy.

The direct involvement of the military bureaucracy appeared to be a “necessary short-term step to provide confidence to Gulf investors and deliver the first push to the struggling economy,” Adli recently wrote in Al-Shorouk daily.

In the current political context, the Gulf governments that are Egypt’s primary donors “are most comfortable investing through the military, which serves as a guarantor of sorts,” he added.

This was underlined in interviews given earlier this year by Taher Abdullah, head of the Army Engineering Authority. Abdullah stressed that when UAE officials discussed projects in Egypt shortly after Morsi’s ouster, they asked the military to handle the aid portfolio.

“The state gave the army the task of carrying out these projects because we have a good reputation and we do them at 60 per cent of budgeted costs,” he said. “People also trust us to do them properly,” he added.

Robert Springborg, an expert on the Egyptian military and a former professor at the Naval Postgraduate School in Monterey in the US, told the Weekly that the military believes it can manage projects better than civilians, especially since president Abdel-Fattah al-Sisi needs to continue to expand the flow of patronage to retain army loyalty.

“They know that the delivery of basic services to citizens is vital to stability and that the military’s control of the economy ensures that it can allocate roles to private business, thus ensuring control of that sector and extraction of resources from it,” he said.

Some have expressed fears that if the military has the upper hand in the economy, as well as in politics, this could seriously skew the country. But this is not the main reservation regarding the current situation.

The presence of the army in business is not new, but its extended role in the economy, described as “a brand-new economy run by Military Inc.,”  have raised questions about the commercial role of the military, especially the accountability of its practices.

Untaxable and unaccountable: No one knows the exact size of the military’s economic activities as it is not taxed and largely unaccountable.

The percentage of the military’s contribution to the economy as a whole is put anywhere between five and 40 per cent, according to local and foreign experts. Al-Sisi told Reuters in an interview preceding his election as president that it did not exceed two per cent.

Details of military spending and revenues are kept off the public record and are out of the reach of parliamentary and public deliberation.

But until Egypt started to buy French and Russian arms recently, all details of military aid about arms purchases from the military’s largest provider, the US, could be got from different American state body Websites. This meant that only revenue figures connected to the military’s economic empire were confidential.

A recent OECD report noted that reports on joint-venture companies controlled by the ministry of defence and its affiliates in Egypt “essentially released no information”, whether financial or on corporate management.

Opponents of the military’s involvement in the economy believe that the preferential treatment that the army as an institution enjoys creates unfair competition with the private sector.

The military employs conscripted labour and pays no taxes, its imports are tariff-free under a 1986 law, and it can use and buy public land on favourable terms. According to a 1997 presidential decree, the military has the right to manage all undeveloped non-agricultural land, which is almost 87 per cent of the country’s total area.

A spate of legislation since January 2011 has put the military largely out of the reach of public deliberation.

In May 2011, an amendment to the law on the military judiciary stipulated that only military prosecutors and judges had the right to investigate illicit gains by army officers. After last year’s 30 June Revolution, the government issued an executive decree expanding ministers’ powers to sign contracts without competitive bidding.

“That is how the infrastructure projects, including those in the stimulus package, were earmarked to military-affiliated enterprises,” according to Attallah.

Some analysts fear that the military’s role could lead to a revival of the state’s monopoly on the economy, with the military maintaining a pivotal role in producing and distributing goods and services. It is also considered a departure from the economic liberalisation measures under ousted former president Hosni Mubarak’s government.

However, Adli said that the potential impact of the military’s expansion on the future of the private sector was exaggerated.

The expanded role is temporary, he said, as the military had been forced to invest in job creation and growth acceleration to save the wider economy. “After all, the legitimacy and popularity of the new regime, following the road map’s implementation, hinges directly on achieving economic recovery,” he said.

Adli played down the threat the military could represent to the private sector as it has coexisted with the expansion of the private sector and the emergence of a major capitalist class for the past two decades.

The military establishment mainly concentrates its economic activities in the infrastructure sector and does not have a stake in other significant sectors, including heavy industries (cement, iron, steel and aluminium) and services (tourism, telecom and transportation).

“In a nutshell, the military’s economic expansion is still confined to traditional sectors. Its involvement in housing projects remains an exception,” Adli said.

According to Attallah, economic fundamentals will likely push the army into allowing a greater role for other economic players, whether in the form of private-sector firms or cooperatives, as the state is no longer capable of absorbing growing unemployment while employment in the informal sector exacerbates social and economic inequality.

The rational strategy would therefore “entail tolerating the emergence of other political forces associated with private enterprise, rather than bearing the political cost of a stagnant economy and growing youth unemployment,” he said.

Saviour of the economy? While criticised for expanding its grip on different sectors of the economy and keeping its accounts out of public view, commentators have praised the role the army has played to support the economy over the years.

Yehia Hussein Abdel-Hadi, a political activist, defended the army, saying that it had used its profits to support the national economy. He recalled that in 2005 when most of the cement companies were sold to foreign owners, the army decided to step in and set up Arish Cement in Sinai to cover its needs and sell any surplus to the public.

Another example was when the army paid the compensation that international arbitration had ruled Egypt should pay to Egyptian-Italian investor Wagih Siag, from whom the government had withdrawn land bought in Taba after it was revealed that he had an Israeli partner.

When there had been a problem with the sole private-sector importer of alum, used in purifying tap water, a few years ago, the army’s Al-Nasr Company for Chemicals built a factory.

It also managed a number of loss-making public enterprises, like Simaf for Railway Trucks, eventually turning them into profit-making ones.

But for Springborg, the history of economies dominated by the military is nevertheless littered with failure. “Even the Chinese decided some two decades ago that they needed to reduce the role of their military to enhance overall economic performance,” he said.

It was only in the Middle East that militaries continue to exert substantial direct control over the economy, most notably in Pakistan and Egypt, he added.

Egypt’s military and the economy

• The military’s role in the economy started to be felt soon after the 1952 Revolution which brought the army to power in Egypt. Army officers were appointed the heads of many nationalised and newly established enterprises. The socialist administration of the economy expanded the state’s role over that of the private sector, helping to give the military power over local business.

• In the 1970s, then president Anwar Al-Sadat ensured that the military’s economic role was apolitical. He introduced the Open Door Policy, which saw increased economic ties with the West and the emergence of a number of private businesses that benefited from the new policies and sidelined military-run companies.

• The 1979 Peace Treaty with Israel was a boon to the military. After ending the state of war with Israel, Egypt’s leaders reasoned that laying off thousands of well-trained army officers was politically undesirable. The state established an economic body known as the National Services Projects Organisation (NSPO) which founded commercial enterprises to be run by retired officers. According to Yehia Hussein Abdel-Hadi, known for fighting corrupt privatisation deals late in Mubarak’s rule, the then minister of defence, Abdel-Halim Abou Ghazallah, decided that the army should use conscripts to cover army needs. The scope and volume of activities increased to the extent that they fully covered the army’s administrative expenses, lightening the load on the armed forces budget.

• When Egypt embarked on its structural adjustment programme in 1992, at the behest of the IMF, army-owned companies were not touched. Under president Mubarak, the military gained control of a vast business empire, ranging from bottled water companies to petrol stations. There was a fierce behind-the-scenes struggle between the army and Mubarak-era oligarchs, however. According to Attallah of the AUC, state-owned enterprises were privatised at an unprecedented pace in the Mubarak era, and there were worries that it would only be a matter of time before military enterprises would be put up for sale.

• The 25 January Revolution and the following transitional period saw the military make it clear that its economic empire was not to be subject to debate under the new political order. Top military officials ensured that the country’s new constitutions included clauses protecting the military’s accounts. “The military is simply no longer content to stay out of politics in exchange for certain economic privileges. Their old ‘rule but not govern’ formula is increasingly being rejected in favour of a greater stake in politics that will safeguard economic rents,” Attallah said.
Military-Inc– – Al-Ahram Weekly.

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About angelajoya

Assistant Professor, Middle East Political Economy, at the University of Oregon. Currently writing on the Egyptian revolution and the Syrian crisis.
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