Table of Contents

The state-owned defense industry is the oldest part of Egypt’s formal military economy. Indeed, Egyptian sources commonly trace its lineage to Mehmet Ali, who ruled the country in the early nineteenth century and founded modern factories with French assistance to produce weapons and munitions.1 But today’s industry leaders, such as Minister of State for Military Production Mohamed al-Assar, more correctly credit then president Gamal Abdel Nasser with launching what they call “this giant complex” in the 1950s.2 However, its present form derives more heavily from the second half of the 1970s, when Nasser’s successor, Anwar Sadat, saw it as a means of reducing the cost of fulfilling Egypt’s weapons needs and resolving its perennial shortage of capital. Since then, the sector has evolved to include two main clusters of factories and companies that come under the Ministry of Military Production and the Arab Organization for Industrialization, with a minor contribution from companies belonging to the Ministry of Defense (discussed in Chapter 3).

Despite its long lineage, the defense industry has been chronically hobbled by inadequate funding, and minimal investment in research and development. Consequently, its ability to undertake technological adaptation and innovation, raise productivity, and add value is limited, resulting in poor quality, low competitiveness, and marked inefficiencies. Industry officials have repeatedly claimed increases in the proportion of indigenous content in military (and civilian) hardware produced or assembled in Egypt, and promised to contribute to the national economy by reducing imports, boosting exports, and saving hard currency. But in reality, the sector has been dogged by severe delays in bringing production lines into operation, massive underutilization of plants and machinery, and investment decisions that are not based on performance or efficiency. It has only survived by being allowed to displace its losses onto the state treasury and, especially since 2013, to poach public contracts from both public and private civilian competitors.

Ministry of Military Production: Industrial Flagship or Residual Enclave of State-Owned Enterprises?

The MOMP exemplifies both the defense industry’s hopes and its shortcomings.3 Its establishment in 1954 reflected the government’s adoption of an import-substituting industrialization strategy, which saw the launch of a huge iron and steel plant alongside car assembly lines and a military aircraft factory.4 But its cost effectiveness was low and expansion too rapid and ambitious, at a time when Egypt was moreover importing massive amounts of Soviet weaponry, overshadowing the MOMP and leading it to close down in 1969.5 The MOMP was officially resurrected in 1971 following an agreement allowing Egypt to co-produce Soviet weapons, which was not in fact implemented. It resumed production of low-technology military consumables, such as light arms, artillery and tank shells, metal forgings, and vehicle batteries, for the next decade.6 But as a U.S. Central Intelligence Agency (CIA) research paper observed in 1985, this activity was guided as much by “personalities, contacts, and gratuities of the services ‘old-boy’ networks as . . . by any long-range requirements or projected capabilities shortfalls.”7

Lack of funding was also a perennial problem. The defense industry was estimated to need $4–$6 billion in new investments in the late 1980s, but was hobbled by Egypt’s massive external debt (then approaching $50 billion) and poor credit rating.8 As defense analysts Florence Gaub and Zoe Stanley-Lockman note, this prevented setting up new ventures and impeded the transfer of technology and manufacturing know-how through production under license from advanced industrialized countries, leading to the delay or cancellation of projects.9 The same CIA paper confirmed these impediments, and highlighted others: lack of coherent and centralized planning, programming, and budgeting processes; lack of a marketing organization to target export markets; overstaffing; poor management; shortages of skills; and overreliance on foreign technology.10

Thirty-four years later most, if not all, these problems still plague the twenty-plus companies and attached seventeen factories belonging to the MOMP, which together have a workforce stated in 2016 to be 35,000–40,000.11 Originally set up in the 1950s, MOMP subsidiaries were reclassified in accordance with Public Sector Companies Law 97 of 1983 that, in theory at least, made them subject to audit by Egypt’s Central Accounting Organization.12 A year later, they were brought together under a newly established National Authority for Military Production, which continues to oversee them.13 The NAMP was allowed by law to retain funds under the heading of “free currency”—that is, it could acquire foreign currencies at commercial, rather than the official, exchange rates—in order to import necessary intermediate materials and make investments, and to settle unforeseen dues in foreign currencies. It was also allowed to charge fees for managing projects on behalf of civilian agencies.

Despite these advantages, the MOMP continued to struggle financially. In 1993, the Council of Ministers decreed that its companies would be relieved of the costs of defense production, which would instead be borne by the state treasury. The MOMP still needed annual subventions from the Ministry of Finance; according to the Central Accounting Organization, these amounted to approximately EP3.6 billion ($190 million) between the 2010–2011 and 2014–2015 fiscal years. In June 2014, the Ministry of Finance wrote off EP1.15 billion in cumulative debt from 1994–1995 and allowed the MOMP to carry remaining losses forward, but the latter ministry nonetheless built up arrears of EP960 million over the next year.14

Undeterred by this lackluster record, senior defense industry officials present it as a means of utilizing the country’s natural resources, contributing to national development plans and economic growth, achieving mutually beneficial commercial synergies with the domestic private sector, and gaining access to foreign sources of credit, technology, and markets. Major programs to modernize and upgrade MOMP capabilities were announced in the context of successive five-year plans for 2003–2007 and 2007–2012.15 In December 2017, local media reported a new strategic development plan extending to 2052;16 the first phase, lasting until 2030, aims to raise technological levels, increase local content and value through greater investment in research and development, integrate artificial intelligence and robotic technology in production lines, and use information and communications technology effectively.

Grand Plans . . .

Sound in theory, the strategy faces multiple obstacles. The MOMP’s course over the past two decades reveals that it has been driven by contradictory objectives and has suffered persistent delays, misleading reporting, and inherent inefficiencies. This is demonstrated by the trajectory of the Defense Industries Complex, which was launched in the early 2000s in order to relocate all MOMP factories and production shops to a single site. Ostensibly, its aim was to provide the whole sector with modern infrastructure and create a logistics hub from which the industry could supply customers, including abroad. But it may also have been an attempt to prepare the groundwork for the creation of a special economic zone for military industrial production (akin to the model followed by Jordan and the United Arab Emirates).17

The MOMP has been driven by contradictory objectives and has suffered persistent delays, misleading reports, and inherent inefficiencies.

Originally, twenty-eight production units were to have been relocated between 2007 and 2010 to Abu Zaabal, immediately northeast of Cairo, which was already home to several MOMP factories. Construction was also slated to commence in October 2010 on a second site at nearby Belbeis; described by then minister of military production Major General Sayyed Meshaal as “a gift” to the president, this was to be named the Mubarak-II Defense Industries Complex.18 Two factories were reportedly relocated to what was commonly referred to as the Mubarak-I complex in 2007, and in 2013 a Facebook post by the Egyptian Special Forces confirmed that twenty-eight factories had relocated there by the end of 2012, the original date announced by Meshaal, with plans for another thirty-four industrial sites.19 It also claimed that the Mubarak-II complex would open for business at the start of 2014.20

But none of this was true. Of three defense factories slated to relocate in 2007, only one, the Shobra Engineering Industries Company (Factory 27), had been moved to the Defense Industries Complex (no longer named after Mubarak) by the end of 2017.21 Speaking in mid-2015, then minister of military production Major General Ibrahim Younes stated that the complex was “entirely complete and 100 percent ready,” but admitted it was operating at low capacity, which he attributed to “the political situation in previous years” and to delays in the delivery of manufacturing equipment from Europe.22 Younes expected the complex to be ready in 2016, but it was not until May 2017 that his successor, Assar, finally declared the complex ready to receive relocated companies.23

It had been thirty-three years since the resolution passed by the two houses of parliament in 1984 to move defense factories away from population centers, which ultimately led to the creation of the Defense Industries Complex.24 According to the Central Accounting Organization, buildings valued at EP269 million ($38 million) were written off when the Shobra company moved in 2014, and another EP69 million had to be paid to the contractors in compensation for price differences resulting from the lengthy delay.25 Machinery belonging to the Abu Zaabal chemicals company worth EP2.5 billion sat in crates for five years, while moving the Heliopolis Company for Chemical Industries cost EP1 billion worth of buildings and EP226 million worth of equipment and machinery, besides EP126.8 million in interest owed before it had even resumed operations.26 An accidental explosion at one of its storage facilities near Cairo International Airport on July 12, 2018, moreover revealed that it had not even completed the transfer.27 Indeed, an interactive map posted by the MOMP showing the locations of its companies, services, and retail outlets suggests that not one ever made it to the new complex.28

. . . Dubious Results

Claims of increases in output and productivity have been equally inconsistent, raising serious doubts about the MOMP’s ability to compile and process production data, undertake financial reporting, and evaluate operations in order to improve performance. Output reportedly grew steadily. Speaking in August 2010, for example, Meshaal boasted that the defense industry had achieved an “unprecedented leap in the preceding thirty years . . . attaining enormous technological and economic capabilities of all kinds in recent years.”29 The MOMP’s implementation arm, the NAMP, was credited with output worth EP3.8 billion ($618 million) in 2007–2008 (for an investment of EP1.515 billion), up from an output of EP1.4 billion nine years earlier.30 Total investment during the Mubarak era came to EP8 billion, Meshaal added, with cumulative production worth EP30 billion.31 He also claimed that MOMP production had reached EP4 billion in the preceding year, with investments of EP2.5 billion, and was growing at 15 percent thanks to productivity increasing from EP107,000 per worker to EP117,000.32

But these figures were misleading. Sustained growth at the rate claimed by Meshaal in 2010 would have resulted in an overall production value of more than EP6 billion within three years, but in fact it reached EP4.5 billion at most, and probably fell considerably short of that.33 As significantly, the Central Accounting Organization later revealed that the state treasury bore the cost of investment in MOMP companies: in other words, they were not generating enough income to reinvest in their own operations. Losses stood at 134 percent of capital for Benha Company for Electronic Industries, 104 percent for Maadi Company for Engineering Industries, 103 percent for Helwan Company for Diesel Engines, 59 percent for Helwan Company for Machine Tools, and 56 percent for both Helwan and Masarah Companies for Engineering Industries. Meshaal’s intimation that all costs of constructing the new Defense Industries Complex—including roads, electricity infrastructure, and water desalination plants—were covered by MOMP income was untrue.34

Statements by Meshaal’s successors, along with evidence that raising productivity and increasing local content and value added in MOMP companies remained serious challenges, belied at least some of his boasts. Soon after becoming minister of military production in September 2015, Assar replaced the heads of several companies, and later acknowledged that the ministry had suffered “imbalance in financial structures and losses in some companies.”35 A major problem, he explained, was “chaotic hiring” that had taken the MOMP wages bill from EP800 million in 2010 to EP2 billion in 2015 ($38 million to $230 million), with the result that it came to 56 percent of production costs in 2014, rising in some factories to 200 percent.36 “If we produce something for EP100, for example,” he noted, “we pay EP200 in wages and incur a major loss.”37 Facing financial difficulties, MOMP companies accumulated significant arrears in social insurance payments for staff, compelling the ministry to negotiate a settlement with the Ministry of Social Solidarity in March 2016.38

Ironically, Assar’s admissions coincided with glowing statements about performance. Speaking to the heads of the Central Bank of Egypt and several other banks in September 2017, he assured them that the MOMP’s “financial indicators show performance has been on an upward curve over the past five years.”39 This was true, strictly speaking, but the figures he and the MOMP official spokesperson gave for output in 2015–2016 were modest nonetheless: military products worth EP1.95 billion, and civilian goods and services worth EP970 million, for a total of EP2.92 billion.40 In dollar terms—a relevant measure since MOMP companies rely heavily on imported machinery and intermediate goods and are energy-intensive—the values of military and civilian output were approximately $234 million and $117 million respectively, or half the dollar equivalent of the MOMP’s total output value in 2010 ($700 million).41

What makes the output figures for 2015–2016 even more striking is that, according to Assar, they represented an increase of 230 percent in military output and 115 percent in civilian output over the preceding year.42 Using these percentages and historical exchange rates, total production in 2014–2015 would have been EP1.692 billion ($226 million), split almost exactly between military and civilian output.43 In November 2017, Assar claimed that MOMP turnover in 2016–2017 had increased over the preceding year by another EP8.8–EP10 billion, or 140 percent, and anticipated a further increase to EP13 billion in the next year (2017–2018).44 He subsequently modified all his claims, stating in March 2019 that overall MOMP production had risen from EP4.2 billion in 2014–2015 to EP6.3 billion in 2015–2016, EP8.9 billion in 2016–2017, and EP11.6 billion 2017–2018.45

Assar’s original claims and predictions would have seen total MOMP output reach EP25–EP26 billion in 2017–2018, so actual results fell far short of that mark. Even these reflect significant inflation, as the Egyptian pound lost more than half its value against the U.S. dollar in November 2016, with the value of one dollar going from EP8.88 to EP18 virtually overnight (and staying between EP16.2 and EP18 ever since). Using Assar’s revised figures, MOMP output grew impressively in 2014–2016 in U.S. dollar terms, from $236 million to $712 million, but slipped in 2016–2017 and 2017–2018 to around $664–$665 million.

The MOMP has never been a significant exporter, nor a hard currency earner of note.

The MOMP has moreover never been a significant exporter, nor a hard currency earner of note. Egyptian arms exports peaked in the 1980s, consisting mainly of basic munitions and secondhand EAF equipment sold to Iraq during its war with Iran. The total value of military exports during the entire decade has been estimated at $505 million, although presidential decrees approving military export sales totaling $2.52 billion were issued in 1981–1984 alone, of which at least $1 billion was for materiel from EAF stocks.46 In any case, exports are reliably believed to have dropped to between $5 million and $22 million annually in 1990–2015.47 Consequently, the Egyptian defense industry’s gains from the sharp depreciation of the Egyptian pound after 2015 would have been limited. Indeed, its reliance on imports of production machinery and intermediate goods and its access to foreign currencies at favorable rates mean that the relative cost of its production to the public purse can only have risen as the Egyptian pound fell.48 Currency depreciation and government measures limiting the dollar supply denied private businesses the hard currency to finance their imports of production goods, but the defense industry showed no signs of slowing down.

Enduring Handicaps

Whatever the accuracy of the production figures cited above, the combination of an inflated workforce and low productivity had clearly reduced turnover to a minimum in the years preceding 2016–2017. Indeed, Assar took the highly unusual step of admitting in November 2017 that “this is the first time in eight years that profits exceed losses.”50 His admission also raises questions about previous claims that profits were reinvested in the MOMP and AOI and their subsidiaries;51 if they ran at a loss, then either they were not making new investments regularly—whether for retraining personnel, upgrading equipment, expanding production lines, and marketing goods—or operating costs were being borne by other bodies, like the state treasury or discretionary MOD funds.52 Shortages of disposable income may explain the slow completion of the Defense Industries Complex, among other things: estimated at EP1.5 billion in 2010 ($259 million), its cost had reportedly doubled by 2013.

Conversely, the dramatic rise in production claimed in a single year lends credence to Assar’s assertion that the MOMP factories had considerable surplus capacity.53 The Abu Zaabal Company for Engineering Industries has invested EP2.3 billion in its steel rolling line, but this was used at a mere 13.13 percent of capacity in the five years up to mid-2015. The company achieved sales of EP531 million in that period, but 25 percent of raw materials used in production were being lost—instead of the standard rate of 4–5 percent. Underutilization and waste on such a scale points to a much wider range of shortcomings. Assar’s response to the MOMP’s financial problems confirms this. In May 2017, he underlined that MOMP companies needed to increase production and improve performance through better quality control, marketing, research, and management.54 Among other things, he argued, this would bring down the wage bill as a proportion to total production costs: he claimed that it had already dropped from 54 to 36 percent thanks to the surge in turnover in 2015–2016, and in March 2018 stated that it had dropped to 20 percent.55 (The wage bill reduced as a percentage because output increased, but Assar did not clarify how much the cost of other factors of production rose, nor whether this allowed a net profit. Furthermore, wages are paid in Egyptian pounds, whereas many other inputs must be imported or substituted for exports, such as fuel, and are denominated in U.S. dollars, so their total cost must have risen.)

Assar insisted that reducing wages was not an option, but in late 2016 MOMP spokesperson Major General Amro Fuad confirmed plans were in place to cut the workforce from 35,000 to 30,000 within five years.56 Fuad also stated that the MOMP was “encouraging youth” by appointing four new company heads, and requiring all heads of boards of directors to take strategic management training. (Most second-tier managers and workers in MOMP companies and factories are in fact civilians, and probably contribute the most to production and financial management, while the top 5 to 10 percent of positions are held by EAF officers, for which role they receive second salaries.57) In September 2017, Assar commissioned state-owned investment company NI Capital to prepare financial restructuring plans for MOMP companies in order to improve performance.58 At the same time, he contracted with the Egyptian-Korean Development Association (representing seven South Korean companies) to refurbish and upgrade MOMP factories (though there is no evidence this happened). For good measure, Assar also instructed MOMP companies in January 2017 to post the telephone number of the Administrative Monitoring Authority so their employees could report corruption, and two years later he ordered them to play the MOMP “anthem” over their public address systems to exhort their workers to greater productivity.59

Poaching as an Economic Strategy

While these steps made economic and administrative sense, their potential effects could not have materialized so quickly. Past experience confirms this: Meshaal had previously claimed that a program to “maintain and upgrade military factories and retrain personnel and workers” was already 80 percent complete as far back as 2010.60 Nor have mass layoffs at MOMP factories been reported. Rather, the reason for the immediate surge in MOMP balance sheets in 2015–2016 was Assar’s aggressive drive to win contracts from other government ministries. By the start of 2017, he boasted that the MOMP had signed cooperation protocols with “forty entities including twenty-one ministries, several governorates and universities, al-Azhar religious authority, and the Development Company for Egypt’s New Rural Areas, Long Live Egypt Fund, the Social Fund for Development, and others.”61 Later that year, the deputy head of the NAMP said it had “partnerships in all activities undertaken by the other ministries, . . . we provide all their needs.”62

Instead of contributing net value added to the national economy, as Assar and other defense industry officials frequently claimed, the MOMP had only shifted its accounts into the black by replacing other economic actors that would otherwise have won public works and procurement contracts. This was achieved, thanks not to competitive quality or pricing, but to the powerful political position that the military has enjoyed since 2013. In a speech announcing MOMP profits in November 2017, Assar proudly revealed that it had signed memoranda of understanding with thirty-five government ministries, authorities, and governorates (as well as cooperation agreements with thirty-four foreign companies and thirty-two domestic ones) in the preceding year.63 Poaching contracts was the cause of the dramatic increase in turnover for the third year running. Famously, the MOMP took over management of the “smart cards” program intended to direct government subsidies toward the poorest sectors in Egypt, but critics note that this has left “77 percent of the top spending bracket [with] smart cards entitling them to subsidized goods, while 82 percent of the poor do not benefit from Egypt’s social insurance program, which is plagued by corruption and fraud.”64

The MOMP only shifted its accounts into the black by replacing other economic actors that would otherwise have won public works and procurement contracts.

The MOMP was moreover entering sectors in which other military economic actors already operated: construction of roads, water treatment plants, residential housing, sports facilities, and other buildings, and development projects in Sinai (usually undertaken by the EAF’s Engineering Authority and its Megaprojects and Water Departments); railway vehicles and equipment, solar panels and other renewable energy equipment, water heaters and coolers and other household appliances, laptops, butane cylinders, piping and parts for the petroleum industry, and agricultural machinery (usually produced by the Arab Organization for Industrialization); and land reclamation, agricultural cultivation, and agro-industry (normally the purview of the EAF Engineering Authority and the NSPO).65 (Indeed, MOMP companies and factories also duplicated many items in their respective ranges of civilian products.66)

Reinforcing this trend, the MOMP announced in May 2015 that it was setting up a dedicated company to undertake public works and procurement contracts (launched in late 2016 as the Military Production Company for Engineering Projects and Consultancy and General Supply). In theory, setting up a construction-specific conglomerate provides the MOMP with the capacity to undertake massive infrastructure projects and allows it to funnel external assistance. But in reality, both the EAF and the NSPO have their own construction arms and continue to operate in the same domain.67 Besides obvious duplication in construction, related consultancy and contracting, and land reclamation, the new company was intended to operate in the medical, public relations and advertising, real estate, and tourism sectors, in which the NSPO and other MOD agencies are already heavily present.68 Assar also revealed at various times in 2017 that the MOMP was planting 69,000 feddans with aromatic plants for export, managing agricultural land owned by the religious endowments authority in the Delta, and discussing a joint venture with Emirati investors to plant 20 million date palms on 92,000 feddans of land in the South Valley, departing clearly from manufacturing and services as well as duplicating the NSPO’s sphere of activity.69 And in the course of 2019 he added that his ministry was forming a company to manufacture elevators (which the NSPO had already done years earlier) and establishing new joint ventures to produce greenhouses and packing and sealing (again replicating existing NSPO activity).70

Duplication is not new. Without detailed data, it is difficult to establish the extent to which the MOMP competes directly with other military economic actors for contracts, or if this drives down prices of the goods and services they sell to the public and private sectors or to Egyptian consumers generally. But the latest phase of expansion and diversification of MOMP civilian output clearly came in response to the drive by Sisi to generate and increase income streams. This appears to lie behind much of the defense sector’s involvement in a constantly widening range of economic sectors, along with the belief that improving the supply of affordable commodities is a means of shoring up middle-class support and underpinning social stability. It also explains why the various arms of the formal military economy target the same sectors, although focusing on separate complementary sectors would be more efficient and make greater commercial sense.

Assar inadvertently revealed the limitations hobbling the MOMP in March 2018, when after boasting of large surges in turnover, he admitted that only six of its twenty companies had made a profit in the previous fiscal year.71 The cost of raw and intermediate materials, imported machinery and spare parts, and other factors of production such as electricity and fuel had presumably increased in direct proportion to the massive increases claimed for turnover, consequently limiting net income. In June 2019, he also stated that the MOMP’s contracting company had undertaken public contracts with an overall value of EP15 billion (under $1 billion) in the three years since it was formed, but the fact that this included importing goods such as 1,500 elevators for the new administrative capital indicated that MOMP was acting as a middleman as much as a manufacturer of goods and services, though the balance between the two roles is unclear.72 He nonetheless boasted, without apparent irony, that the MOMP complex was distinguished and unique, “without peer in Egyptian industry.”73

Arab Organization for Industrialization: “The Work Site of the State”

The AOI reveals the same patterns as the MOMP. The second main arm of the formal military economy in terms of date of establishment and manufacturing capability, though not of net contribution, it was set up as a joint venture with Saudi Arabia, the United Arab Emirates, and Qatar in 1975 with a startup capital of $1 billion.74 The AOI was intended to provide the participating countries with a degree of self-sufficiency in conventional military hardware, reduce defense costs, build a manufacturing and scientific base for Arab industry, and generate exports to Arab and Muslim countries.75 It benefited from the recently issued Law 43 of 1974 and Law 111 of 1975 that allowed Arab investors (unlike other foreigners) to own real estate, thereby enabling military companies to offer land and infrastructure as equity.76 (The MOMP and MOD later set up their own joint ventures on this basis.) The Gulf states suspended their participation in the AOI after Egypt signed the 1979 peace treaty with Israel and then relinquished their shares, valued at $1.8 billion, in 1994, leaving the organization wholly owned by Egypt, albeit with its legal status as “a specialized international regional organization” unchanged.77

The AOI differs from other defense companies in being registered as an international organization, and in having the president of the republic and governor of the central bank on its board.78 But like the rest of the defense industry, it was exempted from the outset from “all taxes and fees” (including customs duties on imports and taxes and fees normally levied on exports). It was also authorized to open foreign currency accounts in any bank it chose in Egypt or abroad and to convert its currency deposits freely—a major advantage in a country that applied rigid exchange controls until 2015.79 A further presidential decree in 1977 extended the same exemptions to its subsidiary companies—which were additionally allowed to take tax- and fee-free loans—and to all AOI suppliers and subcontractors.80

According to Lieutenant General Hamdy Waheibah, who headed the AOI from 2005 to 2012, the AOI was also not subject to audit by the Central Accounting Organization, nor to the provisions of Labor Law 137 of 1981 and its 2003 amendment.81 The 2014 modification to Law 89 of 1998 on tenders and bids additionally granted the AOI the same power as the MOD and MOMP to award contracts on a no-bid, direct-order basis to suppliers and subcontractors of its own choosing.82 In line with all other military economic actors, the AOI may retain profits (rather than submit them to the state treasury); and like the MOMP, it claims to reinvest all profits in its subsidiaries.83 The AOI is moreover exempt from the health and safety provision of Labor Law 12 of 2003, allowing it to monitor itself.84

The AOI initially comprised four defense factories that were transferred from the MOMP, but has grown to a total of twelve companies and factories with a workforce of 15,000–17,000, including 1,250 engineers.85 The AOI took full ownership of two joint ventures that were originally established with British Aerospace and Rolls-Royce—Arab-British Dynamics Company and Arab British Engine Company—in 1998 and 2009, leaving a third—Arab American Vehicles—still jointly owned with Chrysler.86 Most of its defense-related output consisted of co-production, including assembly, of Western equipment.87 By 2006, Waheibah claimed, 30 percent of AOI military output was being exported to Arab states, averaging $20 million annually in the two preceding years.88 This suggested a modest volume of military production, but six years later, Waheibah stated that the AOI had made a net overall profit of EP470–EP475 million ($78 million) on sales of military and civilian products and services of EP3.4 billion ($563 million) in 2011–2012.89 His successor, Lieutenant General Abdul-Aziz Seif-el-Din, gave lower figures for overall production (EP3 billion) and net profits (approximately EP220 million) in 2012–2013, but this still indicated a steady flow of work.90

The July 2013 military takeover transformed the picture. Since then, public sector entities and private sector companies, which typically sought to build ties with influential political actors in order to secure contracts and market access in every presidential era, have increased their ties with defense sector entities as a means of securing business. The AOI subsequently stated that it had won contracts totaling $965 million (including $400 million in sales) and $855 million (including $760 million in sales) in 2015 and 2016, respectively.91

Despite the dip in 2016, these rates showed impressive growth compared to previous periods. But they did not result from planned improvements in organizational structure and staff training that the AOI had previously announced.92 Rather, as with the MOMP, the jump in output and sales was almost entirely due to the AOI’s drive to win a larger share of public works and procurement contracts, displacing other suppliers and contractors. Seif-el-Din boasted repeatedly of working with numerous government ministries and state universities; AOI annual reports and periodic updates of projects confirm unequivocally that these bodies account for the largest portion by far of AOI contracts and sales. This may explain the claim by unidentified government sources that the AOI increased its sales to $500 million in the second half of 2017, an increase of 7 percent compared to the first half.93

As with the MOMP, the jump in output and sales was almost enitrely due to the AOI’s drive to win a larger share of public works and procurement contracts, displacing other suppliers and contractors.

That the AOI depends on assured contracts from the Egyptian public sector is also reflected in the minimal volume of its exports: a mere $2.9 million in 2015, they reached only $18.5 million in 2016, forty years after it came into being.94 A contract in 2016 to supply Pakistan with twelve Chinese-designed K-8P trainer aircraft, which are assembled and part-manufactured under license in Egypt, was expected to improve these figures, but the AOI has generally been unable to build or sustain significant export levels. Indeed, production of all the more advanced military hardware it assembled under foreign licenses in its first decade or so for the EAF and for export—most notably the Alpha jet, Tucano trainer aircraft, and Gazelle helicopter—has long been discontinued. The main exception has been its success in exporting a total of 745 Fahd and Walid armored personnel carriers to seven Arab and African states, but even this was relatively modest when taking into account that its total production cost of roughly EP3.725 million ($600 million) was spread over three decades from the start of exports.95 These results belie boasts about AOI success in “bringing in hard currency to help the national economy.” To the contrary, it used hard currency to import intermediate goods, assembly kits, and manufacturing machinery.

The Research and Development Handicap

Although the MOMP and AOI have undoubtedly made strides in acquiring technology and production know-how, glowing reports in Egyptian media and their own self-congratulatory statements contain considerable hyperbole. Seif-el-Din labeled the AOI “an important citadel” of Egyptian industry soon after becoming chairman in 2012, while Assar marked the MOMP’s sixty-third anniversary in 2017 by declaring its “greater goal” to be “attaining a defense complex that is 100 percent Egyptian.”96 But serious deficiencies in the defense industry’s capacity for research and development (R&D), which is crucial to absorbing external technology and knowledge and converting them into local output, have greatly limited its economic impact.

In the mid-1990s, Stephen Gotowicki, who then worked in the U.S. Army’s Foreign Military Studies Office, anticipated that “in the coming years, Egypt’s military production sector will probably decline. Egypt suffers from low productivity, a lack of adequate funding and a dearth of external markets.” His prediction of decline proved wrong, but the rest of his critique was accurate:

Egypt’s military industries have not promoted import substitution or sustained export earnings. The technological benefit of the armed forces’ military industrial endeavors have proven to be only marginal to Egypt’s economic developments. While Egypt does assemble sophisticated military weapons systems, the facilities to do so are provided by Western businesses on a “turn key” basis. The Egyptians receive kits for assembly, but the technology involved is closely maintained by the Western partner. Hence, little technology that would allow independent Egyptian development of systems has been received. For Egypt, technology is a conundrum—high technology industrial efforts are a capital intensive endeavor; Egypt has a labor intensive economy with little capital.97

Drawing on insight from U.S. defense officials, political scientists Robert Springborg and Clement Moore Henry assessed a few years later that “many if not most of [the Egyptian defense industry’s] efforts in manufacturing appear to be direct spin-offs from relatively low-level military technology.”98 Since the primary national security value of local defense industries lies in their contribution to the military adaptation capacity of states, inadequate investment in R&D reflects either incompetence or lack of commitment to sustaining a genuinely capable defense industry on the part of its managers and political leaders.99

Egyptian defense industry leaders have repeatedly acknowledged the need to invest in R&D. In 2010, Meshaal stated that his ministry had collaborated with “all Egyptian universities to set up a scientific research and excellence center to serve the defense industry.” In other interviews he explained that the R&D units of all MOMP factories and companies had been grouped in a single new Center for Scientific Distinction in 2005 at a cost of EP200 million ($35 million), and that it would commence operation in October 2011.100 Separately, an Integrated Technology Complex encompassing a technical secondary school, intermediate institute, and a technology college had been set up; this had 180 master’s and forty doctoral students, and trained 300 “engineers and chemists” annually.101 For its part, the AOI has an Arab Institute for Advanced Technology and two centers that are advertised as developing capacity in administration, engineering and technology, information systems, and languages. But in all these cases, the emphasis appears to be on acquiring narrow technical skills for limited applications, rather than on creating an interactive organizational climate for technological and commercial innovation.102

Then AOI head Waheibah appeared to acknowledge the lack of genuine R&D when he commented, in 2009, that “Egypt lives in a major industrial coma . . . [it] lacks design [ability] in 99 percent of industries, from needles, camping stoves, and water taps to [cigarette] lighters. Everything in our markets is a foreign design.”103 His evocation of a famous speech in 1962 in which Nasser envisioned Egypt making everything from “the needle to the rocket” was intended to present the AOI as the exception that was leading the way with genuine R&D capability.104 But analyst Sarah Chayes found little evidence of this when she visited an AOI factory producing consumer electronics and electric appliances in 2013:

[It] merely assembles low-grade Chinese components for products visibly below the standards of readily available Samsung or Sony alternatives. Its line of computers—discontinued since the revolution [in 2011]—was sold only to government ministries. Currently, the twelve-person research and development department is focused on electrical controllers for a prospective solar streetlight project, also aimed at government purchasers. The department, even according to [one of its engineers], generates no innovation. Young engineers, hired right out of school, cycled through on their way to higher-paying jobs in the private sector, at least until the mid-2000s, according to another engineer.105

As a consequence, both the AOI and MOMP have struggled to raise the proportion of local content in products they assemble under foreign license. This is a familiar means of acquiring technology and production know-how and a route to adding value and spurring domestic feeder industries worldwide, but the slow rates of growth in local content reveal inadequate R&D capacity and limit economic returns. The examples of the Walid armored personnel carrier and its successor, the Fahd, is telling: both were based on German designs and produced in Egypt under license (starting in 1960 for the Walid and 1985 for the Fahd), but it took thirty years for local content in the Fahd to go from the initial 25 percent to 68 percent.106 Much the same is true of the Jeep J8, which has been produced in Egypt since late 2008 from knockdown kits supplied by U.S. firm Chrysler: its civilian and military precursors have been assembled in Egypt by the AOI’s Arab American Vehicles since 1978, but in April 2017 local content was stated still to be at only 45 percent.107

The licensed production since 1992 of the U.S.-designed M1A1 Abrams main battle tank, in which Egyptian defense officials take special pride, has been similarly affected. From the outset, the MOMP’s purpose-built Tank Plant (Factory 200) manufactured about 40 percent of the components of the first 555 M1 tanks covered by the original agreement, while importing 60 percent.108 This was already an impressive level of local content for one of the world’s most advanced fighting vehicles. Meshaal claimed in 2010 that local content had risen to 75 percent, even boasting this was “higher than in the United States,” and then claimed that it had reached 95 percent by October 2011. Yet this was true only of specific components such as the chassis, and even that only became true in 2015; the engine was also not produced locally.109 Reflecting these limitations, co-production in fact “dramatically increased the per-unit cost of tanks and other jointly manufactured equipment,” according to the U.S. General Accounting Office, which evaluated the program routinely in the late 1990s and early 2000s.110 Factory 200 moreover employed inflated numbers of personnel; it resisted pressure from U.S. manufacturer General Motors to reduce its workforce from 6,000 to 1,200—although U.S. officials privately estimated at the outset that it only needed 200—finally settling at 4,000 personnel and then bringing this figure down to 2,500 as production came to a close in 2018.111

Egyptian military enterprises appear invested in raising local content—and in acquiring the technology and production means to do so—for high-profile combat equipment that boosts the EAF’s strategic capacity and prestige. Insistence on maintaining M1 co-production moreover reflects hope of using this as a springboard for exports; in the meantime, the Tank Plant is being used to upgrade earlier M1A1 versions.112 This makes good sense, but the limitations of the underlying R&D base impose a ceiling on this and other efforts such as that of Unit 1703 of the MOD’s Military Intelligence and Reconnaissance Administration, which supplements military technology transfer by acquiring equipment that is then reverse engineered by the MOD’s Center for Technological Research, Design, and Development.113 A review of military hardware advertised on the official MOMP and AOI websites shows only vintage technologies; the sole exception is the M1 tank kits, but even these were included by the Defense Security Cooperation Agency of the U.S. Department of Defense in 2015 as one of a number of “older, outdated, or third-party produced systems” in the EAF inventory that “should be transitioned from [U.S. foreign military financing] or ended.”114

Not only has the weakness of Egypt’s R&D base seriously impeded absorbing new technology, preventing significant indigenous adaptations or innovations, but it has also limted the additon of value that could be attained by undertaking maintenance, repair, and upgrades in-country.

Conversely, political scientist Shana Marshall argues that the defense industry has actively pursued third-party transfers of technology through co-production and licensed manufacturing agreements with diverse second- and third-tier foreign defense companies since the early 2000s.115 This is a more promising route to advanced technology, but the sector has a poor track record in this regard: more than four decades after the AOI formed joint ventures with several major Western arms manufacturers and nearly three since the M1 tank assembly line started production, local content has risen relatively little on average. Indeed, not only has the weakness of Egypt’s R&D base seriously impeded absorbing new technology, preventing significant indigenous adaptations or innovations, but it has also limited the addition of value that could be attained by undertaking maintenance, repair, and upgrades in-country. The motivation for building relationships with foreign companies may therefore have less to do with the transfer of technology and know-how than with investing ministry funds abroad with the aim of securing income streams from dividends and acquiring stakes outside Egypt.

A case in point is the agreement covering the donation of 92 second-hand BMP 1A1 infantry fighting vehicles from Greece to the EAF in late 2018. Egypt financed the technical inspection and upgrades to be conducted by Greek industry rather than undertaking these tasks itself; it moreover opted for this deal instead of upgrading the 205 BMP-1 vehicles already in EAF stores.116 Similarly, when the MOD acquired a fleet of Chinese Wing Loong medium-range drones in 2017, it was UAE defense contractors who adapted the communication, observation, and target localization systems for integration into the EAF.117 Waheibah had previously announced that the AOI was producing twelve Chinese-designed ASN-209 unmanned aerial vehicles (that is, drones) in 2012, but his claim that local content reached 99.5 percent is not verified.118

As telling of the real limitations are repeated delays in the launch of new production projects and delivery. Nine years passed between the initial order for 120 K-8E trainer aircraft and the start of assembly in Egypt of the final forty using kits supplied by the Chinese Hongdu Aviation Industry Corporation in 2008, for example.119 Following the U.S. decision to reallocate foreign military funds away from major weapons systems such as the M1 tank and F16 fighter aircraft in 2013, the MOMP once again demonstrated its bias toward big-ticket military technology by negotiating with Russian company UralVagonZavod in 2017 for the assembly and partial manufacture of 400–500 T-90 main battle tanks in Egypt (which has also not taken place).120

Undeterred by the defense industry’s underachievement, Assar has campaigned to raise its international profile. As if in response to the critique made in the 1985 CIA research paper cited earlier about the lack of effective information collection and marketing organization for exports by the MOMP, he showcased its military production at the International Defense Exhibition (IDEX) in Abu Dhabi in February 2017, its first participation in such an event in over ten years.121 AOI head Seif-el-Din had promised an international defense exhibition in Egypt in early 2013, but it was not until December 2018 that his counterpart Assar finally inaugurated the first Egypt Defense Expo (EDEX), again intended to drum up orders for the defense industry’s military products.122

But while the effort was commendable, marketing has been constrained by the poor competitiveness of Egyptian defense products in global markets. Most notable among those on display at EDEX were upgrades of the Fahd and Temsah armored personnel carriers, both based on adaptations of German and Ukrainian vehicles, and prototypes of the ST-100 and ST-500 vehicles, developed under the auspices of the South African International Marathon United Technology Group.123 The Temsah reflected the entry of the Engineering Industries Complex of the EAF’s Vehicles Department as a minor new defense producer into the field; inaugurated in May 2015, it has ten factories that produce everything from vehicle spare parts (exhaust pipes, radiators, nonmetallic rubber parts, foam seats, and the first all-Egyptian-made battery) to tank transporters for M1A1 tanks.124

EDEX did not visibly mark the launch of Egypt as an arms exporter. The sale of 19 Fahds to Burundi was agreed in March 2019, and the MOMP claimed a few months later that the ST-100 was being trialed by Abu Dhabi, but no other orders for any of these vehicles have been confirmed, even by the EAF, which has instead continued to use Mine Resistant Ambush Protected vehicles supplied by the United States since 2015 through its Excess Defense Article program.125 EDEX instead proved to be a marketing opportunity for foreign defense companies to conclude a diverse array of contracts with the EAF.126

“Our Fingerprints in Every House”: The Travails of Civilian Production

The defense industry is no less ambitious in relation to its civilian production. This covers a very wide range of finished and intermediate products for household, service institutions, agricultural, industrial, and environmental uses: kitchen utensils, washing machines, refrigerators, televisions, satellite receivers, laptops, electric and water meters, water filters and coolers, air conditioning, lighting and heating, cooking gas cylinders and regulators, and wood furniture; hospital equipment, disposable syringes, medications and solvents, firefighting vehicles and ambulances, garbage trucks, sports screens and seating, educational tablets; fertilizer, water pumps and piping, agricultural machinery and storage equipment, lateral move irrigation systems, and refrigerated food trucks; concrete mixers, cooling towers, metal fittings, fans, gas taps and fuel injectors, construction explosives, water purification and desalination plants, and paint; agricultural waste recycling and water treatment plants, and renewable energy equipment.127 The defense industry also provides civilian services including contracting and construction, supply and import, installation and upgrade of IT and monitoring systems for public institutions, and technical training.

No wonder a director of one MOMP factory boasted that “our fingerprints are in every house in Egypt.”128 But the shortcomings of the defense industry’s military production are even more consequential for its civilian production. Here, the jumble of official rationales for producing civilian goods and services is partly to blame. Leading officials have repeatedly stated that the defense industry is merely redirecting output that is surplus to EAF needs to civilian markets, utilizing spare capacity, breaking monopolies and stabilizing prices of supposedly “strategic” commodities, reducing imports and saving foreign currency reserves, contributing to social and economic development and GDP generally and to the state’s national development plan specifically, helping to reform the economy, and supporting the private sector.

But shortcomings of the defense industry’s military production are even more consequential for its civilian production.

In theory, some of these aims could be compatible with each other, but in practice most are contradictory. Underutilization of capacity in the defense industry is severe, to take one example, and yet the MOMP in particular has been on an expansionist trajectory for several years, adding production lines, factories, and new companies to its portfolio in pursuance of Assar’s stated strategy of expanding.129 Almost none of the economic sectors in which military agencies are active suffer private sector monopolies that require breaking, regulating markets and prices is the business of government ministries and specialized state agencies, and reassurances about not competing with the private sector are belied by statements about competing with it in order to bring down prices.

Indeed, defense industry leaders make contradictory statements about their own main purpose and contribution. Assar complained in 2017 that it was difficult to increase civilian compared to military output “due to many challenges including competition and imports,” for example, and yet asserted a year later that “if we only produced defense products we would not achieve an economic return.”130 Lieutenant General Abdel-Monem Bayyoumi al-Terras, who became head of the AOI in August 2018, separately confirmed that providing the “top-quality” needs of the EAF was its primary goal rather than profit making, which was ironic given the discontinuation of its higher-technology military programs and the aging technology of its remaining military output.131 These statements moreover belied the fact that at least 60 percent of production is civilian according to figures given by the same sector leaders.132

Preserving the Military Industrial Enclave, Replicating the Past

These contradictions derive from multiple sources. Most important is that, as a protected enclave, the defense industry has inherited “the institutions, the administrative structure, the policy framework, the modes of production and organization, the vested interests, and the habits of thought and work” characterizing much of the economy since the Nasser era, to borrow the assessment of Egypt’s productive sectors and infrastructure by Khalid Ikram, a former director of the World Bank’s Egypt department.133 In part, this also means retention by the defense industry of capital stock originally formed by past investments, such as the huge iron and steel complex and automobile assembly plant established in the late 1950s, which were partly converted to defense production in order to utilize spare capacity, or the aircraft factory that was turned to producing consumer durables.134

Above all, the defense industry remains attached to the import substituting industrialization strategies introduced in the 1950s and 1960s, albeit in a distorted and much reduced form. In addition to investing in new manufacturing ventures in select sectors protected by high customs barriers (such as intermediate chemicals, fertilizers, cement, and steel), defense industry leaders more often exploit their privileged relationship with government ministries and agencies to secure public procurement contracts by direct order, for goods that cannot otherwise compete with domestic or foreign goods that are cheaper or better quality. They have also campaigned to drum up sales with slogans such as “Buy Egyptian,” “Made in Egypt,” and “Encourage Egypt,” and the formation of a “Together to Support the Civilian Output of [Ministry of] Military Production” Facebook group.135 The MOMP announced in November 2017 that it was setting up twenty-two sales outlets across the country, took regular part in the Cairo trade fair, and frequently offered “enormous reductions” on home appliances “in celebration” of special days such as “the new year and festive days of our Christian brothers” and National Police Day.136 The ministry also contracted briefly with a private firm to market its civilian products under the “Make an Egyptian Happy” label.137

The defense industry remains attached to the import substituting industrialization strategies introduced in the 1950s and 1960s, albeit in a distorted and much reduced form.

The defense industry is quite simply not viable without a captive market. This is almost entirely domestic, as the defense industry has failed signally to achieve significant export capability; and where it has, as in the case of phosphate and fertilizer, it benefits from its multiple hidden subsidies. As with the military side of its production, a critical handicap for the defense industry in producing output for civilian markets has been the weakness of R&D, limiting increases in local content and value added. This is part of a general problem for Egypt; former director of the Middle East and Central Asia Department at the International Monetary Fund George Abed noted in 2019 that it spends only 0.6 percent of GDP on R&D compared to 4.3 percent in South Korea and Israel, 2.2 percent in Singapore, 2 percent in China, and 1.3 percent in Malaysia and Brazil.138 As a result, he concluded, Egypt has neglected to transform its industrial structure and fallen continuously behind its peers in integrating its economy into the global manufacturing value chain.139

This handicap is why the increasing emphasis by defense industry leaders on the importance of tawteen (resettlement), the transfer of technology and manufacturing know-how to Egypt through assembly and licensed production deals with foreign companies, is unconvincing. Although sound in theory, the defense industry’s low technological starting base and insufficient investment in R&D severely limit its ability to attract or benefit from transfers. The need for developing the R&D base has been evident for decades, and was repeatedly acknowledged by past ministers of military production and AOI heads over the past twenty years, but the prerequisites for doing so have remained largely ignored in reality. Tawteen appears to have emerged as a new mantra only in response to what AOI head Terras called “President Sisi’s mandate for the transfer and resettlement of technology and the deepening of local manufacturing in cooperation with international expertise.”140

A review of new deals signed with foreign companies since then suggests that little has changed in fact. In a typical instance, the MOMP agreed in December 2018 to identify needs and secure licenses and permits for joint energy and infrastructure projects with the China Energy Engineering Group Corporation, which will provide the actual engineering designs, supply equipment, and undertake the necessary construction services and technical support.141 Almost none of the co-production agreements reached with foreign companies in 2016–2019 in the automotive and railway sectors, for example, envisage Egyptian local content higher than 45–50 percent, only rising to 60 percent in rare instances. Indeed, under these circumstances the sheer number of protocols signed with foreign companies and governments suggests that the Egyptian defense industry remains as reliant on foreign technology and know-how as it was in 1985 when the CIA research paper cited previously identified this as a foremost problem.

These handicaps are largely why conversion of a large part of defense industry capacity to civilian production, which could make good economic sense, has proven ineffective. It is also why so few of the dozens of memorandums of understanding and cooperation agreements between the MOMP and AOI on the one side and Egyptian government ministries and foreign companies and governments on the other side are converted into actual deliverables. Talk of attracting Arab partners to reinvest in the AOI or emerging defense industries in Saudi Arabia and the UAE to partner with their Egyptian counterparts is highly improbable for the same reasons.142 Poor competitiveness and high production costs moreover account for the persistence of the chronic problem of serious underutilization of capacity in defense industry companies, even as new capacity is added. Duplication in the production of manufactured goods and services could generate useful competition, but in the absence of tangible technological innovation and deepening it means that defense companies can continue to market similar products only because their customers are tied in, and the real costs of redundancy and idle capacity are shifted onto the public purse. And despite the defense industry’s claims about offering products at affordable prices, private companies have complained of the high prices of inputs they buy from the MOMP and threatened to turn to imports instead.143

The defense industry is positioned between the roles of producer and procurer: it can manufacture low-tech civilian products at reasonable cost but remains stuck at the stage of assembling imported components as it attempts to climb up the technology ladder, which offers the least local content and value added, and therefore reverts to acting as a middleman for imported goods. This is illustrated by its efforts to produce automotive vehicles, railway cars, and electronics.

In Pursuit of the “100-Percent-Egyptian Car”

The advanced technological content and multiple production linkages of the automotive industry make it a classic starting point for defense industries and a nexus for commercial synergies between military and civilian manufacturing sectors worldwide. But the handicaps discussed above have prevented economic synergies, and threaten to raise the costs of new forays into vehicle production planned by the defense industry. This is graphically displayed by the periodic efforts to revive the bankrupt state-owned Nasr Automotive Manufacturing Company by placing it under the wing of the MOMP, and by more recent attempts by the MOMP and AOI to launch their own vehicle production lines.

Once regarded as a flagship of Egyptian manufacturing, Nasr was among the hundreds of state-owned companies placed under commercial management in 1991, but not privatized. After struggling for many years with loss-making subsidiaries, the Council of Ministers slated it for liquidation in 2009, and production ceased. But in April 2013, then minister of military production Lieutenant General Rida Hafez proposed reviving Nasr’s four factories under the aegis of the MOMP, and later promised that the company would build the first fully Egyptian car within two years.144

Hafez’s proposal generated resistance from retired officers heading other companies whose approval was needed. The head of the Holding Company for Metallurgical Industries, to which Nasr Automotive Manufacturing Company belonged, claimed publicly to support its transfer to the MOMP, but only on the condition that the ministry assumed the company’s debt—then EP1.2 billion ($172 million)—and committed to paying its remaining workforce for another three years (a total cost of EP180–EP216 million).145 Hafez, conversely, wished the holding company to absorb the debt. The retired major general who was executive director of the Egyptian Automobile Manufacturers Association, which stood to lose from the revival of Nasr and competition by the MOMP, was more openly opposed, claiming that restoring the company would require $10 billion in investments.146 Hafez’s death precluded completion of the transfer, which was blocked by his successor Major General Ibrahim Younes. Younes now made the MOMP’s acquisition of Nasr subject to finding a major global partner who could guarantee production of at least 200,000 vehicles annually, an impossible condition.147

The idea of reviving Nasr refused to die, however. In October 2015, its supporters resumed lobbying Assar, who had succeeded Younes as the head of the MOMP. Assar confirmed two months later that the company’s fate was still under review, but showed little interest in absorbing it within his ministry.148 Apparently, neither the military’s professed interest in helping to save leading national economic enterprises nor the perception among its critics that it seeks merely to raid civilian assets outweighed realistic market thinking with respect to Nasr. Various ideas were floated over the next four years, including an announcement in September 2017 that Nasr would be restructured with the assistance of the MOMP, but none of this materialized, and the Ministry of Public Enterprise Sector once again took up the search for foreign partners as part of its plan to develop troubled public sector companies in 2019.149

The defense industry has instead sought to strike out on its own. Between June 2018 and September 2019, the MOMP and AOI agreed co-production of trucks and earthmoving loaders with the Minsk Automobile Plant (Belarus), electric buses with Foton (China), electric cars with Geely (China), and charging stations for electric vehicles with SEE and Marathon (China).150 The routine rationales have been cited in each case—transferring technology and know-how, reducing imports, providing affordable goods, and supporting development—but there is little reason to expect that the defense industry can escape the travails faced by the civilian automotive industry. Despite the heavy trade protection the latter enjoyed until 2019, locally assembled cars were estimated to cost 20–30 percent more to assemble in Egypt than to import in 2005 and still around 30 percent in 2012—at which time the automotive sector was operating at 30 percent of capacity.151 The reliance of the automotive industry on imports for at least 60 percent of its components (not to mention production machinery, tools, and materials) means that it has not been able to benefit from the sharp devaluation of the Egyptian pound to gain a real competitive advantage. As importantly, Minister of Public Enterprise Sector Hisham Tawfik estimated in January 2019 that local components accounted for a mere 17 percent of the final product.152 Sales of locally assembled cars improved by 18 percent on the sharp depreciation of the Egyptian pound, yet sales of imported cars rose by 58 percent after the abolition of customs duties on imports of European vehicles as previously demanded in the 2004 EU-Egypt Association Agreement.153

Claims by defense industry leaders such as Terras, who promised in November 2018 that the AOI would soon produce a “100-percent-Egyptian car,” must be viewed skeptically, therefore.154 The AOI had launched a cheap three-wheel car modeled on the ubiquitous “tuk-tuk” a year earlier, which it more credibly claimed to contain 90 percent local content in parts and labor.155 But the MOMP agreement in September 2019 to co-produce electric buses with Chinese company Foton was more revealing of the true situation: Foton will supply the components—including the battery and electric motor, which are the most technologically complex parts—and Egyptian company IMUT will supply the capital, while the MOMP will contribute a minor share of capital in addition to the land and labor.156 Once again, the inadequacy of R&D is blocking potential increases in local content and value added. The fact that the head of the AOI’s Arab American Vehicles still felt a need to promise investment in R&D in March 2015, thirty-eight years after the company was founded, gives some indication of how severe the deficiency remains.157 So did his boast of maintaining local content in passenger cars at 45–47 percent, which was no more than the minimum requirement decreed by the Ministry of Industry. Similarly, Assar’s claim in 2017 that MAZ trucks were being produced in Egypt with 60 percent local content was not only contradicted by then transport minister Hisham Arafat, who lowered the figure to 50 percent a year later, but also violated the Ministry of Industry’s stipulated 70 percent minimum for local content in this vehicle category.158

In Slow Motion: Railways and Electronics

The inherent shortcomings of the defense industry are especially apparent in two more domains: rail transport, which offers significant efficiency and savings, and electronics, which are critical to industrial innovation and to Egypt’s integration into the global value chain. As importantly, these two sectors illustrate the manner in which the wider policy setting and political economy present obstacles to industrial development by distorting cost-benefit calculations and incentive structures, and how these are also reflected in the defense industry.

In stark contrast to massive public investment in roads and highway and the associated emphasis on the automotive industry, Egypt’s railway system has suffered decades of neglect and underinvestment. Analyst Tamer Hafez observed in late 2016 that the “notoriously unreliable, dangerous railway system has not motivated Egyptian businesses to rely on trains to ship goods—even though rail is a far cheaper and more efficient means of moving cargo, particular[ly] given the congested and unsafe state of the nation’s roads. Nonetheless, rail freight has shrunk to almost zero in recent years.”159 By then, less than 1 percent of the country’s freight was being transported by railway (rising to 1.2 percent by 2017), and only twenty of approximately 700 train platforms were full-service points where trains could load and unload cargo.160 But rather than focus on providing cheap public transport and freight services, ambitious planning currently under way envisages high-speed and monorail links worth $13.9 billion, which can only serve affluent passengers or vanity schemes such as the new administrative capital.161

The marked government bias toward road transport appears to be entirely shared by the military, which has managed most of the so-called national roads construction projects since late 2013.

The marked government bias toward road transport appears to be entirely shared by the military, which has managed most of the so-called national roads construction projects since late 2013. As Hafez noted, none of the new desert cities lying outside the Nile valley and delta, most of which have been constructed with military assistance or management, are “anywhere near the railroad.” Similarly, development of rail transport with Sudan has been severely neglected despite the large number of travelers and volume of goods that move between the two countries annually and despite major government investment in new urban communities and large land reclamation and agricultural schemes projects along the route in Upper Egypt. The construction of a rail link was under study in 2009 but abandoned until Egypt’s presidency of the African Union prompted a renewal of negotiations in 2019, but the railway authority admitted that it had neither funding nor a start date for the project.162

Policy bias and the familiar problem of minimal investment in R&D have resulted in an underwhelming contribution by the defense industry to rail transport. The Egyptian Railways Equipment Company, SEMAF, which belongs to the AOI, claimed in 2018 that local content reached 95 percent in unsophisticated items such as cargo cars, but acknowledged that this dropped to “25–45 percent for subway trains as they contain electronic and electrical systems that are not yet manufactured locally in Egypt.”163 Despite touting its production of railway vehicles and equipment as a showcase of local manufacturing capability, the AOI’s difficulties in delivering a much advertised order for 212 stainless steel, air-conditioned passenger cars in 2012 revealed otherwise. A promotional video released in October 2013 confirmed that only the chassis, paint, and seating for the cars were being manufactured in Egypt; an Italian subcontractor was to supply the engines, operating systems, and other components.164 The AOI switched to a Chinese supplier in 2014, allowing the order to be completed by 2017, but of the total number of the cars the AOI fully assembled only twelve, and imported 108.165

Indeed, instead of the AOI, it is the MOMP that has led the running to supply railway needs. It was already involved in discussions over supplying signal boxes, engines, and passenger cars in early 2015, and in 2017 announced plans to upgrade or supply 295 signal boxes and rehabilitate eighty-six rail stations.166 In January 2018, it discussed joint manufacture of railway control equipment and fast-speed tracks with the private sector Orascom Construction Limited.167 SEMAF, which by the start of 2018 had not received any new orders in six months, was also in discussion with the Ministry of Transport to provide the signal boxes; but the contract worth EP22 billion (then $1.17 billion) with Russian-Hungarian consortium Transmashholding-Hungary to deliver 1,300 passenger cars and provide maintenance services over fifteen years was finally concluded with the MOMP. Until then, only the Railway Authority workshops and SEMAF had manufactured railway cars, but the MOMP will import 700 cars and receive components and sub-assemblies for final fitting of the remaining cars at its Tank Plant.168 Lieutenant General Kamel al-Wazir, the former head of the EAF Engineering Authority who became minister of transport in March 2019, optimistically promised to attain 100 percent local content in railway cars “within a few years.”169 But Transmashholding stated more modestly that it would help the MOMP attain 80 percent local content by the end of the project, while the Tank Plant director stated that it would start at 45 percent.170

While this kind of investment was necessary, it reproduced the typical effort to meet problems with technical fixes focusing on the acquisition of new equipment and expansion of new infrastructure, rather than resolve underlying problems in the existing railway sector and in the policies that determine its economic feasibility within the wider transport system. Much the same applies in the case of the defense industry’s production of electronics. Here, too, it suffers from low local content, poor competitiveness, and underutilization of capacity. In 2002, South Korean Daewoo Electronics canceled a contract with the MOMP’s Benha Company for Electronic Industries to assemble consumer electronics goods after the latter undershot its production and sales targets by a large margin.171 A consultancy report prepared for the Industrial Modernization Center in 2008 noted that utilization reached 50 percent “at best” for some consumer electronics such as televisions, satellite receivers, video recorders, monitors, and computers. It concluded that “Egypt cannot integrate in the Global Electronics Value Chain at this stage. . . . Currently, Egyptian Manufacturers mostly work only in the last layer of the Value Chain.”172 Eight years later, the head of the electronics sector at the Federation of Egyptian Industries complained that the eight largest producers, including the MOMP, accounted for only 10 percent of the domestic market despite having enough capacity.173 Faced with these continuing challenges, the defense industry depends on direct orders from public sector customers such as Cairo University, which contracted Benha in early 2017 to assemble or otherwise supply 750,000 educational tablets for its students.174

Conclusion: The Last Refuge of Nasser-Era Enterprises

Lack of profitability might be understandable for military products that are not primarily intended for export, but the only reason that the Egyptian defense industry has survived low levels of productivity, utilization of capacity, and technological innovation in its civilian output of goods and services is that its losses and hidden costs are transferred to the state treasury, reducing its marginal costs of capital to a minimum. This is not for any lack of genuine manufacturing capability and technical skills, but for the wider political economy within which the sector operates, and which allows its leaders to disregard the need for meaningful cost-benefit analysis. (This was further underlined by Presidential Decree 244 of 2018 designating the MOMP as a state entity “of special nature,” exempting it from applying the requirement in the civil service law of 2015 to fill senior management posts through competitive hiring.175)

The problem also applies to protected public sector businesses and politically connected private companies in Egypt generally, but the defense industry is assured immunity even under market conditions that would prompt the government to restructure or privatize the former and that would penalize the latter. In a very real sense, the defense industry has access to capital (in the form of public sector contracts) that is equivalent to the capital Nasser generated through the land reform, nationalization, and socialist policies of the 1950s and 1960s, and that is utilized with equal inefficiency.

The knowledge that their inefficiency is cost-free helps explain why the various entities constituting the defense industry and their subsidiary companies and factories duplicate activities rather than complement each other. This is also why they do not pursue product specialization, technological deepening, or mergers and consolidation. Their real net contribution to the national economy and to consumers is at best questionable, and yet those in command show little inclination to streamline the sector, whether by divesting certain subsectors and activities or by subjecting all to the transparency and cost-effectiveness measures in order both to provide Egyptian defense needs and attain economic feasibility. The key to such transformation would be to end the defense industry’s assured access to public procurement contracts, which papers over its major shortcomings and financial losses and blocks any talk of reform. But this is unlikely to happen, so long as it functions primarily to uphold the regime maintenance logic in place since the 1950s and service the military component of the governing bureaucratic coalition.

Notes

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