Table of Contents

What impact has the military economy had on the private sector? Some unease over its growth was occasionally voiced in the final years of the Mubarak presidency, but fears that it might actually crowd out the private sector have only really come to the fore since it set on its new expansionary path in late 2013. Until then, the sum total of military production of civilian goods and services had remained small compared to the share of the private sector, whether of overall GDP or within any given sector of the economy. But the marked shift in the military’s economic approach and its insertion into a more central role in public procurement under the Sisi administration has both magnified the scale of military interaction with the private sector and multiplied the scope of areas in which this happens. Fears of the military’s economic activity have often exaggerated its market share and misrepresented its behavior as exceptional (compared to civilian counterparts), but are no longer groundless. The increasingly aggressive expansion of military economic activity is starting to undermine businesses and destabilize sectors in which the private sector has long been dominant.

Military and Private Entrepreneurs in a Rentier Economy

The relationship is complex. Contrary to the assumption that military economic activity is necessarily negative for the private sector, the relationship has mostly been mutually beneficial, as the military in fact steers a large volume of work toward the latter. But the relationship is also often parasitical, as military agencies offer favored private companies access to subsidized factors of production goods and materials or to public works contracts, generating income from these or extracting shares of equity from their civilian counterparts in return. And as the military economy accelerates, it is coming to impinge on the private sector in new ways.

Contrary to the assumption that military economic activity is necessarily negative for the private sector, the relationship has mostly been mutually beneficial, as the military in fact steers a large volume of work toward the latter.

The exact balance between genuine cooperation and positive synergies in the generation of economic value versus collusion in cozy arrangements generating higher financial costs and lower return varies significantly from sector to sector. This depends partly on whether the activity involved relates to manufacturing, public works, or supply and trade. It also depends especially on the level of capital, technical skills and know-how, equipment, and advanced technology needed, and if these can only be provided by private contractors (including foreign ones). These factors moreover determine whether the military’s civilian counterpart is a big, medium, or small business (or foreign), a selection that is additionally influenced by the military’s perceptions of each as a social, economic, and political ally or rival.

In each case the negotiating power of each party differs, as does the likely level of scrutiny by government (or international) agencies. But leverage is inherent in all cases. The military wields its control over permission to use state land and its ability to expedite (or delay) bureaucratic permits and award (or withhold) contracts, both in the present and in the future, and to varyingly coax or compel civilian contractors not only into accepting its terms, but also into doing business with it in the first place. This power relationship lies at the heart of the multifaceted interactions between the military and the private sector, allowing rewards but also seriously distorting incentive structures and subverting market rationale.

The multifold expansion of the military’s role in managing public investment and procurement of goods and services since 2013 has increased both the opportunity and the appetite to redefine relations with the private sector more fundamentally. There is strategic thinking behind the military’s approach, but it also reveals confused economic thinking, poor grasp of market dynamics, and incoherence in harmonizing legal, regulatory, and developmental frameworks. The net effect is to extend the regime maintenance logic that has governed the political economy of Egypt for decades and reproduce the basic patterns of how business is done between the public and private sectors. The main difference is that, while the military still does not set macroeconomic policy, its assumptions about what serves both the national interest and its own have come to shape the field within which the private sector operates more visibly.

Until 2013, much of the military’s direct involvement in the private sector took place through EAF retirees who positioned themselves as fixers in bureaucratic interstices between the private and public sectors, as brokers in economic sectors that enjoyed high levels of trade protection such as the automotive industry, or as founders and managers of private security firms. Other EAF retirees have been shoehorned by military agencies onto the boards of private businesses in sectors where the military has little other presence, a trend that has intensified since 2013. At least as significant is the shifting pattern of the military’s business alliances since 2013, and its expansion into several sectors in which private businesses have long been dominant—most notably in media, cement, and steel—undermining businesses and destabilizing markets. This environment is moreover expanding opportunities for military agencies and individual EAF officers (whether retired or still in service) to set up front companies to benefit from their insider knowledge and capture public contracts.

Military Fixers

Compelled to deal with labyrinthine bureaucracy in order to do business, numerous private companies hire retired officers to deal with government agencies responsible for issuing permits and regulating contracts. Often labeled “public relations” or “government affairs” directors, their task is to clear bureaucratic hurdles and increase the chances of winning contracts. Fixers often deal with fellow retirees embedded in the state agencies with which they work.2 As one interviewee put it, “companies and agencies hire officers, for example as deputy heads of boards, so as to have a ‘hot line’ to officers in other agencies or in the military command and facilitate getting permissions.”3

The number of military fixers rose in the Sadat era as interactions grew between the public, private, and foreign enterprises sectors.4 They played a special role when MOD approval of land use was needed, even in large government-funded projects. Egypt researcher W.J. Dorman established that when the New Urban Communities Authority sought permission to launch the Obour desert city in 1982–1983, for example, the German development agency (GTZ) providing funding and its Egyptian government counterpart authority had to hire an EAF retiree to negotiate a resolution.5 Even nonprofit and nongovernmental organizations—as well as a significant number of public business sector companies—hired retired officers or brought them on board as partners or directors so as to “smooth all variety of business transactions, as companies often run up against the need for military permits or approvals.”6 Statistical surveys do not exist, but Egyptian analysts confirm that by 2011 “most private companies had an officer [on the payroll], maybe 10 to 15 percent of their employees have a security background—either retired or on ‘call up.’”7

For many officers, this kind of employment simply offers a means of supplementing modest retirement pensions. Hiring retirees or taking them on as board members or partners became a means for companies to secure contracts—for which the fixers might receive a percentage—or access to land.8 One Egyptian business analyst noted that “developers wishing to buy land often find it easier if they hire a construction company owned at least in part by a former officer.”9 Companies occasionally also asked then defense minister Tantawi for the loan of active-service officers, whether to acquire particular competences or gain business connections, a practice that has probably continued since then.10 In other cases, as Egypt researcher Ayman Emam established, companies hire the children or other close relatives of EAF procurement officers (or register holiday villas in their names) as a means of securing contracts.11

The increased scope for profit-making means that this kind of arrangement has not always been voluntary. In the last decade of Mubarak’s rule, private companies started to come under pressure to hire retired officers as “delegate members” on their boards of directors.12 In some cases military affiliates or General Intelligence Directorate front companies demanded this as recompense from private businesses that had successfully bid against them for contracts, but it was probably also an adaptation to a period in which private companies sought political favor from Mubarak rather than the military. This practice has taken a new dimension, as by 2019 military agencies were reportedly compelling start-ups to cede a share of their equity or appoint EAF officers to their boards.13

Procurement officers and purchasing managers in private companies are also often EAF retirees who can steer contracts toward military economic entities or win subcontracts for their companies from larger projects run by the military.14 That this relationship is often purely parasitical is obvious from an op-ed written by liberal politician Mohammed Nosseir in April 2015, in which he recounted meeting the director of a private hospital who was a retired general, kept a gun on his desk, and issued instructions for patient care despite his lack of medical training.15

Hiring military retirees is commonplace worldwide and does not necessarily lead to corrupt practices. But the Sisi administration’s resort to the military has gone hand in hand with circumventing legal and regulatory requirements.

Hiring military retirees is commonplace worldwide and does not necessarily lead to cronyism or corrupt practices. Egyptians are hardly alone in perceiving government bureaucracy as a hindrance, and in seeking ways of cutting through it in order to expedite business. But the Sisi administration’s resort to the military as a means of “getting things done” has gone hand in hand with granting it the power to circumvent, and not simply cut through, legal and regulatory requirements, making the role of military fixers even more attractive—or unavoidable—to civilian companies. Indeed, the latter may co-opt EAF retirees to leadership positions, as the International Company for Airports (owned by Egyptian multinational Kato Investment Group) did when it appointed Major General Hani Rashad ‘Oqab to head its board of directors in 2014; ‘Oqab subsequently joined the board of EMAC Holding Company for Investment, a subsidiary of Kuwaiti company Kharafi, which has a forty-year build-operate-transfer contract for Marsa ‘Alam International Airport on the Red Sea.16

Gaining Entry

The officers’ republic secures other kinds of footholds in the private sector. This is achieved in part through the membership of military-affiliated companies in relevant chambers of commerce. But retired officers enable additional, mutually beneficial relations between formally registered military companies, privatized and publicly owned state companies, and private firms. The automotive industry demonstrates this particularly clearly, given the “exceedingly high concentration of cronies” who occupied 95 percent of the related ISIC4 subsectors in 2016, according to political economists Ferdinand Eibl and Adeel Malik.17 Production, import, and licensing policies and de facto practices underpin what in effect remains a captive, rent-seeking market for all participants, both public and private. And so what could have been useful economic synergies function instead as self-serving symbiosis.

The military economy’s first serious foray into the sector was spearheaded by Arab American Vehicles (AAV), a joint venture by the Arab Organization for Industrialization and Daimler-Chrysler in 1977.18 But this consisted mainly of assembling kits supplied from the United States and Korean, French, and Japanese cars in small numbers.19 Then defense minister Abdul-Halim Abu-Ghazalah sought to acquire a more direct military stake in the sector in the 1980s, with the result that Egypt was allowed to set up a production line assembling construction vehicles at the M1 tank plant established with General Dynamic for the domestic market after 1992.20

Privatization changed the structure of the automotive industry considerably after 1991, but the expansion of the officers’ republic has ensured a continuing and significant military presence. For example, Major General Hussein Mostafa, former head of the AAV, became executive director of the Egyptian Automobile Manufacturers Association, which groups private companies assembling or importing vehicles, as well as feeder companies, a position he held until February 2018.21 The association was headed by another EAF retiree, Major General Hasan Soliman, until his death in October 2018. Soliman was also a long-time board member of the General Union of Chambers of Commerce and head of its branch for automobile traders and dealers. He additionally headed the al-Amal Group for the Manufacture and Assembly of Cars, which was the distributor for the state-owned giant Nasr Automotive Manufacturing Company in 1970–2001 and now claims to be the biggest importer and trader of cars in Egypt, with exclusive dealerships for several foreign car brands.22 Both Mostafa and Soliman were also founding members of the Egyptian Council for Cars, which was launched in June 2015 as an umbrella lobbying body for manufacturers, traders, feeder industry, and service and maintenance corporations.23

The automotive industry illustrates the conveyor belt that takes EAF officers from military-affiliated bodies into the commercial sector. Retired EAF officers appear on company boards or in significant staff positions, especially in public business sector companies such as Engineering Automotive Manufacturing (EamcoEG), Misr Company for Car Trade, and Auto Manufacturing and Repair. As this shows, the automotive market remains heavily influenced by state agencies, nearly three decades since the start of privatization. The hold of EAF retirees on public business sector companies is such that, when the retired major general heading Misr Company for Car Trade head died in November 2016, he was immediately replaced by another.24 This symbiosis of company management and the officers’ republic may also explain why Misr and Nile companies remain separate despite a 2010 decree by the holding company merging them, suggesting that influential military interest groups may have seen the merger as a threat to their sinecures and resisted it. The Holding Company for Maritime and Land Transport, to which these public sector companies belong, is also headed by an EAF retiree. Other officers have headed the automobile branch of individual chambers of commerce or sat on their boards of directors, extending their influence in the sector.25

Straddling by former EAF officers has moreover created an influence loop in which military actors are involved not only in automobile production and sales but also in planning and formulating strategic policy decisions for the sector. This was made evident when the Egyptian Auto Feeders Association in July 2016 announced an initiative to boost national production to 1 million cars annually.26 This seemed fantastically ambitious, vastly exceeding current output or capacity, which has been variously estimated anywhere from 93,000 to 325,000 vehicles annually, with as few as 24,000 assembled in 2018. It would have meant increasing exports to between 700,000 and 900,000 vehicles a year, since local demand has never exceeded 300,000, and indeed was only 100,000 in 2017.27 But the ambition reflects the mindset of industry leaders who wish to appear responsive to Sisi’s directives, and who seek reductions in demand for foreign currencies and a parallel increase of local content in manufactured goods.

Senior serving and retired military officers were deeply engaged on both sides of the ensuing struggles over the strategic shaping of the industry, and over such thorny issues as the advisability of reviving the ailing former flagship, Nasr Automotive Manufacturing Company—struggles that brought out latent divergences over strategic and commercial goals between different sectors or interest groups within both the military economy on the one side and the public and private economic sectors on the other. When the Central Bank of Egypt and Ministry of Investment formed a committee in December to reconcile divergent views on how to develop the sector, they appointed a retired EAF major general to head it and another as a board member.28

Private Security

Large numbers of EAF officers went into early retirement following the 1973 war and 1979 peace treaty with Israel, generating a pool of expertise for the new breed of private security companies, which expanded with economic liberalization in following years.29 But while genuinely private companies like the multinational Group 4 Securicor get most of their business from the Egyptian private sector, those affiliated to, or promoted by, the EAF (and Ministry of Interior) dominate public sector contracts.30 The perception that they are powerfully connected moreover ensures they additionally win a significant share of contracts from private businesses.

Large numbers of EAF officers went into early retirement following the 1973 war and 1979 peace treaty with Israel, generating a pool of expertise for the new breed of private security companies.

The replication of rent-seeking patterns is clear in the case of Care Service, which was founded in 1979 to provide typical services ranging from security, protection, and money transfer to office cleaning. It has held on to its advantage ever since: in 2014 it was among the top three market leaders, with a 30 percent share, and boasted clients such as HSBC bank, British Airways, and KLM in addition to major government bodies.31 According to the company website, it had a workforce of 35,000—including “many generals” according to several sources—and enjoyed an annual turnover of EP500 million ($84 million) in 2011.32 Its head, Major General Adel Amarah, stated more conservatively in 2015 that the company had over 25,000 employees (split evenly between security and cleaning and environmental services), but this may have excluded Care Service operations in Kuwait, the UAE, and Saudi Arabia. Amarah anticipated at the same time that company turnover would reach EP350 million (worth between $32 million and $49 million due to the pound’s devaluation) by the end of the year (supposedly following 100 percent growth in the private security sector since 2011).33

Discrepancies in reported income and employment reflect the opacity of private companies like Care Service, which are not obliged to publish financial data. Indeed, the home page on its website giving its turnover in 2011 has not been updated since then, a good indicator of a company affiliated with sovereign bodies in Egypt such as the Ministries of Defense or Interior. More pertinently, the company head is a former military intelligence officer who was assistant minister of defense and a member of the Supreme Council of the Armed Forces in 2011.34 He additionally heads the private security companies’ branch of the Cairo Chamber of Commerce, another EAF access route into the private sector.

Care Service has moreover been awarded no-bid contracts by direct order, typical of economic agencies affiliated with the EAF or GID. These contracts included one in April 2013 to service three government hospitals in Sinai, where economic investment and business contracts are tightly monitored and often controlled by the EAF; this may be why Care Service facilities in al-Arish came under attack by Islamist insurgents in January 2016.35 The synergy was also apparent in the company’s interest in securing services contracts for Egypt’s megaprojects, which are managed by the MOD; in one example it reportedly received an EP43 million contract to build low-income housing funded by the UAE.

In 2015, the director general of the NSPO’s security company, still known by its old name of Queen Service (rather than Nasr Company for Services and Maintenance), made the familiar claim that it provided many services at “one-third the cost of competing companies in the private sector.”36 The company’s access to the virtually free labor of EAF conscripts should have made it considerably cheaper, but even so it faced growing competition from genuine private sector companies. By then, between 200 and 500 companies were estimated to have joined the private security sector, although as few as fifty were properly registered, with a combined workforce of between 70,000 and 120,000.37

Predictably, some of these companies were set up by EAF retirees, such as Firewall Security Consultants, which was founded in 2012 by a former Special Forces officer.38 In mid-2015, the deputy head of the Protection and Security Branch at the Ministry of Interior (MOI) expected the majority of independent private security firms to close, while new ones run by former EAF and police officers entered the market.39 Illustrating their growing assertiveness, EAF-affiliated private security companies replaced existing civilian contractors for housekeeping and grounds cleaning services at the American University in Cairo in July 2017.40

The most significant beneficiary of the growing private security market has been Falcon Group International. Established in 2006, various sources claim its workforce grew to 4,000 by 2011, and to between 6,000 and 12,000 by 2014. By then, it was reported to have a turnover of EP2 billion (approximately $283 million, as the pound had devalued), representing 45 percent of the market; this cannot be confirmed, but the company claimed in 2015 to have acquired 54 percent of the private security market.41 What is certain is that it has picked up many of the new contracts generated by the intensified securitization of public spaces since the military takeover in July 2013 and Sisi’s election to the presidency in May 2014. This trend greatly expanded demand for private security companies, which it has scrambled to fill. Falcon Group provided security at Sisi’s electoral campaign headquarters, and subsequently won a slew of contracts to provide site security for the second Suez Canal and fifteen state universities. In a new twist reflective of neoliberal policies, it has even been contracted by the Ministries of Interior and Defense to provide public security at sports events.42

Falcon Group is the product of an unusual mélange of the public and private sectors. It was founded by the Commercial International Bank, itself a joint venture established in 1975 between the state-owned National Bank of Egypt and the Chase Manhattan Bank.43 One of Egypt’s biggest businessmen, Naguib Sawiris, joined its board in 2008. Although its executive director is a civilian, the company is widely seen as a front for military intelligence.44 Reflecting its favored status, Falcon Group formed a joint venture with the Civil Aviation Ministry and other government agencies in August 2016 to complement security at Cairo International and Sharm el-Sheikh Airports, and in 2018 became the local certified biometric integrator for the German company equipping these airports with biometric gateways.45 The new venture, the National Falcon Company, reportedly contracted a British firm to train 7,000 personnel, potentially taking the mother company’s total workforce to nearly 20,000, and planned to sell training services to the private security sector in general.46 In 2015, Falcon had also become the agent in Egypt for Westminster Group, a UK-based global specialist security and services company, which claimed that Falcon provided security for “more than 26 Banks as well as many diplomatic organizations such as the United Nations and Arabic Embassies . . . [and] more than 1,250 facility sites.”47 A further sign of Falcon’s commercial success, and of the influence of its officer networks, was that it won the contract to inspect electricity meters in August 2017 and displaced the NSPO’s Queen Service company in supervising ticket barriers in Cairo’s subway service in December 2018.48

Possibly in response to lobbying by other agencies, Sisi issued a presidential decree in July 2015 allowing the Ministries of Defense and Interior to establish their own commercially oriented security companies to compete in the market.49 In late 2018, the Central Bank of Egypt was reportedly in discussion with a number of major banks over establishing a money transfer company in partnership with a “sovereign body,” a term used to indicate the MOD or MOI, and a few months later Banque Du Caire established a private security company in partnership with such a body.50 This new proliferation may also explain the award of the contract to provide security at the African Cup of Nations games in April 2019 to a new security company called the African Company for Security Guard Services, which had no previous history, rather than to Falcon Group International, which already provided this service for the country’s major football clubs such as Zamalek, al-Ahly, and al-Itihad.51 Ticketing for the African Cup of Nations games was also handled by a “sovereign body,” and Egyptian Media for Marketing and Production, a GID front company, partially organized the cup itself.52

But the sector so far remains a sinecure of Military Intelligence, as the profile of other companies confirms. Most prominent is the Egyptian subsidiary of multinational Group 4 Securicor, which has 6,000 personnel. Group 4 Securicor was headed by former Military Intelligence officer Major General Sameh Saif al-Yazal, ensuring him membership of the American Chamber of Commerce in Egypt.53 Yazal also headed the staunchly pro-Sisi For the Love of Egypt parliamentary bloc until his death in April 2016. Military Intelligence extended its reach in early 2018 when Falcon Group founded a new subsidiary, Tawasol for Public Relations, which has bought out, often under constraint, Egypt’s remaining private media outlets and is set to overhaul management of state-owned television and radio stations.54

Going Private

As the example of the media sector shows, evolving military–private sector relations and the heating up of the military economy have generated rapidly widening opportunities for EAF officers to launch their own commercial activities. In many cases these are legitimate enterprises established by retired officers capitalizing on their specialist skills and connections, but a gray area has also emerged in which retirees and colleagues who remain in active service form front companies in order to capture contracts. Once again, this derives from a pattern established in previous eras, when bogus private sector firms were registered in order to get allotments of subsidized commodities or imports, which they then sold on to legitimate ventures, and when public sector bodies abetted the practice by purchasing goods or services from bogus firms.55

An example of retirees successfully branching out on their own is Maridive, a global company with four subsidiaries operating in the oil and maritime sectors that was founded by a former naval officer. But the Alexandria Stevedore Company presents the more common kind of success story: formed in 1984 by former EAF and port authority officers, it has been accused by the stevedores’ labor union of illegally monopolizing warehouse facilities.56 According to a former administrator in a foreign oil and gas company operating in Egypt, the Alexandria Stevedore Company was one of several bodies, including the port authority and customs department, that had to be bribed in order to clear imported machinery and supplies for which official fees had already been charged; EAF officers handled all transactions, both formal and informal, for an additional handling fee.57

Military ties are more obscure in other cases. According to an Egyptian political economist, EAF personnel benefit from “private companies that they don’t own. An example is courier services, where the profit per unit is low but volume is big, because everyone in the military sphere gets to use these same services, that is, military personnel, their relatives, and their friends. These are informal ties, rather than institutionalized ones, but of course they create jobs, helping people to employ sons or daughters.”58 Another analyst notes that in Nasr City, the largely MOD-owned residential urban neighborhood of Cairo launched in 1958, minor works such as plumbing or electrics are contracted by direct order to designated subcontractors.59

The General Intelligence Directorate offers further insight to the functioning of front companies, as it is closely intertwined with the EAF, which provides a majority of its officers. Analyst Abdel-Fattah Barayez asserts, for example, that “the company with around 70 percent of internet capacity in Egypt is somehow owned by [the GID],” which is also influential in the telecommunications regulation agency and owns an intermediary gas export company.60 He also cites the testimony in court of a former head of the General Authority for Petroleum that the GID owned al-Sharq Company, which exported gas to Jordan.61 Some public business sector companies are also thought to be fronts, such as those under the Ganoub al-Wadi Holding Company label. Ahmed Ezzat, a former GID officer who turned whistle-blower following Mubarak’s ouster, moreover claimed in September 2011 that the profits of these companies were going to high-ranking officers in the service.62

What remains unclear is whether the private companies winning subcontracts are merely founded by EAF officers in their personal capacity and for their private gain, or if some act as fronts on behalf of the MOD or other military agencies, using their funds and channeling income back to them, in the way that GID sets up its front companies. Generally, the evidence available suggests that the MOD does not operate venture capital in the same way, possibly because it has much greater opportunity and leverage, both legal and de facto, to enter major economic sectors and markets openly. And given the modest lump sum payments that even senior officers receive on retirement, it is unlikely that they are able to capitalize companies fully, even if they club together with fellow retirees—or with officers still in service.

EAF officers who act as intermediaries and clearing agents on behalf of private companies—both Egyptian and foreign—certainly receive off-the-books fees when dealing with public agencies or providing introductions. But EAF officers still in active service may well also be establishing small companies, registered in the names of family members, and using their direct connections and insider knowledge to win contracts (and possibly selling them on), thus securing lucrative income streams. Commanding officers in the EAF’s “civilian construction brigades” and their subordinate “platoons” and site engineers involved in military-managed construction projects have the discretion to award contracts for minor projects (or parts of larger ones), and may do so on the basis of personal relations or receipt of bribes to companies so small that, despite being registered, lack an office address, permanent staff, or the requisite skills and machinery, resulting in padded costs and the use of inferior materials.63

Swimming With the Whales of the Nile: Military Relations With the Private Sector

Access to state land for business use has been identified by numerous economists and financial institutions such as the International Monetary Fund as one of the most important impediments to private sector development in Egypt.64 And because this is under the control of the MOD, both directly through its veto power over licensing land use applications and indirectly through its role in the National Center for Planning State Land Uses, this constitutes the most obvious and significant example of military leverage over civilian actors (including government agencies). The military has also taken full advantage of the discretionary legal and regulatory frameworks and de facto practices that, while not primarily of its own making, have offered it significant leverage over other economic actors. So much so that the International Monetary Fund departed briefly from its normal public reticence to warn openly in September 2017 that private sector development and job creation “might be hindered by involvement of entities under the Ministry of Defense.”65 Together, these factors have contributed to the severe distortion of market incentives and of the structure of the private sector.

At the level of individual private companies, however, mutual benefit has characterized relations with the military far more often than rivalry or antagonism, generating favoritism and cronyism. This is largely explained by the continuing reliance of private businesses on public procurement and works contracts, which accounted for approximately 27 percent of GDP in 2003 and 31 percent in 2016, and on state agencies for key resources such as access to land and import licenses for intermediate goods.66 Furthermore, as Khalid Ikram notes,

government interventions through laws and regulations in many sectors remained so widespread that they virtually determined the level and composition of output, even though formally these sectors remained in the hands of private decision-makers. The “footprint” of the government in the Egyptian economy is much more extensive than might be inferred from traditional criteria, such as the ratio of government expenditure to GDP.67

Consequently, the nature of the military’s relations with the private sector has been a function of the relative rise or decline of its political preeminence within the governing system and its level of penetration of the state apparatus in any given period. But a significant shift has been under way since 2013, as the military’s considerable economic, bureaucratic, and political autonomy allows it to reshape much of the context within which the private sector operates. Its accelerating expansion in a number of economic sectors that have long been dominated by private companies is turning it not only into a direct competitor but also into a disruptive market actor as its behavior is not conditioned by normal calculations of commercial cost-benefit. In parallel, the military has realigned its strategic relationships with big, medium, and small businesses.

An Enduring Relationship

The era of nationalization in the early 1960s laid a pattern of relations between the military and the private sector that endures today. Paradoxically, for decades its core was the mostly cozy arrangement in which ascendant military-bureaucratic strata and the private sector extracted both licit and illicit incomes from the public sector and from import trade. Ironically, the 1961 socialist decrees had the perverse effects of simply transferring many private sector employees into the newly nationalized companies and of extending corruption from the military into the rapidly expanding civilian bureaucracy.68 The discrediting of the EAF in the 1967 defeat by Israel and the introduction of controlled liberalization and foreign investment under Sadat’s inifitah policy from 1974 onwards shifted the relative weight of each: space expanded for private economic actors to flourish in select sectors, leaving the military to following on their coattails opportunistically.

The era of nationalization in the early 1960s laid a pattern of relations between the military and the private sector that endures today.

The historical trajectory confirms that interactions between the military and the private sector were a function of the latter’s relationship with the Egyptian state more broadly. Political scientist John Waterbury observed of the Sadat era that “whatever segment of the private sector one looks at, its interpenetration with the public sector is striking.”69 He added that contracting and construction were especially “dependent upon the enormous volume of business dealt out by the state,” and further noted that for their part public sector managers were mostly “willing to work with the private sector, particularly through subcontracting arrangements, with the comfortable assurance that the private sector was legally subordinate to and effectively prevented from competing with the public sector.”70 As the military economy commenced its growth path under Mubarak in the 1980s, Robert Springborg concluded that its “alliance with public and private sector enterprise and the proliferation of arms industries creates a class of military, and military dependent, munfatihun [commercial middlemen].”71 By 1990, a distinct segment of business people were being “awarded lucrative contracts from the military for a variety of goods and services,” according to an area handbook published by the U.S. Library of Congress.72

The privatization program launched in 1991 had a more far-reaching impact, by breaking the monopoly of the public sector on command of the economy and enabling the private sector to reemerge as a major economic actor. Businessmen allied to the Mubarak regime were further enriched over the next two decades as he consolidated his personal power, giving rise to their sobriquet of “whales of the Nile.” Conversely, the military was marginalized politically as the president turned to the MOI as the chief agency for domestic repression; the MOI budget and manpower grew at faster rates than the MOD’s throughout this period.73 The military was compensated with the expansion of the officers’ republic and increased statutory power over use of state land, which it used to extract income from the private sector. But control of the larger part of public funds and assets shifted to different hands, limiting the military’s share of income streams and fueling its resentment of the crony businessmen clustered around Mubarak, his son Gamal, and the governing National Democratic Party. This legacy has shaped the military’s evolving approach to dealing with private sector contractors since it was catapulted into a position of political primacy by the 2011 revolution and 2013 coup d’état.

Political Connectedness and Military Leverage

The two decades between the launch of privatization and the end of Mubarak’s rule were marked by the emergence of many politically connected firms.74 Cronyism intensified in parallel with the increasing concentration of legal authority over resources such as land in the MOD’s purview, and with expanding penetration of official regulatory and economic agencies by the officers’ republic. This laid the foundation for a similar parasitical relationship between the military economy and parts of the private sector, albeit also for growing tensions. Much of this rent-seeking behavior focused on powerful civilian actors: Mubarak; his son Gamal and the Policies Committee of the ruling NDP that Gamal headed; and wider NDP networks in parliament, chambers of commerce, and elsewhere. The more successful private companies in the 1991–2011 period were those that drew heavily on this group (rather than the military) for their board membership; penetration of the public sector offered the military leverage and the opportunity to extract income from relations with the private sector, but did not confer control.

The anchor of political connectedness, which makes it so necessary and rewarding in the context of the Egyptian economy, is what economists Ishac Diwan, Philip Keefer, and Marc Schiffbauer call the “mechanisms of privilege.” These include trade protection, energy subsidies, access to government land, and favorable regulatory enforcement, as well as better access to finance, tax advantages, preferential access to government contracts, and easier licensing requirements.75 Both private and publicly owned companies that are politically connected enjoy multiple regulatory and fiscal advantages over possible competitors. The military enjoys all these privileges, but more important is that it can extend them to its favored private partners and subcontractors.

Table 3: Quid Pro Quo in Military Relationships With the Private Sector, by Category
  Military Seek Private Sector Benefit Private Sector Cost
Big business Capital, technical skills/know-how, technology, access to foreign capital, and partnerships in higher tech or capital-intensive projects Large contracts and political connections Dependence on military goodwill in non-competitive markets, limited opportunities in sectors where military has their own interests or favored partners
Medium-sized business Volume of output (delivery) in low-tech projects (e.g., construction of housing and highways) Award of contracts on non-competitive basis and assurance of future contracts Compelled to accept low profit margin, absorb losses (e.g., due to exchange rate fluctuations) or undertake work for free/delayed payment for work completed
Small business Volume of output (delivery) in low-tech projects, and consolidation of social alliance. Illicit income (bribes) for military engineers and officers with discretionary power to award small contracts or approve sub-standard materials Award of contracts on non-competitive basis, ability to win contracts through bribes or personal connections, and use of poor quality materials Low value added, low development of technical capability and capital, poor prospect for future growth

As a result, rent-seeking must have constituted a main form of military income generation throughout this period. In contrast, the number of formally registered military businesses and the volume of their output grew only modestly. Furthermore, much of their activity was also rentier: privileged businesses were given access to subsidized inputs of military factories to assemble goods such as electronics and enjoyed protection from possible competitors.76

Gifts of land and housing moreover became a centerpiece of political patronage amid the rampant speculation in real estate that characterized this period. It became common for businessmen to buy large areas of land in or around Cairo and other main cities in order to gift parcels or sell them at below-market value to EAF commanders, as well as to governors and other high-level state officials.77 These acted as sweeteners to secure the land cheaply or to win government contracts; recipients might receive many such gifts, which they then sold on at full market prices. Politically connected businesses were also assured that their land would be supplied with electricity, telecommunication, and transport infrastructure at public expense, greatly increasing the land’s market value and enabling them to use it as collateral to raise bank loans.78 The MOD additionally capitalized on its control of land use and its ability to provide infrastructure in order to generate significant commercial synergies for the military economy.

The military’s relationship with the private sector is particularly significant because the latter accounted for 75 percent of GDP in 2009 according to the World Bank. But significant economic activity has concentrated in only around 20,000 out of 2 million nonfarm establishments, as economists Ishac Diwan, Philip Keefer, and Marc Schiffbauer have shown.79 They believe the formal military agencies have in effect become what they dub “a large crony market leader” for this 1 percent (the remaining 99 percent are too small to participate), at least in relation to projects in which they can award contracts.80 A review of these over the past six years, especially, reveals that public business sector and private companies that are politically connected—this time with the officers’ republic—receive bigger slices of the subcontracting market, with a much larger number of less productive “small firms that use vintage technologies to serve local market niches” making up the balance.81

Partnering with Big Business: An Ambivalent Relationship

The EAF’s return to center stage in Egyptian politics in 2011 reinforced the importance of political connections even further, as private companies that had military connections found their bids for contracts and applications for licenses expedited by the SCAF and saw their profitability increase.82 But the stage was also set for a discernible shift pattern of military relations with the private sector.

The EAF’s return to center stage in Egyptian politics in 2011 reinforced the importance of political connections even further, as private companies that had military connections found their bids for contracts and applications for licenses expedited.

Military ambivalence toward big business had intensified after the notably pro-business government of Ahmed Nazif was formed in 2004, prompting then minister of defense Tantawi to escalate his opposition to the privatization of certain state-owned companies and banks. Speaking in public three months after Mubarak’s ouster, SCAF member Major General Mahmoud Nasr cited “the interference of big businessmen in political life” as one of the causes of the “25 January revolution.”83 An example of those now targeted by the military was Mubarak crony Mohamed Aboul-Enein, whose Cleopatra Group, originally a manufacturer of ceramics, had partnered with the NSPO in its East ‘Owaynat land reclamation scheme in the late 1990s.84 Aboul-Enein was among several high-profile fugitives—such as steel magnate Ahmed Ezz and former arms and natural gas broker Hussein Salem—who were prosecuted and fled the country. All welcomed the military takeover of July 2013 and agreed favorable financial settlements for their outstanding court cases for corruption in return for being allowed back into the country, but none was granted full political and business rehabilitation. This may explain why Aboul-Enein later objected in public to the growing economic role of the EAF, arguing that it “is unacceptable that the military gets something because of advantages more than the normal investors.”85

Some relationships remained, nonetheless, although they also reveal ambivalence on the part of the military. Most prominent among the businessmen who survived the transition from the Mubarak era is Ahmad Haykal, second son of the famous former editor of al-Ahram newspaper Mohamed Hassanein Haykal. His Qalaa Holdings (formerly Citadel Capital) was one of a new breed of Egyptian companies that relied primarily on business markets and international partners for capital and thrived under the economic reforms of the 2000s, in contrast to the dependency of rent-seeking companies like the Cleopatra Group, on access to public contracts and resources. Qalaa’s partnership with the military became visible in 2009, when it purchased the National River Port Management Company from the MOD, making it the only private transport company operating along the Nile. The company was headed by a major general who had spent his last tour of EAF duty before retiring as chairman of a state-owned oil and gas company.86 Possibly thanks to its political connections, Qalaa Holdings was able to secure a major loan backed by the U.S. government’s Overseas Private Investment Corporation at the height of Egypt’s upheaval in 2011.87

But Qalaa Holdings also ran into difficulties. In 2010 it announced plans to build “an unparalleled river-transport network” to transport wheat, but was reported the following year to be struggling to get its fleet of barges operational.88 Qalaa Holdings had already contracted with the MOD’s Alexandria Shipyard in 2009 to build thirty river barges, but few if any were delivered as the latter had produced only nineteen in total by 2019.89 And although Qalaa Holdings’ fleet had expanded to forty-five by 2012, it faced competition from the MOD’s National Company for River Navigation, which claimed to have moved 2.5 million tons of cargo in 2018.90 The Nile Valley Authority for River Transport, a joint Egyptian-Sudanese governmental entity set up in 1975 and headed by an EAF retiree, also competed for a share of the cross-border trade.91 But the main impediment has been the failure of successive governments over the past two decades to implement ambitious plans to resolve physical and regulatory bottlenecks and develop Egypt’s waterways, in sharp contrast to the massive investment in military-managed highway construction.92 River transport still accounted for less than 1 percent of the total volume of cargo shipped internally in Egypt in 2012, as a result, while a study commissioned by the Organization for Economic Cooperation and Development in 2014 found that private investors believed they were being asked to bear too much risk.93

Nonetheless, Qalaa Holdings is positioned in sectors of primary interest to the military economy, acquiring stakes in firms “that have leading positions in the energy, cement and transportation sectors, among others” in 2015.94 It has also invested heavily in agricultural land development, food export, and river transport in neighboring Sudan, in part through its subsidiary ASEC Engineering and Management, dovetailing closely with the involvement of military agencies (and the GID) in the import of Sudanese crops and livestock for Egyptian markets. Qalaa Holdings also announced the expansion of transport infrastructure along the Nile and western Suez Gulf in 2015, which again coincides with similar investments previously undertaken by the MOD.95

The MOD later selected Qalaa Holdings’ subsidiary Mashreq Petroleum Company to take part in the East Port Said development megaproject, while Qalaa Holdings subcontracted the National Transport and Overseas Services Company (NOSCO), which is headed by a retired EAF major general, to provide heavy transport for the big petroleum refinery it was constructing in 2016 alongside the existing Mostorod complex (in operation since 1973) in Qalyubiyah Province.96 The fact that the new Mostorod venture was part of an $18 billion plan to build new refineries and modify existing plants, and only the second of eleven refineries in Egypt to be majority privately owned, indicates either Haykal’s privileged position or the importance of the capital, expertise, and productive capacity Qalaa Holdings could bring to bear.97 The involvement of the state-owned NOSCO moreover reconfirms the overlapping between publicly funded projects and the officers’ republic.98

That said, the main significance of the relationship with Qalaa Holdings is not cronyism, but rather the military’s shift toward partnering with companies that have both the technical expertise and the capital necessary to improve project success and delivery rates. This is evident in the MOD’s partnering with long-standing economic giants in several megaprojects it manages: Egyptian multinational Orascom Construction Limited, which won subcontracts for work in the Suez Economic Development Corridor and the new administrative capital in 2014 and 2015; Elsewedy Electric, the largest producer of electrical cables in Egypt and the Middle East; and the Arab Contractors Company, a former public sector company that is now globalized, which in 2015 was involved in the €2 billion Burullus port project in Kafr al-Sheikh Governorate (in which NOSCO was once again a subcontractor).99 The MOD has also relied on Arab multinationals such as Dar al-Handasah, whose Egyptian subsidiary was contracted in 2014 to design the master plan for developing the entire Suez Canal zone, to draft terms of reference for the canal expansion and to lead on the East Port Said development.100

As these examples show, the military has not sidelined big business completely. But it has eschewed an unambiguous alliance with those it regards as political or commercial competitors.101 Relations are especially uncomfortable with globalized businesses that have sought to put themselves beyond reach by moving the bulk of their operations and capital abroad as insurance against market fluctuations and political pressures in Egypt. Despite winning a share of public contracts awarded by the military, those businesses are very aware of being marginalized in economic decisionmaking.102 Orascom CEO Naguib Sawiris repeatedly expressed this in public in 2014, using television appearances to oppose EAF involvement in the civilian economy and demand that it focus on “protecting the country and paying attention to the disasters taking place in Libya and Iraq.”103 He pledged to invest $500 million in infrastructure and energy projects during the Sharm al-Sheikh investment conference in March 2015, which led to a slew of MOD-managed megaprojects, but later admitted that none of this amount had been spent.104

The military has not sidelined big business completely. But it has eschewed an unambiguous alliance with those it regards as political or commercial competitors.

The military has apparently sought to circumvent the political complexities of dealing with these big businesses by turning to both foreign investors and a new breed of companies combining Egyptian and international capital. A clear focus has emerged on attracting major investments from Europe, China, and India that can offer technology and capital to the new industrial parks and commercial complexes being established under military management in the Suez Economic Zone, for example. This offers military agencies and the officers’ republic commercial leverage thanks to their control of land use and the necessary permits, and also facilitates their access to private credit, which previously was more narrowly channeled to politically connected firms in the Mubarak era.105

Another example is Carbon Holdings, which undertakes extensive work in the Suez Economic Zone, and also in Ain al-Sukhna, which the military has turned since 2004 into a prime focus for massive investment in tourism, trade, and industry and their associated infrastructure. Founded and headed by Basil el-Baz, the son of one of Mubarak’s chief foreign policy advisers and a member on the board of Sisi’s Long Live Egypt Fund (discussed below), Carbon Holdings leverages connections with the national and international petroleum industry, counterparts in the UAE, Europe, and the United States, and international lending corporations to access investments and technology. Its board includes the co-founder and managing director of Qalaa Holdings, a former minister of petroleum and mineral resources, and chairmen of several Gulf businesses, reflecting a new nexus of politically connected domestic and foreign private capital with which the military prefers to deal.106

Teaming up with the Minnows: The Military’s Small and Medium Business Constituency

The pattern of military relations with big businesses reveals highly strategic motives, both economic and political. The same is true of the military’s effort to build a new constituency of small and medium enterprises, although in this case the objectives and calculations differ. For years, the MOD and affiliated agencies such as the EAF Engineering Authority have routinely outsourced work to small and medium-sized companies for projects that do not require advanced expertise and that are labor- rather than capital-intensive.107 The pattern has intensified sharply as the sheer volume of military-managed construction projects ballooned after 2013. Ostensibly a means of generating job opportunities and increasing economic growth rates, this has also led to a restructuring of rent-seeking and patronage networks.108 And for private companies that are too small to capture contracts through political connections, hitching their fortunes to the military’s wagon clearly constitutes a viable business strategy.

This is the backdrop to statements by military officials, such as those by the head of the EAF’s Megaprojects Department Major General Karam Salem Mohamed, who claimed in December 2015 that his department had given work to 198 big, medium-sized, and small businesses in its New Ismailiya City project, through which it had provided direct employment for 80,000 people and another 2 million indirectly.109 Two months later, the head of the EAF Engineering Authority, Major General Kamel al-Wazir, said that it had involved “1,000 civilian companies, 300 consultancy bureaus, and over a million workers and technicians” in 1,377 projects.110

Military agencies are responding once again to one of Sisi’s drives, this time to invigorate small and medium-sized businesses. This resembles their efforts to increase revenue and also their much-publicized contribution to his pet Long Live Egypt Fund, after prominent businessmen failed signally to help reach its target endowment of EP100 billion (then $5.4 billion) in 2014.111 But although the military has not displaced patronage networks centered on the presidency or other state institutions, its management of megaprojects and the extensive—at times exclusive—economic usufruct it enjoys in designated strategic zones such as the Suez Canal have deepened its symbiotic relationship with favored medium-sized and small enterprises while reinforcing impediments to the rest of the private sector.

Contractors working in Egypt confirm that in most large projects managed by military agencies, the work is conducted by dozens of small subcontractors, each of which may undertake construction of only one or two residential buildings or a few kilometers of highway.112 For example, the EAF’s Engineering Authority initially subcontracted work on the New Ismailiya City to ninety small companies in June 2015.113 But the most significant instance of the trend was the allocation of subcontracts for the Suez Canal expansion: not only did consortiums led by Mubarak-era companies or even former MOD partners such as the Arab Contractors Company or the Arab Academy for Science, Technology, and Maritime Transport fail to win the main tender, but two-thirds of the eighty-odd companies that initially received subcontracts were either former MOD subcontractors or, in a majority of cases, relatively or completely unknown.114 The military has also emphasized awarding licenses to small businesses and low-tech startups in the Suez Economic Zone. Little wonder, as analyst Maged Atiyah reported in 2015, that a common concern in Egypt was that “soon all small and medium businesses will be Army subcontractors.115 Although this is an exaggeration, it reflects a growing trend behind which lies a clear incentive structure for both sides. In order to win the work or gain access, subcontractors routinely pay bribes.116 But there are other trade-offs. EAF conscripts with specialist skills report being sent to work for companies, such as the Takmely Insurance Fund or the Delta Sugar Company, while private companies employ graduates of military technical schools or produce goods that military companies then market as their own.117

Military agencies and private partners both profit from the constant circulation of money through subcontracting and management fees. After winning massive government contracts to construct civilian housing in late 2013, for example, the MOD then subcontracted the National Banks’ Real Estate Company in January 2014 to build military housing. Ten of the company’s twelve contracts at the time were from the MOD (worth EP209 million in total—$30 million), and in April 2016 the company revealed it had received a major real estate investment worth EP250 million from the MOD, was working on another MOD project worth EP100 million in Nasr City (a district in Cairo on land previously owned by the military), and expected to be assigned work for a megaproject managed by the MOD.118 Similarly, Engineering Design Consultants constructed 1,000 residential units for EAF officers in Salam City on behalf of Nile General Contracting Company, which had been awarded the contract, and the 6th of October Panorama, this time directly on behalf of the MOD’s Military Works Department.

An Expanding Military Appetite?

Until 2015, military actors largely avoided economic sectors in which private firms made the principal contribution to GDP and job generation. Economic analyst Abdel-Fattah Barayez could still argue at the start of 2016 that the military was “virtually absent or retained a tiny share in a number of key economic sectors that grew considerably since the 1990s,” including “a wide array of manufacturing industries like cement, fertilizers, glass, ceramics, aluminum, and iron and steel, as well as key service sectors such as telecom and hospitality and tourism.”119 The military remained concentrated in nontradable sectors.

But hostile takeovers of Egyptian media since 2016 and military investments in producing tradable commodities in sectors previously dominated by private businesses point to a significant break with past practice. Already, by 2017 the Investment Climate Statement for Egypt produced by the U.S. Department of State noted that military-owned companies (in addition to state-owned enterprises generally) competed directly with private companies in many economic sectors.120 A mix of political and economic considerations shapes behavior, as these developments are intended to serve the Sisi administration’s efforts to control public space (in the case of media), provide public goods such as housing and affordable food to gain social support, achieve savings in megaprojects (as with steel and cement), and increase state revenues and exports. But military strategies have proved flawed in each, inflicting avoidable financial costs on both sides and political damage by alienating the private companies most directly affected.

Media: A Hostile Takeover

The MOD and allied agencies have acquired a commanding position in Egypt’s public and private media since 2015, though with mixed consequences. Military involvement in the sector stretches back to the Nasser era when EAF officers had a prime role in government media councils and other opinion-shaping bodies.121 Demilitarization under Sadat reduced their direct role and influence, especially in print media, as did the rise of privately owned TV satellite channels from 2001 onward. But military and security agencies have exploited the Sisi administration’s containment of the private media that proliferated after the 2011 revolution, for their own commercial gain. This has been facilitated by the continuing monopoly over radio and terrestrial television broadcasting held by the state-owned Egyptian Radio and Television Union, and its tight grip over private satellite broadcasters, who are only allowed to operate in designated “free zones.”122

The MOD demonstrated its interest in media soon after the SCAF assumed Mubarak’s powers in 2011, donating $58 million in budgetary assistance to the Egyptian Radio and Television Union (ERTU), which still had an EP19 billion ($3.2 billion) deficit in 2012.123 A retired EAF major general heads ERTU’s major satellite company, Nilesat (in which the AOI also has a 1 percent share).124 And when the government transformed ERTU into a general authority in December 2016, its new board included representatives of several bodies in which the MOD is represented.125 More significant has been the acquisition—through blunt, hostile takeovers—of several of Egypt’s most prominent private media companies. Others have been forced out of the market as military and security agencies gained control of media production companies and redirected their contracts to their newly acquired businesses.

Initially, the GID spearheaded the process, acquiring a swath of major news and entertainment, advertising, and production companies in 2015. Its investment vehicle was Eagle Capital for Financial Investments, a private equity fund that, according to investigative journalist Hossam Bahgat, manages all GID companies, including Black and White, which was commissioned by the ERTU to produce a patriotic daily television talk show.126 Military Intelligence also entered the sector aggressively, working with military advisers in the presidency. In January 2017, al-Asimah television network came under the management of the Cheri Media company, whose deputy head is a former EAF spokesperson.127 In August, al-Asimah and its subsidiaries were acquired by Falcon Group International, a front for Military Intelligence, which established Tawasol for Public Relations to handle its growing media portfolio.128 Tawasol immediately purchased al-Hayat private television network outright, acquiring DRN Radio and Home Media management company.129

Whether the push by Military Intelligence pointed to competition with the GID for income streams or consolidation of regime control over media is unclear. In 2016, a Military Intelligence officer joined the board of Youm7 newspaper, which was owned by a staunch Sisi loyalist, businessman Ahmed Abu-Hashima. But his firm, Egyptian Media for Marketing and Production, was forcibly bought out by the GID’s Eagle Capital for Financial Investments in late 2017, as investigative journalist and activist Hossam Bahgat painstakingly detailed.130 In addition to the newspaper, Eagle Capital acquired Abu-Hashima’s associated news website DotEgypt (DotMasr) and OnTV, which had been purchased from independent businessman Naguib Sawiris in 2016. Under its new management, Egyptian Media for Marketing and Production also bought al-Hayat network in 2018, presumably from the military-sponsored Tawasol. Another of its subsidiaries is the Sout al-Omma newspaper (acquired before the GID buy-out).131

In any event, acquisition of private media enabled the military both to invest capital and to provide employment and extra pay for both active-duty and retired officers who are embedded in media outlets and monitor their content. It also served a political agenda: the EAF’s Morale Affairs Department proudly announced in October 2017 that it had produced three feature movies “for the first time since the 1973 war.”132 And it further reflected both the drive of military-affiliated agencies to do the president’s bidding in generating new revenue streams and the “gold-rush” effect as officers (and bureaucrats) vied to enter a lucrative sector; this could reach absurd proportions, as demonstrated by the Nile National Navigation Company’s foray into producing cinema movies, TV series, and musical clips.133 But the emphasis on propaganda and the poor quality of much of the production of military-controlled commercial media has severely affected their viability; by late 2018 they were reportedly cutting staff to reduce costs and looking for buyers in order to exit the sector.

Market Stabilization or Predation?

Speaking in April 2016, the head of the EAF Engineering Authority Major General Kamel al-Wazir justified military interventions in the steel and cement sectors as intended to ensure the stability of supply and prices, prevent monopolies in “strategic” sectors and commodities, and support the EAF’s work on the country’s megaprojects.134 The latter assertion was obviously true, since steel reinforced bars (rebars) account for 30 percent of construction costs and 10 to 25 percent of building costs in Egypt.135 But the rest of Wazir’s claims flew in the face of market realities. The steel and cement sectors are dominated by private firms, none of which enjoys a monopolistic position; furthermore, both sectors suffered from high rates of idle capacity even before military agencies increased their own capacity starting in 2016. Price and supply instability at that particular time were due to the coincidence of a severe shortage in national energy supply and dollar scarcity due to the sharp depreciation of the Egyptian pound, rather than to price-gouging by the private sector or to structural factors in those markets.

What military agencies have done is secure supply and prices for the megaprojects they manage, while insulating the production facilities they own from the challenges affecting the private sector. They are moreover able to reduce the most significant production costs compared to both private firms and to the last few public business sector companies still operating in these sectors. These include raw materials (especially when imported) and probably energy and fuel, which together account for 60 percent of total production cost, since the military benefits from customs exemptions, favorable exchange rates, and discreet discounts; labor, since the NSPO can resort to conscripts; and transport, which contributes heavily to fuel costs, since the military can utilize EAF vehicles for free, subsume fuel consumption under the defense budget, and avoid paying tolls on highways operated by the MOD or its subordinate agencies. Military agencies are moreover exempt from the value-added tax applied in 2017 and, by being able to draw on their own funds, would not have been seriously affected when the Central Bank of Egypt increased interest rates by 7 percentage points between November 2016 and July 2017, raising the cost of borrowing for private companies.136

These advantages have positioned military agencies to undercut prices in the rest of the market, and so their expansion into the steel and cement sectors appears predatory. Rather than break monopolies, they have generated a monopsony: as a large buyer they can dictate prices of commodities, while also producing them. But they are only competitive because the playing field is uneven. Forcing commodity prices down under these conditions damages the private sector, with which Sisi seeks good relations in the hope of increasing investment and broadening the political base of his regime, and discourages new investors, which the government has sought since 2016.

As significantly, the military’s investment in the steel and cement sectors is only feasible so long as it is guaranteed a return thanks to the massive demand generated by megaprojects.

As significantly, the military’s investment in the steel and cement sectors is only feasible so long as it is guaranteed a return thanks to the massive demand generated by megaprojects. As that tails down, the military will either be stuck with dead capital and the permanent drain on its funds from maintaining its large cement plants, or else have to cover its sunk costs by competing aggressively for market share in the rest of the civilian economy, further damaging and alienating the private sector. The free availability of military-produced cement in civilian markets (rather than selling it directly and exclusively to military-run construction projects) suggests that this kind of competition is already happening.

Steel

The steel sector bears out these dynamics. Local production capacity has consistently exceeded consumption since 2000; total national output of rebars for construction was some 6.5 million tons annually by 2017, leaving up to 35 percent of capacity underutilized by conservative estimates.137 Even after megaprojects increased demand, this was easily met by existing capacity; output reached 8 million tons in 2018, but overall capacity was estimated at 12.8 to 13.5 million tons.138 The rate of underutilization had increased to between 38 and 59 percent of capacity, depending on which source is consulted. When NSPO head Major General Mostafa Amin claimed in August 2018 that his agency had stepped into the steel sector to increase national production because overall supply was insufficient, this was patently false, and by a very wide margin.139

For decades, the defense industry was fed by the huge steel factory launched by Nasser in 1954. Military production of steel was largely confined to a large rolling plant belonging to the MOMP’s Abu Zaabal for Engineering Industries, which commenced production in 2010.140 However, this was only a semi-integrated plant producing semifinished products, and it was not until the NSPO acquired the Suez Steel Company in 2016 that it finally gained the ability to produce finished steel products needed for construction.141 Suez Steel was the country’s second-largest producer but had run up losses of EP1.48 billion by June 2015.142 The NSPO bought the 40 percent share of former owner Gamal al-Garhy for EP3.8 billion, paid off over EP5 billion in loans owed to local banks, and raised the company’s total capital to EP13.9 billion (then $1.138 billion).143 This included EP2 billion in new investment, partly from banks; it is unclear if the NSPO provided the balance from its own funds, but it ended up with an 82 percent share of the company after its restructuring.

Having acquired a significant share of the sector, the NSPO reportedly planned to take Suez Steel’s annual production to 1.4 million tons of rebars.144 It may have been to finance this expansion that Suez Steel reportedly sought a further bank loan of EP1 billion in June 2017.145 Ostensibly, the aim was to replace the 800,000 tons of capacity of Misr National Steel (Ataqah), a sister company of Suez Steel that remained in Garhy’s ownership, but this simply meant adding further production capacity to an already oversaturated sector instead of utilizing existing private sector capacity more fully.

The MOD behaved in much the same way when it acquired a controlling stake in the Egyptian Steel company in November 2018. Only a year earlier, company CEO and co-founder Ahmed Abu-Hashimah had confidently predicted that it would have a 20–25 percent share of Egypt’s market, with total production capacity of 2 million tons.146 But the shortage of gas and electricity that struck industrial sectors severely in 2016 took Egyptian Steel into crisis and, like Suez Steel, it came under pressure to repay over EP3 billion in bank loans. (As noted above, Abu-Hashimah had previously acted as a front man for the GID in purchasing a swath of private media from 2014 onward, but was forced out after racking up significant losses, and so his buyout from Egyptian Steel may have reflected a similar behind-the-scenes dynamic.) In a restructuring deal reached in November 2018, EP1 billion of debt was paid off, Qatari co-founder Sheikh Mohamed bin Suhaim Al Thani was bought out (reputedly he held a 70 percent share), and the company’s total capital was raised.147 Major General Hisham al-Khatib, assistant for armaments to the minister of defense, was appointed head of Egyptian Steel, with Abu-Hashimah as deputy.

In the cases of both Suez Steel and Egyptian Steel, the military could claim that it was saving ailing companies. But this had little to do with breaking monopolies, stabilizing steel prices, or assisting the development of the wider steel sector. Rather, the NSPO and MOD insulated themselves from exposure to everything that makes steel a high-cost, high-risk venture for private companies in Egypt: competition from imported rebars, dollar and energy shortages, fluctuation of exchange rates and global market prices (including for raw materials that must be imported), and higher fuel consumption. The result is to create a bifurcated sector in which the structure of risk and opportunity differs significantly for the country’s military and civilian (and mainly private) parts; the former moreover offers its products freely to civilian consumers, while creating market conditions that preclude a reverse flow. With total capacity of 1.55–2.3 million tons, military ownership in the sector has leapt to at least 12–16 percent; this should be revised to 27 percent if the planned expansions in Suez Steel and Egyptian Steel, which would take their combined capacity to 3.52 million tons, have been implemented.

The NSPO and MOD achieved this outcome, on the one hand, by acquiring the means to produce not only rebars but also the intermediate products from which they are made: billets, which smaller companies must import from abroad, making them vulnerable to exchange rate fluctuations, and sponge iron, a cheaper substitute for steel scrap, which is expensive in Egypt.148 Reflecting their vulnerability, smaller rerollers of imported billet halted production and sales in response to the increase in customs duties in April 2019.149 On the other hand, military-owned companies are assured of high demand from megaprojects and can therefore utilize capacity at higher rates even if this means stockpiling output, since they can draw it down to meet guaranteed future orders. These companies can also force commodity prices down by using their swing capacity to undersell private competitors in their own markets, in theory benefiting consumers, but only at the cost of forcing private companies either to sell below cost (absorbing significant losses), reduce sales (incurring costs of stockpiling), or cut production (increasing their ratio of idle capacity).

Cement

The pattern has been identical in the cement sector. It, too, is dominated by private companies, and suffers from considerable oversupply. Typically of economic data for Egypt, estimates of total production capacity vary widely, ranging from 68.5 million tons a year in 2015–2017 according to official figures submitted by the Egyptian foreign ministry to the Organization for Economic Cooperation and Development in May 2018, through 79 million tons estimated by industry sources, to 83.5 million tons according to the Cement Association of the Egyptian Federation of Industries.150 Consumption has been relatively steady, even after the launch of the country’s megaprojects: 50 million tons annually in 2013 and 2014, rising to 54–55 million tons in 2015–2018.151 Until 2018, internationally owned companies accounted for 52 percent of the market, Egyptian private companies for around 40 percent, with the publicly owned National Cement Company and the NSPO’s al-Arish Cement Company making up the balance.

As in the case of steel, military officials presented a distorted picture of capacity when justifying new investments in the cement sector. The NSPO inaugurated its first two production lines with a total capacity of 3.2 million tons in April 2012, accounting for 6 percent of national output in 2015.152 But in 2016 it made two major commitments: to double capacity of its al-Arish plant to 6.5 million tons annually by 2018, and to add nearly 12.5 million tons more in 2018 by building an entirely new plant in Beni Suef (which is also owned by al-Arish Cement Company) at a cost of $1.12 billion.153 NSPO head Major General Mostafa Amin explained that expansion was needed in order to meet predicted demand of 86 million tons by 2022, omitting the fact that this target could already be met almost fully by existing capacity.154 Indeed, even with NSPO plants at full production, idle capacity in the sector as a whole is expected to run at 19 percent by 2020.155

Once again, sanguine projections overlooked the adverse consequences to the private sector and to government plans for the cement sector—as well as the future financial risk to the military. Buffeted by energy and dollar shortages in 2016, which slowed demand for construction materials, as well as stiff competition in export markets from regional producers with lower input costs, most cement firms experienced mounting losses in 2017 and 2018.156 According to a report by financial services company CI Capital, cement prices rose by 20 percent in 2017 while the cost of production increased by about 37 percent, but producers were unable to pass the increase on to consumers. Many economized by stockpiling clinker, the intermediate product in the manufacture of cement, rather than turn it into the final product, although this added to the strain on their capital. National inventory stood at 5.0–7.1 million tons by the first quarter of 2018, and may reach 15.7 million by 2022.157

Faced with its own deep inefficiencies, the publicly owned National Cement Company suspended production in November 2017, and finally went under less than a year later.158 As a Reuters special report also noted, Suez Cement and Alexandria Cement, majority owned by German and Greek companies respectively, saw their losses rise by 100 to 1,000 percent compared to 2017; the publicly owned al-Nahdah Cement, which had claimed a profit in 2017, was compelled to reduce production at the start of 2019 and to stockpile its clinker.159 In August, a report by Egypt-based Pharos Investment Banking anticipated that market demand was inadequate to save smaller companies, which could be forced to close over the coming year.160

Rather than secure the supply of cement and stabilize prices by helping the private sector to cope with marked volatility in 2016–2017—or by taking over the ailing National Cement Company and rehabilitating it, approximately as it did with Suez Steel and Egyptian Steel—the NSPO exploited its relative insulation from negative externalities to expand its own company. In doing so it completely disregarded the government’s parallel effort to expand the cement sector and undermined it. In 2016, the Industrial Development Authority had offered fourteen licenses to establish or expand cement plants but was only able to sell three by 2018 (adding an eventual 6 million tons of capacity annually).161 Both local and foreign companies were reluctant to invest in a sector with an estimated oversupply of 30 million tons a year.162 Under pressure from private cement companies, which claimed their sales had plummeted by 50 percent over the preceding few years, the government pledged in July 2019 to subsidize their production, meaning that the public purse would absorb the costs of the military’s entry into the sector.163

Pushing the NSPO’s share of overall capacity to some 23 percent in an industry estimated to account for 10 percent of Egyptian manufacturing and 1 percent of GDP may have appeared tempting from a commercial perspective.164 But attaining market viability has other requirements that the military has shown it neither grasps nor controls. In theory, military production can help correct markets and prices, much as governments do, but only if it is accompanied by extensive consultation, coordinated effectively with other policy instruments, and carefully calibrated. Instead, military interventions in the steel and cement sectors have been market-distorting and self-defeating, both financially and politically. According to a former company official cited by journalist Omaima Ismail in September 2019, the new Beni Suef factory was operating at just 40 percent of its capacity.165 Some realization of this may explain why the NSPO has not yet followed up on statements by its director general and Sisi in August 2018 that the agency would put shares in its al-Arish Cement and Suez Steel Companies for sale on the stock market, a proposal repeated by Sisi in October 2019.166

Distrust, Crowding, and Diversion

Military partnership with private companies in the production of public goods and services under its management has contributed to economic value added in terms of capital investment, but has also led to several consequences that have been almost as damaging for private sector development when in harmony with each other as when they are in conflict. The political connections that have secured business for many companies have contributed more generally to stifling normal market competition and innovation. Whether the result of deliberately favoring cronies or of a misguided economic approach, the military is closing select markets to rivals by resorting to noncompetitive methods to drive down prices and siphoning off investment capital, thereby additionally reducing employment prospects (despite claims to the contrary).167 And even in an area that the military claims as a special interest such as the Suez Economic Zone, which could significantly boost national economic growth and industrial output, the military has neither resolved internal debates nor demonstrated the professional competence to develop the legal and regulatory frameworks for private (and primarily foreign) investment, despite six years of massive investment of both financial and political capital by both the president and government.

A problem for the military is that its objectives in working with the private sector are at cross-purposes.

A problem for the military is that its objectives in working with the private sector are at cross-purposes. At one level, it seeks capital, expertise, and equipment that it lacks, whether for publicly funded megaprojects it manages or for investment areas and industrial clusters of special economic interest to it such as Ain al-Sukhna. At another, it ostensibly seeks to assist the development of small and medium-sized businesses, in line with declared priorities of the president and the urging of international financial institutions. But in both cases the military’s primary aim is to generate revenue and growth to service the political needs of the country’s ruling coalition, and secondarily to capture rent to serve clientelistic networks while building up its own capital and assets base. This was at least marginally compatible with private sector interests up to 2013, but the transformation of military economic activity since then has put the relationship on a different trajectory. The problem does not lie so much in the scale, because military management of massive public works has also benefited private companies, as it does in the scope, because military agencies have imposed cost-sharing on the latter and also entered tradable commodity sectors aggressively.

Commenting in 2015, Noha Bakr, an assistant to the minister of international cooperation, argued once again that the military’s interventions were solely intended to protect the economy from market shortages and fluctuations, and that only surplus military output was sold to cover supply gaps in civilian markets, adding that “the products of the military factories have not disturbed the market or affected free market rules.”168 Minister of State for Military Production Mohamed al-Assar later underlined that 70 percent of MOMP projects were being undertaken in partnership with private companies; and sought once again in March 2019 to reassure the private sector that the ministry did not wish to take over or monopolize any industrial sector.169

The validity of these claims was already dubious in 2015, as various military agencies geared up to expand their economic role, but they are certainly no longer true now. As its forays into the media, steel, and cement sectors show, the military is on an expansionary path of acquiring, and then defending, stakes that set it in direct competition with the private sector. This is additionally demonstrated by the massive expansion of NSPO capacity for the production of processed marble and granite (discussed previously), and by the launch in August 2019 of a phosphate and fertilizer factory complex managed by military-owned Nasr Company for Intermediate Chemicals. That company has an annual production capacity of 3.45 million tons, greater than the entirety of Egypt’s expected total production of three million tons of chemical products by 2020.170

Relations with the private sector are further complicated by an unmistakable shift in perceptions and tone since the establishment of a new administration in July 2013. Big businesses that would normally regard autocratic rule as profitable and seek a special relationship have faced erratic behavior and contradictory statements from Sisi and senior military officials. An early instance of this was the president’s launch of the Long Live Egypt (Tahya Misr) Fund in 2014.171 Sisi hoped to build this into a “generations sovereign fund” with a capital of EP100 billion through investment in export-generating and labor-intensive projects, commercial partnerships, and private sector donations.172 But as he acknowledged, the fund had raised only EP5–EP6 billion by January 2015 despite donations from familiar EAF business counterparts such as Arab Contractors Company, Nasr City Housing and Development, Etisalat, and Orascom Construction Limited. The total value of donations reached only EP7.7 billion by March 2018, but by that time the devaluation of the Egyptian pound had reduced the dollar value of its endowment to below its initial level.173

In April 2015, then prime minister Ibrahim Mahlab appointed the head of the MOD’s Financial Authority as treasurer of Tahya Misr and an EAF brigadier general as its financial director.174 Whether as a result or not is unclear, but private businessmen have been pressured to donate to the fund, a practice that continues at present and one they resent, as interviews conducted for this report confirm. Indeed, even smaller businesses, such as hotels in popular tourist destinations, report being pressured to make monthly donations to Tahya Misr.175 The fact that Sisi felt it necessary to reassure business leaders in December 2015 that donating to the Long Live Egypt Fund was voluntary—and that they did not run a risk of seeing their businesses nationalized or confiscated—was a telling measure of the concerns his administration was generating, its need for their capital, and their limited actual investment.176 Yet when just a month later an official such as the governor for North Sinai (typically, a retired EAF major general) sought to explain the failure of development in the region, he blamed it on the private sector, accusing it of delivering less than 1 percent of projects when it was supposed to undertake 60 percent.177

No less novel is the shift in the functioning of political connectedness. In the Mubarak era, as economists Adeel Malik and Ferdinand Eibl have shown, sector-wide trade protection benefited both cronies and non-cronies operating in the same sector, and civilian companies could receive preferential treatment by entering sectors in which the military was present. But developments in the steel, cement, and industrial chemicals sectors since 2016 show a reversal of this pattern, as new protectionist tariffs have had starkly differentiated impacts, hurting private producers while benefiting their military counterparts.

The pragmatism and opportunism that largely governed relations between the presidency, military, and private sector up to 2011 have not been replaced entirely, but are being corroded. As economists Ishac Diwan, Philip Keefer, and Marc Schiffbauer argue,

Sisi has taken the route of a reversal to a hard-autocratic rule, including through rebuilding state dominance. In such a situation, the state is unlikely to trust the private sector. At the same time, Sisi has taken its distance from several of Mubarak’s old cronies, developing instead his own personalized network now mostly managed directly by the army. But as long as political risk remains high, a risk inherent in the “restoration” efforts built on a violent divide-and-rule-strategy, it is likely that this new group of cronies would remain narrow, and growth low.178

Besides reproducing the chronic distortion of market incentives, Sisi’s focus on megaprojects and the military’s expansion in established economic sectors intensifies the capital-dependent approach of the past, rather than encouraging the expansion and diversification of markets that private companies need in order to grow and of which they are a principal agent. Instead, they divert resources needed by the private sector in a manner reminiscent of the Nasser era. Then, the Aswan High Dam project significantly affected both public and private investment, leading to retrenchment in other sectors, and diverted them of needed building materials.179 Ironically, although the military has considerably expanded productive capacity of cement since 2016, numerous private developers complain that military-managed construction has drained markets of steel, tiles, wire, and other materials and resulted in the slow-down or suspension of private sector projects.180

Conclusion: Private or Military Capital to Build Egypt?

The military’s behavior in the economic domain is not all predatory, nor even predominantly so—yet. Rather, it reflects the reality of how much of economic activity in Egypt is still driven by the state and top-down decisions by powerful political actors, whose investment criteria and methods of evaluating economic utility are extremely crude.181 As a joint venture business adviser notes, the official approach puts an

emphasis on targets: “we will produce X tons in the next six months,” but without checking what the market needs or can absorb. When the state tries to help companies, it focuses on one and encourages it with a big contract, and then moves on to the next company and does the same thing—but this results in surges of output that don’t match what the market needs or can absorb.182

Khalid Ikram observed in 2006 that Egyptian economic performance and policies were shaped by “a narrow approach to project selection, in which the ability to produce a particular commodity could be all important, while the economic costs of producing it received only cursory attention.” His observation remains valid today, of an administration that understands the economy as no more than a collection of discrete projects and investments, and of the military that has been chosen as one of its principal tools.183

Western governments and international financial institutions abet this trend through a posture of nominal political neutrality that overlooks the real impacts of the Sisi administration’s policies on private sector development.

This is also the context for the preference of both the Sisi administration and the military to seek strategic alliances with foreign investors, rather than with Egyptian businesses who might evolve as competing domestic political actors. But as with the Egyptian private sector, a new pattern is emerging in relation to foreign companies as well. Chinese, Russian, Gulf, and some Western companies that feel politically protected or are not risk-averse (notably Italian, for example) have invested in economic development zones and in construction and industrial projects favored by the military. But as a Reuters special report in 2018 noted, other foreign investors continued to shy away from Egypt (despite a $12 billion loan from the IMF that should have laid the ground for economic expansion), due to concerns over the military’s tax and other advantages and the lack of credible arbitration in business disputes with it.184 As a result, what the World Bank assessed in October 2019 as “sluggish” foreign direct investment has been mainly directed to the oil and gas sector, leaving Egypt’s other productive sectors struggling with diminishing levels of private investment.185

The military is often no more than an instrument of presidential or governmental policy, but as it expands into producing tradables in significant volumes the likelihood increases that it will utilize its advantages to undersell the private sector and strive for greater market share in order to protect its investments and sunk costs. It is also likely to overinvest in quick-yielding activities as it becomes more embedded in the civilian economy, reinforcing the speculative trend already evident since at least the early 1990s, although this would be detrimental to encouraging the kind of private sector development that Egypt needs. At an absolute minimum, the military will fall back on the enclave it has greatly expanded since 2013, as is evident in the major trade-tourism-industry complex that it is putting together along the Red Sea coast. Partnerships with select private companies are integral to this trajectory, as is the military’s role in opening the door to foreign companies and government-supported agencies with even greater financial and technological resources to invest in strategic zones that are under near-total military control. Western governments and international financial institutions abet this trend through a posture of nominal political neutrality that overlooks the real impacts of the Sisi administration’s policies on private sector development, which they formally endorse as the key to resolving Egypt’s social and economic problems.

For its part, the military remains wedded to the notion that it has gained a usufruct to state-owned assets and indeed to national resources generally; rather than relinquish it, it is far more likely to double down.

Even if the military ultimately refrains from overextending, the potential consequences of the present policy course for the Egyptian economy are portentous. The World Bank estimated in December 2018 that Egypt needs $675 billion to cover infrastructure needs and financing gaps over the coming twenty years, but faces a shortfall of $230 billion that only private investment or commercial financing can meet.186 This is wholly dependent on creating an enabling environment, but highly unlikely on current trends. Sisi’s award of control of prime tourist real estate in dozens of Red Sea islands and at two main coastal locations to the MOD in August 2019 merely reinforced the message that private investors can only operate in one of the most lucrative sectors of the Egyptian economy if they work with, and through, the military.187 For its part, the military remains wedded to the notion that it has gained a usufruct to state-owned assets and indeed to national resources generally; rather than relinquish it, it is far more likely to double down.188 Whether consciously or not, Sisi and the military are gambling that private capital will go along and that, at worst, the momentum of capital generation by the military will suffice to make up for a shortfall of private investment.

Notes

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